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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the calendar year ended December 31, 2001, or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 1-11515
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COMMERCIAL FEDERAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
Nebraska 47-0658852
--------------------------------- -------------------------
(State or Other
Jurisdiction of Incorporation or (I.R.S. Employer
Organization) Identification No.)
13220 California Street,
Omaha, Nebraska 68154
--------------------------------- -------------------------
(Address of Principal
Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (402) 554-9200
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, Par Value
$.01 Per Share New York Stock Exchange
-------------- -------------------------
(Title of Each Class) (Name of Each Exchange on
Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the registrant's common stock
as quoted on the New York Stock Exchange on March 21, 2002, was $1,044,091,891.
As of March 21, 2002, there were issued and outstanding 45,245,860 shares of
the registrant's common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2002 Annual Meeting of
Stockholders--See Part III.
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COMMERCIAL FEDERAL CORPORATION
FORM 10-K INDEX
Page No.
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PART I Item 1. Business................................................. 3
Item 2. Properties............................................... 42
Item 3. Legal Proceedings........................................ 42
Item 4. Submission of Matters to a Vote of Security Holders...... 42
-------- -------- --------------------------------------------------------- --------
PART II Item 5. Market for Commercial Federal Corporation's Common Equity
and Related Stockholder Matters.......................... 43
Item 6. Selected Financial Data.................................. 44
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 46
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk........................................ 74
Item 8. Financial Statements and Supplementary Data.............. 74
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 132
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PART III Item 10. Directors and Executive Officers of
Commercial Federal Corporation........................... 132
Item 11. Executive Compensation................................... 133
Item 12. Security Ownership of Certain
Beneficial Owners and Management......................... 133
Item 13. Certain Relationships and Related Transactions........... 134
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PART IV Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K...................................... 134
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SIGNATURES................................................................. 135
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2
PART I
ITEM 1. BUSINESS
Forward Looking Statements
This document contains certain statements that are not historical fact but
are forward-looking statements that involve inherent risks and uncertainties.
Management cautions readers that a number of important factors could cause
actual results to differ materially from those in the forward looking
statements. Factors that might cause a difference include, but are not limited
to: fluctuations in interest rates, inflation, the effect of regulatory or
government legislative changes, expected cost savings and revenue growth not
fully realized, the progress of strategic initiatives and whether realized
within expected time frames, general economic conditions, adequacy of allowance
for credit losses, costs or difficulties associated with restructuring
initiatives, technology changes and competitive pressures in the geographic and
business areas where Commercial Federal Corporation conducts its operations.
These forward-looking statements are based on management's current
expectations. Actual results in future periods may differ materially from those
currently expected because of various risks and uncertainties.
General
Commercial Federal Corporation (the "Corporation") was incorporated in the
state of Nebraska on August 18, 1983, as a unitary non-diversified savings and
loan holding company. The primary purpose of the Corporation was to acquire all
of the capital stock of Commercial Federal Bank, a Federal Savings Bank (the
"Bank") in connection with the Bank's 1984 conversion from mutual to stock
ownership. A secondary purpose was to provide the structure to expand and
diversify the Corporation's financial services to activities allowed by
regulation to a unitary savings and loan holding company. The general offices
of the Corporation are located at 13220 California Street, Omaha, Nebraska
68154.
The primary subsidiary of the Corporation is the Bank. The Bank was
originally chartered in 1887 and converted to a federally chartered mutual
savings and loan association in 1972. On December 31, 1984, the Bank completed
its conversion from mutual to stock ownership and became a wholly-owned
subsidiary of the Corporation. Effective August 27, 1990, the Bank's federal
charter was amended from a savings and loan to a federal savings bank.
The assets of the Corporation, on an unconsolidated basis, substantially
consist of 100% of the Bank's common stock. The Corporation has no significant
independent source of income, and therefore depends almost exclusively on
dividends from the Bank to meet its funding requirements. During the calendar
year ended December 31, 2001, the Corporation incurred interest expense on its
$21.7 million of subordinated extendible notes, $46.4 million of junior
subordinated deferrable interest debentures and $64.4 million on an unsecured
term note and revolving line of credit. Interest is payable monthly on the
subordinated extendible notes and quarterly on the junior subordinated
deferrable interest debentures, the unsecured term note and the line of credit.
For additional information on the debt of the Corporation see Note 13 to the
Consolidated Financial Statements that are filed under Item 8 of this Form 10-K
Annual Report for the year ended December 31, 2001 (the "Report").
The Corporation began repurchasing its common stock in April 1999. For the
year ended December 31, 2001, the Corporation purchased and cancelled 7,662,600
shares of its common stock at a cost of $180.9 million. Since the first
repurchase was announced in April 1999, the Corporation purchased and canceled
15,701,500 shares of its common stock at a cost of $329.9 million. The
Corporation's 7.95% fixed-rate subordinated extendible notes totaling $50.0
million were redeemable by the note holders on December 1, 2001. A total of
$28.3 million was redeemed, leaving an outstanding balance of $21.7 million at
December 31, 2001. The Corporation also pays operating expenses primarily for
shareholder and stock related expenditures such as the
3
annual report, proxy, corporate filing fees and assessments and certain costs
directly attributable to the holding company. In addition, common stock cash
dividends totaling $15.2 million, or $.31 per common share, were declared
during the year ended December 31, 2001.
The Bank pays dividends to the Corporation on a periodic basis primarily to
cover the amount of the principal and interest payments on the Corporation's
debt, to fund the Corporation's common stock repurchases and to repay the
Corporation for the common stock cash dividends paid to the Corporation's
shareholders. During the year ended December 31, 2001, the Corporation received
cash dividends totaling $216.0 million from the Bank. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") -- Liquidity and Capital Resources" under Item 7 of this Report for
additional information.
The Bank operates as a federally chartered savings institution with deposits
insured by the Savings Association Insurance Fund ("SAIF") and the Bank
Insurance Fund ("BIF") both administered by the Federal Deposit Insurance
Corporation ("FDIC"). The Bank is a community banking institution offering
commercial and consumer banking, mortgage banking and investment services. All
loan origination activities are conducted through the Bank's branch office
network, through the loan offices of Commercial Federal Mortgage Corporation
("CFMC"), its wholly-owned mortgage banking subsidiary, and through a
nationwide correspondent network of mortgage loan originators. The Bank also
provides insurance and securities brokerage and other retail financial services.
Through December 31, 2001, the Corporation has identified two distinct lines
of business operations for the purposes of management reporting: Community
Banking and Mortgage Banking. The Community Banking segment involves a variety
of traditional banking and financial services. The Mortgage Banking segment
involves the origination and purchase of residential mortgage loans, the sale
of these mortgage loans in the secondary mortgage market, the servicing of
mortgage loans and the purchase and origination of rights to service mortgage
loans. Beginning in 2002, the lines of business operations are designated as
Retail Banking, Commercial Banking, Mortgage Banking and Treasury Operations.
At December 31, 2001, the Corporation had assets of $12.9 billion and
stockholders' equity of $734.7 million, and operated 196 branches located in
Colorado (44), Iowa (42), Nebraska (41), Kansas (26), Oklahoma (19), Missouri
(14), Arizona (6) and Minnesota (4). The four branches in Minnesota are
anticipated to be sold by June 30, 2002. The Bank is one of the largest retail
financial institutions in the Midwest and, based upon total assets at December
31, 2001, the Corporation was the 8th largest publicly-held thrift institution
holding company in the United States. In addition, CFMC serviced a loan
portfolio totaling $13.5 billion at December 31, 2001, with approximately $9.5
billion in loans serviced for third parties and $4.0 billion in loans serviced
for the Bank. See "MD&A--General" under Item 7 of this Report.
The operations of the Corporation are significantly influenced by general
economic conditions, by inflation and changing prices, by the related monetary,
fiscal and regulatory policies of the federal government and by the policies of
financial institution regulatory authorities, including the Office of Thrift
Supervision ("OTS"), the Board of Governors of the Federal Reserve System and
the FDIC. Deposit flows and costs of funds are influenced by interest rates on
competing investments and general market rates of interest. Lending activities
are affected by the demand for mortgage and commercial financing, consumer
loans and other types of loans, which, in turn, are affected by the interest
rates at which such financings may be offered, the availability of funds, and
other factors, such as the supply of housing for mortgage loans and regional
economic situations.
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Topeka, which
is one of the 12 regional banks comprising the FHLB System. The Bank is further
subject to regulations of the Federal Reserve Board, which governs reserves
required to be maintained against deposits and certain other matters. As a
federally chartered savings bank, the Bank is subject to numerous restrictions
on operations and investments imposed by applicable statutes and regulations.
See "Regulation."
4
Corporate Highlights
Key Strategic Initiatives
Beginning in the six-month transition period ended December 31, 2000,
management implemented a number of key strategic initiatives designed to
improve the Corporation's financial performance. These changes continued into
2001, focusing not only on revenue enhancement and cost reduction, and but also
on an executive management restructuring aimed at designing and implementing
changes to build the Corporation's commercial banking business and enhancing
shareholder value. These key initiatives included:
. A complete balance sheet review including the disposition of low-yielding
and higher risk investments and residential mortgage loans with proceeds
from this disposition expected to be used to reduce high-cost borrowings,
to repurchase additional shares of the Corporation's common stock and the
remainder reinvested in lower risk securities with a predictable income
stream.
. A thorough assessment of the Bank's delivery and servicing systems.
. The sale of the leasing company.
. Acceleration of the disposition of other real estate owned.
. A management restructuring to further streamline the organization and
improve efficiencies as well as the appointment of a new chief operating
officer.
. A program to further strengthen the commercial lending portfolio.
. A change in the Corporation's year end from June 30 to December 31.
. An expansion of the Corporation's common stock repurchase program.
The balance sheet restructuring was completed during the six months ended
December 31, 2000. The remainder of these initiatives were completed in 2001.
These actions transitioned the Corporation into 2001 with improved operating
margins, a more compact and stable balance sheet to generate future growth
under all types of operating environments, improved operating efficiencies and
a stronger management team. Net income for 2001 includes $15.6 million ($10.1
million after-tax, or $.20 per diluted share) in net gains relating to the
completion of the August 2000 initiatives. These net gains are primarily the
result of the Corporation realizing pre-tax gains on the sales of 34 branches
sold during 2001 partially offset by severance costs and expenses associated
with right-sizing branch personnel, expenses to close branches and expenses to
exit leasing operations. During the six months ended December 31, 2000,
implementation of these initiatives resulted in losses and expenses totaling
approximately $112.2 million, or $77.1 million after-tax ($1.41 per diluted
share). See "MD&A--Key Strategic Initiatives" under Item 7 of this Report for
additional information.
Common Stock Repurchases
During the year ended December 31, 2001, the Corporation continued to
repurchase its common stock. On May 7, 2001, the Board of Directors authorized
a fourth repurchase of 5,000,000 shares of the Corporation's outstanding common
stock to be completed no later than December 31, 2002. For the twelve months
ended December 31, 2001, the Corporation purchased 7,662,600 shares of its
common stock at a cost of $180.9 million.
Supervisory Goodwill Lawsuit
On September 12, 1994, the Bank and the Corporation commenced litigation
against the United States in the United States Court of Federal Claims seeking
to recover monetary relief for the government's refusal to honor certain
contracts that it had entered into with the Bank. The suit alleges that such
governmental action constitutes a breach of contract and an unlawful taking of
property by the United States without just compensation or due process in
violation of the Constitution of the United States. The Corporation and the
Bank are pursuing alternative damage claims of up to approximately $230
million. The Bank also assumed a lawsuit in the merger with Mid Continent
Bancshares, Inc., ("Mid Continent"), a fiscal year 1998 acquisition, against
the United States
5
also relating to a supervisory goodwill claim filed by the former company. The
litigation status and process of these legal actions, as well as that of
numerous actions brought by others alleging similar claims with respect to
supervisory goodwill and regulatory capital credits, make the value of the
claims asserted by the Bank (including the Mid Continent claim) uncertain as to
their ultimate outcome, and contingent on a number of factors and future events
which are beyond the control of the Bank, both as to substance, timing and the
dollar amount of damages that may be awarded to the Bank and the Corporation if
they finally prevail in this litigation.
Regulatory Capital Compliance
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines. Prompt
corrective action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA") require specific capital ratios
to be considered well-capitalized. At December 31, 2001, the Bank exceeded the
minimum requirements for the well-capitalized category. As of December 31,
2001, the most recent notification from the OTS categorized the Bank as
"well-capitalized" under the regulatory framework for prompt corrective action
provisions under FDICIA. There are no conditions or events since such
notification that management believes have changed the Bank's classification.
See "Regulation -- Regulatory Capital Requirements" and Note 17 to the
Consolidated Financial Statements under Item 8 of this Report.
Other Information
Additional information concerning the general business of the Corporation
during the year ended December 31, 2001, is included in the following sections
of this Report and under Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and under Item 8 "Notes to the
Consolidated Financial Statements" of this Report. Additional information
concerning the Bank's regulatory capital requirements and other regulations
which affect the Corporation is included in the "Regulation" section of this
Report.
Lending Activities
General
The Corporation's lending activities focus 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. Commercial
real estate loans and consumer loans have been emphasized during the year ended
December 31, 2001. The origination activity of these loans has increased
substantially over previous years. Management plans to continue to expand the
Corporation's commercial lending activity in 2002 and beyond. Residential loan
origination activity, including activity through correspondents, increased
significantly in calendar year 2001 due to the low interest rate environment
generating new residential loan volumes as well as a large volume of loan
refinancing activity compared to prior years. See "Loan Activity."
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 branch office
network to help increase the volume of single-family residential loan
originations and take advantage of its extensive branch network. The
Corporation's mortgage banking subsidiary has continued and will continue to
originate real estate loans through the Corporation's branches, loan offices of
CFMC and through its nationwide correspondent network.
6
At December 31, 2001, the Corporation's total loan and mortgage-backed
securities portfolio was $10.2 billion, representing 79.3% of its $12.9 billion
of total assets. Mortgage-backed securities totaled $1.8 billion at December
31, 2001, representing 17.9% of the Corporation's total loan and
mortgage-backed securities portfolio. The Corporation's total loan and
mortgage-backed securities portfolio was secured primarily by real estate at
December 31, 2001.
Commercial real estate and land loans (collectively referred to as "income
property loans") are secured by various types of commercial properties
including office buildings, shopping centers, warehouses and other income
producing properties. Commercial lending increased during 2001 and is expected
to significantly expand for the Corporation in the future. The Corporation's
single-family residential construction lending activity is primarily
attributable to operations in Las Vegas, Nevada and in its primary market
areas. Multi-family residential loans consist of loans secured by various types
of properties, including townhomes, condominiums and apartment projects with
more than four dwelling units.
The Corporation's primary area of loan production is the origination of
loans secured by existing single-family residences. Adjustable-rate
single-family residential loans are originated primarily for retention in the
Corporation's loan portfolio to match more closely the repricing of the
Corporation's interest-bearing liabilities as a result of changes in interest
rates. Fixed-rate single-family residential loans are originated using
underwriting guidelines, appraisals and documentation which are acceptable to
the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National
Mortgage Association ("GNMA") and the Federal National Mortgage Association
("FNMA") to facilitate the sale of such loans to such agencies in the secondary
market. The Corporation also originates fixed-rate single-family residential
loans using internal lending policies in accordance with what management
believes are prudent underwriting standards but which may not strictly adhere
to FHLMC, GNMA and FNMA guidelines. Fixed-rate single-family residential loans
are originated or purchased for the Corporation's loan portfolio if such loans
have characteristics which are consistent with the Corporation's asset and
liability goals and long-term interest rate yield requirements. At December 31,
2001, fixed-rate single-family residential loans increased to $2.5 billion
compared to $2.3 billion at December 31, 2000. This increase is due to the held
for sale portfolio where the fixed-rate loans increased $196.4 million at
December 31, 2001, compared to 2000. The adjustable-rate portfolio decreased to
$2.2 billion at December 31, 2001, compared to $3.0 billion at December 31,
2000. The net decrease in adjustable-rate residential loans is due to low
mortgage rate environment in 2001 where many adjustable-rate loans were
refinanced into low fixed-rate loans.
In fiscal year 1998 the Corporation initiated commercial and multi-family
real estate lending with these loans secured by properties located within the
Corporation's primary market areas. This lending activity increased in 2001
over all periods since fiscal year 1998. The Corporation continues to build on
its commercial relationships. In the fourth quarter of 2001, the Corporation
stared a new internet-based full-service cash management program. This service
allows businesses access to electronic banking features such as funds
transfers, debit consumer accounts, payment of vendors, direct payroll deposit,
wire transfers and other services. These loans, which are subject to prudent
credit review and other underwriting standards and collection procedures, are
expected to constitute a greater portion of the Corporation's lending business
in the future.
In addition to real estate loans, the Corporation originates consumer, home
improvement, agricultural, commercial business and savings account loans
through the Corporation's branch and loan office network and direct mail
solicitation. Management intends to continue to increase its consumer loan
origination activity with strict adherence to prudent underwriting and credit
review procedures.
Regulatory guidelines generally limit loans and extensions of credit to one
borrower. At December 31, 2001, all loans were within the regulatory limitation
of $202.4 million to one borrower.
7
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 below.
Other than as disclosed below, there were no concentrations of loans which
exceeded 10% of total loans at December 31, 2001.
December 31,
-------------------------------------- -------------------------------
2001 2000 2000 1999
------------------ ------------------ ------------------ -----------
Amount Percent Amount Percent Amount Percent Amount
----------- ------- ----------- ------- ----------- ------- -----------
(Dollars in Thousands)
Loan Portfolio
Conventional real estate mortgage
loans:
Loans on existing properties-
Single-family residential........... $ 4,437,766 42.1% $ 5,015,369 47.0% $ 6,684,993 56.4% $ 6,268,958
Multi-family residential............ 324,602 3.1 232,203 2.2 193,711 1.6 182,510
Land................................ 38,797 .4 32,558 .3 30,138 .3 105,504
Commercial real estate.............. 1,324,748 12.6 1,138,038 10.7 985,008 8.3 756,412
----------- ------ ----------- ------ ----------- ------ -----------
Total............................. 6,125,913 58.2 6,418,168 60.2 7,893,850 66.6 7,313,384
Construction loans-
Single-family residential........... 304,638 2.9 258,972 2.4 245,302 2.1 241,548
Multi-family residential............ 120,826 1.1 99,041 .9 51,845 .4 25,893
Land................................ 178,675 1.7 143,602 1.4 121,396 1.0 --
Commercial real estate.............. 179,312 1.7 215,979 2.0 152,260 1.3 78,908
----------- ------ ----------- ------ ----------- ------ -----------
Total............................. 783,451 7.4 717,594 6.7 570,803 4.8 346,349
FHA and VA loans....................... 270,193 2.6 351,376 3.3 579,021 4.9 463,437
Mortgage-backed securities............. 1,829,728 17.4 1,514,510 14.2 1,221,831 10.3 1,277,575
----------- ------ ----------- ------ ----------- ------ -----------
Total real estate loans........... 9,009,285 85.6 9,001,648 84.4 10,265,505 86.6 9,400,745
Consumer, leases and other loans--
Home improvement and
other consumer loans............... 1,330,877 12.6 1,361,354 12.8 1,292,806 10.9 1,114,583
Savings account loans............... 18,598 .2 22,589 .2 21,297 .2 19,125
Leases.............................. 160 -- 53,836 .5 94,694 .8 122,704
Commercial loans.................... 170,280 1.6 228,426 2.1 179,703 1.5 186,242
----------- ------ ----------- ------ ----------- ------ -----------
Total consumer and other loans.... 1,519,915 14.4 1,666,205 15.6 1,588,500 13.4 1,442,654
----------- ------ ----------- ------ ----------- ------ -----------
Total loans............................ $10,529,200 $100.0% $10,667,853 $100.0% $11,854,005 $100.0% $10,843,399
=========== ====== =========== ====== =========== ====== ===========
1998 1997
----------------- -----------------
Percent Amount Percent Amount Percent
------- ---------- ------- ---------- -------
Loan Portfolio
Conventional real estate mortgage
loans:
Loans on existing properties-
Single-family residential........... 57.8% $5,476,608 60.2% $5,142,629 57.7%
Multi-family residential............ 1.7 169,860 1.9 156,127 1.8
Land................................ .9 22,582 .2 62,944 .7
Commercial real estate.............. 7.0 494,325 5.4 499,575 5.6
------ ---------- ------ ---------- ------
Total............................. 67.4 6,163,375 67.7 5,861,275 65.8
Construction loans-
Single-family residential........... 2.2 279,437 3.1 283,271 3.2
Multi-family residential............ .2 2,979 -- 6,320 .1
Land................................ -- 2,803 -- 10,445 .1
Commercial real estate.............. .8 40,479 .5 20,093 .2
------ ---------- ------ ---------- ------
Total............................. 3.2 325,698 3.6 320,129 3.6
FHA and VA loans....................... 4.3 468,503 5.1 439,398 4.9
Mortgage-backed securities............. 11.8 1,083,789 11.9 1,378,162 15.5
------ ---------- ------ ---------- ------
Total real estate loans........... 86.7 8,041,365 88.3 7,998,964 89.8
Consumer, leases and other loans--
Home improvement and
other consumer loans............... 10.3 809,671 8.9 760,945 8.5
Savings account loans............... .2 21,948 .2 19,516 .2
Leases.............................. 1.1 73,395 .8 46,174 .5
Commercial loans.................... 1.7 155,617 1.8 79,818 1.0
------ ---------- ------ ---------- ------
Total consumer and other loans.... 13.3 1,060,631 11.7 906,453 10.2
------ ---------- ------ ---------- ------
Total loans............................ $100.0% $9,101,996 $100.0% $8,905,417 $100.0%
====== ========== ====== ========== ======
(Continued on next page)
8
Composition of Loan Portfolio (continued)
December 31,
---------------------------------------- ---------------------------------
2001 2000 2000 1999
------------------- ------------------- ------------------- ------------
Amount Percent Amount Percent Amount Percent Amount
----------- ------- ----------- ------- ----------- ------- -----------
(Dollars in Thousands)
Balance forward of total loans.............. $10,529,200 100.0% $10,667,853 100.0% $11,854,005 100.0% $10,843,399
Add (subtract):
Unamortized premiums, net of discounts... 10,159 160 170 10,138
Unearned income.......................... -- -- (16,730) (22,543)
Deferred loan costs (fees), net.......... 5,819 20,250 26,374 11,809
Loans in process......................... (209,574) (196,940) (164,313) (153,124)
Allowance for loan losses................ (102,451) (83,439) (70,556) (80,419)
Allowance for losses on mortgage-backed
securities.............................. -- -- (280) (322)
----------- ----------- ----------- -----------
Loan portfolio.............................. $10,233,153 $10,407,884 $11,628,670 $10,608,938
=========== =========== =========== ===========
1998 1997
------------------ ------------------
Percent Amount Percent Amount Percent
------- ---------- ------- ---------- -------
Balance forward of total loans.............. 100.0% $9,101,996 100.0% $8,905,417 100.0%
Add (subtract):
Unamortized premiums, net of discounts... 14,161 17,805
Unearned income.......................... (13,253) *
Deferred loan costs (fees), net.......... 24,178 (3,882)
Loans in process......................... (112,781) (108,741)
Allowance for loan losses................ (64,757) (60,929)
Allowance for losses on mortgage-backed
securities.............................. (419) (678)
---------- ----------
Loan portfolio.............................. $8,949,125 $8,748,992
========== ==========
--------
* Not restated from a fiscal year 1998 acquisition accounted for as a pooling
of interests.
For additional information regarding the Corporation's loan portfolio and
mortgage-backed securities, see Notes 3, 4 and 5 to the Consolidated Financial
Statements under Item 8 of this Report.
9
The table below sets forth the geographic distribution of the Corporation's
total real estate loan portfolio (excluding mortgage-backed securities,
consumer and other loans and before any reduction for unamortized premiums (net
of discounts), undisbursed loan proceeds, deferred loan fees, unearned income
and allowance for loan losses) as of the dates indicated:
December 31, June 30,
------------------------------------ --------------------------------------------------------------------------
2001 2000 2000 1999 1998 1997
----------------- ----------------- ----------------- ----------------- ----------------- -----------------
State Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
----- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- ------- ---------- -------
(Dollars in Thousands)
Colorado...... $1,302,407 18.1% $1,436,156 19.2% $1,647,963 18.2% $1,686,667 20.8% $1,710,256 24.6% $1,660,721 25.1%
Iowa.......... 776,131 10.8 716,499 9.6 818,293 9.0 737,677 9.1 676,099 9.7 618,177 9.3
Nebraska...... 735,495 10.2 723,068 9.7 1,073,664 11.9 1,014,198 12.5 985,906 14.2 937,025 14.2
Kansas........ 668,161 9.3 658,366 8.8 954,020 10.5 860,740 10.6 678,734 9.8 557,657 8.4
Arizona....... 437,640 6.1 381,628 5.1 351,001 3.9 253,480 3.1 180,740 2.6 155,315 2.4
Missouri...... 395,378 5.5 345,931 4.6 380,653 4.2 329,985 4.1 185,282 2.7 175,900 2.7
Oklahoma...... 363,114 5.1 378,789 5.1 459,315 5.1 382,474 4.7 318,198 4.6 264,710 4.0
Nevada........ 232,017 3.2 253,057 3.4 207,364 2.3 160,643 2.0 130,159 1.9 109,475 1.7
Georgia....... 198,719 2.8 254,097 3.4 302,929 3.3 232,128 2.9 227,971 3.3 235,665 3.6
California.... 196,487 2.7 180,254 2.4 192,598 2.1 247,835 3.0 148,401 2.1 195,114 2.9
Texas......... 185,555 2.6 188,700 2.5 205,783 2.3 184,313 2.3 158,614 2.3 187,189 2.8
Florida....... 170,526 2.4 191,265 2.6 268,492 3.0 242,972 3.0 123,528 1.8 116,881 1.8
Virginia...... 159,396 2.2 153,731 2.0 240,818 2.7 206,814 2.5 161,793 2.3 140,498 2.1
Massachusetts. 156,477 2.2 203,742 2.7 188,500 2.1 62,233 .8 55,902 .8 68,061 1.0
Maryland...... 121,036 1.7 123,827 1.7 208,833 2.3 183,460 2.2 157,180 2.3 138,886 2.1
Minnesota..... 120,501 1.7 120,579 1.6 125,979 1.4 92,964 1.1 62,765 .9 63,885 1.0
North Carolina 115,151 1.6 148,086 2.0 135,085 1.5 118,207 1.4 60,634 .9 69,465 1.0
Ohio.......... 100,478 1.4 110,181 1.5 143,992 1.6 122,146 1.5 93,325 1.3 76,049 1.1
Washington.... 89,053 1.2 99,303 1.3 113,932 1.3 93,956 1.2 91,670 1.3 91,054 1.4
Alabama....... 74,949 1.0 86,709 1.1 125,767 1.4 90,675 1.1 50,285 .7 37,653 .6
Illinois...... 72,156 1.0 102,066 1.3 137,217 1.5 131,098 1.6 111,142 1.6 92,381 1.4
Connecticut... 57,582 .8 66,068 .9 83,567 .9 71,696 .9 64,975 .9 72,154 1.1
Michigan...... 41,601 .6 66,295 .9 55,349 .6 29,505 .4 38,495 .5 46,762 .7
New Jersey.... 38,876 .5 54,139 .7 71,352 .8 82,068 1.0 98,061 1.4 107,022 1.6
Utah.......... 37,459 .5 36,510 .5 53,060 .6 39,336 .5 25,444 .4 20,729 .3
Pennsylvania.. 31,376 .5 40,319 .5 51,811 .6 55,130 .7 59,083 .8 68,728 1.0
Indiana....... 28,293 .4 38,986 .5 63,255 .7 66,727 .8 40,357 .6 34,689 .5
New York...... 21,296 .3 27,439 .4 31,548 .3 39,146 .5 38,382 .5 48,395 .7
Other states.. 252,247 3.6 301,348 4.0 351,534 3.9 304,897 3.7 224,195 3.2 230,562 3.5
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total....... $7,179,557 100.0% $7,487,138 100.0% $9,043,674 100.0% $8,123,170 100.0% $6,957,576 100.0% $6,620,802 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== ===== ========== =====
10
The following table presents the composition of the Corporation's total real
estate portfolio (excluding mortgage-backed securities, consumer and other
loans and before any reduction for unamortized premiums (net of discounts),
undisbursed loan proceeds, deferred loan fees, unearned income and allowance
for loan losses) by state and property type at December 31, 2001:
Conventional FHA/VA
Residential Residential Multi- Land Sub Commercial % of
State 1-4 Units Loans Family Loans Total Loans Total Total
----- ------------ ----------- -------- ----- ---------- ---------- ---------- -----
(Dollars in Thousands)
Colorado...... $ 793,525 $ 10,277 $107,390 $ 37,076 $ 948,268 $ 354,139 $1,302,407 18.1%
Iowa.......... 423,898 11,998 62,437 44,790 543,123 233,008 776,131 10.8
Nebraska...... 539,506 35,515 39,424 18,357 632,802 102,693 735,495 10.2
Kansas........ 412,138 65,697 27,976 19,586 525,397 142,764 668,161 9.3
Arizona....... 238,302 8,068 16,763 50,413 313,546 124,094 437,640 6.1
Missouri...... 228,344 19,328 26,826 5,581 280,079 115,299 395,378 5.5
Oklahoma...... 198,141 16,199 58,665 3,634 276,639 86,475 363,114 5.1
Nevada........ 77,788 3,611 26,648 30,255 138,302 93,715 232,017 3.2
Georgia....... 169,064 9,595 475 -- 179,134 19,585 198,719 2.8
California.... 109,296 2,601 16,342 57 128,296 68,191 196,487 2.7
Texas......... 83,506 8,928 19,548 -- 111,982 73,573 185,555 2.6
Florida....... 127,456 4,837 15,682 -- 147,975 22,551 170,526 2.4
Virginia...... 150,898 8,498 -- -- 159,396 -- 159,396 2.2
Massachusetts. 155,996 10 471 -- 156,477 -- 156,477 2.2
Maryland...... 106,593 14,297 4 -- 120,894 142 121,036 1.7
Minnesota..... 98,538 3,091 6,738 4,178 112,545 7,956 120,501 1.7
North Carolina 101,567 1,058 4,788 -- 107,413 7,738 115,151 1.6
Ohio.......... 96,480 2,623 884 -- 99,987 491 100,478 1.4
Washington.... 77,682 4,926 1,297 -- 83,905 5,148 89,053 1.2
Alabama....... 65,297 9,652 -- -- 74,949 -- 74,949 1.0
Illinois...... 63,919 3,767 64 1,769 69,519 2,637 72,156 1.0
Connecticut... 55,443 108 6 1,776 57,333 249 57,582 .8
Michigan...... 38,474 2,319 19 -- 40,812 789 41,601 .6
New Jersey.... 38,187 689 -- -- 38,876 -- 38,876 .5
Utah.......... 25,246 5,559 962 -- 31,767 5,692 37,459 .5
Pennsylvania.. 28,976 2,186 214 -- 31,376 -- 31,376 .5
Indiana....... 22,383 5,910 -- -- 28,293 -- 28,293 .4
New York...... 17,198 142 93 -- 17,433 3,863 21,296 .3
Other states.. 198,563 8,704 11,712 -- 218,979 33,268 252,247 3.6
---------- -------- -------- -------- ---------- ---------- ---------- -----
Total......... $4,742,404 $270,193 $445,428 $217,472 $5,675,497 $1,504,060 $7,179,557 100.0%
========== ======== ======== ======== ========== ========== ========== =====
% of Total.... 66.1% 3.8% 6.2% 3.0% 79.1% 20.9% 100.0%
==== === === === ==== ==== =====
11
Contractual Principal Repayments
The following table sets forth certain information at December 31, 2001,
regarding the dollar amount of all loans and mortgage-backed securities
maturing in the Corporation's portfolio based on contractual terms to maturity.
This repayment information excludes scheduled payments or an estimate of
possible prepayments. Demand loans (loans having no stated schedule of
repayments and no stated maturity) and overdrafts are reported as due in one
year or less. Since prepayments significantly shorten the average life of loans
and mortgage-backed securities, management believes that the following table
will bear little resemblance to what will be the actual repayments. Loan
balances have not been reduced for (1) unamortized premiums (net of discounts),
undisbursed loan proceeds, deferred loan fees and allowance for loan losses or
(2) nonperforming loans.
Due During the Year Ended December 31,
--------------------------------------------
After
2002 2003-2006 2006 Total
- ---------- ---------- ---------- -----------
(In Thousands)
Principal Repayments
Real Estate Loans:
Single-family residential (1)--
Fixed-rate..................................... $ 42,255 $ 314,316 $2,181,322 $ 2,537,893
Adjustable-rate................................ 29,678 310,902 1,829,486 2,170,066
Multi-family residential, land and commercial real
estate--
Fixed-rate..................................... 52,558 435,528 257,455 745,541
Adjustable-rate................................ 47,123 104,335 791,148 942,606
---------- ---------- ---------- -----------
171,614 1,165,081 5,059,411 6,396,106
---------- ---------- ---------- -----------
Construction Loans:
Fixed-rate......................................... 121,800 20,852 8,708 151,360
Adjustable-rate.................................... 587,666 27,066 17,359 632,091
---------- ---------- ---------- -----------
709,466 47,918 26,067 783,451
---------- ---------- ---------- -----------
Consumer and Other Loans:
Fixed-rate......................................... 78,687 698,999 540,643 1,318,329
Adjustable-rate.................................... 74,057 26,078 101,451 201,586
---------- ---------- ---------- -----------
152,744 725,077 642,094 1,519,915
---------- ---------- ---------- -----------
Mortgage-Backed Securities:
Fixed-rate......................................... 52,933 251,353 1,333,576 1,637,862
Adjustable-rate.................................... 3,927 18,564 169,375 191,866
---------- ---------- ---------- -----------
56,860 269,917 1,502,951 1,829,728
---------- ---------- ---------- -----------
Principal Repayments.................................. $1,090,684 $2,207,993 $7,230,523 $10,529,200
========== ========== ========== ===========
--------
(1) Includes conventional mortgage loans, FHA and VA loans.
12
Scheduled contractual principal repayments do not reflect the actual
maturities of the assets. The average maturity of loans is substantially less
than their average contractual terms. This is due primarily to prepayments and,
in the case of conventional mortgage loans, due-on-sale clauses, which
generally give the Corporation the right to declare a loan immediately due and
payable in the event that the borrower sells the real property subject to the
mortgage and the loan is not repaid. The average life of mortgage loans tends
to increase when current mortgage loan rates are substantially higher than
rates on existing mortgage loans and, conversely, decrease when rates on
existing mortgage loans are substantially higher than current mortgage loan
rates. Under the latter circumstances, the weighted average yield on loans
decreases as higher yielding loans are repaid.
The following table sets forth the amount of all loans and mortgage-backed
securities due after December 31, 2002 (January 1, 2003, and thereafter), which
have fixed interest rates and those which have adjustable interest rates. These
loans and mortgage-backed securities have not been reduced for (1) unamortized
premiums (net of discounts), undisbursed loan proceeds, deferred loan fees and
allowance for loan losses or (2) nonperforming loans.
Adjustable
Fixed-Rate Rate Total
---------- ---------- ----------
(In Thousands)
Real Estate Loans:
Single-family residential...................... $2,495,638 $2,140,388 $4,636,026
Multi-family residential, land and commercial.. 692,983 895,483 1,588,466
Construction loans.............................. 29,560 44,425 73,985
Consumer and other loans........................ 1,239,642 127,529 1,367,171
Mortgage-backed securities...................... 1,584,929 187,939 1,772,868
---------- ---------- ----------
Principal repayments due after December 31, 2001 $6,042,752 $3,395,764 $9,438,516
========== ========== ==========
Residential Loans
The Corporation originates and purchases both fixed-rate and adjustable-rate
mortgage loans secured by single-family units through its branch network, the
loan offices of CFMC and a nationwide correspondent network. Such residential
mortgage loans are either:
. conventional mortgage loans which comply with the requirements for sale
to, or conversion into securities issued by, FNMA or FHLMC ("conventional
conforming loans"),
. mortgage loans which exceed the maximum loan amount allowed by FNMA or
FHLMC but which otherwise generally comply with FNMA and FHLMC loan
requirements, or mortgage loans not exceeding the maximum loan amount
allowed by FNMA or FHLMC but do not meet all of the conformity
requirements of FNMA and FHLMC ("conventional nonconforming loans") or
. FHA/VA loans which qualify for sale in the form of securities guaranteed
by GNMA.
The Corporation originates substantially all conventional conforming loans
or conventional nonconforming loans (collectively, "conventional loans") with
loan-to-value ratios at or below 80.0% unless the borrower obtains private
mortgage insurance (through the Corporation's mortgage banking subsidiary,
which premium the borrower pays with their mortgage payment) for the
Corporation's benefit covering that portion of the loan in excess of 80.0% of
the appraised value. Occasional exceptions to the 80.0% loan-to-value ratio for
conventional loans are made for loans to facilitate the resolution of
nonperforming assets.
Fixed-rate residential mortgage loans generally are originated with terms of
15 and 30 years and are amortized on a monthly basis with principal and
interest due each month. Adjustable-rate residential mortgage loans are also
originated with terms of 15 and 30 years. However, certain adjustable-rate
loans contain provisions
13
which permit the borrower, at the borrower's option, to convert at certain
periodic intervals over the life of the loan to a long-term fixed-rate loan.
The adjustable-rate loans currently have interest rates which are scheduled to
adjust at six, 12, 24 or 36 month intervals based upon various indices,
including the Treasury Constant Maturity Index or the Eleventh District Federal
Home Loan Bank Cost of Funds Index. The amount of any such interest rate
increase is limited to one or two percentage points annually and four to six
percentage points over the life of the loan. Certain adjustable-rate loans are
also offered which have interest rates fixed over annual periods ranging from
two through seven years, and also ten year loans, with such loans repricing
annually after the fixed interest-rate term. Adjustable-rate loans are
primarily offered at the fully indexed contractual rate. The Corporation
applies its underwriting criteria to such loans based on the amount of the loan
for which the borrower could qualify at the indexed rate. At December 31, 2001,
approximately 1.33%, or $60.6 million, of the Corporation's residential real
estate loan portfolio was 90 days or more delinquent.
Construction Loans
During the year ended December 31, 2001, the six months ended December 31,
2000, and fiscal years 2000 and 1999, the Corporation originated $728.4
million, $342.1 million, $608.1 million and $475.1 million, respectively, of
construction loans. The Corporation conducts its construction lending
operations in its primary market areas and Las Vegas, Nevada. The residential
construction lending operations, which loans are subject to prudent credit
review and other underwriting standards and procedures, are expected to
continue to increase over prior periods. At December 31, 2001, approximately
..53%, or $3.0 million, of the Corporation's construction loan portfolio was 90
days or more delinquent.
Construction financing is considered to involve a higher degree of risk of
loss than long-term financing on improved, occupied real estate. Risk of loss
on a construction loan is dependent largely upon the accuracy of the initial
estimate of the property's value at completion of construction and the total
estimated cost, including interest. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Corporation may be required to
advance funds beyond the amount originally committed to permit completion of
the project. If the estimate of value proves to be inaccurate, the Corporation
may be confronted, at or prior to the maturity of the loan, with a project
having a value which is insufficient to assure full repayment.
Commercial Real Estate and Land Loans
The Corporation originated commercial real estate loans totaling $768.6
million, $291.2 million, $347.0 million and $280.7 million, respectively,
during the year ended December 31, 2001, the six months ended December 31,
2000, and fiscal years 2000 and 1999. Commercial real estate lending entails
significant additional risks compared with residential real estate lending.
These additional risks are due to larger loan balances which are more sensitive
to economic conditions, business cycle downturns and construction related
risks. The payment of principal and interest due on the Corporation's
commercial real estate loans is substantially dependent upon the performance of
the projects securing the loans. As an example, to the extent that the
occupancy and rental rates are not high enough to generate the income necessary
to make payments, the Corporation could experience an increased rate of
delinquency and could be required either to declare the loans in default and
foreclose upon the properties or to make concessions on the terms of the
repayment of the loans. At December 31, 2001, approximately 1.36%, or $23.3
million, of the Corporation's commercial real estate and land loans were 90
days or more delinquent.
The aggregate amount of loans which a federal savings institution may make
on the security of liens on nonresidential real property may not exceed 400.0%
of the institution's total risk-based capital as determined under current
regulatory capital standards. This limitation totaled approximately $3.4
billion at December 31, 2001, compared to $1.7 billion of commercial real
estate and land loans outstanding at December 31, 2001. This restriction has
not and is not expected to materially affect the Corporation's business.
14
Consumer Loans
Federal regulations permit federal savings institutions to make secured and
unsecured consumer loans up to 35.0% of an institution's total regulatory
assets. Any loans in excess of 30.0% of assets may only be made directly to the
borrower and cannot involve the payment of any finders or referral fees. In
addition, a federal savings institution has lending authority above the 35.0%
category for certain consumer loans, such as home equity loans, property
improvement loans, mobile home loans and savings account secured loans.
Consumer loans originated by the Corporation are primarily second mortgage
loans, loans to depositors on the security of their savings accounts and loans
secured by automobiles. The Corporation has increased its secured consumer
lending activities in order to meet its customers' financial needs and will
continue to increase such lending activities in the future in its primary
market areas.
Consumer loans entail greater risk than do residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for a defaulted consumer loan may not provide an adequate source of
repayment of the outstanding loan balance as a result of the greater likelihood
of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower. In
addition, consumer loan collections are dependent on the borrower's continuing
financial stability, and thus are more likely to be adversely affected by job
loss, divorce, illness or personal bankruptcy. Furthermore, the application of
various federal and state laws, including federal and state bankruptcy and
insolvency laws, may limit the amount which can be recovered on such loans.
Such loans may also give rise to claims and defenses by a consumer loan
borrower against an assignee of such loans such as the Corporation, and a
borrower may be able to assert against such assignee claims and defenses which
it has against the seller of the underlying collateral. At December 31, 2001,
approximately .44%, or $6.9 million, of the Corporation's consumer loans are 90
days or more delinquent.
Loan Sales
In addition to originating loans for its portfolio, the Corporation, through
its mortgage banking subsidiary, participates in secondary mortgage market
activities by selling whole and securitized loans to institutional investors or
other financial institutions with the Corporation generally retaining the right
to service such loans. Substantially all of the Corporation's secondary
mortgage market activity is with GNMA, FNMA and FHLMC. Conventional conforming
loans are either sold for cash as individual whole loans to FNMA or FHLMC, or
pooled in exchange for securities issued by FNMA or FHLMC which are then sold
to investment banking firms. FHA and 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.
During the year ended December 31, 2001, the six months ended December 31,
2000, and fiscal years 2000 and 1999, the Corporation sold an aggregate of $2.7
billion, $2.3 billion, $762.1 million and $2.0 billion, respectively, in
mortgage loans. These sales resulted in net gains during calendar year 2001 and
fiscal year 1999 totaling $4.7 million and $3.4 million, respectively, and net
losses of $18.0 million and $110,000, respectively, during the six months ended
December 31, 2000, and fiscal year 2000. Of the amount of mortgage loans sold
during the year ended December 31, 2001, the six months ended December 31,
2000, and fiscal year 2000, $2.3 billion, $2.2 billion and $742.4 million,
respectively, were sold in the secondary market, and the remaining balances
sold to other institutional investors. At December 31, 2001, the carrying value
of loans held for sale totaled $470.6 million.
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
15
providing for recourse in the event of default on obligations transferred in
connection with sales of certain securities by such institution. At December
31, 2001, the remaining balance of these loans sold with recourse totaled $8.8
million.
Loan Activity
The following table sets forth the Corporation's loan and mortgage-backed
securities activity for the periods as indicated:
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, ---------------------
2001 2000 2000 1999
------------ ------------ ---------- ----------
(In Thousands)
Loans Originated:
Real estate loans-
Residential loans.................................. $1,201,279 $ 357,465 $ 672,295 $1,287,556
Construction loans................................. 728,432 342,102 608,145 475,073
Commercial real estate and land loans................. 768,578 291,237 346,979 280,723
Consumer and other loans.............................. 1,343,577 530,862 1,289,878 996,948
---------- ---------- ---------- ----------
Loans originated............................... $4,041,866 $1,521,666 $2,917,297 $3,040,300
========== ========== ========== ==========
Loans Purchased:
Conventional mortgage loans-
Residential loans.................................. $2,569,630 $ 718,495 $1,697,395 $2,323,781
Bulk residential loan purchases.................... -- -- 207,494 613,503
Commercial loans...................................... 19,075 9,968 51,267 5,311
Mortgage-backed securities............................ 1,074,215 909,599 160,073 664,665
---------- ---------- ---------- ----------
Loans purchased................................ $3,662,920 $1,638,062 $2,116,229 $3,607,260
========== ========== ========== ==========
Loans Securitized:
Conventional mortgage loans securitized into mortgage-
backed securities................................... $ 41,910 $ 3,543 $ 42,635 $ 20,773
========== ========== ========== ==========
Acquisitions:
Residential real estate loans......................... $ -- $ -- $ -- $ 560,521
Consumer and other loans.............................. -- -- -- 616,755
Mortgage-backed securities............................ -- -- -- 87,231
---------- ---------- ---------- ----------
Loans from acquisitions........................ $ -- $ -- $ -- $1,264,507
========== ========== ========== ==========
Loans Sold:
Conventional mortgage loans........................... $2,736,379 $2,282,895 $ 762,070 $1,955,384
Mortgage-backed securities............................ 93,281 549,834 -- 205,904
---------- ---------- ---------- ----------
Loans sold..................................... $2,829,660 $2,832,729 $ 762,070 $2,161,288
========== ========== ========== ==========
Loan Servicing for Other Institutions
The Corporation, through its mortgage banking subsidiary, services
substantially all of the mortgage loans that it originates and purchases
(whether retained for the Bank's portfolio or sold in the secondary market),
thereby generating ongoing loan servicing fees. The Corporation also
periodically purchases mortgage servicing rights. At December 31, 2001, the
Bank's mortgage banking subsidiary was servicing approximately 133,400 loans
and participations for others with principal balances aggregating $9.5 billion,
compared to 138,700 loans and participations for others with principal balances
totaling $9.1 billion at December 31, 2000.
16
Loan servicing includes collecting and remitting loan payments, accounting
for principal and interest, holding escrow (impound funds) for payment of taxes
and insurance, making inspections as required of the mortgage premises,
collecting amounts due from delinquent mortgagors, supervising foreclosures in
the event of unremedied defaults and generally administering the loans for the
investors to whom they have been sold.
The Corporation receives fees for servicing mortgage loans for others,
ranging generally from .25% to .53% per annum on the declining principal
balances of the loans. The average service fee collected by the Corporation was
..35%, .36% and .39%, respectively, for the year ended December 31, 2001, the
six months ended December 31, 2000, and for fiscal year 2000. 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 December
31, 2001, was 7.16% compared to 7.45% at December 31, 2000.
At December 31, 2001 and 2000, approximately 92.9% and 96.7%, respectively,
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 these advanced
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, VA guarantees or
FNMA or FHLMC reimbursement provisions in connection with loan foreclosures.
During the year ended December 31, 2001, the average amount of funds advanced
by the Corporation pursuant to servicing agreements was approximately $2.4
million.
Interest Rates and Loan Fees
Interest rates charged by the Corporation on its loans are primarily
determined by secondary market yield requirements and competitive loan rates
offered in its lending areas. In addition to interest earned on loans, the
Corporation receives loan origination fees for originating certain loans. These
fees are a percentage of the principal amount of the mortgage loan and are
charged to the borrower.
Loan Commitments
At December 31, 2001, the Corporation had issued commitments of $603.4
million, excluding the undisbursed portion of loans in process, to fund and
purchase loans and to extend credit on consumer and commercial unused lines of
credit. These commitments are generally expected to settle within three months
following December 31, 2001. These outstanding loan commitments to extend
credit do not necessarily represent future cash requirements since many of the
commitments may expire without being drawn. The Corporation anticipates that
normal amortization and prepayments of loan and mortgage-backed security
principal will be sufficient to fund these loan commitments. See
"MD&A--Liquidity and Capital Resources" under Item 7 of this Report.
Collection Procedures
If a borrower fails to make required payments on a loan, the Corporation
generally will take immediate action to satisfy its claim against the security
on 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
17
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 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. Impairment losses are recorded when the carrying
value exceeds the fair value minus estimated costs to sell the property.
In certain circumstances the Corporation does not immediately foreclose when
a delinquency is not cured promptly, particularly when the borrower does not
intend to abandon the collateral, since by not foreclosing the risk of
ownership would still be retained by the borrower. The evaluation of borrowers
and collateral may involve determining that the most economic way to reduce the
Corporation's risk of loss may be to allow the borrower to remain in possession
of the property and to restructure the debt as a troubled debt restructuring.
In these circumstances, the Corporation would strive to ensure that the
borrower's continued participation in and management of the collateral does not
put the Corporation at further risk of loss. In situations in which the
borrower is not performing under the restructured terms, foreclosure
proceedings are commenced when legally allowable.
A troubled debt restructuring is a loan on which the Corporation, for
reasons related to the debtor's financial difficulties, grants a concession to
the debtor, such as a reduction in the loan's interest rate, a reduction in the
face amount of the debt, or an extension of the maturity date of the loan, that
the Corporation would not otherwise consider. A loan classified as a troubled
debt restructuring may be reclassified as current if such loan has returned to
a performing status at a market rate of interest for at least 8 to 12 months,
the loan-to-value ratio is 80.0% or less, the cash flows generated from the
collateralized property support the loan amount subject to minimum debt service
coverage as defined and overall applicable economic conditions are favorable.
Such loan balance decreased to $3.1 million at December 31, 2001, compared to
$4.3 million at December 31, 2000, and $5.4 million at June 30, 2000. The
decrease comparing December 31, 2001, to December 31, 2000, is due primarily to
the charge-off of a loan totaling $582,000 and the reclassification of another
loan totaling $414,000 from troubled debt restructuring status to current loan
status. The decrease at December 31, 2000, compared to June 30, 2000, is due
primarily to the payoff of two loans totaling $2.4 million partially offset by
the addition of one commercial loan totaling $1.4 million.
The Corporation's nonperforming assets totaled $142.2 million at December
31, 2001, an increase of $16.0 million, or 12.7%, compared to December 31,
2000. This increase is the result of a net increase totaling $19.2 million in
real estate owned partially offset by net decreases in nonperforming loans and
troubled debt restructurings totaling $2.0 million and $1.2 million,
respectively. At December 31, 2000, nonperforming assets totaled $126.2
million, an increase of $26.1 million, or 26.0% compared to June 30, 2000,
primarily as a result of an increase of $30.9 million in nonperforming loans
partially offset by decreases of $3.6 million in real estate owned and $1.1
million in troubled debt restructurings. For a discussion of the major
components of the increase in nonperforming assets at December 31, 2001,
compared to December 31, 2000, see "MD&A--Provision for Loan Losses and Real
Estate Operations" under Item 7 of this Report.
18
The following table sets forth information with respect to the Bank's
nonperforming assets as follows:
December 31, June 30,
------------------ ------------------------------------
2001 2000 2000 1999 1998 1997
-------- -------- -------- -------- ------- -------
(Dollars in Thousands)
Loans accounted for on a nonaccrual basis:(1)
Real estate--
Residential............................... $ 63,495 $ 81,406 $ 48,996 $ 49,061 $43,212 $37,506
Commercial................................ 23,423 4,446 2,550 12,220 1,369 905
Consumer and other loans.................... 6,929 10,019 13,466 8,734 4,785 4,322
-------- -------- -------- -------- ------- -------
Total................................. 93,847 95,871 65,012 70,015 49,366 42,733
-------- -------- -------- -------- ------- -------
Accruing loans which are contractually
past due 90 days or more.................. -- -- -- -- -- 894
-------- -------- -------- -------- ------- -------
Total nonperforming loans.................... 93,847 95,871 65,012 70,015 49,366 43,627
-------- -------- -------- -------- ------- -------
Real estate:
Commercial.................................. 8,762 10,198 12,862 8,880 8,465 9,631
Residential................................. 36,446 15,824 16,803 14,384 8,821 9,759
Other....................................... -- -- -- -- 480 147
-------- -------- -------- -------- ------- -------
Total................................. 45,208 26,022 29,665 23,264 17,766 19,537
-------- -------- -------- -------- ------- -------
Troubled debt restructurings: (2)
Commercial.................................. 3,057 4,195 5,259 9,534 3,524 9,489
Residential................................. 84 90 172 195 778 1,126
-------- -------- -------- -------- ------- -------
Total................................. 3,141 4,285 5,431 9,729 4,302 10,615
-------- -------- -------- -------- ------- -------
Nonperforming assets......................... $142,196 $126,178 $100,108 $103,008 $71,434 $73,779
======== ======== ======== ======== ======= =======
Nonperforming loans to total loans (3)....... 1.08% 1.05% .61% .73% .62% .58%
Nonperforming assets to total assets......... 1.10% 1.01% .73% .81% .69% .73%
Allowance for loan losses.................... $102,451 $ 83,439 $ 70,556 $ 80,419 $64,757 $60,929
======== ======== ======== ======== ======= =======
Allowance for loan losses to total loans (3). 1.18% .91% .66% .84% .81% .81%
Allowance for loan losses to total
nonperforming assets....................... 72.05% 66.13% 70.48% 78.07% 90.65% 82.58%
Allowance for loan losses to nonresidential
nonperforming assets....................... 242.94% 289.14% 206.68% 204.28% 347.73% 239.99%
--------
(1) During fiscal year 1997, the Corporation recorded interest income totaling
$49,000 on accruing loans contractually past due 90 days or more. No
interest income was recorded during the year ended December 31, 2001, the
six months ended December 31, 2000, or during fiscal years 2000, 1999 and
1998. Had these nonaccruing loans been current in accordance with their
original terms and outstanding throughout this year or since origination,
the Corporation would have recorded gross interest income on these loans
totaling $6.4 million, $5.3 million, $3.8 million, $4.2 million, $4.3
million and $3.7 million, respectively, during the year ended December 31,
2001, the six months ended December 31, 2000, and fiscal years 2000, 1999,
1998 and 1997.
(2) During the year ended December 31, 2001, the six months ended December 31,
2000, and fiscal years 2000, 1999, 1998 and 1997, the Corporation
recognized interest income on loans classified as troubled debt
restructurings aggregating $236,000, $176,000, $430,000, $470,000, $380,000
and $852,000, respectively, whereas under their original terms the
Corporation would have recognized interest income of $268,000, $194,000,
$494,000, $526,000, $499,000 and $1.1 million, respectively. At December
31, 2001, the Corporation had no material commitments to lend additional
funds to borrowers whose loans were subject to troubled debt restructuring.
(3) Based on the total balance of loans 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.
19
The geographic concentration of nonperforming loans as of the dates
indicated was as follows:
December 31, June 30,
--------------- -------------------------------
State 2001 2000 2000 1999 1998 1997
----- ------- ------- ------- ------- ------- -------
(In Thousands)
Kansas................. $17,035 $ 7,177 $ 5,484 $15,552 $ 6,030 $ 2,973
Nevada................. 10,122 23,932 1,822 1,651 1,198 438
Iowa................... 9,563 12,037 12,890 6,111 4,013 3,477
Nebraska............... 6,376 3,829 3,287 2,455 2,595 2,629
Colorado............... 6,242 2,882 2,607 2,646 4,065 2,717
Maryland............... 4,579 3,611 4,261 2,712 2,258 1,623
Georgia................ 3,285 3,789 2,640 2,752 2,127 2,601
Florida................ 3,162 3,554 4,244 4,356 1,502 1,389
Oklahoma............... 3,005 3,925 2,653 3,568 3,178 2,303
Arizona................ 2,801 1,309 751 450 1,195 973
Alabama................ 2,759 2,054 1,684 863 1,307 510
Texas.................. 2,467 1,533 1,814 1,378 2,028 3,274
Virginia............... 2,319 2,622 2,476 1,691 1,479 656
Ohio................... 2,275 2,790 2,459 1,818 722 342
Missouri............... 2,146 2,093 1,455 3,241 1,944 2,402
California............. 1,235 2,782 2,301 3,988 3,377 3,206
Illinois............... 1,212 1,524 1,024 1,325 1,579 1,754
Connecticut............ 1,013 673 280 605 752 860
Pennsylvania........... 993 661 881 844 852 855
Washington............. 960 730 509 690 182 449
North Carolina......... 827 1,519 1,172 907 293 392
Minnesota.............. 804 499 355 590 1,004 610
New Jersey............. 665 1,043 1,010 1,414 1,277 1,060
Michigan............... 569 606 776 725 310 142
New York............... 457 980 771 686 671 606
Other states........... 6,976 7,717 5,406 6,997 3,428 5,386
------- ------- ------- ------- ------- -------
Nonperforming loans. $93,847 $95,871 $65,012 $70,015 $49,366 $43,627
======= ======= ======= ======= ======= =======
The nonperforming loans totaling $93.8 million at December 31, 2001,
consisted of 1,574 loans as follows:
Number
Amount of Loans
------- --------
(Dollars in Thousands)
Residential real estate.................................... $60,616 989
Commercial real estate..................................... 23,298 33
Residential construction................................... 2,879 15
Commercial construction.................................... 125 1
Consumer loans............................................. 4,461 483
Agribusiness loans......................................... 1,595 29
Commerical and other operating loans....................... 873 24
------- -----
Nonperforming loans..................................... $93,847 1,574
======= =====
20
The geographic concentration of nonperforming real estate as of the dates
indicated was as follows:
December 31, June 30,
--------------- ----------------------------------
State 2001 2000 2000 1999 1998 1997
----- ------- ------- ------- ------- ------- -------
(In Thousands)
Nevada............................ $21,892 $ 167 $ 333 $ 657 $ 138 $ 603
Missouri.......................... 4,593 4,147 8,725 4,811 465 522
Arizona........................... 4,417 401 171 582 -- --
Iowa.............................. 2,167 1,905 2,016 3,595 1,345 1,129
Nebraska.......................... 1,691 944 796 1,196 5,417 5,565
Kansas............................ 1,580 6,997 5,753 1,809 1,876 873
Illinois.......................... 1,539 1,955 2,179 2,069 373 13
Georgia........................... 1,051 451 386 301 140 933
Oklahoma.......................... 955 770 1,913 1,292 1,299 509
Maryland.......................... 823 839 531 471 1,315 436
Ohio.............................. 706 967 550 678 -- --
Florida........................... 702 1,410 1,422 1,180 297 277
Colorado.......................... 444 791 1,119 2,768 2,825 6,589
Pennsylvania...................... 336 79 126 377 111 102
Minnesota......................... 78 99 163 627 456 13
California........................ 69 443 626 1,098 52 1,382
Indiana........................... 62 431 559 395 29 --
New Jersey........................ 21 269 102 122 317 240
Texas............................. 9 525 503 85 445 220
Other states...................... 2,073 2,432 1,917 2,224 1,338 1,478
Unallocated reserves.............. -- -- (225) (3,073) (472) (1,347)
------- ------- ------- ------- ------- -------
Nonperforming real estate...... $45,208 $26,022 $29,665 $23,264 $17,766 $19,537
======= ======= ======= ======= ======= =======
At December 31, 2001, nonperforming real estate totaling $45.2 million (393
properties) consisted of residential real estate totaling $36.4 million (374
properties) or 80.5% of the total and commercial real estate totaling $8.8
million (19 properties). The real estate located in Nevada primarily consists
of a residential master planned community property totaling $21.6 million at
December 31, 2001.
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 commercial
loans and loans modified in a troubled debt restructuring. 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 December 31,
2001, the Corporation had impaired loans totaling $17.3
21
million, net of specific reserves. Troubled debt restructurings totaling $2.7
million, net of specific reserves totaling $475,000, are classified as impaired
loans and included in the table for nonperforming assets. At December 31, 2000,
impaired loans totaled approximately $24.2 million.
Classification of Assets
Savings institutions are required to review their assets on a regular basis
and, as warranted, classify them as "substandard," "doubtful," or "loss" as
defined by OTS regulations. Adequate valuation allowances are required to be
established for assets classified as substandard or doubtful. If an asset is
classified as a loss, the institution must either establish a specific
valuation allowance equal to the amount classified as loss or charge off such
amount. An asset which does not currently warrant classification as substandard
but which possesses credit deficiencies or potential weaknesses deserving close
attention is required to be designated as "special mention." In addition, a
savings institution is required to set aside adequate valuation allowances to
the extent that any affiliate possesses assets which pose a risk to the savings
institution. The OTS has the authority to approve, disapprove or modify any
asset classification or any amount established as an allowance pursuant to such
classification. The Corporation establishes specific valuation allowances equal
to 100.0% of all assets classified as doubtful or loss resulting in a net book
value of zero. At December 31, 2001, the Corporation had $67.2 million in
assets classified as special mention, $151.4 million in assets classified as
substandard, and no assets classified as doubtful or loss. Substantially all
nonperforming assets at December 31, 2001, are classified as substandard
pursuant to applicable asset classification standards. Of the Corporation's
loans which were not classified at December 31, 2001, 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 for 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 estimated provisions for loan losses
and impairments for 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.
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
. 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,
. to identify problem assets at the earliest possible time,
. to assure an adequate level of allowances for possible losses to cover
identified and anticipated credit risks,
. to monitor the Corporation's compliance with established policies and
procedures, and
. to provide the Corporation's management with information obtained through
the asset review process.
22
This credit review group analyzes all significant loans and real estate of
the Corporation for appropriate levels of reserves on loans and impairment
losses on real estate based on varying degrees of loan or real estate value
weakness. These types of loans and real estate are assigned a credit risk
rating ranging from one (excellent) to six (loss). Loans with minimal credit
risk (not adversely classified or with a credit risk rating of one to four)
generally have reserves established on the basis of the Corporation's
historical loss experience and various other factors. Loans adversely
classified (substandard, doubtful, loss or with a credit risk rating of five or
six) have greater levels of specific reserves established as applicable to
recognize impairment in the value of loans. Impairment losses are recorded on
real estate when the fair value less estimated selling costs of the property is
less than the carrying value of the property.
It is management's responsibility to maintain a reasonable allowance for
loan losses applicable to all categories of loans through periodic charges to
operations. Management employs a systematic methodology to determine the amount
of allocated specific allowances of loan losses. Specific loans that are
impaired, or any portion impaired, are allocated a specific allowance equal to
the amount of impairment. The estimated allowances established on each of the
Corporation's specific pools of outstanding loan portfolios is based on a
minimum and maximum percentage range of the specific portfolios as follows:
Minimum Maximum
Loan Loss Loan Loss
Type of Loan and Status Percentage Percentage
----------------------- ---------- ----------
Residential real estate loans:
Current.................................................................... .15% .25%
90 days delinquent (or classified substandard)............................. 7.50 10.00
Residential construction loans:
Current.................................................................... 1.00 1.75
Classified special mention................................................. 2.00 5.00
90 days delinquent (or classified substandard)............................. 10.00 20.00
Commercial real estate loans:
Current.................................................................... 1.00 1.75
Classified special mention................................................. 2.00 5.00
90 days delinquent (or classified substandard)............................. 10.00 20.00
Commercial operating loans:
Current.................................................................... 1.00 1.75
Classified special mention................................................. 2.00 5.00
90 days delinquent (or classified substandard)............................. 10.00 20.00
Agricultural loans:
Current.................................................................... 1.00 1.75
Classified special mention................................................. 2.00 5.00
90 days delinquent (or classified substandard)............................. 10.00 20.00
Consumer loans:
Current--auto.............................................................. 1.75 2.50
Current--home equity....................................................... .75 1.50
Current--all others........................................................ 2.75 3.50
Classified substandard and 90 days delinquent.............................. 20.00 30.00
120 days delinquent (the unsecured balance of consumer loans over 120 days
delinquent is generally written off)..................................... 100.00 100.00
Credit card/taxsaver:
Current credit card........................................................ 4.00 5.00
Current taxsaver........................................................... .75 1.50
90 days delinquent (or classified substandard)............................. 20.00 30.00
120 days delinquent........................................................ 100.00 100.00
23
Effective January 1, 2002, the Corporation amended its policy for
calculating reserves on the loan portfolio by classifying the credit risk of
the portfolio into eight categories compared to six at December 31, 2001.
Classes one through four represent varying degrees of pass rated risk credits,
or minimal credit risk, with minimum and maximum rates of .25% to 1.10% for
class one, .60% to 1.80% for class two, .85% to 2.30% for class three and 1.35%
to 3.10% for class four. Classes five (special mention), six (substandard),
seven (doubtful) and eight (loss), mirror regulatory definitions and are
consistent between all commercial loan types. Classes five through eight are
subject to minimum and maximum rates of 5.0% to 10.0% for class five, 10.0% to
20.0% for class six, 50.0% to 100.0% for class seven and 100.0% for class eight.
Other changes include the minimum and maximum range for reserve percentages
for consumer auto loans at 1.75% to 2.50%, consumer home equity loans .75% to
1.50%, all other consumer loans 2.75% to 3.50% and current Taxsaver credit card
loans .75% to 1.50%. Also, due to the increase in the size of the small
business loan portfolio, such loans have been broken out from consumer loans
and are subject to new reserve percentages. The minimum and maximum ranges are
2.0% to 4.0% for one through four rated risk credits, 2.0% to 10.0% for five
rated risk credits, 30.0% to 50.0% for six rated risk credits and 100.0% for
seven and eight rated risk credits. These changes were designed to more
accurately reflect the inherent risk in the Corporation's loan portfolio and
the current economic environment.
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 and business conditions that may affect the borrower's ability to
pay, credit quality and delinquency trends, regular examinations by the
Corporation's credit review group of specific problem loans and of the overall
portfolio quality and real estate market conditions in the Corporation's
lending areas.
Management determines the elements of the allowance through two methods. The
first valuation process is the analysis of specific loans for individual
impairment. This impairment is measured according to the provisions of
Statements of Financial Accounting Standards No. 114, "Accounting by Creditors
for Impairment of a Loan" and No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures." Management applies specific
monitoring policies and procedures that vary according to the relative risk
profile and other characteristics of the loans within the various loan
portfolios. Management completes periodic specific credit evaluations on
commercial real estate, commercial operating, and agricultural loans and loan
relationships with committed balances in excess of $1.0 million. Management
reviews these loans to assess the ability of the borrower to service all
principal and interest obligations and, as a result, may adjust the risk grade
accordingly and the corresponding classification. Loans and loan relationships
in these portfolios which possess, in management's estimation, potential or
well defined weaknesses which could effect the full collection of the
Corporation's contractual principal and interest are evaluated under more
stringent reporting and oversight procedures. These specific loans are
classified as either special mention, substandard, doubtful or loss. The loans
classified as doubtful or loss are allocated a specific allowance equal to 100%
of the amount of the loan.
The second valuation process is determining the estimated allowance is based
on minimum and maximum range percentages applied to each of the Corporation's
pools of outstanding loan portfolios. The Corporation's residential, consumer
and credit card portfolios are relatively homogenous. Generally, no single loan
is individually significant in terms of its size or potential loss. Therefore,
management reviews these portfolios by analyzing their performance as a
specific pool against which management estimates an allowance for impairment.
Management's determination of the level of the reserve within the minimum and
maximum percentages for these homogenous pools rests upon various judgments and
assumptions used to determine the impairment related to the risk
characteristics of the specific portfolio pools. The minimum and maximum range
percentages are evaluated at least on a quarterly basis for appropriateness
based on historical write-offs, delinquency trends, economic conditions and
other factors.
24
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 uncollectable. 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 income to real estate operations
through the disposition of such real estate when the sale proceeds exceed the
carrying value of the real estate.
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.
25
The following table sets forth the activity in the Bank's allowance for loan
losses for the periods as indicated:
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, --------------------------------------
2001 2000 2000 1999 1998 1997
------------ ------------ -------- -------- -------- --------
(Dollars in Thousands)
Allowance for losses on loans
at beginning of year................. $ 83,439 $ 70,556 $ 80,419 $ 64,757 $ 60,929 $ 59,577
Loans charged-off:
Single-family residential.......... (2,405) (909) (1,874) (2,542) (2,838) (2,535)
Multi-family residential
and commercial real estate....... (1,054) (2,564) (1,938) (71) -- (300)
Consumer and other................. (21,615) (13,435) (20,350) (13,147) (11,319) (12,597)
-------- -------- -------- -------- -------- --------
Loans charged-off.............. (25,074) (16,908) (24,162) (15,760) (14,157) (15,432)
-------- -------- -------- -------- -------- --------
Recoveries:
Single-family residential.......... 6 9 81 210 254 101
Multi-family residential and
commercial real estate........... -- -- 5 -- 2,822 297
Consumer and other................. 5,312 2,539 5,747 3,464 1,740 2,474
-------- -------- -------- -------- -------- --------
Recoveries..................... 5,318 2,548 5,833 3,674 4,816 2,872
-------- -------- -------- -------- -------- --------
Net loans charged-off................. (19,756) (14,360) (18,329) (12,086) (9,341) (12,560)
Provision charged to operations....... 38,945 27,854 13,760 12,400 13,853 13,427
Activity of combining companies
to convert to June 30 fiscal year.... -- -- -- -- 390 475
Allowances acquired in acquisitions... -- -- -- 17,307 1,273 1,966
Change in estimate of allowance for
bulk purchased loans................ (172) (87) (5,294) (1,959) (2,324) (1,878)
Charge-off to allowance
for bulk purchased loans............. -- (28) -- -- (23) (78)
Charge-off to allowance
on sale of securitized loans......... (5) (496) -- -- -- --
-------- -------- -------- -------- -------- --------
Allowance for losses on loans
at end of year....................... $102,451 $ 83,439 $ 70,556 $ 80,419 $ 64,757 $ 60,929
======== ======== ======== ======== ======== ========
Ratio of net loans charged-off to
average loans outstanding during the
period.............................. .22% .14% .19% .14% .12% .18%
=== === === === === ===
26
Investment Activities
The Corporation's general policy is to invest primarily in short-term liquid
assets in compliance with regulatory requirements. As of December 31, 2001, the
Corporation had total average liquid assets of $2.1 billion, which consisted of
$221.4 million in cash and $1.9 billion in agency-backed securities. The
Corporation's liquidity ratio was 15.42% as of December 31, 2001. 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. 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 and short-term cash investments as of the dates indicated
as follows:
December 31, June 30,
------------------- -----------------
2001 2000 2000 1999
---------- -------- -------- --------
(In Thousands)
U.S. Treasury and other Government agency obligations $ 848,131 $534,502 $894,099 $833,957
Obligations of states and political subdivisions..... 179,593 141,363 51,646 54,450
Other securities..................................... 122,621 95,272 47,422 58,164
---------- -------- -------- --------
Total investment securities....................... 1,150,345 771,137 993,167 946,571
Interest-earning cash on deposit and federal funds... 590 1,283 1,086 39,585
---------- -------- -------- --------
Total Investments................................. $1,150,935 $772,420 $994,253 $986,156
========== ======== ======== ========
27
The following table sets forth the scheduled maturities, market values and
weighted average yields for the Corporation's investment securities at December
31, 2001:
One Year Over One Within Over Five Within More Than
or Less Five Years Ten Years Ten Years Total
---------------- ---------------- ---------------- ---------------- ---------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Market
Cost Yield Cost Yield Cost Yield Cost Yield Cost Value
--------- ------- --------- ------- --------- ------- --------- ------- ---------- ----------
(Dollars in Thousands)
U.S. Treasury and other Government
agency obligations.............. $-- -- % $131,004 5.85% $635,100 5.48% $ 80,691 2.82% $ 846,795 $ 848,131
States and political subdivisions. 950 4.54 18,125 6.32 17,097 5.31 141,287 5.29 177,459 179,593
Other debt securities............. -- -- 52,452 6.77 29,961 6.68 36,059 7.72 118,472 122,621
---- ---- -------- ---- -------- ---- -------- ---- ---------- ----------
Total.......................... $950 4.54% $201,581 6.13% $682,158 5.53% $258,037 4.86% $1,142,726 $1,150,345
==== ==== ======== ==== ======== ==== ======== ==== ========== ==========
Average
Yield
-------
U.S. Treasury and other Government
agency obligations.............. 5.28%
States and political subdivisions. 5.39
Other debt securities............. 7.03
----
Total.......................... 5.48%
====
For further information regarding the Corporation's investment securities, see
Note 2 to the Consolidated Financial Statements under Item 8 of this Report.
28
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, prepayment and
maturity of investment securities, and other borrowings. At December 31, 2001,
deposits made up 54.0% of total interest-bearing liabilities compared to 67.3%
at December 31, 2000, and 58.2% at June 30, 2000. 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.
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.
The Corporation has increased its non-interest bearing negotiable order of
withdrawal ("NOW") accounts and plans to increase such non-interest bearing
accounts in the future. In addition, the Corporation intends to continue
pricing its certificates of deposit products at rates that minimize the
Corporation's total costs of funds. The competition for certificates of deposit
is very strong in a market of shrinking funds as individuals continually seek
the most attractive investment alternatives available. Rates on deposits are
priced based on investment opportunities as the Corporation attempts to control
the flow of funds in its deposit accounts according to its business objectives
and the cost of alternative sources of funds.
The Corporation's core deposits (NOW accounts, money market accounts and
savings or passbook accounts) increased $133.5 million to $3.4 billion at
December 31, 2001, compared to $3.3 billion at December 31, 2000. The core
deposits increased even though the Corporation experienced an outflow of $171.7
million from the 34 branches sold in 2001. Non-interest bearing NOW accounts
totaled $699.9 million at December 31, 2001, compared to $562.4 million at
December 31, 2000.
Fixed-term, fixed-rate certificates of deposit at December 31, 2001,
represented 46.2% (or $3.0 billion) of total deposits compared to 57.0% (or
$4.4 billion) of total deposits at December 31, 2000. The Corporation offers
certificate accounts with terms ranging from one month to 120 months. The net
decrease totaling $1.4 billion in certificates of deposits comparing December
31, 2001, to December 31, 2000, is due primarily to the Corporation's planned
run-off of certificates of deposit according to the Corporation's business
plan, including a reduction in brokered deposits totaling $269.2 million, and
the sale of certificates of deposit totaling $274.5 million due to the 34
branches sold in 2001.
For additional information on the Corporation's deposits, see Note 11 to the
Consolidated Financial Statements under Item 8 of this Report.
29
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 amount of deposits between such dates:
December 31, 2001 December 31, 2000 June 30, 2000
------------------------------- ----------------------------- -----------------------------
% of Increase % of Increase % of Increase
Amount Deposits (Decrease) Amount Deposits (Decrease) Amount Deposits (Decrease)
---------- -------- ----------- ---------- -------- ---------- ---------- -------- ----------
(Dollars in Thousands)
Passbook accounts...... $1,939,596 30.3% $ 78,522 $1,861,074 24.2% $ 285,694 $1,575,380 21.5% $ 438,098
NOW accounts........... 1,198,646 18.7 132,676 1,065,970 13.8 37,330 1,028,640 14.0 (8,281)
Market rate savings.... 304,620 4.8 (77,724) 382,344 5.0 (148,973) 531,317 7.3 (377,916)
Certificates of deposit 2,953,660 46.2 (1,431,438) 4,385,098 57.0 189,935 4,195,163 57.2 (376,816)
---------- ----- ----------- ---------- ----- --------- ---------- ----- ---------
Total deposits......... $6,396,522 100.0% $(1,297,964) $7,694,486 100.0% $ 363,986 $7,330,500 100.0% $(324,915)
========== ===== =========== ========== ===== ========= ========== ===== =========
June 30, 1999
------------------------------
% of Increase
Amount Deposits (Decrease)
---------- -------- ----------
Passbook accounts...... $1,137,282 14.9% $ 146,286
NOW accounts........... 1,036,921 13.5 156,920
Market rate savings.... 909,233 11.9 268,746
Certificates of deposit 4,571,979 59.7 525,256
---------- ----- ----------
Total deposits......... $7,655,415 100.0% $1,097,208
========== ===== ==========
30
The following table shows the composition of average deposit balances and
average rates for the periods as indicated:
Year Ended June 30,
Year Ended Six Months Ended --------------------------------
December 31, 2001 December 31, 2000 2000 1999
---------------- ---------------- --------------- ---------------
Average Avg. Average Avg. Average Avg. Average Avg.
Balance Rate Balance Rate Balance Rate Balance Rate
---------- ---- ---------- ---- ---------- ---- ---------- ----
(Dollars in Thousands)
Passbook accounts...... $1,958,022 4.73% $1,703,299 5.34% $1,320,996 4.48% $1,125,632 3.70%
NOW accounts........... 1,119,862 .37 1,031,255 .61 1,041,483 .71 1,020,345 1.20
Market rate savings.... 335,798 2.77 448,043 3.82 774,660 4.01 745,265 3.62
Certificates of deposit 3,709,030 5.51 4,283,327 5.88 4,295,975 5.31 4,497,729 5.38
---------- ---- ---------- ---- ---------- ---- ---------- ----
Average deposit
accounts............. $7,122,712 4.36% $7,465,924 4.90% $7,433,114 4.38% $7,388,971 4.37%
========== ==== ========== ==== ========== ==== ========== ====
The following table sets forth the Corporation's certificates of deposit
(fixed maturities) classified by rates at the periods as indicated:
December 31, June 30,
--------------------- ---------------------
Rate 2001 2000 2000 1999
---- ---------- ---------- ---------- ----------
(In Thousands)
Less than 2.00%........ $ 45,207 $ 1,968 $ -- $ --
2.00%--2.99%........... 562,840 78 7,685 6,555
3.00%--3.99%........... 537,808 6,119 6,740 73,342
4.00%--4.99%........... 825,086 583,156 771,419 1,816,539
5.00%--5.99%........... 611,563 1,251,274 2,007,819 2,310,800
6.00%--6.99%........... 257,613 2,313,213 1,328,741 307,487
7.00%--7.99%........... 112,885 227,833 70,974 53,311
8.00% and over......... 658 1,457 1,785 3,945
---------- ---------- ---------- ----------
Certificates of deposit $2,953,660 $4,385,098 $4,195,163 $4,571,979
========== ========== ========== ==========
The following table presents the outstanding amount of certificates of
deposit in amounts of $100,000 or more by time remaining until maturity at the
periods as indicated:
December 31, June 30,
----------------- -----------------
2001 2000 2000 1999
-------- -------- -------- --------
(In Thousands)
Maturity Period
---------------
Three months or less $256,828 $353,172 $208,258 $482,996
Over three through six months. 69,244 222,913 117,680 124,793
Over six through twelve months 87,912 279,053 254,141 143,127
Over twelve months............ 70,136 61,388 113,341 41,427
-------- -------- -------- --------
Total...................... $484,120 $916,526 $693,420 $792,343
======== ======== ======== ========
Borrowings
The Corporation has also relied upon other borrowings, primarily advances
from the FHLB, as additional sources of funds. 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.
31
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 mortgage loans 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 December 31, 2001, the Corporation had
pledged $3.7 billion of its real estate loans and $516.5 million of its
mortgage backed securities and held FHLB stock totaling $253.9 million.
At December 31, 2001, the Corporation had advances totaling $4.9 billion
from the FHLB at interest rates ranging from 1.78% to 7.69% and at a weighted
average rate of 4.76%. At December 31, 2000, and June 30, 2000, such advances
from the FHLB totaled $3.6 billion and $5.0 billion, respectively, at weighted
average rates of 6.41% and 5.98%. Fixed-rate advances totaling $1.7 billion at
December 31, 2001, with a weighted average rate of 5.29% are convertible into
adjustable-rate advances at the option of the FHLB with call dates ranging from
January 2002 to March 2003. Such convertible advances all have scheduled
maturities due over five years.
Set forth below is certain information relating to the Corporation's
securities sold under agreements to repurchase and FHLB advances at the dates
and for the periods indicated:
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, ----------------------
2001 2000 2000 1999
------------ ------------ ---------- ----------
(Dollars in Thousands)
Repurchase Agreements:
Balance at end of year........................ $ 201,912 $ 6,905 $ 33,379 $ 128,514
Maximum month-end balance..................... $ 201,912 $ 33,411 $ 132,432 $ 334,294
Average balance............................... $ 82,215 $ 18,692 $ 69,763 $ 209,111
Weighted average interest rate during the year 5.32% 4.98% 5.62% 5.94%
Weighted average interest rate at end of year. 4.30% 4.91% 4.99% 5.72%
FHLB Advances:
Balance at end of year........................ $4,928,075 $3,565,465 $5,049,582 $3,632,241
Maximum month-end balance..................... $4,928,075 $5,180,560 $5,049,582 $3,709,348
Average balance............................... $4,265,468 $4,883,700 $4,373,510 $3,000,837
Weighted average interest rate during the year 5.49% 6.10% 5.51% 5.26%
Weighted average interest rate at end of year. 4.76% 6.41% 5.98% 5.05%
For additional information on the Corporation's FHLB advances, securities
sold under agreements to repurchase and other borrowings, see Notes 12 and 13
to the Consolidated Financial Statements under Item 8 of this Report.
Customer Services
Retail management aggressively markets the Bank's various checking and loan
products since these are the principal entry points for consumers seeking a
banking relationship. The Corporation's goal is to become the new customer's
primary bank so that the opportunity is there immediately and over time to
cross-sell the Bank's numerous services to develop profitable household
relationships. Accordingly, management continues to update the data processing
equipment within the branch operations to provide a cost-effective and
efficient delivery of
32
services to the Bank's customers. Management has also been proactive in the
implementation of new consumer- oriented technologies, including online banking
and bill-paying through the Bank's web sight at www.comfedbank.com. Management
continues to strive to provide customers with the ability to bank when, where
and how they choose. The Corporation initiated a full-service cash management
program in the fourth quarter of 2001 to further develop the Bank's commercial
banking relationships. The Bank utilizes an internet-based cash management tool
providing business owners access to full-service electronic banking. Services
of this program, among others, include funds transfer, debit of consumer
accounts, electronic payment of vendors, payroll direct deposits and wire
transfers. In addition to online banking, the Bank offers customers the ability
to bank in person at our free-standing branch offices and supermarket
locations, many of which offer extended weekday and weekend hours; by
telephone, utilizing our 24-hour AccessNow automated customer service system
tied to extended-hour operator availability; and by ATMs through the Bank's
proprietary network and links to other national and international ATM services.
Additional information about the Bank's competitive products can be obtained
from the Bank's web site.
Subsidiaries
The Bank is permitted to invest an amount equal to 2.0% of its consolidated
regulatory assets in capital stock and secured and unsecured loans in its
service corporations, and an amount equal to an additional 1.0% of its
consolidated regulatory assets when such additional investment is used for
community development purposes. In addition, federal savings institutions
meeting regulatory capital requirements and certain other tests may invest up
to 50.0% of their regulatory core capital in conforming first mortgage loans to
service corporations. Under such limitations, at December 31, 2001, the Bank
was authorized to invest up to $380.2 million in the stock of, or loans to,
service corporations (based upon the 3.0% limitation). As of December 31, 2001,
the Bank's investment in capital stock in its service corporations and their
wholly-owned subsidiaries was $8.4 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 two subsidiaries (Commercial Federal Service
Corporation and First Savings Investment Corporation) engaged in activities not
permissible for national banks. Investments in such subsidiaries must be 100%
deducted from capital. See "Regulation -- Regulatory Capital Requirements." At
December 31, 2001, the total investment in such subsidiaries was $8.0 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 December 31, 2001, the Bank had twelve wholly-owned subsidiaries, five of
which own and operate certain real estate properties of the Bank. With the
exception of the two real estate subsidiaries discussed above, these
subsidiaries are considered engaged in permissible activities and do not
require deductions from capital. CFMC was approved by the OTS in 1994 to be
classified as an "operating subsidiary" and as such, CFMC ceased to be subject
to the regulatory investment limitation in service corporations. The remaining
wholly owned subsidiaries, exclusive of CFMC, are classified as service
corporations. Descriptions of the principal active subsidiaries of the Bank
follow.
See Exhibit 21 "Subsidiaries of the Corporation" herein for a complete
listing of all subsidiaries of the Corporation.
33
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 December 31, 2001, CFMC
serviced 51,000 loans for the Bank and 133,400 loans for others. See "Lending
Activities -- Loan Servicing for Other Institutions."
Commercial Federal Investment Services, Inc. ("CFIS")
CFIS offers customers discount brokerage services in 46 of the Corporation's
branch offices. CFIS provides investment advice and access to all major stock,
bond, mutual fund, and option markets through a third party registered
broker-dealer, who provides all support functions either independently or
through affiliates.
Commercial Federal Insurance Corporation ("CFIC")
CFIC serves as a full-service independent insurance agency, offering a full
line of homeowners, commercial (including property and casualty), health, auto
and life insurance products. Additionally, a wholly-owned subsidiary of CFIC
provides reinsurance on credit life and disability policies written by an
unaffiliated carrier for consumer loan borrowers of the Corporation.
Commercial Federal Service Corporation ("CFSC")
CFSC was formed primarily to develop and manage real estate, principally
apartment complexes located in eastern Nebraska, directly and through a number
of limited partnerships. Subsidiaries of CFSC act as general partner and
syndicator in many of the limited partnerships. Under the capital regulations
previously discussed, the Bank's investments in and loans to CFSC are fully
excluded from regulatory capital. See "Regulation -- Regulatory Capital
Requirements."
REIT Holding Company ("REIT")
During fiscal year 2000, a real estate investment trust was formed to hold
mortgage loan participation interests. All earnings from the REIT are derived
from loan participation interests acquired from the Bank.
Employees
At December 31, 2001, the Corporation and its wholly-owned subsidiaries had
2,800 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 and short
and long-term disability coverage. The Corporation also offers discounts on
loan fees to its employees who qualify based on term of employment (except that
no preferential rates or terms are offered to executive officers and senior
management). The Corporation considers its employee relations to be good.
Competition
The Corporation faces strong competition in the attraction of deposits and
in the origination of real estate, consumer and commercial loans. Its most
direct competition for savings deposits has come historically from commercial
banks and from thrift institutions located in its primary market areas. The
Corporation's primary market area for savings deposits includes Colorado, Iowa,
Nebraska, Kansas, Oklahoma, Missouri and Arizona and, for loan originations,
includes Colorado, Iowa, Nebraska, Kansas, Oklahoma, Missouri, Arizona and Las
Vegas, Nevada (primarily residential construction lending). Management believes
that the Corporation's extensive branch network has enabled the Corporation to
compete effectively for deposits and loans against other financial
institutions. The Corporation has been able to attract savings deposits
primarily by offering depositors a wide variety of deposit accounts, convenient
branch locations, a full range of financial services and competitive rates of
interest.
34
The Corporation's competition for real estate, consumer and commercial loans
comes principally from other thrift institutions, mortgage banking companies,
commercial banks, insurance companies and other institutional lenders. The
Corporation competes for loans principally through the efficiency and quality
of the service provided to borrowers and the interest rates and loan fees
charged.
Regulation
General
The Bank must comply with various regulations of both the OTS and the FDIC.
The Bank's lending activities and other investments must comply with federal
statutory and regulatory requirements. The Bank must also comply with the
reserve requirements of the Federal Reserve Board. This supervision and
regulation is intended primarily for the protection of the SAIF and depositors.
Both the OTS and the FDIC have extensive discretion in connection with their
supervisory and enforcement activities and examination policies, including
policies regarding the classification of assets and the establishment of
adequate loan loss reserves. The OTS regularly examines the Bank and prepares
reports to the Board of Directors of the Bank regarding any deficiencies. The
Bank must also file reports with the OTS and the FDIC concerning its activities
and financial condition and must obtain regulatory approval before engaging in
certain transactions.
As a savings and loan holding company, the Corporation is also subject to
the OTS's regulation, examination, supervision and reporting requirements.
Certain of these regulatory requirements are referred to within this
"Regulation" section or appear elsewhere in this Report.
The Gramm-Leach-Bliley Act
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was signed
into law. Effective March 11, 2000, the GLB Act authorized affiliations between
banking, securities and insurance firms and authorized bank holding companies
and national banks to engage in a variety of new financial activities. The GLB
Act, however, prohibits future affiliations between existing unitary savings
and loan holding companies, like the Corporation, and firms that are engaged in
commercial activities and prohibits the formation of new unitary holding
companies.
The GLB Act imposed new privacy requirements on financial institutions.
Financial institutions are generally prohibited from disclosing customer
information to non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such disclosure. Financial
institutions are also required to disclose their privacy policies to customers
annually. Financial institutions, however, must comply with state law if it is
more protective of customer privacy than the GLB Act.
The GLB Act imposes certain burdens on the Corporation's operations. From a
competitive environment perspective, the GLB Act reduces the range of companies
with which the Corporation may affiliate, although the Act may facilitate
affiliations with companies in the financial services industry.
35
Regulatory Capital Requirements
At December 31, 2001, 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 December 31, 2001:
Actual Requirement Excess
--------- ----------- ------
(Dollars in Thousands)
Bank's stockholder's equity.................................................. $ 854,180
Add accumulated losses on certain available for sale securities and cash flow
hedges, net................................................................ 51,765
Less intangible assets....................................................... (191,450)
Less investments in non-includable subsidiaries.............................. (7,961)
---------
Tangible capital............................................................. $ 706,534
=========
Tangible capital to adjusted assets (1)...................................... 5.58% 1.50% 4.08%
========= ==== ====
Tangible capital............................................................. $ 706,534
Plus certain restricted amounts of other intangible assets................... 3,236
---------
Core capital (Tier 1 capital)................................................ $ 709,770
=========
Core capital to adjusted assets (2).......................................... 5.60% 3.00%/(3)/ 2.60%
========= ==== ====
Core capital................................................................. $ 709,770
Less equity investments and other assets required to be deducted............. (1,102)
Plus qualifying subordinated debt............................................ 50,000
Plus unrealized gains on available for sale equity securities................ 102
Plus qualifying loan loss allowances......................................... 91,943
---------
Risk-based capital (Total capital)........................................... $ 850,713
=========
Risk-based capital to risk-weighted assets (4)............................... 11.38% 8.00% 3.38%
========= ==== ====
--------
(1) Based on adjusted total assets totaling $12,669,688.
(2) Based on adjusted total assets totaling $12,672,924.
(3) This is the minimum percentage requirement for institutions that are not
anticipating or experiencing significant growth and have well-diversified
risks, including minimal interest rate risk exposure, excellent asset
quality, high liquidity and stable and sufficient earnings. For all other
institutions the minimum required ratio is 4.00%.
(4) Based on risk-weighted assets totaling $7,474,704.
The Federal Deposit Insurance Corporation Improvement Act of 1991
established five regulatory capital categories: well-capitalized,
adequately-capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized; and authorized banking regulatory agencies to take
prompt corrective action with respect to institutions in the three
undercapitalized categories. These corrective actions become increasingly more
stringent as an institution's regulatory capital declines. At December 31,
2001, the Bank exceeded the minimum requirements for the well-capitalized
category as shown in the following table:
Tier 1 Tier 1 Total
Capital Capital Capital
to Adjusted to Risk- to Risk-
Total Weighted Weighted
Assets Assets Assets
----------- -------- --------
Percentage of adjusted assets......................... 5.60% 9.50% 11.38%
Minimum requirements to be classified well-capitalized 5.00% 6.00% 10.00%
Under OTS capital regulations, the Bank must maintain "tangible" capital
equal to 1.5% of adjusted total assets, "core" or "Tier 1" capital equal to
3.0% of adjusted total assets and "total" or "risk-based" capital (a
combination of core and "supplementary" capital) equal to 8.0% of risk-weighted
assets. In addition, the OTS can impose certain restrictions on savings
associations that have a total risk-based capital ratio that is less than
36
8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a
ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if
the institution is rated a Composite 1 under the regulatory CAMELS examination
rating system).
Tangible capital is defined as common shareholders' equity (including
retained earnings), noncumulative perpetual preferred stock and related
surplus, minority interests in the equity accounts of fully consolidated
subsidiaries and certain nonwithdrawable accounts and pledged deposits, less
intangible assets , non-mortgage servicing assets, and credit-enhancing
interest-only strips above the amount that may be included in core capital.
Tangible capital is further reduced by an amount equal to the savings
association's debt and equity investments in subsidiaries engaged in activities
not permissible for national banks. At December 31, 2001, the Bank had
approximately $8.0 million of debt and equity invested in two subsidiaries
which are engaged in activities not permissible for national banks that was
deducted from capital. See "Business -- Subsidiaries."
Core capital consists of tangible capital plus restricted amounts of certain
grandfathered intangible assets, purchased credit card relationships and
non-mortgage servicing rights. The Bank's core capital of $709.8 million at
December 31, 2001 did not include any qualifying supervisory goodwill but did
include $3.2 million of restricted amounts of certain intangible assets (core
value of deposits).
Risk-based capital is comprised of core capital and supplementary capital.
Supplementary capital consists of certain preferred stock issues,
nonwithdrawable accounts and pledged deposits that do not qualify as core
capital, certain approved subordinated debt, certain other capital instruments,
a portion of the Bank's loan loss allowances and a portion of the Bank's
unrealized gains on equity securities. The portion of the allowances for loan
losses includable in supplementary capital is limited to 1.25% of risk-weighted
assets and totaled $91.9 million at December 31, 2001. Qualifying subordinated
debt, issued in the fourth quarter of 2001, is included in supplementary
capital and totaled $50.0 million at December 31, 2001. The portion of the
unrealized gain that may be included is limited to a maximum of 45.0% provided
the equity securities have readily determinable fair values.
The risk-based capital requirement is measured against risk-weighted assets,
which equal the sum of every on-balance-sheet asset and the credit-equivalent
amount of every off-balance-sheet item after being multiplied by an assigned
risk weight. The risk weights are determined by the OTS and range from 0% for
cash to 100% for consumer loans, non-qualifying single-family, multi-family and
residential construction loans and commercial real estate loans, repossessed
assets and loans more than 90 days past due. OTS capital regulations require
savings institutions to maintain minimum total capital, consisting of core
capital plus supplementary capital (limited to 100% of core capital), equal to
8.0% of risk-weighted assets.
The OTS requires savings institutions with more than a "normal" level of
interest rate risk to maintain additional total capital. A savings institution
with a greater than normal interest rate risk is required to deduct from total
capital, for purposes of calculating its risk-based capital requirement, an
amount (the "interest rate risk component") equal to one-half the difference
between the institution's measured interest rate risk and the normal level of
interest rate risk, multiplied by the economic value of its total assets. The
Bank has determined that, on the basis of current financial data, it will not
be deemed to have more than a normal level of interest rate risk under the rule
and therefore will not be required to increase its total capital as a result of
the rule.
In addition to these standards, the Director of the OTS is authorized to
establish higher minimum levels of capital for a savings institution if the
Director determines that such institution is in need of more capital in light
of the particular circumstances of the institution. The Director of the OTS may
treat the failure of any savings institution to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive requiring
any savings institution which fails to maintain capital at or above the minimum
level required by the Director to submit and adhere to a plan for increasing
capital. Such an order may be enforced in the same manner as an order issued by
the FDIC.
37
Federal Home Loan Bank System
The Bank is a member of the FHLB of Topeka, which is one of 12 regional
FHLBs. Each FHLB serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from funds
deposited by financial institutions and proceeds derived from the sale of
consolidated obligations of the FHLB System. It makes loans to members in
accordance with policies and procedures established by the Board of Directors
of the FHLB of Topeka.
As a member of the FHLB of Topeka, the Bank must purchase and maintain
shares of capital stock in the FHLB of Topeka in an amount at least equal to
the greater of:
. 1.0% of the Bank's aggregate unpaid principal of its residential mortgage
loans, home purchase contracts, and similar obligations at the beginning
of each year; or
. 5.0% of its then outstanding advances (borrowings) from the FHLB.
The Bank was in compliance with this requirement at December 31, 2001, with
an investment in FHLB stock totaling $253.9 million.
Liquidity Requirements
The OTS issued a final rule effective July 18, 2001, whereby savings
associations are only required to maintain sufficient liquidity to ensure their
safe and sound operation. The Bank's liquidity ratio was 15.42% at December 31,
2001.
Qualified Thrift Lender Test
Savings institutions like the Bank are required to satisfy a qualified
thrift lender ("QTL") test. To meet the QTL test, the Bank must maintain at
least 65.0% of its portfolio assets (total assets less intangible assets,
property the Bank uses in conducting its business and liquid assets in an
amount not exceeding 20.0% of total assets) in "Qualified Thrift Investments."
Qualified Thrift Investments consist primarily of residential mortgage loans
and mortgage-backed securities and other securities related to domestic,
residential real estate or manufactured housing. The shares of stock the Bank
owns in the FHLB of Topeka also qualify as Qualified Thrift Investments as do
loans for educational purposes, loans to small businesses and loans made
through credit cards or credit card accounts. Certain other types of assets
also qualify as Qualified Thrift Investments subject to an aggregate limit of
20.0% of portfolio assets.
If the Bank satisfies the test, it will continue to enjoy full borrowing
privileges from the FHLB of Topeka. If it does not satisfy the test it may lose
it borrowing privileges and be subject to activities and branching restrictions
applicable to national banks. Compliance with the QTL test is measured on a
monthly basis and the Bank must meet the test in nine out of every 12 months.
As of December 31, 2001, the Bank was in compliance with the QTL test with
approximately 78.15% of the Bank's portfolio assets invested in Qualified
Thrift Investments.
Restrictions On Capital Distributions
The OTS limits the payment of dividends and other capital distributions
(including stock repurchases and cash mergers) by the Bank. Under these
regulations, a savings institution must submit notice to the OTS prior to
making a capital distribution if:
. the association does not qualify for expedited treatment under OTS
application processing regulations,
. it would not be well capitalized after the distribution,
. the distribution would result in the retirement of any of the
association's common or preferred stock or debt counted as its regulatory
capital, or
. the association is a subsidiary of a holding company.
38
A savings association must file an application to the OTS and obtain its
approval prior to paying a capital distribution if:
. the association does not qualify for expedited treatment under OTS
application processing regulations,
. the association would not be adequately capitalized following the
distribution,
. the association's total distributions for the calendar year exceeds the
association's net income for the calendar year to date plus its net
income (less distributions) for the preceding two years, or
. the distribution would otherwise violate applicable law or regulation or
an agreement with or condition imposed by the OTS.
At December 31, 2001, the Bank was required to file an application to the
OTS prior to paying a capital distribution. During calendar year 2001 the Bank
recorded net income of approximately $105.6 million and made capital
distributions totaling $216.0 million. Total distributions exceeded the Bank's
retained net income for calendar year 2001 plus the preceding two years (the
"retained net income standard") by $228.2 million. Despite the above authority,
the OTS may prohibit any savings institution from making a capital distribution
if the OTS determined that the distribution constituted an unsafe or unsound
practice. Furthermore, under the OTS's prompt corrective action regulations the
Bank would be prohibited from making any capital distributions if, after making
the distribution, the Bank would not satisfy its minimum capital requirements.
Deposit Insurance
The SAIF insures the Bank's deposit accounts up to applicable regulatory
limits. The Bank also has a portion of deposits (approximately 14 %) acquired
from acquisitions that are insured by the BIF. The FDIC establishes an
assessment rate for deposit insurance premiums which protects the insurance
fund and considers the fund's operating expenses, case resolution expenditures,
income and effect of the assessment rate on the earnings and capital of SAIF
members. The SAIF assessment is based on the capital adequacy and supervisory
rating of the institution and is assigned by the FDIC.
The FDIC's assessment schedule for SAIF deposit insurance mandates the
assessment rate for well-capitalized institutions with the highest supervisory
ratings be reduced to zero and institutions in the lower risk assessment
classification be assessed at the rate of .27% of insured deposits. In
addition, all institutions are required to pay assessments to help fund
interest payments on certain bonds issued by the Financing Corporation. The
Financing Corporation assessment rate is reset quarterly. The rates for each of
the respective quarters during 2001 were .019 basis points, .0188 basis points,
..0184 basis points and .0182 basis points, respectively.
Transactions With Related Parties
Generally, transactions between the Bank and any of its affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act. Section 23A limits
the extent to which the savings institution or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to 10.0% of
such institution's capital stock and surplus, and contain an aggregate limit on
all such transactions with all affiliates to an amount equal to 20.0% of such
capital stock and surplus. Savings institutions are also prohibited from making
loans to any affiliate that is not engaged in activities permissible to bank
holding companies. Section 23B requires that such transactions be on terms as
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. An affiliate of a savings
institution is any company or entity that controls, is controlled by or is
under common control with the savings institution. In a holding company
context, the parent holding company of a savings institution (such as the
Corporation) and any companies that are controlled by such parent holding
company are affiliates of the savings institution.
Loans to Executive Officers, Directors and Principal Stockholders
Savings institutions are also subject to the restrictions contained in
Section 22(h) of the Federal Reserve Act and the Federal Reserve Board's
Regulation O thereunder on loans to executive officers, directors and principal
39
stockholders. Under Section 22(h), loans to a director, executive officer and
to a greater than 10.0% stockholder of a savings institution and certain
affiliated interests of such persons, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the institution's
loans-to-one-borrower limit (generally equal to 15.0% of the institution's
unimpaired capital and surplus). Section 22(h) also prohibits the making of
loans above amounts prescribed by the appropriate federal banking agency, to
directors, executive officers and greater than 10.0% stockholders of a savings
institution, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the institution with any
"interested" director not participating in the voting. Regulation O prescribes
the loan amount (which includes all other outstanding loans to such person) as
to which such prior board of director approval is required as being the greater
of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section
22(h) requires that loans to directors, executive officers and principal
stockholders be made on terms substantially the same as offered in comparable
transactions to other persons. Section 22(h) also generally prohibits a
depository institution from paying the overdrafts of any of its executive
officers or directors.
Savings institutions must also comply with Section 22(g) of the Federal
Reserve Act and Regulation O on loans to executive officers and the
restrictions of 12 U.S.C. Section 1972 on certain tying arrangements and
extensions of credit by correspondent banks. Pursuant to Section 22(g) of the
Federal Reserve Act, the institution's board of directors must approve loans to
executive officers, directors and principal shareholders of the institution.
Section 1972 also prohibits a depository institution from extending credit to
or offering any other services, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain some
additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain
exceptions. Section 1972 also prohibits extensions of credit to executive
officers, directors, and greater than 10.0% stockholders of a depository
institution by any other institution which has a correspondent banking
relationship with the institution, unless such extension of credit is on
substantially the same terms as those prevailing at the time for comparable
transactions with other persons and does not involve more than the normal risk
of repayment or present other unfavorable features.
Federal Reserve System
Pursuant to current regulations of the Federal Reserve Board, a thrift
institution must maintain average daily reserves equal to 3.0% on the first
$41.3 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 December 31, 2001, the Bank met its reserve
requirements.
Savings And Loan Holding Company Regulation
The Corporation is a registered savings and loan holding company. As such,
it is subject to OTS regulations, examinations, supervision and reporting
requirements. As a subsidiary of a savings and loan holding company, the Bank
is subject to certain restrictions in its dealings with the Corporation and any
affiliates.
Activities Restrictions
Since the Corporation only owns one thrift institution, it is classified as
a unitary savings and loan holding company. There are generally no restrictions
on the activities of a unitary savings and loan holding company. However, if
the Director of the OTS determines that there is reasonable cause to believe
that the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the Director of the OTS may impose
restrictions to address such risk. If the Corporation were to acquire control
of another savings institution, other than through merger or other business
combination with the Bank, the Corporation would become a multiple savings and
loan holding
40
company. In addition, if the Bank fails to meet the QTL test, then the
Corporation would also become subject to the activity restrictions applicable
to multiple holding companies. A multiple savings and loan holding company may
only engage in the following activities:
. furnishing or performing management services for a subsidiary savings
institution;
. conducting an insurance agency or escrow business;
. holding, managing, or liquidating assets owned by or acquired from a
subsidiary savings institution;
. holding or managing properties used or occupied by a subsidiary savings
institution;
. acting as trustee under deeds of trust;
. those activities authorized by regulation as of March 5, 1987, to be
engaged in by multiple holding companies; or
. those activities authorized by the Federal Reserve Board as permissible
for bank holding companies, unless the Director of the OTS by regulation
prohibits or limits such activities.
The Corporation would also have to register as a bank holding company and
become subject to applicable restrictions unless the Bank requalified as a QTL
within one year thereafter. See "Regulation -- Qualified Thrift Lender Test."
Restrictions On Acquisitions
The Corporation must obtain the prior approval of the OTS before acquiring
control of any other savings institution. 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:
. the multiple savings and loan holding company involved controls a savings
institution which operated a home or branch office in the state of the
institution to be acquired as of March 5, 1987;
. the acquired is authorized to acquire control of the savings institution
pursuant to the emergency acquisition provisions of the Federal Deposit
Insurance Act; or
. the statutes of the state in which the institution to be acquired is
located specifically permit institutions to be acquired by
state-chartered institutions or savings and loan holding companies
located in the state where the acquiring entity is located (or by a
holding company that controls such state-chartered savings institutions).
Taxation
The Corporation is subject to the provisions of the Internal Revenue Code of
1986, as amended. The Corporation and its subsidiaries, including the Bank,
file a consolidated federal income tax return based on a June 30 fiscal year
end compared to a December 31 year end for reporting purposes. Consolidated
taxable income is determined on an accrual basis. The Internal Revenue Service
has completed examination of the Corporation's consolidated federal income tax
returns through June 30, 1995, with no effect on the Corporation's results of
operations.
The State of Nebraska imposes a franchise tax on all financial institutions.
Under the franchise tax, the Bank can not join in the filing of a consolidated
return with the Corporation (which is filed separately). The Bank is assessed
at a rate of $.47 per $1,000 of average deposits. The franchise tax is limited
to 3.81% of the Bank's
41
income before tax (including subsidiaries) as reported on the Bank's
consolidated books and records. The Corporation also pays franchise or state
income taxes in a number of jurisdictions in which the Corporation or its
subsidiaries conduct business. For further information regarding federal income
taxes payable by the Corporation, see Note 15 to the Consolidated Financial
Statements under Item 8 of this Report.
ITEM 2. PROPERTIES
At December 31, 2001, the Corporation conducted business through 196 branch
offices in eight states: Colorado (44), Iowa (42), Nebraska (41), Kansas (26),
Oklahoma (19), Missouri (14), Arizona (6) and Minnesota (4). On October 12,
2000, the Corporation announced a series of branch divestitures as part of its
key strategic initiatives. During 2001, twelve branches were consolidated and
34 branches were sold.
At December 31, 2001, the Corporation owned the buildings for 92 of its
branch offices and leased the remaining 104 offices under leases expiring (not
assuming exercise of renewal options) between January 2002 and April 2048. The
Corporation has 236 "Cashbox" ATMs located throughout its eight-state region.
At December 31, 2001, the total net book value of land, office properties and
equipment owned by the Corporation was $158.7 million. Management believes that
the Corporation's premises are suitable for its present and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Corporation, the Bank or
any subsidiary is a party or to which any of their property is subject which
are expected to have a material adverse effect on the Corporation's financial
position. For information on other legal proceedings, see Note 18 to the
Consolidated Financial Statements under Item 8 of this Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the quarter
ended December 31, 2001.
42
PART II
ITEM 5. MARKET FOR COMMERCIAL FEDERAL CORPORATION'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Corporation's common stock is traded on the New York Stock Exchange
under the symbol "CFB." The following table sets forth the high, low and
closing sales prices and dividends declared for the periods indicated for the
common stock:
Common Stock Price
-------------------- Dividends
Quarter Ended High Low Close Declared
------------- ------ ------ ------ ---------
December 31, 2001. $26.40 $22.15 $23.50 $.080
September 30, 2001 28.55 22.12 24.27 .080
June 30, 2001..... 23.40 21.11 23.10 .080
March 31, 2001.... 22.99 19.94 22.30 .070
December 31, 2000. 20.38 16.06 19.44 .070
September 30, 2000 19.25 16.31 19.13 .070
June 30, 2000..... 17.13 14.81 15.56 .070
March 31, 2000.... 16.81 12.19 16.63 .070
December 31, 1999. 20.81 16.25 17.81 .070
September 30, 1999 24.69 18.63 19.63 .065
As of December 31, 2001, there were 45,974,648 shares of common stock issued
and outstanding that were held by over 5,500 shareholders of record and
3,232,122 shares subject to outstanding options. The number of shareholders of
record does not reflect the persons or entities who hold their stock in nominee
or "street" name.
Cash dividends declared for calendar year 2001 totaled $15.2 million, or
$.31 per common share compared to $7.6 million, or $.14 per common share ($.28
annualized per common share), for the six months ended December 31, 2000. Cash
dividends declared for fiscal year 2000 totaled $15.8 million, or $.275 per
common share, compared to fiscal year 1999 of $15.1 million. For information
regarding the payment of future dividends and any possible restrictions see
"MD&A--Liquidity and Capital Resources" under Item 7 of this Report and Note 16
to the Consolidated Financial Statements under Item 8 of this Report.
43
ITEM 6. SELECTED FINANCIAL DATA
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, --------------------------------------
2001 2000(1) 2000 1999 1998 1997
------------ ------------ -------- -------- -------- --------
(Dollars in Thousands Except Per Share Data)
Interest income............................... $871,374 $498,732 $927,690 $839,354 $757,688 $717,592
Interest expense.............................. 563,945 344,297 585,549 507,021 477,389 453,969
-------- -------- -------- -------- -------- --------
Net interest income........................... 307,429 154,435 342,141 332,333 280,299 263,623
Provision for loan losses..................... (38,945) (27,854) (13,760) (12,400) (13,853) (13,427)
Retail fees and charges....................... 53,519 25,650 43,230 36,740 30,284 26,198
Loan servicing fees, net...................... 3,622 11,521 25,194 22,961 24,523 25,910
Gain (loss) on sales of securities and changes
in fair value of derivatives, net............ 15,422 (69,462) -- 4,376 3,765 510
Gain (loss) on sales of loans................. 8,739 (18,023) (110) 3,423 3,092 2,142
Bank owned life insurance..................... 13,872 713 -- -- -- --
Real estate operations........................ (6,971) (4,809) (88) (1,674) 1,894 1,314
Other operating income........................ 32,184 14,304 33,613 24,189 23,702 15,914
General and administrative expenses (2)....... 232,470 148,389 251,931 238,594 206,123 204,130
Amortization core value of deposits........... 7,211 3,903 8,563 8,984 5,954 9,380
Amortization of goodwill...................... 8,134 4,250 8,673 6,718 1,860 1,855
-------- -------- -------- -------- -------- --------
Income (loss) before income taxes,
extraordinary items and cumulative effect
of change in accounting principle............ 141,056 (70,067) 161,053 155,652 139,769 106,819
Income tax provision (benefit)................ 43,374 (19,691) 55,269 63,260 52,356 37,980
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary items and
cumulative effect of change in accounting
principle.................................... 97,682 (50,376) 105,784 92,392 87,413 68,839
Extraordinary items, net (3).................. -- -- -- -- -- (583)
Cumulative effect of change in accounting
principle, net (4)........................... -- (19,125) (1,776) -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss)............................. $ 97,682 $(69,501) $104,008 $ 92,392 $ 87,413 $ 68,256
======== ======== ======== ======== ======== ========
Earnings (loss) per share: (5)
Income (loss) before extraordinary items
and cumulative effect of change in
accounting principle....................... $ 1.93 $ (.92) $ 1.82 $ 1.54 $ 1.52 $ 1.17
Extraordinary items, net (3)................ -- -- -- -- -- (.01)
Cumulative effect of change in accounting
principle, net (4)......................... -- (.35) (.03) -- -- --
-------- -------- -------- -------- -------- --------
Net income (loss)........................... $ 1.93 $ (1.27) $ 1.79 $ 1.54 $ 1.52 $ 1.16
======== ======== ======== ======== ======== ========
Dividends declared per common share........... $ .310 $ .140 $ .275 $ .250 $ .212 $ .185
======== ======== ======== ======== ======== ========
Other data:
Net interest rate spread.................... 2.61% 2.46% 2.67% 2.85% 2.62% 2.58%
Net yield on interest-earning assets........ 2.62% 2.44% 2.78% 2.99% 2.88% 2.86%
Return on average assets (6)................ .76% (1.01)% .77% .77% .85% .70%
Return on average equity (6)................ 12.23% (15.30)% 10.85% 9.95% 10.96% 9.18%
Return on average tangible equity........... 16.30% (20.15)% 14.52% 12.49% 11.98% 9.86%
Dividend payout ratio....................... 16.06% n/a 15.36% 16.23% 13.95% 15.95%
Total number of branches at end of period... 196 241 255 256 195 190
(Continued on next page)
44
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, --------------------------------------------------
2001 2000 2000 1999 1998 1997
------------ ------------ ----------- ----------- ----------- -----------
(Dollars in Thousands Except Per Share Data)
Total assets.................... $12,901,585 $12,540,304 $13,793,038 $12,775,462 $10,399,229 $10,040,596
Investment securities........... 1,150,345 771,137 993,167 946,571 673,304 622,240
Mortgage-backed
securities..................... 1,829,728 1,514,510 1,220,138 1,282,545 1,091,849 1,388,940
Loans receivable, net........... 8,403,425 8,893,374 10,407,692 9,326,393 7,857,276 7,360,481
Intangible assets............... 191,450 207,427 230,850 252,677 77,186 58,166
Deposits........................ 6,396,522 7,694,486 7,330,500 7,655,415 6,558,207 6,589,395
Advances from Federal Home Loan
Bank........................... 4,939,056 3,565,465 5,049,582 3,632,241 2,379,182 1,719,841
Other borrowings................ 520,213 175,343 206,026 353,897 444,968 800,608
Stockholders' equity............ 734,654 863,739 987,978 966,883 861,195 764,066
Book value per common share..... 15.98 16.23 17.67 16.22 14.67 13.08
Tangible book value per common
share.......................... 11.82 12.33 13.54 11.98 13.35 12.08
Regulatory capital ratios of the
Bank:
Tangible capital.............. 5.58% 6.51% 6.55% 6.97% 7.88% 7.40%
Core capital
(Tier 1 capital)............. 5.60% 6.55% 6.59% 7.05% 7.99% 7.53%
Risk-based capital--..........
Tier 1 capital.............. 9.50% 10.84% 11.74% 12.74% 14.58% 14.37%
Total capital............... 11.38% 11.84% 12.59% 13.70% 15.49% 15.25%
--------
(1) In 2000, the Corporation changed its year end to December 31 from June 30.
(2) Includes a net gain of $15.6 million for calendar year 2001 classified in
exit costs and termination benefits; and net charges from exit costs and
termination benefits totaling $25.8 million and $3.9 million, respectively,
for the six months ended December 31, 2000, and fiscal year 2000; and
merger and other nonrecurring expenses totaling $30.1 million, $25.2
million and $38.3 million for fiscal years 1999, 1998 and 1997.
(3) Represents the loss on early retirement of debt, net of income tax benefits.
(4) Represents the cumulative effect of the change in method of accounting for
derivative instruments and hedging activities, net of income tax benefit,
for the six months ended December 31, 2000, and for start-up and
organizational costs, net of income tax benefit for fiscal year 2000.
(5) All periods presented are based on diluted earnings (loss) per share. The
conversion of stock options for the six months ended December 31, 2000, is
not assumed since the Corporation incurred a loss from operations. As a
result, for the six months ended December 31, 2000, the diluted loss per
share is computed the same as the basic loss per share.
(6) Return on average assets ("ROAA") and return on average stockholders'
equity ("ROAE") for the calendar year ended December 31, 2001, are .68% and
10.96%, respectively, excluding the after-tax effect of net nonrecurring
income and charges totaling $10.1 million. ROAA and ROAE for the six months
ended December 31, 2000, are .39% and 5.88%, respectively, excluding the
after-tax effect of net nonrecurring income and charges totaling $96.2
million. ROAA and ROAE for fiscal year 2000 are .76% and 10.77% excluding
the after-tax effect of net nonrecurring income and charges totaling
$756,000. ROAA and ROAE for fiscal year 1999 are 1.00% and 12.86% excluding
the after-tax effect of merger-related and other nonrecurring charges
totaling $27.1 million. ROAA and ROAE for fiscal year 1998 are 1.06% and
13.65% excluding the after-tax effect of merger-related and other
nonrecurring charges totaling $21.5 million. ROAA and ROAE for fiscal year
1997 are .97% and 12.58% excluding the after-tax effect of the nonrecurring
expenses totaling $25.1 million associated with the SAIF special assessment
and other charges.
45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Commercial Federal Corporation (the "Corporation") is a unitary
non-diversified savings and loan holding company whose primary asset is
Commercial Federal Bank, a Federal Savings Bank (the "Bank"). The Corporation
is one of the largest financial institutions in the Midwest and the 8th largest
publicly held thrift holding company in the United States. The Bank, with a
thrift charter, operates as a community banking institution, offering
commercial and consumer banking, mortgage banking, insurance and investment
services.
General
At December 31, 2001, the Corporation, headquartered in Omaha, Nebraska,
operated 196 branches with 44 located in Colorado, 42 in Iowa, 41 in Nebraska,
26 in Kansas, 19 in Oklahoma, 14 in Missouri, 6 in Arizona and 4 in Minnesota.
At December 31, 2000, the Corporation had 241 branches in these eight states.
To serve its customers, the Corporation conducts community banking operations
through its branch network, and loan origination activities through its
branches, offices of its wholly-owned mortgage banking subsidiary and a
nationwide correspondent network of mortgage loan originators. The Corporation
also provides insurance and securities brokerage and other retail financial
services.
Operations focus on offering deposits, making loans (primarily consumer,
commercial real estate, single-family residential, business lending and
agribusiness loans) and providing customers with a full array of financial
products and a high level of customer service. The Corporation's retail
strategy continues to be centered on attracting new customers and selling both
new and existing customers multiple products and services. Additionally, the
Corporation continues to build and leverage an infrastructure designed to
increase noninterest income. The Corporation's operations are also continually
reviewed in order to gain efficiencies to increase productivity and reduce
costs.
In August 2000, the Corporation changed its year end to December 31 from
June 30. A December 31 year end allows the Corporation to be aligned with the
financial industry from a reporting perspective and facilitates comparisons
with industry norms. Beginning with this six-month transition period ended
December 31, 2000, management implemented a number of key strategic initiatives
designed to improve the Corporation's financial performance. These changes
continued into 2001, focusing not only on revenue enhancement and cost
reduction, but also on an executive management restructuring aimed at designing
and implementing changes to build the Corporation's commercial banking business
and enhancing shareholder value.
These key initiatives included a complete balance sheet review, a thorough
assessment of the Bank's delivery and servicing systems, the sale of an
underperforming leasing company and a management restructuring. The balance
sheet restructuring was completed during the six months ended December 31,
2000. The remainder of the August 2000 initiatives were completed in 2001.
These actions transitioned the Corporation into 2001 with improved operating
margins, a more compact and stable balance sheet to generate future growth
under all types of operating environments, improved operating efficiencies and
a stronger management team.
Net income for the calendar year ended December 31, 2001, was $97.7 million,
or $1.93 per diluted share. Net income for 2001 includes $15.6 million ($10.1
million after-tax, or $.20 per diluted share) in net gains relating to the
completion of the August 2000 initiatives. These net gains are primarily the
result of the Corporation realizing pre-tax gains on the sales of 34 branches
sold during 2001 partially offset by severance costs and expenses associated
with right-sizing branch personnel, expenses to close branches and expenses to
exit leasing operations. The Corporation also realized pre-tax gains on the
sales of available-for-sale securities totaling $18.3 million. These net gains
were recognized primarily to offset the valuation adjustment losses totaling
$19.1 million in the mortgage servicing rights portfolio as of December 31,
2001.
The Corporation incurred a net loss of $69.5 million, or $1.27 loss per
diluted share (net loss of $50.4 million, or $.92 loss per share, before the
cumulative effect of change in accounting principle), for the six months ended
December 31, 2000. This net loss reflects the implementation of the key
strategic initiatives and the
46
implementation of Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities ("SFAS No. 133").
For the six months ended December 31, 2000, implementation of these initiatives
resulted in losses and expenses totaling approximately $112.2 million, or $77.1
million after-tax($1.41 per diluted share). The effect of adopting the
provisions of SFAS No. 133 was to record a net charge totaling $19.1 million,
net of income tax benefits of $10.3 million, or $.35 per diluted share, as a
cumulative effect of a change in accounting principle. See Note 22 "Cumulative
Effect of Change in Accounting Principle" to the Consolidated Financial
Statements for additional information. Net income for fiscal year 2000 was
$104.0 million, or $1.79 per diluted share, compared to net income of $92.4
million, or $1.54 per diluted share for fiscal year 1999. Fiscal year 2000 net
income includes the effect of after-tax charges of $2.9 million relating to
exit costs and termination benefits, an after-tax gain of $5.4 million from the
sale of the corporate headquarters building and a charge totaling $1.8 million
after-tax, representing the effect of the change in accounting for certain
start-up costs. Fiscal year 1999 net income was reduced by an after-tax charge
of $27.1 million, or $.45 per diluted share ($30.0 million pre-tax) associated
primarily with an acquisition and the termination of employee stock ownership
plans acquired in the mergers of three financial institutions during fiscal
years 1999 and 1998.
Critical Accounting Policies
The "Management's Discussion and Analysis of Financial Condition and Results
of Operations," and disclosures included within this Form 10-K Annual Report,
are based on the Corporation's audited consolidated financial statements. These
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses. On
an ongoing basis, management evaluates the estimates used, including the
adequacy of allowances for loan losses, valuation of mortgage-serving rights,
and contingencies and litigation. Estimates are based upon historical
experience, current economic conditions and other factors that management
considers reasonable under the circumstances. These estimates result in
judgments regarding the carrying values of assets and liabilities where these
values are not readily available from other sources as well as assessing and
identifying the accounting treatments of commitments and contingencies. Actual
results may differ from these estimates under different assumptions or
conditions. The following critical accounting policies involve the more
significant judgments and assumptions used in the preparation of the
consolidated financial statements.
Allowance for Losses on Loans
The allowance for loan losses is a valuation allowance for estimated credit
losses inherent in the loan portfolio as of the balance sheet date. The
allowance for loan losses consists of two elements. The first element is an
allocated allowance established for specifically identified loans that are
evaluated individually for impairment and are considered to be individually
impaired. A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of principal and interest when due according to the
contractual terms of the loan agreement. Impairment is measured by (i) the
present value of expected future cash flows, (ii) the loan's obtainable market
price, or (iii) the fair value of the collateral if the loan is collateral
dependent (the primary method used by the Corporation). The
second element is an estimated allowance established for impairment on each of
the Corporation's pools of outstanding loans. See "Provision for Loan Losses"
in the MD&A and "Asset Quality" under Item 1 of this Report for additional
information. These estimated allowances are based on several analysis factors
including the Corporation's past loss experience, economic and business
conditions that may affect the borrowers ability to pay, geographic and
industry concentrations, composition of the loan portfolio, credit quality and
delinquency trends, regular examinations by the Corporation's credit review
group of specific problem loans, the overall portfolio quality and real estate
market conditions in the Corporation's lending areas, and known and inherent
risks in each of the portfolios. These evaluations are inherently subjective
because, while they are based on objective data (delinquency trends, portfolio
composition, loan grading and others), it is the interpretation of that data by
management that ultimately determines the estimate of the appropriate
allowance. Additionally, while the
47
allowance attempts to measure the impairment inherent in the loan portfolio at
the balance sheet date, its adequacy will ultimately be dependent upon how
conditions existing at the balance sheet date impact the loans in the future.
Consequently, these estimates require revisions as more information becomes
available.
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
income to real estate operations through the disposition of such real estate
when the sale proceeds exceed the carrying value of the real estate.
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.
Mortgage Servicing Rights
Mortgage servicing rights are established based on the cost of acquiring the
right to service mortgage loans or the allocated fair value of servicing rights
retained on originated loans sold. The Corporation reports mortgage servicing
rights at the lower of amortized cost or fair value. The carrying value of
mortgage servicing rights is adjusted by the fair value of any related interest
rate floor agreements and possible impairment losses. The fair value of
mortgage servicing rights is determined based on the present value of estimated
expected future cash flows, using assumptions as to current market discount
rates and prepayment speeds. Mortgage servicing rights are stratified by loan
type and interest rate for purposes of impairment measurement. Loan types
include government, conventional and adjustable-rate mortgage loans. Impairment
losses are recognized to the extent the unamortized mortgage servicing rights
for each stratum exceed the current fair value of that stratum. Impairment
losses by stratum are recorded as reductions in the carrying value of the asset
through a valuation allowance with a corresponding reduction to loan servicing
income. Individual allowances for each stratum are adjusted in subsequent
periods to reflect changes in impairment. Valuation allowances totaling $19.6
million and $583,000, respectively, were outstanding at December 31, 2001 and
2000. Mortgage servicing rights totaled $117.2 million at December 31, 2001,
compared to $111.1 million at December 31, 2000.
The determination of the fair value of mortgage servicing rights is an
important estimate. Since mortgage servicing rights are not quoted in an active
market, management uses valuation models to estimate the fair value. The
Corporation uses a software model to compute the fair value. Prepayment speeds
are downloaded into the model from an independent market service and adjusted
for geographic location and age of the loan. The prepayment speed assumption
weighs heavily in determining the fair value of the mortgage servicing rights.
On a quarterly basis, the Corporation obtains an independent valuation report
for comparison to their software model.
48
Derivative Financial Instruments
Effective July 1, 2000, derivatives are recognized as either assets or
liabilities in the consolidated statement of financial condition and measured
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. For a derivative designated as hedging the exposure to variable
cash flows of a forecasted transaction (referred to as a cash flow hedge), the
effective portion of the derivative's gain or loss is initially reported as a
component of accumulated other comprehensive income (loss) and subsequently
reclassified into earnings when the forecasted transaction affects earnings.
The ineffective portion of the gain or loss is reported in earnings
immediately. For a derivative designated as hedging the exposure to changes in
fair value of an asset or liability (referred to as a fair value hedge), any
gain or loss associated with the derivative is reported in earnings, along with
the change in fair value of the asset or liability being hedged. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in earnings in the period of change. On the date the Corporation
enters into a derivative contract, management must designate the derivative as
a hedge of the identified cash flow exposure, fair value exposure or as a "no
hedging" derivative.
Proper documentation is a critical aspect pursuant to hedge accounting
treatment. The Corporation formally documents all relationships between
derivative instruments and hedged items, as well as its risk-management
objective and strategy for undertaking various hedge transactions. In this
documentation, the Corporation specifically identifies the asset, liability,
firm commitment, or forecasted transaction that has been designated as a hedged
item and states how the hedging instrument is expected to hedge the risks
related to the hedged item. The Corporation formally measures effectiveness of
its hedging relationships both at the hedge inception and on an ongoing basis
in accordance with its risk management policy. The methods used to measure
effectiveness vary depending on the hedging relationship. The fair value of the
Corporation's derivatives is determined using various methods depending on the
nature of the derivatives such as quotes obtained from independent pricing
services, valuation models of independent pricing services with known factors
put into the model, or software models utilizing assumptions or data obtained
from independent sources.
Key Strategic Initiatives
On August 14, 2000, the Board of Directors approved a series of strategic
initiatives aimed at improving the overall operations of the Corporation. Key
initiatives included:
. A complete balance sheet review including the disposition of over $2.0
billion in low-yielding and higher risk investments and residential
mortgage loans. The proceeds from these dispositions were to be used to
reduce high-cost borrowings, repurchase additional shares of the
Corporation's common stock and reinvest any excess in lower risk
securities with a predictable income stream.
. A thorough assessment of the Bank's delivery and servicing systems to
ensure the proper channels to achieve the growth potential and to
maintain a high level of customer service.
. The sale of the leasing company acquired as part of a February 1998
acquisition.
. A management restructuring to further streamline the organization and
improve efficiencies as well as the appointment of a new chief operating
officer.
. A program to further strengthen the commercial lending portfolio by
actively recruiting new lenders in order to accelerate the growth in
loans experienced over the past year, while maintaining credit quality.
. A change in the Corporation's fiscal year end from June 30 to December 31.
. An expansion of the Corporation's common stock repurchase program by up
to 10% of its outstanding shares, or approximately 5.5 million shares.
Following the balance sheet review, management concluded that the
Corporation's balance sheet had an excess of residential mortgage loans and
securities with a higher risk profile and sub-optimal spreads resulting in
earnings volatility and modest asset returns. Effective July 1, 2000, the
Corporation transferred approximately
49
$1.8 billion of held-to-maturity securities to the trading and available for
sale portfolios. The transfer of these securities resulted in a pre-tax loss of
$28.4 million recorded on July 1, 2000, as part of the cumulative adjustment of
a change in accounting principle. As a result of the balance sheet review and
transfer of these securities, during the six months ended December 31, 2000,
the Corporation sold investment and mortgage-backed securities totaling $1.2
billion resulting in a pre-tax loss of $30.0 million and sold securitized
residential loans totaling approximately $1.6 billion resulting in a pre-tax
loss of $18.2 million. Proceeds from these sales were used to purchase
lower-risk, higher-yielding assets, repay advances from the FHLB and repurchase
common stock. As a result, as of December 31, 2000, the balance sheet risk was
significantly reduced, improving the Corporation's interest rate risk profile
and helping to produce improved earnings in the future. The balance sheet
restructuring was completed during the six months ended December 31, 2000.
After a review of its branch network, management concluded that the Bank had
too many branches in rural and remote locations that were less profitable and
didn't fit into the Corporation's plan to cluster branches and centralize
administrative functions. Under this initiative, the Corporation closed or
consolidated 12 branches and sold 34 branches during 2001. The branches were
located in Iowa (22), Kansas (11), Missouri (6), Nebraska (3), Oklahoma (3) and
Arizona (1). Deposits totaling $446.3 million were associated with these branch
sales. During the year ended December 31, 2001, the Corporation realized net
pre-tax gains totaling $18.3 million relating to the sold branches. These gains
were from the premiums received on the sales of the deposits, loans and fixed
assets of these branches. Severance costs associated with right-sizing branch
personnel and expenses to close branches totaled $2.0 million. Four branches in
Minnesota with deposits totaling approximately $20.0 million are remaining to
be sold as of December 31, 2001. It is anticipated that these four branches
will be sold by June 30, 2002. During the six months ended December 31, 2000,
the Corporation also recorded a pre-tax charge of $17.0 million related to exit
costs and write-offs of intangible assets associated with these branches.
The leasing operations did not have a strategic fit for the Corporation. The
leasing portfolio was reclassified to held for sale during the six months ended
December 31, 2000, and totaled $52.7 million as of December 31, 2000.
Adjustment to fair value and additional expenses totaling $4.6 million were
recorded as exit costs and termination benefits during the six months ended
December 31, 2000. A substantial portion of the leasing portfolio was sold in
February 2001 with the closing of the transaction in April 2001. Additional
expenses to finalize this transaction totaling $754,000 were recorded in the
first quarter of 2001.
The management restructuring was completed in 2001 with the appointment of a
chief operating officer and chief credit officer. The commercial banking
lending operations infrastructure was also completed in 2001.
During the six months ended December 31, 2000, the Corporation expensed $2.1
million as exit costs and termination benefits related to the outplacement of
personnel. These costs consisted of severance, benefits and related
professional services. The Corporation also incurred fees totaling $2.9 million
for consulting services during the six months ended December 31, 2000. The
consulting services were related to the identification and implementation of
these key strategic initiatives.
In November 1999, the Corporation initiated the integration of the
Corporation's new data processing system to support community-banking
operations. This plan was aimed at decreasing expenses, increasing sustainable
growth in revenues, and increasing productivity through the elimination of
duplicate or inefficient functions. Major aspects of the plan included 21
branches to be sold or closed, the elimination of 121 positions and the
consolidation of the correspondent loan servicing operations. During the six
months ended December 31, 2000, the remaining branches were sold or closed with
the Corporation realizing a net gain totaling $2.5 million from the branch
sales. These gains were primarily from premiums realized on the sales of
deposits, loans and fixed assets. Implementation of the November 1999 plan
resulted in charges to exit costs and termination benefits totaling $3.9
million recorded in fiscal year 2000. Under this plan 121 positions were
eliminated with personnel costs consisting of severance, benefits and related
professional services totaling approximately $1.5 million. This plan also
included the consolidation of the correspondent loan servicing functions to
Omaha, Nebraska from Wichita, Kansas and Denver, Colorado. Direct and
incremental costs associated with this part of the plan totaled $2.4 million.
50
Common Stock Repurchases
On May 7, 2001, the Board of Directors authorized the Corporation's fourth
stock repurchase program since April 1999. This repurchase program consisted of
5,000,000 shares of the Corporation's outstanding common stock to be completed
no later than December 31, 2002. In compliance with Nebraska law, all
repurchased shares will be cancelled. Repurchases under this program began
August 9, 2001, after the Corporation's third repurchase program was completed
on August 8, 2001. For the twelve months ended December 31, 2001, the
Corporation purchased 7,662,600 shares of its common stock at a total cost of
$180.9 million.
The following table shows the history of the Corporation's common stock
repurchases since April 1999:
Number of
Shares Cost
---------- --------
(Dollars in Thousands)
Authorization on:
April 28, 1999 (completed December 1999).. 3,000,000 $ 66,007
December 27, 1999 (completed August 2000). 3,000,000 46,395
August 14, 2000 (completed August 2001)... 5,500,000 114,102
May 7, 2001 (through December 31, 2001)... 4,201,500 103,439
---------- --------
Totals....................................... 15,701,500 $329,943
========== ========
The fourth stock repurchase was completed on January 28, 2002, with the
remaining 798,500 shares of common stock purchased at a cost of $19.5 million.
On February 28, 2002, the Board of Directors authorized an additional stock
repurchase for 500,000 shares to be completed not later than December 31, 2003.
Results of Operations
Comparison of Results of Operations
Net income for the calendar year ended December 31, 2001, was $97.7 million,
or $1.93 per diluted share ($1.95 per basic share). Net income for 2001
includes $15.6 million ($10.1 million after-tax, or $.20 per diluted share) in
net gains relating to the August 2000 initiatives. These net gains, recorded as
a credit to the expense category "exit costs and termination benefits," are due
to the net gains realized on the sales of branches ($18.3 million pre-tax)
partially offset by severance costs associated with right-sizing branch
personnel and expenses to close the branches ($2.0 million pre-tax) and
expenses to exit leasing operations ($754,000 pre-tax). The Corporation also
realized pre-tax gains on the sales of available-for-sale securities totaling
$18.3 million. These net gains on these sales were recognized primarily to
offset the valuation adjustment losses totaling $19.1 million in the mortgage
servicing rights portfolio as of December 31, 2001. These valuation
adjustments, recorded as reductions to loan servicing fees, are due to an
increase in loan prepayments resulting from a decrease in interest rates.
A net loss of $69.5 million, or $1.27 loss per basic and diluted share, was
incurred for the six months ended December 31, 2000. Included in the net loss
for the six months ended December 31, 2000, is a loss of $19.1 million ($.35
per basic and diluted share) from the cumulative effect of change in accounting
principle, net of income tax benefits of $10.3 million, relating to the
adoption of SFAS No. 133. The net decrease in income comparing the year-ago six
month period is due to net decreases in total other income of $94.1 million and
net interest income of $19.5 million, and in net increases of $21.1 million in
the provision for loan losses, $19.5 million in total other expense and $17.3
million in the cumulative effect of changes in accounting principles.
These net decreases to income were partially offset by a net change of $48.9
million in the income tax provision. The net decrease in total other income
included net losses on the sales of securities of $30.0 million, losses on the
termination of interest rate swap agreements of $38.4 million and loss on the
sale of securitized mortgage loans of $18.2 million. The net increase in the
cumulative effect of changes in accounting principles is a result of the
adoption of SFAS No. 133 effective July 1, 2000.
51
Net income for fiscal year 2000 was $104.0 million, or $1.79 per diluted and
basic share. These results compare to net income for fiscal year 1999 of $92.4
million, or $1.54 per diluted share ($1.55 per basic share). The increase in
net income for fiscal year 2000 compared to 1999 was primarily due to net
increases of $11.8 million and $8.4 million, respectively, in total other
income and net interest income after provision for losses and a net decrease of
$8.0 million in the provision for income taxes. These increases were partially
offset by net increases of $13.3 million in total general and administrative
expenses, $1.5 million in amortization of intangible assets and the cumulative
effect of a change in accounting principle totaling $1.8 million.
See "Ratios" for certain performance ratios of the Corporation for the year
ended December 31, 2001, the six months ended December 31, 2000, and fiscal
years 2000 and 1999.
Net Interest Income and Interest Rate Spread
For calendar year 2001, net interest income totaled $307.4 million, the
interest rate spread was 2.61% and the net yield on interest-earning assets was
2.62%. As a comparison, the net interest rate spread and the net yield on
interest-earning assets were 2.46% and 2.44%, respectively, for the six months
ended December 31, 2000. Net interest income for 2001 was lower compared to the
previous twelve-month period ended December 31, 2000, due to the decrease of
approximately $186.6 million in the net-earnings balance (the difference
between average interest-bearing liabilities and average interest-earning
assets). The Corporation's average balances of interest-earning assets and
interest-bearing liabilities decreased in 2001 due mainly to the balance sheet
restructuring completed during the six months ended December 31, 2000, and the
Corporation's repurchases of its common stock totaling $180.9 million over the
last twelve months. The average balance of interest-earning assets decreased
$849.1 million in 2001 compared to the twelve months ended December 31, 2000;
and the average balance of interest-bearing liabilities decreased $662.5
million over the same period. The increased interest rate spreads and net yield
on interest-earning assets are due to (i) the lower interest rate environment
in 2001 in which costing liabilities have been repricing downward at a faster
rate than earning assets have been repricing, (ii) the continued shift in the
asset mix toward higher yielding commercial and consumer loans and (iii) a
shift in funding away from certificates of deposit to checking and savings
(core deposits). Based on the completion of the balance sheet restructuring,
the current mix of interest-earning assets and interest-bearing liabilities and
the current interest rate environment, management anticipates a relatively
stable margin for the first six months of 2002. However, the future trend in
interest rate spreads and net interest income will be dependent upon such
factors as the composition and size of the Corporation's interest-earning
assets and interest-bearing liabilities, the interest rate risk exposure of the
Corporation and the maturity and repricing activity of interest-sensitive
assets and liabilities, as influenced by changes in and levels of both
short-term and long-term market rates.
Net interest income totaled $154.4 million for the six months ended December
31, 2000, compared to $173.9 million for the six months ended December 31,
1999, a decrease of $19.5 million, or 11.2%. During the six months ended
December 31, 2000 and 1999, interest rate spreads were 2.46% and 2.82%,
respectively, a decrease of 36 basis points. The net yield on interest-earning
assets was 2.44% and 2.86%, a decrease of 42 basis points over the respective
periods. Net interest income decreased for the six months ended December 31,
2000, compared to 1999, due to the compression of the interest rate spreads
from the year 2000 rate increases by the Federal Reserve. This compression in
the net yield on interest-earning assets was primarily due to the Corporation's
interest-bearing liabilities repricing more quickly than the interest-earning
assets. The decrease in the interest rate spread was due primarily to a 75
basis point increase in costing liabilities as a result of the rise in
short-term interest rates comparing the respective six-month periods and the
liability sensitive balance sheet of the Corporation. Total interest expense
increased $62.4 million comparing the six months ended December 31, 2000 to
1999 due to the higher costs of funds and a net increase of $592.4 million in
average interest-bearing liabilities. Total interest income increased $42.9
million over the same six-month period with a net increase of $487.6 million in
average interest-earning assets. The increase in these average balances was due
to net growth in the total loan portfolio ($630.4 million), primarily in
residential mortgage loans and higher-yielding commercial and construction
loans. The consumer loan portfolio also experienced moderate growth. This loan
growth was funded primarily with FHLB advances. The average balance of advances
from the FHLB and the weighted average rate paid on these advances increased
$737.2 million and 91 basis points, respectively, comparing the six months
ended December 31, 2000, to the six months ended December 31, 1999.
52
Net interest income totaled $342.1 million for fiscal year 2000 compared to
$332.3 million for fiscal year 1999, an increase of $9.8 million, or 3.0%.
During fiscal years 2000 and 1999, interest rate spreads were 2.67% and 2.85%,
respectively. The net yield on interest-earning assets during fiscal years 2000
and 1999 was 2.78% and 2.99%, representing a decrease of 21 basis points
comparing fiscal year 2000 to 1999. Net interest income for fiscal year 2000
increased over 1999 due primarily to average interest-earning assets increasing
$1.2 billion to $12.3 billion for fiscal year 2000 compared to $11.1 billion
for fiscal year 1999. This increase was partially offset by a net increase in
average interest-bearing liabilities of $1.3 billion to $12.1 billion for
fiscal year 2000. The increases in these average balances were due in part to
growth in the loan portfolio, primarily residential mortgage loans and
commercial real estate loans, and the Midland First Financial Corporation
("Midland") acquisition on March 1, 1999. The loan growth was partially funded
with FHLB advances. These net increases in total earning assets and costing
liabilities were partially offset by the compression of the interest rate
spreads. The interest rate spread decreased 18 basis points in fiscal year 2000
due primarily to a 14 basis point increase in costing liabilities as a result
of the rise in short-term interest rates in fiscal year 2000 and the liability
sensitive balance sheet of the Corporation.
The following table presents certain information concerning yields earned on
interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the periods presented:
For the Year
For the Year Six Months Ended At
Ended Ended June 30, December 31, At June 30,
December 31, December 31, ----------- ----------- ----------
2001 2000 2000 1999 2001 2000 2000 1999
------------ ------------ ---- ---- ---- ---- ---- ----
Weighted average yield on:
Loans................................ 7.81% 7.96% 7.75% 7.85% 7.43% 8.21% 7.87% 7.70%
Mortgage-backed securities........... 6.49 7.37 6.40 6.25 6.42 6.79 6.56 6.31
Investments.......................... 6.09 7.67 6.89 6.54 5.10 6.82 6.79 6.45
---- ---- ---- ---- ---- ---- ---- ----
Interest-earning assets.......... 7.43 7.87 7.52 7.56 6.98 7.89 7.64 7.41
---- ---- ---- ---- ---- ---- ---- ----
Weighted average rate paid on:
Savings deposits..................... 3.11 3.59 3.11 2.80 2.47 3.57 3.32 2.88
Other time deposits.................. 5.51 5.88 5.31 5.38 4.35 5.95 5.76 5.17
Advances from FHLB................... 5.49 6.10 5.51 5.26 4.76 6.41 5.98 5.05
Securities sold under agreements
to repurchase...................... 5.32 4.98 5.62 5.94 4.30 4.91 4.99 5.72
Other borrowings..................... 6.39 8.08 7.80 8.10 4.33 8.69 8.69 7.27
---- ---- ---- ---- ---- ---- ---- ----
Interest-bearing liabilities..... 4.82 5.41 4.85 4.71 3.97 5.44 5.28 4.57
---- ---- ---- ---- ---- ---- ---- ----
Net interest rate spread................ 2.61% 2.46% 2.67% 2.85% 3.01% 2.45% 2.36% 2.84%
==== ==== ==== ==== ==== ==== ==== ====
Net yield on interest-earning assets.... 2.62% 2.44% 2.78% 2.99% 2.96% 2.46% 2.50% 2.95%
==== ==== ==== ==== ==== ==== ==== ====
53
The table below presents average interest-earning assets and average
interest-bearing liabilities, interest income and interest expense, and average
yields and rates during the periods indicated. The following table includes
nonaccruing loans averaging $96.4 million, $77.3 million, $70.5 million and
$63.6 million, respectively, for the calendar year ended December 31, 2001, the
six months ended December 31, 2000, and the fiscal years ended June 30, 2000
and 1999 as interest-earning assets at a yield of zero percent:
Year Ended Six Months Ended --------------------
December 31, 2001 December 31, 2000 2000
-------------------------- -------------------------- --------------------
Average Yield/ Average Yield/ Average
Balance Interest Rate Balance Interest Rate Balance Interest
----------- -------- ------ ----------- -------- ------ ----------- --------
(Dollars in Thousands)
Interest-earning assets:
Loans................................... $ 8,782,321 $685,480 7.81% $10,257,240 $408,582 7.96% $ 9,798,198 $759,711
Mortgage-backed securities........... 1,690,967 109,657 6.49 1,338,706 49,334 7.37 1,291,061 82,563
Investments.......................... 1,251,559 76,237 6.09 1,063,782 40,816 7.67 1,239,548 85,416
----------- -------- ---- ----------- -------- ---- ----------- --------
Interest-earning assets.............. 11,724,847 871,374 7.43 12,659,728 498,732 7.87 12,328,807 927,690
----------- -------- ---- ----------- -------- ---- ----------- --------
Interest-bearing liabilities:
Savings deposits..................... 3,413,039 105,992 3.11 3,182,597 57,600 3.59 3,137,139 97,715
Other time deposits.................. 3,709,030 204,375 5.51 4,283,327 126,979 5.88 4,295,975 227,959
Advances from FHLB................... 4,265,468 234,213 5.49 4,883,700 152,317 6.10 4,373,510 240,924
Securities sold under agreements to
repurchase.......................... 82,215 4,374 5.32 18,692 476 4.98 69,763 3,922
Other borrowings..................... 234,669 14,991 6.39 171,525 6,925 8.08 192,666 15,029
----------- -------- ---- ----------- -------- ---- ----------- --------
Interest-bearing liabilities......... 11,704,421 563,945 4.82 12,539,841 344,297 5.41 12,069,053 585,549
----------- -------- ---- ----------- -------- ---- ----------- --------
Net earnings balance.................... $ 20,426 $ 119,887 $ 259,754
=========== =========== ===========
Net interest income..................... $307,429 $154,435 $342,141
======== ======== ========
Interest rate spread.................... 2.61% 2.46%
==== ====
Net yield on interest-earning assets.... 2.62% 2.44%
==== ====
1999
--------------------------
Average Yield/
Yield/Rate Balance Interest Rate
---------- ----------- -------- ------
Interest-earning assets:
Loans................................... 7.75% $ 8,933,834 $700,911 7.85%
Mortgage-backed securities........... 6.40 1,231,838 77,039 6.25
Investments.......................... 6.89 939,179 61,404 6.54
---- ----------- -------- ----
Interest-earning assets.............. 7.52 11,104,851 839,354 7.56
---- ----------- -------- ----
Interest-bearing liabilities:
Savings deposits..................... 3.11 2,891,242 80,832 2.80
Other time deposits.................. 5.31 4,497,729 242,026 5.38
Advances from FHLB................... 5.51 3,000,837 157,787 5.26
Securities sold under agreements to
repurchase.......................... 5.62 209,111 12,419 5.94
Other borrowings..................... 7.80 172,379 13,957 8.10
---- ----------- -------- ----
Interest-bearing liabilities......... 4.85 10,771,298 507,021 4.71
---- ----------- -------- ----
Net earnings balance.................... $ 333,553
===========
Net interest income..................... $332,333
========
Interest rate spread.................... 2.67% 2.85%
==== ====
Net yield on interest-earning assets.... 2.78% 2.99%
==== ====
The net earnings balance decreased $186.6 million during the year ended
December 31, 2001. This decrease is primarily due to the Corporation
repurchasing shares of its common stock at a cost of $180.9 million during 2001
and the impact from the balance sheet restructuring. The Corporation's net
earnings balance decreased by $104.8 million during the six months ended
December 31, 2000, compared to the six months ended December 31, 1999. This
decrease in the net earnings balance comparing these periods is primarily due
to the restructuring of the balance sheet, the repurchases of common stock
totaling $82.8 million over the last twelve months and the funding of the
$200.0 million bank owned life insurance ("BOLI") program. The BOLI asset is
excluded from the average balance of interest-earning assets and the BOLI
related income is recorded in other income.
54
The Corporation's net earnings balance decreased $73.8 million during fiscal
year 2000 compared to 1999. The ratio of average interest-earning assets to
average interest-bearing liabilities was 102.2% during fiscal year 2000
compared to 103.1% during fiscal year 1999. The decrease in the net earnings
balance for fiscal year 2000 compared to 1999 is primarily due to the
acquisition of Midland and the repurchase of the Corporation's common stock.
Interest-earning average assets for fiscal year 2000 were fully impacted by the
$83.0 million cash outlay to finance the Midland acquisition on March 1, 1999,
and by the $63.9 million to repurchase common stock.
The table below presents the dollar amount of changes in interest income and
expense for each major component of interest-earning assets and
interest-bearing liabilities, and the amount of change in each attributable to:
(i) changes in volume (change in volume multiplied by prior year rate), and
(ii) changes in rate (change in rate multiplied by prior year volume). The net
change attributable to change in both volume and rate, which cannot be
segregated, has been allocated proportionately to the change due to volume and
the change due to rate. The following table demonstrates the effect of the
change is a volume of interest-earning assets and interest-bearing liabilities,
the changes in interest rates and the effect on the interest rate spreads
previously discussed:
Year Ended December 31, 2001
Compared to the Six Months Ended December 31, 2000
Twelve Months Ended December 31, 2000 Compared to December 31, 1999
------------------------------------ ---------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
Volume Rate Total Volume Rate Total
--------- -------- --------- ------- -------- --------
(In Thousands)
Interest income:
Loans........................................... $(101,618) $ (9,151) $(110,769) $25,168 $ 11,369 $ 36,537
Mortgage-backed securities...................... 25,127 (5,826) 19,301 1,032 6,762 7,794
Investments..................................... 6,915 (14,614) (7,699) (6,409) 4,929 (1,480)
--------- -------- --------- ------- -------- --------
Interest income.............................. (69,576) (29,591) (99,167) 19,791 23,060 42,851
--------- -------- --------- ------- -------- --------
Interest expense:
Savings deposits................................ 11,887 (14,574) (2,687) 3,683 7,280 10,963
Other time deposits............................. (30,287) (6,217) (36,504) (2,104) 15,025 12,921
Advances from FHLB.............................. (27,299) (21,705) (49,004) 21,290 21,003 42,293
Securities sold under agreements to repurchase.. 3,150 59 3,209 (2,412) (345) (2,757)
Other borrowings................................ 4,272 (3,251) 1,021 (1,506) 447 (1,059)
--------- -------- --------- ------- -------- --------
Interest expense............................. (38,277) (45,688) (83,965) 18,951 43,410 62,361
--------- -------- --------- ------- -------- --------
Effect on net interest income...................... $ (31,299) $ 16,097 $ (15,202) $ 840 $(20,350) $(19,510)
========= ======== ========= ======= ======== ========
Year Ended June 30, 2000
Compared to 1999
----------------------------
Increase (Decrease) Due to
Volume Rate Total
-------- -------- --------
Interest income:
Loans........................................... $ 65,539 $ (6,739) $ 58,800
Mortgage-backed securities...................... 3,761 1,763 5,524
Investments..................................... 20,545 3,467 24,012
-------- -------- --------
Interest income.............................. 89,845 (1,509) 88,336
-------- -------- --------
Interest expense:
Savings deposits................................ 9,257 7,626 16,883
Other time deposits............................. (10,742) (3,325) (14,067)
Advances from FHLB.............................. 75,292 7,845 83,137
Securities sold under agreements to repurchase.. (7,869) (628) (8,497)
Other borrowings................................ 1,596 (524) 1,072
-------- -------- --------
Interest expense............................. 67,534 10,994 78,528
-------- -------- --------
Effect on net interest income...................... $ 22,311 $(12,503) $ 9,808
======== ======== ========
55
Asset/Liability Management
The net interest income of the Corporation is subject to the risk of
interest rate fluctuations to the extent that there is a difference, or
mismatch, between the amount of the Corporation's interest-earning assets and
interest-bearing liabilities which mature or reprice in specified periods. When
interest rates change, to the extent the Corporation's interest-earning assets
have longer maturities or effective repricing periods than its interest-bearing
liabilities, the interest income realized on the Corporation's interest-earning
assets will adjust more slowly than the interest expense on its
interest-bearing liabilities. This mismatch in the maturity and repricing
characteristics of assets and liabilities is commonly referred to as the "gap."
A gap is considered positive when the interest rate sensitive assets maturing
or repricing during a specified period exceed the interest rate sensitive
liabilities maturing or repricing during the same period. A gap is considered
negative when the interest rate sensitive liabilities maturing or repricing
during a specified period exceed the interest rate sensitive assets maturing or
repricing during the same period. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income while a
positive gap would result in an increase in net interest income. Similarly,
during a period of declining interest rates, a negative gap would result in an
increase in net interest income while a positive gap would adversely affect net
interest income.
The Corporation generally invests in interest-earning assets that reprice
more slowly than its interest-bearing liabilities. This mismatch exposes the
Corporation to interest rate risk. In a rising rate environment,
interest-bearing liabilities will reprice faster than interest-earning assets,
thereby decreasing net interest income. The Corporation seeks to control its
exposure to interest rate risk by emphasizing shorter-term assets such as
commercial and consumer loans. In addition, the Corporation utilizes
longer-term advances from the FHLB to extend the repricing characteristics of
its interest-bearing liabilities. The Corporation also enters into interest
rate swap agreements in order to lengthen synthetically its short term debt
obligations.
In connection with its asset/liability management program, the Corporation
has interest rate swap agreements with other counterparties under terms that
provide for an exchange of interest payments on the outstanding notional amount
of the swap agreement. These agreements are primarily used to artificially
lengthen the maturity of certain deposit liabilities and FHLB advances. In
accordance with these arrangements the Corporation pays fixed rates and
receives variable rates of interest according to a specified index. The
Corporation had swap agreements with notional principal amounts of $2.6 billion
at December 31, 2001, $1.5 billion at December 31, 2000, $2.5 billion at June
30, 2000, and $215.0 million at June 30, 1999. For the year ended December 31,
2001, the six months ended December 31, 2000, and fiscal years 2000 and 1999,
the Corporation recorded $45.7 million, $415,000, $2.9 million and $2.8
million, respectively, in net interest expense from its interest rate swap
agreements. The swap agreements outstanding as of December 31, 2001, have
maturities ranging from December 2002 to October 2011. The Corporation has $1.0
billion of 10 year fixed-rate FHLB advances with interest rates ranging from
4.30% to 5.40%, call dates ranging from January 2002 to May 2002 and maturity
dates ranging from February 2009 to July 2009. The Corporation entered into
swaption agreements in 2001 to hedge its interest rate risk and duration on
these callable FHLB advances. All terms of the swaption agreements exactly
match the terms of these FHLB advances. In the event any of these FHLB
advances are called, the Corporation will exercise its corresponding option to
enter into a swap agreement paying a fixed rate of interest and receiving a
variable note. See Note 14 to the Consolidated Financial Statements for
additional information on the Corporation's swap and swaption agreements.
The following table represents management's projected maturity and repricing
of the Bank's interest-earning assets and interest-bearing liabilities at
December 31, 2001. The amounts of interest-earning assets, interest-bearing
liabilities and interest rate swap agreements presented which mature or reprice
within a particular period were determined in accordance with the contractual
terms and expected behavior over time of such assets, liabilities and interest
rate swap agreements. Adjustable-rate loans and mortgage-backed securities are
included in the period in which they are first scheduled to adjust and not in
the period in which they mature. All loans and mortgage-backed securities are
adjusted for prepayment rates based on information provided by independent
sources as of December 31, 2001, and the Bank's historical prepayment
experience. Fixed-rate passbook
56
deposits, NOW accounts and non-indexed money market accounts are assumed to
reprice or mature according to the decay rates defined by regulatory
guidelines. Indexed money market rate deposits are deemed to reprice or mature
within the 90-day category. Management believes that these assumptions
approximate actual experience and considers such assumptions reasonable;
however, the actual interest rate sensitivity of the Bank's interest-earning
assets and interest-bearing liabilities may vary substantially if actual
experience differs from the assumptions used.
Within 91 Days Over 1 3 Years
90 Days to 1 Year to 3 Years and Over Total
----------- ---------- ---------- ----------- -----------
(Dollars in Thousands)
Interest-earning assets:
Fixed-rate mortgage loans (1)........ $ 645,501 $ 906,129 $1,342,890 $ 1,202,062 $ 4,096,582
Other loans (2)...................... 1,628,893 1,775,832 1,844,947 889,243 6,138,915
Investments (3)...................... 422,120 1,467 21,893 1,009,203 1,454,683
----------- ---------- ---------- ----------- -----------
Interest-earning assets.......... 2,696,514 2,683,428 3,209,730 3,100,508 11,690,180
----------- ---------- ---------- ----------- -----------
Interest-bearing liabilities:
Savings deposits..................... 1,817,346 282,199 520,255 823,060 3,442,860
Other time deposits.................. 1,360,576 1,044,775 491,102 57,207 2,953,660
Borrowings (4)....................... 3,157,201 247,625 125,725 1,808,362 5,338,913
Impact of interest rate swap
agreements......................... (2,520,000) -- 1,000,000 1,520,000 --
----------- ---------- ---------- ----------- -----------
Interest-bearing liabilities..... 3,815,123 1,574,599 2,137,082 4,208,629 11,735,433
----------- ---------- ---------- ----------- -----------
Gap position............................ (1,118,609) 1,108,829 1,072,648 (1,108,121) (45,253)
----------- ---------- ---------- ----------- -----------
Cumulative gap position................. $(1,118,609) $ (9,780) $1,062,868 $ (45,253) $ (45,253)
=========== ========== ========== =========== ===========
Gap as a percentage of the Bank's total
assets................................ (8.67)% 8.59% 8.32% (8.59)% (.35)%
Cumulative gap as a percentage of the
Bank's total assets................... (8.67)% (.08)% 8.24% (.35)% (.35)%
--------
(1) Includes conventional single-family and multi-family mortgage loans and
mortgage-backed securities.
(2) Includes adjustable-rate single-family mortgage loans, adjustable-rate
mortgage-backed securities and all other types of loans with either fixed
or adjustable interest rates.
(3) Included in the "Within 90 Days" column is Federal Home Loan Bank stock of
$253.9 million.
(4) Includes advances from the FHLB and other borrowings.
The Bank's one-year cumulative gap is a negative $9.8 million, or .08%, of
the Bank's total assets at December 31, 2001, compared to a negative $1.1
billion, or 8.66%, of the Bank's total assets at December 31, 2000, and a
negative $1.7 billion, or 12.67% at June 30, 2000. The interest rate risk
policy of the Bank limits the liability sensitive one-year cumulative gap not
to exceed 15.0%.
The Corporation's interest rate sensitivity is also monitored through
analysis of the change in the net portfolio value ("NPV"). The Corporation's
Asset Liability Management Committee ("ALCO"), comprised of senior management,
monitors the sensitivity of the value of the balance sheet to changes in market
interest rates. The primary purpose of the asset/liability management function
is to manage the Corporation's combined portfolio such that its capital is
leveraged effectively into assets and liabilities which maximize corporate
profitability while minimizing exposure to changes in interest rates. The ALCO
and the Board of Directors review the interest rate risk position of the Bank
on at least a quarterly basis.
Several measures are employed to determine the Bank's exposure to interest
rate risk. Market value sensitivity analysis measures the change in the Bank's
NPV ratio in the event of sudden and sustained changes in market interest
rates. The NPV ratio is defined as the market value of the Bank's capital
divided by the market
57
value of its assets. Interest rate sensitivity gap analysis is used to compare
the repricing characteristics of the Bank's assets and liabilities. Finally,
net interest income sensitivity analysis is used to measure the impact of
changing interest rates on corporate earnings.
If estimated changes to the NPV ratio and the sensitivity gap are not within
the limits established by the Board of Directors, the Board may direct
management to adjust its asset and liability mix to bring interest rate risk
within Board-approved limits. The Corporation's Board of Directors has adopted
an interest rate risk policy which establishes a minimum allowable NPV ratio
(generally 4.00%) over a range of hypothetical interest rates extending from
300 basis points below current levels to 300 basis points above current levels.
In addition, the policy establishes a maximum allowable change in the NPV ratio
of 2.00% in the event of an instantaneous and adverse change in interest rates
of 200 basis points.
The OTS monitors the Bank's interest rate risk management procedures under
guidelines set forth in Thrift Bulletin 13a. This bulletin requires that the
Corporation's Board of Directors set interest rate risk limits that would
prohibit the Bank from exhibiting a post-shock NPV ratio and interest rate
sensitivity measure of "significant risk" or greater. The OTS limits generally
set a minimum NPV ratio of 6.00% at the 200 basis points rate shock level, and
a maximum change in NPV ratio of 4.00% at the same level. The limits the Board
has imposed on the Bank are more conservative than the limits set by the OTS.
The following table presents the projected change in the Bank's NPV ratio
for various hypothetical rate shock levels as of December 31, 2001.
Board
Market Minimum Change Maximum
Value of Market Value NPV Board in NPV Allowable
Hypothetical Change in Interest Rates Capital of Assets Ratio Limit Ratio Change
------------------------------------- -------- ------------ ----- ------- ------ ---------
(Dollars in Thousands)
300 basis point rise.......... $730,325 $12,054,888 6.06% 4.00% .01% n/a
200 basis point rise.......... 779,654 12,349,898 6.31% 4.00% .26% (2.00)%
100 basis point rise.......... 816,496 12,649,716 6.45% 4.00% .40% n/a
Base Scenario................. 778,490 12,877,183 6.05% 4.00% -- n/a
100 basis point decline....... 656,051 13,046,112 5.03% 4.00% (1.02%) n/a
200 basis point decline....... 564,154 13,263,745 4.25% 4.00% (1.80%) (2.00)%
300 basis point decline....... 465,981 13,503,456 3.45% 4.00% (2.60%) n/a
At December 31, 2001, the Bank's NPV ratios were within the targets set by
the Board of Directors in all rate scenarios. In addition, at December 31,
2001, the Bank was within the limits set by the OTS to maintain a risk rating
of better than "significant risk." The NPV ratio is calculated by the
Corporation pursuant to guidelines established by the OTS. The modeling
calculation is based on the net present value of discounted estimated cash
flows utilizing prepayment assumptions and market rates of interest provided by
independent sources as of December 31, 2001, with adjustments made to reflect
the shift in interest rates as appropriate. Computation of prospective effects
of hypothetical interest rate changes are based on numerous assumptions,
including relative levels of market interest rates, loan prepayments, and
deposit decay, and should not be relied upon as indicative of actual results.
Further, the computations do not contemplate any actions the ALCO could
undertake in response to changes in interest rates.
Provision for Loan Losses
The Corporation recorded loan loss provisions totaling $38.9 million for the
year ended December 31, 2001. Net loans charged-off totaled $19.8 million in
2001 consisting mainly of charge-offs for consumer, agriculture and credit card
loans totaling $16.3 million. The Corporation increased its provision for loan
losses in 2001. The total allowance for loan losses increased to $102.5 million
at December 31, 2001, compared to $83.4 million at December 31, 2000. A
significant reason for this increase is due to the negative impact on the
ability of
58
borrowers to pay their loans attributable to the recessionary economic
conditions present in the second half of 2001 and the continued deterioration
in the economy. This is reflected in the increasing ratio of nonperforming
loans to total loans and nonperforming assets to total assets, as well as the
increase in total nonperforming asset balances. 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 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.
The allowance for loan losses consists of two elements. The first element is
an allocated allowance established for specifically identified loans that are
evaluated individually for impairment and are considered to be individually
impaired. The second element is an estimated allowance established for
impairment on each of the Corporation's pools of outstanding loans. These
estimated allowances are based on several analysis factors including the
Corporation's past loss experience, general economic and business conditions,
geographic and industry concentrations, credit quality and delinquency trends,
and known and inherent risks in each of the portfolios. These evaluations are
inherently subjective as they require frequent revisions as more information
becomes available. The allowance for credit losses totaled $102.5 million at
December 31, 2001, or 107.3% of total nonperforming loans, compared to $83.4
million, or 87.0% at December 31, 2000, and $70.6 million, or 108.5% at June
30, 2000.
Total allowance for loan losses increased to $83.4 million at December 31,
2000, compared to $70.6 million at June 30, 2000. This increase was due to
additional loan loss provisions recorded during the six months ended December
31, 2000, based on management's assessment of increased credit risk due to the
changing economic environment and the increase in nonperforming loans. The
decrease in total allowance for loan losses to $70.6 million at June 30, 2000,
compared to $80.4 million at June 30, 1999, was due to an increase in net
charge-offs in fiscal year 2000 compared to 1999.
The Corporation recorded loan loss provisions of $27.9 million and $6.8
million for the six months ended December 31, 2000 and 1999, respectively. The
increase is primarily attributable to management's evaluation of the
Corporation's portfolio credit risk and subsequent decision to increase
reserves by $12.9 million from June 30, 2000, to December 31, 2000, based on
changing economic conditions and increases in nonperforming loans during the
last half of 2000. Net loans charged-off totaled $14.4 million for the
six-month period in 2000 compared to $6.6 million for the 1999 period. Net
charge-offs were higher for the 2000 period due to increases in lease
charge-offs ($5.5 million) and commercial real estate loan charge-offs ($2.6
million). The increase in lease charge-offs is primarily due to credit issues
on the retained portfolio. The increase in the commercial real estate loan
charge-offs is due primarily to a charge-off totaling $1.7 million on an office
building in Kansas and $535,000 on an apartment building in Nebraska.
Loan loss provisions totaling $13.8 million and $12.4 million were recorded
in fiscal years 2000 and 1999, respectively. Net loans and leases charged-off
totaled $18.3 million for fiscal year 2000 compared to $12.1 million for 1999.
The net charge-offs are higher for fiscal year 2000 due to charge-offs totaling
$6.9 million relating to one commercial loan ($1.5 million), an apartment
complex ($1.3 million) and leases ($4.1 million).
At December 31, 2001, the residential loan portfolio totaled $5.0 billion
and is secured by properties located primarily in Colorado (16%), Nebraska
(12%) and Kansas (10%). At December 31, 2000, the Corporation's residential
loan portfolio totaling $5.6 billion was secured by properties located
primarily in Colorado (17%), Nebraska (11%) and Kansas (9%). At June 30, 2000,
these loans totaled $7.5 billion and were secured by properties located
primarily in Colorado (17%), Nebraska (13%) and Kansas (11%). At June 30, 1999,
these loans totaled $7.0 billion and were secured by residential properties
located primarily in Colorado (20%), Nebraska (13%) and Kansas (10%). At
December 31, 2001, the commercial real estate portfolio totaled $1.5 billion
and was secured by properties located primarily in Colorado (24%), Iowa (15%)
and Kansas (9%). The commercial real estate loan portfolio at December 31,
2000, totaling $1.4 billion was secured by properties primarily located in
Colorado (23%), Iowa (17%) and Kansas (9%). At June 30, 2000, commercial real
estate loans totaled $1.1 billion and were secured by properties located
primarily in Colorado (26%), Iowa (16%) and
59
Kansas (11%). At June 30, 1999, commercial real estate loans totaled $835.3
million and were secured by properties primarily located in Colorado (29%),
Kansas (15%) and Iowa (14%).
Management of the Corporation believes that the present level of allowance
for loan losses is adequate to reflect the risks inherent in its portfolios.
However, there can be no assurance that the Corporation will not experience
increases in its nonperforming assets, that it will not increase the level of
its allowance 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.
Nonperforming assets are monitored on a regular basis by the Corporation's
internal credit review and problem asset groups. Nonperforming assets are
summarized as follows as of the dates indicated:
December 31, June 30,
------------------ ------------------
2001 2000 2000 1999
-------- -------- -------- --------
(Dollars in Thousands)
Nonperforming loans (1)
Residential real estate............................. $ 63,495 $ 81,406 $ 48,996 $ 49,061
Commercial real estate.............................. 23,423 4,446 2,550 12,220
Consumer and other loans............................ 6,622 7,271 5,119 4,859
Leases and credit cards............................. 307 2,748 8,347 3,875
-------- -------- -------- --------
Total........................................... 93,847 95,871 65,012 70,015
-------- -------- -------- --------
Real estate (2)........................................
Commercial.......................................... 8,762 10,198 12,862 8,880
Residential......................................... 36,446 15,824 16,803 14,384
-------- -------- -------- --------
Total........................................... 45,208 26,022 29,665 23,264
-------- -------- -------- --------
Troubled debt restructurings (3)
Commercial.......................................... 3,057 4,195 5,259 9,534
Residential......................................... 84 90 172 195
-------- -------- -------- --------
Total........................................... 3,141 4,285 5,431 9,729
-------- -------- -------- --------
Total nonperforming assets............................. $142,196 $126,178 $100,108 $103,008
======== ======== ======== ========
Nonperforming loans to total loans..................... 1.08% 1.05% .61% .73%
Nonperforming assets to total assets................... 1.10% 1.01% .73% .81%
Total allowance for loan losses (4).................... $102,451 $ 83,439 $ 70,556 $ 80,419
Allowance for loan losses to total loans............... 1.18% .91% .66% .84%
Allowance for loan losses to total nonperforming assets 72.05% 66.13% 70.48% 78.07%
Allowance for loan losses to nonresidential
nonperforming assets................................. 242.94% 289.14% 206.68% 204.28%
--------
(1) Nonperforming loans consist of nonaccruing loans (loans 90 days or more
past due) and accruing loans that are contractually past due 90 days or
more. At December 31, 2001 and 2000, and June 30, 2000 and 1999, there were
no accruing loans contractually past due 90 days or more.
(2) Real estate consists of commercial and residential property acquired
through foreclosure or repossession (real estate owned and real estate in
judgment) and real estate from certain subsidiary operations, and does not
include performing real estate held for investment totaling $12.3 million,
$12.8 million, $9.9 million and $9.5 million, respectively, at December 31,
2001 and 2000, and June 30, 2000 and 1999.
(3) A troubled debt restructuring is a loan on which the Corporation, for
reasons related to the debtor's financial difficulties, grants a concession
to the debtor, such as a reduction in the loan's interest rate, a reduction
in the face amount of the debt, or an extension of the maturity date of the
loan, that the Corporation would not otherwise consider.
(4) Includes $92,000, $1,176,000, $59,000 and $75,000, respectively, at
December 31, 2001 and 2000, and June 30, 2000 and 1999, in allowance for
losses established primarily to cover risks associated with borrowers'
delinquencies and defaults on loans and leases held for sale.
60
Nonperforming loans at December 31, 2001, decreased $2.0 million compared to
December 31, 2000, due primarily to the foreclosure of a construction loan
totaling $22.7 million which moved to the real estate category and a decrease
of $2.6 million in leases. These decreases were partially offset by two
commercial real estate groups of loans totaling $20.8 million going 90 days
past due and general increases totaling $3.0 million in the residential real
estate portfolio. The $22.7 million construction loan foreclosure was on a
property located in Nevada for the development of a residential master planned
community. The $2.6 million decrease in leases reflects the Corporation's sale
of a substantial portion of this portfolio during the first quarter of 2001.
Nonperforming loans at December 31, 2000, increased $30.9 million compared to
June 30, 2000, due primarily to an increase in residential construction
delinquencies of $22.7 million, residential delinquencies of $9.7 million and
commercial real estate delinquencies of $1.9 million partially offset by a
decrease of $3.9 million in leasing delinquencies. Nonperforming loans at June
30, 2000, decreased compared to 1999 primarily due to a decrease of $9.7
million in delinquent commercial real estate offset by increases of $4.5
million and $260,000, respectively, in leases and other loans and consumer
loans. The higher concentration levels of nonperforming loans at December 31,
2001,were secured by properties located in Kansas (18%), Nevada (11%) and Iowa
(10%). This compares to December 31, 2000, with nonperforming loans secured by
properties located in Nevada (25%), Kansas (17%) and Iowa (13%).
Real estate owned at December 31, 2001, increased $19.2 million from
December 31, 2000, due primarily to the addition of the residential master
planned community development property located in Nevada. The book value of
this property totaled $21.6 million at December 31, 2001. Real estate owned at
December 31, 2000, decreased $3.6 million from June 30, 2000, due primarily to
decreases in commercial and residential real estate totaling $2.7 million and
$979,000, respectively. The decrease in commercial real estate was due to
impairment losses totaling $3.1 million recorded during the six months ended
December 31, 2000, on two hotels in Kansas. The net increase of $6.4 million in
real estate at June 30, 2000, compared to 1999 was due to increases of $4.0
million and $2.4 million, respectively, in commercial and residential real
estate. The increases were primarily due to the transfer of delinquent
residential and commercial loans totaling $21.1 million and $10.9 million,
respectively, to nonperforming real estate. Partially offsetting these
increases were sales of residential and commercial properties totaling $15.2
million and $6.2 million, respectively. Real estate owned at December 31, 2001,
is located primarily in Nevada (48%), Missouri and Arizona compared to December
31, 2000, and June 30, 2000, where the higher concentrations were located
primarily in Kansas and Missouri.
Troubled debt restructurings decreased $1.1 million at December 31, 2001,
compared to December 31, 2000, due primarily to the charge-off of one loan
totaling $582,000 and the reclassification of another loan for $414,000 from
troubled debt restructuring status to current loan status. Troubled debt
restructuring decreased $1.1 million at December 31, 2000, compared to June 30,
2000, due primarily to the payoff of two loans totaling $2.4 million partially
offset by the addition of one loan totaling $1.4 million. Troubled debt
restructurings decreased $4.3 million at June 30, 2000, compared to June 30,
1999, due to the reclassification of $3.2 million of commercial troubled debt
restructurings to nonperforming loan status and $1.1 million of commercial
troubled debt restructurings to current loan status.
Non-Interest Income
Retail Fees and Charges
Retail fees and charges totaled $53.5 million for the year ended December
31, 2001. The primary source of this fee income is customer charges for retail
financial services such as checking account fees and service charges, charges
for insufficient checks or uncollected funds, stop payment fees, debit card
fees, overdraft protection fees, transaction fees for personal checking and
automatic teller machine services. Increases in the volume of checking accounts
and an increased retail fee pricing structure effective September 1, 2001, is
the reason retail fees and charges are up for 2001.
Retail fees and charges totaled $25.7 million and $20.7 million for the six
months ended December 31, 2000 and 1999, respectively. The net increase for the
six months ended December 31, 2000, compared to 1999 was due to increases in
fees for overdraft and insufficient funds charges on checking accounts and
debit card fees.
61
Retail fees and charges totaled $43.2 million and $36.7 million for fiscal
years 2000 and 1999, respectively. The net increase for fiscal year 2000
compared to 1999 was due to increased fee structures and volume increases in
checking account fees and related ancillary fees for overdraft and insufficient
funds charges, debit card fees and overall fees from the acquisition of
Midland. Also contributing to the increase was the emphasis on cross-selling of
products available from the Corporation's increased retail customer deposit
base.
Loan Servicing Fees
The major components of loan servicing fees for the periods indicated and
the amount of loans serviced for other institutions are as follows:
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, ----------------------
2001 2000 2000 1999
------------ ------------ ---------- ----------
(In Thousands)
Revenue from loan servicing fees......... $ 33,079 $ 13,814 $ 27,943 $ 29,250
Revenue from late loan payment fees...... 6,693 2,848 5,954 5,732
Amortization of mortgage servicing rights (17,092) (4,558) (8,703) (12,021)
Valuation adjustments for impairment..... (19,058) (583) -- --
---------- ---------- ---------- ----------
Loan servicing fees, net................. $ 3,622 $ 11,521 $ 25,194 $ 22,961
========== ========== ========== ==========
Loans serviced for other institutions.... $9,488,621 $9,100,938 $7,271,014 $7,448,814
========== ========== ========== ==========
The amount of revenue generated from loan servicing fees, and changes in
comparing periods, is primarily due to the average size of the Corporation's
portfolio of mortgage loans serviced for other institutions and the level of
rates for service fees collected partially offset by the amortization expense
of mortgage servicing rights and valuation allowances. The loan servicing fees
category also includes fees collected for late loan payments. The net increases
in revenue comparing the respective periods are due to a higher average balance
of mortgage loans serviced slightly offset by a lower level of service fee
rates comparing the respective periods. The average service fee rate collected
by the Corporation was .33% for the year ended December 31, 2001, compared to
..36% for the six months ended December 31, 2001, and .39% for both of the
fiscal years 2000 and 1999. The increases in amortization expense of mortgage
servicing rights reflects an increase in prepayments due to the lower interest
rate environment comparing the respective periods. The amount of amortization
expense of mortgage servicing rights is determined, in part, by mortgage loan
pay-downs in the servicing portfolio that are influenced by changes in interest
rates. In addition, valuation adjustments totaling $19.1 million and $583,000
million in impairment losses were recorded during the year ended December 31,
2001, and the six months ended December 31, 2000, as reductions of loan
servicing fees and of the carrying amount of the mortgage servicing rights
portfolio. The valuation allowances are due to an increase in loan prepayments
resulting from a decrease in interest rates during the respective periods. The
mortgage loans serviced for other institutions increased at December 31, 2000,
compared to June 30, 2000, from the $1.6 billion of residential loans
securitized and sold in November 2000 with servicing retained.
The fair value of the Corporation's loan servicing portfolio increases as
mortgage interest rates rise and loan prepayments decrease. It is expected that
income generated from the Corporation's loan servicing portfolio will increase
in such an environment. However, this positive effect on the Corporation's
income is offset, in part, by a decrease in additional servicing fee income
attributable to new loan originations, which historically decrease in periods
of higher, or increasing, mortgage interest rates, and by an increase in
expenses from loan production costs since a portion of such costs cannot be
deferred due to lower loan originations. Conversely, the value of the
Corporation's loan servicing portfolio will decrease as mortgage interest rates
decline.
62
Gain (Loss) on Sales of Securities and Changes in Fair Value of Derivatives,
Net
The following transactions were recorded during the year ended December 31,
2001, and the six months ended December 31, 2000:
Year Ended Six Months Ended
December 31, December 31,
2001 2000
------------ ----------------
(In Thousands)
Gain (loss) on the sales of available-for-sale securities:
Investment securities............................................................ $14,727 $(14,210)
Mortgage-backed securities....................................................... 3,571 (19,102)
------- --------
18,298 (33,312)
------- --------
Gain on the sales of trading securities:
Investment securities............................................................ -- 2,466
Mortgage-backed securities....................................................... -- 876
------- --------
-- 3,342
------- --------
Changes in the fair value of derivative financial instruments
not qualifying for hedge accounting:
Interest rate floor agreements................................................... (870) (25)
Forward loan sales commitments................................................... -- (665)
Conforming loan commitments...................................................... -- (380)
------- --------
(870) (1,070)
------- --------
Amortization expense on the deferred loss on terminated interest rate swap
agreements included in accumulated other comprehensive income (loss).............. (2,034) (170)
Loss on the termination of interest rate swap agreements............................ -- (38,209)
Other items......................................................................... 28 (43)
------- --------
Gain (loss) on the sales of securities and changes in fair value of derivatives, net $15,422 $(69,462)
======= ========
During the year ended December 31, 2001, the Corporation realized pre-tax
gains on the sales of available-for-sale investment and mortgage-backed
securities totaling $18.3 million. These net gains were recognized primarily to
offset the valuation adjustment loss of $19.1 million in the mortgage servicing
rights portfolio as of December 31, 2001. In addition, in December 2000, the
Corporation incurred losses totaling $8.6 million on terminated interest rate
swap agreements. Since the related hedged FHLB advances and deposit liabilities
were not paid this loss is included in other comprehensive income (loss) with
$2.0 million amortized to operations during the year ended December 31, 2001.
The unamortized balance of these terminated interest rate swap agreements
totaled $6.4 million at December 31, 2001.
During the six months ended December 31, 2000, the Corporation realized a
pre-tax net loss totaling $30.0 million on the sales of the available-for-sale
and trading investment and mortgage-backed securities. This net loss was the
result of the Corporation selling securities in the trading portfolio totaling
$429.8 million and in the available for sale portfolio totaling $765.6 million
during the six months ended December 31, 2000. Effective July 1, 2000, the
Corporation adopted the provisions of SFAS No. 133 and, under provisions of
this statement, the Corporation transferred $432.6 million of its
held-to-maturity portfolio of investment and mortgage-backed securities to the
trading portfolio. The fair value adjustment of these transferred securities
resulted in a pre-tax loss of $28.4 million ($18.5 million after-tax) recorded
against current operations as of July 1, 2000, as a cumulative effect of a
change in accounting principle, net of income tax benefits. The loss on the
termination of interest rate swap agreements totaling $38.2 million resulted
from the Corporation exiting interest rate swap agreements with a notional
amount of $1.2 billion primarily due to the pay down of FHLB advances during
the quarter ended December 31, 2000. Under SFAS No. 133, this loss of $38.2
million was recognized on these swap
63
agreements ($1.0 billion notional amount) since the related hedged FHLB
advances were paid off. A net loss of $1.1 million was also recorded during the
six months ended December 31, 2000, resulting from the changes in fair value of
certain derivatives. During the six months ended December 31, 1999, there were
no sales of securities classified as available for sale.
During fiscal year 2000 there were no sales of securities available for
sale. During fiscal year 1999 the Corporation sold securities available for
sale resulting in a pre-tax gain of $4.4 million on sales of $235.6 million.
Mortgage-backed securities accounted for most of the activity with pre-tax
gains of $3.9 million recorded.
Gain (Loss) on Sales of Loans
During the year ended December 31, 2001, the Corporation recorded $8.7
million on the gain on sales of loans and changes in the fair value of
derivative financial instruments and certain hedged items. During the year
ended December 31, 2001, loans were sold totaling $2.7 billion resulting in a
pre-tax gain of $4.7 million. Loans are typically originated by the mortgage
banking operations and sold in the secondary market with loan servicing
retained and without recourse to the Corporation. The Corporation also has
derivative financial instruments (forward loan sales commitments and conforming
loan commitments) and certain hedged items (loan warehouse fair value hedge)
that under SFAS No. 133 are recorded at fair value with the changes in fair
value reported in current earnings. For the year ended December 31, 2001, the
net changes in the fair value of these derivative financial instruments and
certain hedged items totaled $4.0 million and were recorded as a net gain in
this category.
During the six months ended December 31, 2000 and 1999, loans were sold
totaling approximately $2.3 billion and $341.6 million, respectively, resulting
in a pre-tax loss of $18.0 million for the six months ended December 31, 2000,
and a pre-tax gain of $241,000 for the December 31, 1999, six month period. As
part of the August 2000 strategic initiatives to restructure the balance sheet,
approximately $1.6 billion of 30-year residential mortgages were securitized
and sold. This November 2000 sale of these securitized mortgage loans resulted
in a pre-tax loss of $18.2 million. The sale of these single-family residential
loans allowed the Corporation to increase margins and reduce earnings
volatility associated with rising interest rates, and at the same time increase
the mortgage loans serviced portfolio.
During fiscal years 2000 and 1999, the Corporation sold loans to third
parties through its mortgage banking operations totaling approximately $762.1
million and $2.0 billion, respectively, resulting in a pre-tax loss of $110,000
for fiscal year 2000 and in a net pre-tax gain of $3.4 million for fiscal year
1999.
Real Estate Operations
The Corporation recorded a net loss from real estate operations totaling
$7.0 million for the year ended December 31, 2001. Impairment losses on real
estate are recognized when and to the extent that the carrying value of a
property is greater than its market value less estimated selling costs. Real
estate operations reflect impairment losses for real estate, net real estate
operating activity, and gains and losses on dispositions of real estate. The
loss in real estate operations for 2001 is due primarily to an impairment
write-down in December 2001 totaling $3.0 million recorded on the Nevada
residential master planned community development property that was acquired
through foreclosure in March 2001, $2.2 million in impairment losses on
residential properties, $1.4 million in net operating expenses on real estate
properties owned and $767,000 in expenses related to the Nevada property,
partially offset by net gains on the sale of real estate properties totaling
$826,000.
The Corporation recorded a loss from real estate operations totaling $4.8
million for the six months ended December 31, 2000, compared to a gain totaling
$138,000 for the six months ended December 31, 1999. The net decrease in real
estate operations for the six months ended December 31, 2000, was due primarily
to impairment losses recorded on two hotel properties in Kansas totaling $3.1
million and four commercial properties totaling
64
$449,000. Net operating losses on the two Kansas hotels totaled $1.1 million
for the six-month 2000 period. Net gains on disposal of real estate properties
decreased by $236,000 for the six months ended December 31, 2000, compared to
1999.
The Corporation recorded net losses from real estate operations in fiscal
years 2000 and 1999 totaling $88,000 and $1.7 million, respectively. The net
increase in real estate operations for fiscal year 2000 compared to 1999 is due
primarily to a net decrease in the provision for real estate losses totaling
$1.5 million and an increase in net gains on real estate dispositions.
Bank Owned Life Insurance
In December 2000, the Corporation invested in a BOLI program with a contract
value of $200.0 million. Revenue from the BOLI program became a significant
component of other operating income beginning in calendar year 2001. In 2001
the Corporation recorded $14.7 million in revenue from the BOLI program
compared to $713,000 during the six months ended December 31, 2000.
Other Operating Income
Other operating income totaled $46.1 million for the year ended December 31,
2001. The major components of other operating income are brokerage commissions,
credit life and disability commissions and insurance commissions. For the year
ended December 31, 2001, brokerage commission income totaled $10.0 million,
insurance commission income totaled $6.1 million and commission income for
credit life and disability totaled $2.3 million.
Other operating income totaled $15.0 million and $20.7 million for the six
months ended December 31, 2000 and 1999, respectively. Other operating income
totaled $33.6 million and $24.2 million for fiscal years 2000 and 1999,
respectively. Brokerage commission income totaled $4.2 million and $4.5 million
for the six months ended December 31, 2000 and 1999. The decrease comparing
periods was primarily attributable to the volatility in the stock market
comparing 2000 to 1999. Insurance commission remained relatively stable and
totaled $1.9 million for both six month periods. Credit life and disability
insurance totaled $1.4 million and $2.0 million for the six months ended
December 31, 2000 and 1999. Other operating income totaled $7.5 million and
$12.3 million for the six months ended December 31, 2000 and 1999. The decrease
for the 2000 six month period compared to the 1999 period was due primarily to
the sale of the corporate headquarters building in December 1999 that resulted
in a pre-tax gain of $8.5 million. Additionally, during the six months ended
December 31, 2000, the Corporation recorded a $1.3 million gain on the sale of
a parcel of the Corporation's business park and BOLI income totaling $769,000.
Brokerage commission income totaled $9.8 million and $9.2 million,
respectively, for fiscal years 2000 and 1999. Brokerage commission income
increased for fiscal year 2000 compared to 1999 due to significant growth in
the volume of customer transactions for equity securities. A greater focus on
cross-selling, an increase in the number of sales locations due to acquisitions
and a more qualified staff also contributed to these increases.
Insurance commission income totaled $4.0 million and $2.8 million,
respectively, for fiscal years 2000 and 1999. The increase comparing fiscal
year 2000 to 1999 was primarily due to increased annuity sales due to the
higher interest rate environment in fiscal year 2000 and to an increase in net
reinsurance operations. Credit life and disability commission income totaled
$4.1 million and $2.0 million, respectively, for fiscal years 2000 and 1999.
Commission income from credit life and disability is directly related to
consumer loan volume and the emphasis placed on selling the product. Credit
life and disability commission income from leasing activity decreased during
this same period.
Other operating income includes miscellaneous items that can fluctuate
significantly from year to year. Such amounts totaled approximately $15.7
million and $10.2 million, respectively, for fiscal years 2000 and 1999. The
65
increase comparing fiscal year 2000 to 1999 is due primarily to the net pre-tax
gain totaling $8.5 million on the sale of the corporate headquarters building.
Non-Interest Expense
General and Administrative Expenses
Total general and administrative expenses were $232.5 million for the year
ended December 31, 2001. General and administrative expenses totaled $248.0
million excluding exit costs and termination benefits totaling is a net gain of
$15.6 million. This net gain of $15.6 million is the result of pre-tax gains on
the sale of 34 branches during 2001 totaling $18.3 million partially offset by
expenses associated with right-sizing branches ($2.0 million) and $754,000 in
expenses to exit leasing operations. Major changes in expenses incurred or
charged to operations during 2001 include (i) $13.9 million in bonuses and
commissions for management incentive plans and retail and mortgage production
incentive plans compared to $3.4 million for the six months ended December 31,
2000, (ii) employee medical and dental costs of $6.2 million compared to $2.9
million for the six months ended December 31, 2000, (iii) $4.1 million in legal
expenses in 2001 associated with the Corporation's supervisory goodwill lawsuit
against the United States and (iv) $1.1 million in contributions of which $1.0
million was funded into a charitable trust.
Total general and administrative expenses totaled $148.4 million and $127.8
million for the six months ended December 31, 2000 and 1999. The net increase
of $20.6 million in general and administrative expenses for the six months
ended December 31, 2000, compared to the six months ended December 31, 1999,
was primarily due to net increases in exit costs and termination benefits of
$21.5 million, outside services of $1.9 million and other operating expenses of
$1.3 million. These increases are partially offset by decreases of $2.1 million
in compensation, $1.4 million in communication expense and $957,000 in
occupancy and equipment. Excluding exit costs and termination benefits, general
and administrative expenses decreased $839,000 from $123.5 million to $122.6
million comparing the six months ended December 31, 2000, to the prior year
period. This net decrease was primarily due to a lower number of full-time
equivalent employees comparing the respective periods, management's emphasis on
tighter cost controls and the effect of certain initiatives starting with the
November 1999 branch divestitures and employee outplacement. The increase in
exit costs and termination benefits is due to the implementation of key
strategic initiatives announced August 2000. Exit costs and termination
benefits totaling $25.8 million resulting from these key strategic initiatives
relate to the sale and consolidation of branches ($14.5 million, net of gains
on sales of branches totaling $2.5 million), costs to exit leasing operations
($4.6 million), strategic consulting fees ($2.9 million), management
restructuring ($2.1 million) and other various initiatives ($1.7 million).
Total general and administrative expenses totaled $251.9 million and $238.6
million for fiscal years 2000 and 1999, respectively. Excluding charges for
exit costs and termination benefits, merger-related expenses and certain other
nonrecurring charges, general and administrative expenses totaled $248.0
million and $208.5 million for fiscal years 2000 and 1999. The net increase of
$13.3 million in general and administrative expenses for fiscal year 2000
compared to 1999 is primarily due to net increases of $12.9 million in
compensation and benefits, $17.6 million in other expenses, $6.5 million in
data processing, $3.9 million in exit costs and termination benefits, $2.3
million in occupancy and equipment and $1.2 million in advertising. These
increases were offset by net decreases of $29.9 million in merger expenses and
$1.2 million in regulatory insurance and assessments. The charges for exit
costs and termination benefits of $3.9 million reflect the expenses and charges
pursuant to the sale and closing of 21 branches ($2.4 million) and the
elimination of 121 positions ($1.5 million). The Midland acquisition, which was
accounted for under the purchase method of accounting, contributed to the net
increases in additional general and administrative expenses for fiscal year
2000. These acquisitions resulted in increased personnel wages, benefits and
costs of operating additional branches, as well as other expenses incurred on
an indirect basis. General and administrative expenses also increased for
fiscal year 2000 compared to 1999 due to higher costs associated with the new
data processing computer systems, higher item processing costs from the
customer deposit delivery system implemented in the second quarter of fiscal
year 1999 and to decreases in deferred costs associated with loan originations
due to lower loan origination volume.
66
Intangible Assets Amortization
During the year ended December 31, 2001, the amortization of core value of
deposits and goodwill totaled $7.2 million and $8.1 million, respectively.
Amortization expense has decreased due to core value of deposits amortizing on
an accelerated basis in earlier years of an acquisition and to discontinuation
of amortization expense associated with the write-off of a portion of
intangible assets from the August 2000 branch divestiture initiatives.
Effective January 1, 2002, the Corporation adopted Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"). Beginning in 2002, goodwill will no longer be amortized but will be
evaluated at least on an annual basis for impairment. For the year ended
December 31, 2002, goodwill totaling $7.8 million, or approximately $.16 per
share, will not be amortized against current year operations pursuant to SFAS
No. 142.
Total amortization expense of intangible assets for the six months ended
December 31, 2000, was $8.2 million compared to $9.3 million for the six months
ended December 31, 1999. The amortization expense is lower due to core value of
deposits amortized on an accelerated basis and from the write-off of a portion
of intangible assets from the November 1999 branch sales and closings, and the
finalization of the March 1999 Midland acquisition for purchase accounting
adjustments and the core value study.
Total amortization expense of intangible assets for fiscal years 2000 and
1999 was $17.2 million and $15.7 million, respectively. The net increase in
amortization expense of intangible assets for fiscal year 2000 compared to 1999
is primarily due to the finalization of purchase accounting adjustments and the
core value of deposits study for the March 1999 Midland acquisition. The
amortization expense of intangible assets associated with these two
acquisitions totaled $9.9 million and $7.8 million, respectively, for fiscal
years 2000 and 1999.
Income Tax Provision (Benefit)
The provision for income taxes totaled $43.4 million for the year ended
December 31, 2001. The effective tax rate was 30.7% for 2001 compared to the
statutory rate of 35.0%. The effective tax rate was lower than the statutory
rate primarily due to tax benefits from the BOLI, tax-exempt interest income
and tax credits.
For the six months ended December 31, 2000, the Corporation recorded an
income tax benefit totaling $19.7 million, or an effective tax benefit rate of
28.1%. This compares to a provision for income taxes for the six months ended
December 31, 1999, of $29.2 million, or an effective tax rate of 34.7%. The
effective tax benefit rate of 28.1% differs from the statutory rate of 35.0%
primarily due to nondeductible goodwill, the establishment of valuation
allowances on deferred state taxes, tax exempt interest income and low income
housing tax credits.
For fiscal years 2000 and 1999 the provision for income taxes totaled $55.3
million and $63.3 million, respectively. The effective tax rates for fiscal
years 2000 and 1999 were 34.3% and 40.6%, respectively. The effective tax rate
varied from the statutory rate of 35.0% for fiscal year 2000 due to the tax
benefits generated from the creation of a real estate investment trust and to
increases in tax-exempt securities. The effective tax rate varied from the
statutory rate for fiscal year 1999 due to the nondeductibility of certain
merger-related expenses and other nonrecurring charges. A significant
nondeductible merger-related expense for fiscal year 1999 was the $14.0 million
associated with the termination of the employee stock ownership plans acquired
in mergers. For both fiscal years 2000 and 1999, the effective tax rates also
varied from the statutory rate due to the nondeductibility of amortization of
intangible assets in relation to the level of taxable income for the respective
years.
Cumulative Effect of Change in Accounting Principle
Effective July 1, 2000, the Corporation adopted the provisions of SFAS No.
133. SFAS No. 133 requires the recognition of all derivative financial
instruments as either assets or liabilities in the statement of financial
condition and measurement of those instruments at fair value. The Corporation's
interest rate floor agreements,
67
forward loan sales commitments and conforming loan commitments did not qualify
for hedge accounting. Since these derivatives did not qualify for hedge
accounting, this statement required that upon initial adoption, the fair values
of these derivatives be recorded as a charge to operations on July 1, 2000, as
a cumulative effect of a change in accounting principle. Also, under the
provisions of this statement, the Corporation was permitted to transfer
held-to-maturity securities to trading on July 1, 2000. The Corporation
transferred held-to-maturity securities with a book value of $432.6 million
(fair value of $404.2 million) to trading on July 1, 2000. The adjustment to
fair value on the transfer of securities from held-to-maturity to trading on
July 1, 2000, was also recorded as a charge to operations as a cumulative
effect of change in accounting principle. The net effect of adopting the
provisions of SFAS No. 133 was to record a net charge to operations totaling
$19.1 million, net of income tax benefits of $10.3 million, or $.35 per share,
as a cumulative effect of a change in accounting principle for the six months
ended December 31, 2000. See Note 22 to the Consolidated Financial Statements
for additional information.
Effective July 1, 1999, the Corporation adopted the provisions of Statement
of Position 98-5 "Reporting the Costs of Start-Up Activities." This statement
required that costs of start-up activities and organizational costs be expensed
as incurred. Prior to this statement, these costs were capitalized and
amortized over periods ranging from five to 25 years. The effect of adopting
the provisions of this statement was to record a charge of $1.8 million, net of
an income tax benefit of $978,000, or $.03 per diluted share, as a cumulative
effect of a change in accounting principle for the fiscal year ended June 30,
2000. These costs consist of organizational costs primarily associated with the
creation of a real estate investment trust subsidiary and start-up costs of the
proof of deposit department for processing customer transactions following the
conversion of the Corporation's deposit system.
Ratios
The table below sets forth certain performance ratios of the Corporation for
the periods indicated:
Six Months Year Ended
Year Ended Ended June 30,
December 31, December 31, -----------
2001 2000 2000 1999
------------ ------------ ----- ----
Return on average assets: net income (loss) divided by average total
assets (1)........................................................ .76% (1.01)% .77% .77%
Return on average equity: net income (loss) divided by average
equity (1)........................................................ 12.23 (15.30) 10.85 9.95
Equity-to-assets ratio: average stockholders' equity to
average total assets.............................................. 6.21 6.62 7.10 7.79
General and administrative expenses divided by average assets (2)... 1.81 2.16 1.87 2.00
--------
(1) Return on average assets and return on average stockholders' equity for the
year ended December 31, 2001, are .68% and 10.96%, respectively, excluding
the after-tax effect of nonrecurring income and charges totaling $10.1
million. Return on average assets and return on average stockholders'
equity for the six months ended December 31, 2000, are .39% and 5.88%,
respectively, excluding the after-tax effect of nonrecurring income and
charges totaling $96.2 million. Return on average assets and return on
average stockholders' equity for fiscal year 2000 are .76% and 10.77%,
respectively, excluding the after-tax effect of nonrecurring income and
charges totaling $756,000. Return on average assets and return on average
stockholders' equity for fiscal year 1999 are 1.00% and 12.86%,
respectively, excluding the after-tax effect of merger-related and other
nonrecurring charges totaling $27.1 million
(2) General and administrative expenses divided by average assets for the year
ended December 31, 2001, is 1.93%, excluding net gains in exit costs and
termination benefits totaling $15.6 million. The ratio for the six months
ended December 31, 2000, is 1.79% and for fiscal year 2000 is 1.84%
excluding the nonrecurring exit costs and termination benefits totaling
$25.8 million and $3.9 million, respectively. The ratio for fiscal year
1999 is 1.75% excluding the merger-related and other nonrecurring charges
totaling $30.1 million.
68
The operating ratio for general and administrative expenses for the year
ended December 31, 2001, excluding exit costs and termination benefits, is
higher compared to the six months ended December 31, 2000. The operating ratio
for 2001 is higher due to increased expenses associated with management
incentives, legal costs and the establishment of a charitable trust along with
a net decrease of $867.6 million in average assets. The operating ratio for
general and administrative expenses for the six months ended December 31, 2000,
is higher compared to fiscal year 2000 due to an increase of $21.8 million in
exit costs and termination benefits. The operating ratio for general and
administrative expenses for fiscal year 2000 is lower compared to 1999 due to a
net increase of $1.6 billion in average assets partially offset by an increase
of $13.3 million in general and administrative expenses. The net increase in
general and administrative expenses for fiscal year 2000 over 1999 is due to a
full year of expenses associated with the Midland acquisition, higher costs
from new computer systems and item processing charges, and to lower loan
origination volumes that translates to decreases in deferred costs associated
with loan originations.
Implementation of New Accounting Pronouncements
Effective April 1, 2001, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" relating to
the securitization of assets. On July 20, 2001, Statement of Financial
Accounting Standards No. 141 "Business Combinations" was issued, which requires
that only the purchase method of accounting be applied to all business
combinations initiated after June 30, 2001. Effective July 1, 2000, the
Corporation adopted the provisions of SFAS No. 133. This statement required the
recognition of all derivative financial instruments as either assets for
liabilities in the statement of financial condition and measurement of those
instruments at fair value. See Note 22 for additional information on the effect
of this statement.
Effective January 1, 2002, the Corporation adopted the provisions of SFAS
No. 142. Beginning January 1, 2002, goodwill will no longer be subject to
amortization. For calendar year 2002, goodwill totaling $7.8 million will not
be amortized against current operations pursuant to this statement. Management
of the Corporation has not completed its overall assessment of any additional
effect of SFAS No. 142, and therefore has not determined the total effect that
the initial adoption of this statement will have on the Corporation's financial
position, liquidity or results of operations. See Note 29 for additional
information on this statement.
Liquidity and Capital Resources
The Corporation's principal asset is its investment in the capital stock of
the Bank. Since the Corporation does not generate any significant revenues
independent of the Bank, the Corporation's liquidity is dependent on the extent
to which it receives dividends from the Bank. The Bank's ability to pay
dividends to the Corporation is dependent on its ability to generate earnings
and is subject to a number of regulatory restrictions and tax considerations.
Under the capital distribution regulations of the OTS, the Bank is permitted to
pay capital distributions during a calendar year up to 100.0% of its retained
net income (net income determined in accordance with generally accepted
accounting principles less total capital distributions declared) for the
current calendar year combined with the Bank's retained net income for the
preceding two calendar years without requiring an application for approval to
be filed with the OTS. At December 31, 2001, the Bank's total distributions
exceeded its retained income by $228.2 million under this regulation thereby
requiring the Bank to file an application with the OTS for any capital
distribution. During calendar year 2001 the Bank recorded net income of
approximately $105.6 million but made capital distributions totaling $216.0
million which increased this deficit. The capital distributions were made to
the parent company to cover its common stock repurchases, common stock cash
dividends and debt service. If the Bank's regulatory capital would fall below
certain levels, then applicable regulations would require approval by the OTS
of any proposed dividends and, in some cases, would prohibit the payment of
dividends.
The Corporation manages its liquidity at both the parent company and
subsidiary levels. At December 31, 2001, the cash of Commercial Federal
Corporation (the "parent company") totaled $13.4 million compared to
69
$36.0 million at December 31, 2000. Due to the parent company's limited
independent operations, the parent company's ability to make future interest
and principal payments on its $21.7 million of 7.95% fixed-rate subordinated
extendible notes due December 1, 2006, on its $46.4 million of 9.375%
fixed-rate junior subordinated debentures due May 15, 2027, and on its term and
revolving credit notes is dependent upon its receipt of dividends from the Bank.
During the year ended December 31, 2001, the parent company received cash
dividends totaling $216.0 million from the Bank for:
. the financing of common stock repurchases totaling $161.3 million,
. common stock cash dividends totaling $11.5 million paid by the parent
company to its common stockshareholders,
. interest payments totaling $9.5 million on the parent company's debt,
. principal payments totaling $5.4 million on the parent company's
five-year term note, and
. principal payments totaling $28.3 million on the parent company's 7.95%
subordinated extendible notes due December 1, 2006.
During the six months ended December 31, 2000, the parent company received
cash dividends totaling $57.0 million from the Bank. These dividends were for
(i) common stock cash dividends totaling $3.7 million paid by the parent
company to its common stock shareholders, (ii) interest payments totaling $5.9
million on the parent company's debt, (iii) the financing of common stock
repurchases totaling $45.6 million, and (iv) a principal payment of $1.8
million on the parent company's five-year term note. During fiscal years 2000
and 1999, the parent company received cash dividends totaling $117.8 million
and $73.3 million, respectively.
Cash dividends paid by the parent company to its common stock shareholders
totaled $15.2 million, $7.8 million, $15.8 million and $13.5 million,
respectively, during the year ended December 31, 2001, six months ended
December 31, 2000, and fiscal years 2000 and 1999. The payment of dividends on
the common stock is subject to the discretion of the Board of Directors of the
Corporation and depends on a variety of factors, including operating results
and financial condition, liquidity, regulatory capital limitations and other
factors. The Bank will continue to pay dividends to the parent company, subject
to regulatory restrictions, to cover future principal and interest payments on
the parent company's debt and quarterly cash dividends on common stock when and
as declared by the parent company. The parent company also receives cash from
the exercise of stock options and the sale of stock under its employee benefit
plans which totaled $4.6 million, $775,000, $2.4 million and $9.7 million,
respectively, during the year ended December 31, 2001, six months ended
December 31, 2000, and fiscal years 2000 and 1999. In addition, the parent
company receives funds from the Bank for income tax benefits from operating
losses of the parent company as provided in the corporate tax sharing agreement.
During 2001, the Corporation continued repurchasing shares of its
outstanding common stock that began in April 1999. On August 14, 2000, the
Corporation's Board of Directors authorized the repurchase of up to 10% of its
outstanding stock, or approximately 5,500,000 shares. This repurchase was
completed on August 8, 2001. On May 7, 2001, the Board authorized an additional
repurchase for 5,000,000 shares. During 2001, the Corporation purchased
7,662,600 shares of its common stock at a cost of $180.9 million. During the
six months ended December 31, 2000, the Corporation repurchased and cancelled
2,765,400 shares of its common stock at a cost of $49.0 million. During the
fiscal year end June 30, 2000, the Corporation repurchased and cancelled
3,773,500 shares of its common stock at a cost of $63.9 million. During fiscal
year 1999 the Corporation repurchased and cancelled 1,500,000 shares at a cost
of $36.2 million.
The Corporation owed $50.0 million of 7.95% fixed-rate subordinated
extendible notes due December 1, 2006 (the "Notes"). Contractual interest on
the Notes is paid monthly and was set at 7.95% until December 1, 2001. The
interest rate for the Notes was reset at the Corporation's option on December
1, 2001, at 7.95% until
70
December 1, 2004, the next reset date selected by management. This interest
rate of 7.95% exceeds 105% of the effective interest rate on comparable
maturity U.S. Treasury obligations, as defined in the Indenture. These notes
were redeemable by the holders on December 1, 2001. A total of $28.3 million
was redeemed, leaving an outstanding balance of $21.7 million at December 31,
2001. The Corporation and noteholders may elect to redeem the Notes in whole on
December 1, 2004, the next interest reset date, at par plus accrued interest.
The Notes are unsecured general obligations of the Corporation.
The Corporation's primary sources of funds are (i) deposits, (ii) principal
repayments on loans, mortgage-backed and investment securities, (iii) advances
from the FHLB and (iv) cash generated from operations. Net cash flows used by
operating activities totaled $110.8 million for the year ended December 31,
2001. Net cash flows provided by operating activities totaled $413.3 million,
$183.4 million and $229.5 million, respectively, for the six months ended
December 31, 2000, and fiscal years 2000 and 1999. Amounts fluctuate from
period to period primarily as a result of mortgage banking activity relating to
the purchase and origination of loans for resale and the subsequent sale of
such loans. Given the lower interest rate environment in 2001, the Corporation
experienced significant increases in residential loan activity. During the year
ended December 31, 2001, the Corporation purchased and originated $3.0 billion
in loans for resale. Proceeds from the sales of loans totaled $2.7 billion for
the year ended December 31, 2001.
Certain amounts from operating activities for the six months ended December
31, 2000, reflect the balance sheet restructuring announced in August 2000. On
July 1, 2000, the Corporation transferred approximately $1.8 billion of
held-to-sale securities to the trading and available for sale portfolios.
During the six months ended December 31, 2000, the Corporation sold investment
and mortgage-backed securities totaling $1.2 million resulting in a net loss of
$30.0 million and sold securitized residential loans totaling approximately
$1.6 billion resulting in a loss of $18.2 million. Proceeds from these sales
were used to purchase lower-risk, higher-yielding assets, repay advances from
the FHLB and repurchase common stock. The purchase and origination of loans for
resale totaling $711.2 million for fiscal year 2000 is lower compared to $1.9
billion for fiscal year 1999 primarily due to increased prepayment and
refinancing activity during 1999. Proceeds from the sales of loans totaled
$762.0 million for fiscal year 2000 compared to $2.0 billion in fiscal year
1999.
Net cash flows used by investing activities totaled $469.1 million, $1.2
billion and $818.0 million for the year ended December 31, 2001, and fiscal
years 2000 and 1999, respectively. Net cash flows provided by investing
activities totaled $786.2 million for the six months ended December 31, 2000.
Amounts fluctuate from period to period primarily as a result of (i) principal
repayments on loans and mortgage-backed securities and (ii) the purchase and
origination of loans, mortgage-backed and investment securities. During the
year ended December 31, 2001, the Corporation sold 34 branches as part of the
strategic initiatives. The divestiture of these branches is represented by the
$259.1 million consisting primarily of the outflow of deposits sold totaling
$446.3 million. Also during the year ended December 31, 2001, the Corporation
sold investment and mortgage-backed securities totaling $1.1 billion resulting
in pre-tax gains of $18.3 million. These gains on the sales of investment and
mortgage-backed securities were recognized in part to offset the valuation
adjustment loss of $19.1 million in the mortgage servicing rights portfolio. A
substantial portion of the leasing portfolio was sold in February 2001 for cash
and a secured note for $9.5 million. The cash proceeds totaling $34.8 million
from the leasing sale were received in April 2001. During the six months ended
December 31, 2000, the Corporation made an investment of $200.0 million in a
BOLI program.
Net cash flows provided by financing activities totaled $594.4 million,
$889.6 million and $724.7 million, respectively, for the year ended December
31, 2001, and fiscal years 2000 and 1999. Net cash flows used by financing
activities totaled $1.2 billion for the six months ended December 31, 2000.
Advances from the FHLB and deposits have been the primary sources to balance
the Corporation's funding needs during each of the periods presented. The net
decrease of $851.7 million in deposits for the year ended December 31, 2001, is
due to the run-off of higher costing certificates of deposits and the reduction
in brokered deposits used for funding needs. For the year 2001, certificates of
deposit decreased by approximately $1.2 billion, including a reduction of
$269.2 million in brokered deposits, pursuant to the Corporation's business
plan. The Corporation has fixed-rate
71
long-term FHLB advances with balances totaling $1.7 billion at December 31,
2001, that are callable at the option of the FHLB. These convertible advances
had call dates ranging from January 2002 to March 2003. During the year ended
December 31, 2001, the Corporation has purchased $1.0 billion of swaptions at a
cost of $68.3 million to hedge the call option on $1.0 billion of convertible
advances. On November 28, 2001, the Bank issued and sold $30.0 million of
floating rate subordinated debt securities due December 8, 2011. Interest is
payable semi-annually with the initial interest rate at 6.01% that resets
semi-annually equal to the six-month London Interbank Offered Rate ("LIBOR")
plus 3.75%. The subordinated debt securities, unsecured, rank junior and are
subordinate in right of payment of all senior debt of the Bank. On December 18,
2001, the Bank issued and sold $20.0 million of floating rate junior
subordinated debentures due December 18, 2031. Interest is payable quarterly
with the initial interest rate at 5.60% that resets quarterly equal to the
three-month LIBOR plus 3.60%. The junior subordinated debentures, unsecured,
rank junior and are subordinate in right of payment of all senior debt of the
Bank. The $30.0 million of subordinated debt securities and the $20.0 million
of junior subordinated debentures are includable as part of supplementary Tier
2 regulatory capital for the Bank. Proceeds from these issuances were utilized
by the Bank to make capital distributions to the Corporation. On November 30,
2001, a distribution for $30.0 million was used to redeem $28.3 million of the
Corporation's 7.95% subordinated extendible notes and to repurchase common
stock. On January 20, 2002, a distribution for $20.0 million was used to repay
$7.0 million of the Corporation's revolving line of credit and to repurchase
common stock. At December 31, 2001, the Corporation had borrowed $130.0 million
of Federal funds and $7.2 million from the Treasury Tax and Loan program.
During the year ended December 31, 2001, the Corporation repurchased shares of
its common stock at a cost of $180.9 million.
The Corporation experienced net increases in deposits of $364.0 million for
the six months ended December 31, 2000. The net increase in deposits for this
six month period was primarily due to the Corporation's expanded use of
brokered deposits for funding needs. At December 31, 2000, brokered
certificates of deposits totaled $322.1 million compared to $82.4 million at
June 30, 2000. During the six months ended December 31, 2000, the Corporation
borrowed long-term FHLB advances that were callable at the option of the FHLB.
At December 31, 2000, the Corporation had fixed-rate advances totaling $1.7
billion that were convertible into adjustable-rate advances. These convertible
advances had call dates ranging from January 2001 to March 2003. During the six
months ended December 31, 2000, the Corporation repurchased shares of its
common stock at a cost of $49.0 million.
Excluding deposits acquired in acquisitions, the Corporation experienced net
decreases in deposits of $325.8 million and $211.1 million for fiscal years
2000 and 1999, respectively. The decreases in deposits were primarily due to
depositors seeking higher-yielding investment options. During fiscal years 2000
and 1999 the Corporation borrowed long-term FHLB advances that were callable at
the option of the FHLB. Such advances provided the Corporation with lower
costing interest-bearing liabilities than other funding alternatives. At June
30, 2000 and 1999, the Corporation had fixed-rate advances totaling $2.3
billion and $3.0 billion, respectively, that were convertible into
adjustable-rate advances. The one-year notes for $40.0 million from the AmerUs
Bank ("AmerUs") acquisition were paid in full on July 30, 1999. The $32.5
million term note due July 31, 2003, was refinanced on July 1, 1999. The
proceeds to pay the $40.0 million AmerUs note in full and the refinancing came
from a term note for $72.5 million due June 30, 2004, unsecured, with quarterly
principal payments of $1.8 million and interest payable quarterly. In addition,
on August 30, 1999, the Corporation borrowed $10.0 million from the same lender
on a revolving line of credit. The proceeds were used to help finance the
Corporation's repurchase of its common stock. During fiscal years 2000 and
1999, the Corporation repurchased shares at a cost of $63.9 million and $36.2
million, respectively. On August 14, 1998, First Colorado Bancorp, Inc. ("First
Colorado") issued 1,400,000 shares of common stock prior to its merger with the
Corporation, resulting in the receipt of proceeds totaling $32.5 million.
Contractual Obligations and Other Commitments
Through the normal course of operations, the Corporation has entered into
certain contractual obligations and other commitments. These obligations
generally relate to funding of operations through debt issuances as
72
well as leases for premises and equipment. As a financial institution, the
Corporation routinely enters into commitments to extend credit, including loan
commitments, standby letters of credit and financial guarantees. These
commitments are generally expected to settle within three months following
December 31, 2001. These outstanding loan commitments to extend credit in order
to originate loans or fund commercial and consumer loans lines of credit do not
necessarily represent future cash requirements since many of the commitments
may expire without being drawn. Such commitments are subject to the same credit
policies and approval process accorded to loans made by the Corporation. The
Corporation expects to fund these commitments, as necessary, from the sources
of funds previously described.
The Corporation also enters into derivative financial instruments as part of
its interest rate risk management process. See "Asset/Liability Management" and
Note 14 to the Consolidated Financial Statements for additional information
regarding derivative financial instruments.
The following table represents the Corporation's significant contractual
obligations and outstanding commitments at December 31, 2001:
(In Thousands)
To fund and purchase:
Single-family fixed-rate mortgage loans............................... $183,759
Single-family adjustable-rate mortgage loans.......................... 71,456
Commercial real estate fixed-rate loans............................... 57,941
Commercial real estate adjustable-rate loans.......................... 93,420
Consumer, commercial operating and agricultural loans................. 13,874
Consumer unused lines of credit....................................... 141,773
Commercial unused lines of credit..................................... 41,172
Investment securities................................................. 805
--------
Totals--commitments to fund and purchase................................. $604,200
========
Mandatory forward delivery commitments to sell residential mortgage loans $445,000
========
Long-term Operating
Due December 31: Debt Leases Total
---------------- --------- --------- --------
2002............... $146,363 $ 5,109 $151,472
2003............... 7,250 4,560 11,810
2004............... 49,875 3,366 53,241
2005............... -- 2,321 2,321
2006............... 121,725 1,658 123,383
2007 and thereafter 195,000 10,415 205,415
-------- ------- --------
Totals............. $520,213 $27,429 $547,642
======== ======= ========
The maintenance of an appropriate level of liquid resources to provide
funding necessary to meet the Corporation's current business activities and
obligations is an integral element in the management of the Corporation's
assets. The OTS issued a final rule effective July 18, 2001, whereby savings
associations are now required to only maintain sufficient liquidity to ensure
their safe and sound operation. The Bank's liquidity ratio was 15.42% at
December 31, 2001. Liquidity levels will vary depending upon savings flows,
future loan fundings, cash operating needs, collateral requirements and general
prevailing economic conditions. The Bank does not foresee any difficulty in
meeting its liquidity requirements.
Impact of Inflation and Changing Prices
The consolidated financial statements and related consolidated financial
information are prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position
73
and operating results in terms of historical dollars without considering
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and liabilities
of a financial institution are monetary in nature. As a result, interest rates
have a more significant effect on a financial institution's performance than
the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or in the same magnitude as the price of goods and
services.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information included in the "Asset/Liability Management" section of
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," included under Item 7 of this Report, is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report On Internal Controls
Management of Commercial Federal Corporation is responsible for the
preparation, integrity, and fair presentation of its published consolidated
financial statements and all other information presented in this Annual Report.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and,
as such, include amounts based on informed judgments and estimates made by
Management.
Management is responsible for establishing and maintaining effective
internal control over financial reporting, including safeguarding of assets.
The internal control contains monitoring mechanisms and actions are taken to
correct deficiencies identified.
There are inherent limitations in the effectiveness of any internal control,
including the possibility of human error and the circumvention or overriding of
controls. Accordingly, even effective internal control can provide only
reasonable assurance with respect to financial statement preparation. Further,
because of changes in conditions, the effectiveness of internal control may
vary over time.
Management assessed Commercial Federal Corporation's internal control over
financial reporting, including the safeguarding of assets, as of December 31,
2001. This assessment was based on the criteria for effective internal control
described in "Internal Control-Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based upon this
assessment, Management believes that Commercial Federal Corporation maintained
effective internal control over financial reporting, including safeguarding of
assets, as of December 31, 2001.
/s/ William A. Fitzgerald /s/ David S. Fisher
William A. Fitzgerald David S. Fisher
Chairman of the Board and Chief Financial Officer
Chief Executive Officer
74
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Commercial Federal Corporation
Omaha, Nebraska
We have audited the accompanying consolidated statements of financial
condition of Commercial Federal Corporation and subsidiaries (the
"Corporation") as of December 31, 2001 and 2000, and as of June 30, 2000, and
the related consolidated statements of operations, comprehensive income (loss),
stockholders' equity, and cash flows for the year ended December 31, 2001, for
the six months ended December 31, 2000, and for each of the two years in the
period ended June 30, 2000. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Commercial
Federal Corporation and subsidiaries as of December 31, 2001 and 2000, and as
of June 30, 2000, and the results of their operations and their cash flows for
the year ended December 31, 2001, for the six months ended December 31, 2000,
and for each of the two years in the period ended June 30, 2000, in conformity
with accounting principles generally accepted in the United States of America.
As discussed in Note 22 to the consolidated financial statements, effective
July 1, 2000, the Corporation changed its method of accounting for derivatives
to conform with the provisions of Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities". As
discussed in Note 22 to the consolidated financial statements, effective July
1, 1999, the Corporation changed its method of accounting for start-up
activities and organizational costs to conform with the provisions of Statement
of Position 98-5 "Reporting the Costs of Start-Up Activities".
/s/ Deloitte & Touche LLP
Omaha, Nebraska
February 7, 2002
75
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31,
------------------------ June 30,
2001 2000 2000
----------- ----------- -----------
(Dollars in Thousands)
ASSETS
Cash (including short-term investments of $590, $1,283
and $1,086)...................................................... $ 206,765 $ 192,358 $ 199,566
Investment securities available for sale, at fair value............ 1,150,345 771,137 70,478
Mortgage-backed securities available for sale, at fair value....... 1,829,728 1,514,510 362,756
Loans and leases held for sale, net................................ 470,647 242,200 183,356
Investment securities held to maturity (fair value of $857,786).... -- -- 922,689
Mortgage-backed securities held to maturity (fair value of
$835,095)......................................................... -- -- 857,382
Loans receivable, net of allowances of $102,359, $82,263 and
$70,497.......................................................... 7,932,778 8,651,174 10,224,336
Federal Home Loan Bank stock....................................... 253,946 251,537 255,756
Real estate, net................................................... 57,476 38,331 39,129
Premises and equipment, net........................................ 158,691 167,210 181,692
Bank owned life insurance.......................................... 214,585 200,713 --
Other assets....................................................... 435,174 303,707 265,048
Core value of deposits, net of accumulated amortization of $54,900,
$51,835 and $47,932.............................................. 28,733 36,209 42,488
Goodwill, net of accumulated amortization of $30,927, $22,814
and $18,564...................................................... 162,717 171,218 188,362
----------- ----------- -----------
Total Assets................................................ $12,901,585 $12,540,304 $13,793,038
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits........................................................ $ 6,396,522 $ 7,694,486 $ 7,330,500
Advances from Federal Home Loan Bank............................ 4,939,056 3,565,465 5,049,582
Other borrowings................................................ 520,213 175,343 206,026
Other liabilities............................................... 311,140 241,271 218,952
----------- ----------- -----------
Total Liabilities........................................... 12,166,931 11,676,565 12,805,060
----------- ----------- -----------
Commitments and Contingencies -- -- --
----------- ----------- -----------
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued................................................... -- -- --
Common stock, $.01 par value; 120,000,000 shares authorized;
45,974,648, 53,208,628 and 55,922,884 shares issued and
outstanding................................................... 460 532 559
Additional paid-in capital...................................... 80,799 255,870 303,635
Retained earnings............................................... 705,160 622,659 699,724
Accumulated other comprehensive loss, net....................... (51,765) (15,322) (15,940)
----------- ----------- -----------
Total Stockholders' Equity.................................. 734,654 863,739 987,978
----------- ----------- -----------
Total Liabilities and Stockholders' Equity.................. $12,901,585 $12,540,304 $13,793,038
=========== =========== ===========
See accompanying Notes to Consolidated Financial Statements.
76
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months
Year Ended Ended
December 31, December 31,
2001 2000 2000 1999
------------ ------------ -------- --------
(Dollars in Thousands)
Interest Income:
Loans receivable....................................... $685,480 $408,582 $759,711 $700,911
Mortgage-backed securities............................. 109,657 49,334 82,563 77,039
Investment securities.................................. 76,237 40,816 85,416 61,404
-------- -------- -------- --------
Total interest income.............................. 871,374 498,732 927,690 839,354
Interest Expense:.........................................
Deposits............................................... 310,367 184,579 325,674 322,858
Advances from Federal Home Loan Bank................... 234,213 152,317 240,924 157,787
Other borrowings....................................... 19,365 7,401 18,951 26,376
-------- -------- -------- --------
Total interest expense............................. 563,945 344,297 585,549 507,021
Net Interest Income....................................... 307,429 154,435 342,141 332,333
Provision for Loan Losses................................. (38,945) (27,854) (13,760) (12,400)
-------- -------- -------- --------
Net Interest Income After Provision for Loan Losses....... 268,484 126,581 328,381 319,933
Other Income (Loss):
Retail fees and charges................................ 53,519 25,650 43,230 36,740
Loan servicing fees, net............................... 3,622 11,521 25,194 22,961
Gain (loss) on sales of securities and changes in fair
value of derivatives, net............................ 15,422 (69,462) -- 4,376
Gain (loss) on sales of loans.......................... 8,739 (18,023) (110) 3,423
Bank owned life insurance.............................. 13,872 713 -- --
Real estate operations................................. (6,971) (4,809) (88) (1,674)
Other operating income................................. 32,184 14,304 33,613 24,189
-------- -------- -------- --------
Total other income (loss).......................... 120,387 (40,106) 101,839 90,015
Other Expense (Gain):
General and administrative expenses--
Compensation and benefits.............................. 105,120 53,306 111,720 98,869
Occupancy and equipment................................ 37,726 19,015 38,873 36,528
Data processing........................................ 18,019 9,685 18,834 12,360
Advertising............................................ 11,995 6,531 15,100 13,893
Communication.......................................... 13,731 7,109 16,201 16,566
Item processing........................................ 16,413 8,120 15,683 9,637
Outside services....................................... 11,152 6,058 8,422 7,086
Other operating expenses............................... 33,880 12,801 23,157 13,738
Exit costs and termination benefits.................... (15,566) 25,764 3,941 --
Merger expenses........................................ -- -- -- 29,917
-------- -------- -------- --------
Total general and administrative expenses.......... 232,470 148,389 251,931 238,594
Amortization of core value of deposits.................. 7,211 3,903 8,563 8,984
Amortization of goodwill................................ 8,134 4,250 8,673 6,718
-------- -------- -------- --------
Total other expense................................ 247,815 156,542 269,167 254,296
-------- -------- -------- --------
Income (Loss) Before Income Taxes and Cumulative Effect
of Change in Accounting Principle....................... 141,056 (70,067) 161,053 155,652
Income Tax Provision (Benefit)............................ 43,374 (19,691) 55,269 63,260
-------- -------- -------- --------
Income (Loss) Before Cumulative Effect
of Change in Accounting Principle....................... 97,682 (50,376) 105,784 92,392
-------- -------- -------- --------
Cumulative Effect of Change in
Accounting Principle, Net of Tax Benefit................ -- (19,125) (1,776) --
-------- -------- -------- --------
Net Income (Loss)......................................... $ 97,682 $(69,501) $104,008 $ 92,392
======== ======== ======== ========
77
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS--(Continued)
Six Months
Year Ended Ended
December 31, December 31,
2001 2000 2000 1999
------------- ------------- ----------- -----------
Weighted Average Number of Common Shares
Outstanding Used in Basic Earnings Per Share
Calculation.................................... 49,995,621 54,705,067 58,024,192 59,539,111
Add Assumed Exercise of Outstanding Stock Options
as Adjustments for Dilutive Securities......... 497,298 -- 218,173 587,735
------------- ------------- ----------- -----------
Weighted Average Number of Common Shares
Outstanding Used in Diluted Earnings Per Share
Calculation.................................... 50,492,919 54,705,067 58,242,365 60,126,846
============= ============= =========== ===========
Basic Earnings (Loss) Per Common Share:
Income (loss) before cumulative effect of
change in accounting principle.............. $ 1.95 $ (.92) $ 1.82 $ 1.55
Cumulative effect of change in accounting
principle, net.............................. -- (.35) (.03) --
------------- ------------- ----------- -----------
Net Income (Loss)......................... $ 1.95 $ (1.27) $ 1.79 $ 1.55
============= ============= =========== ===========
Diluted Earnings (Loss) Per Common Share:
Income (loss) before cumulative effect of
change in accounting principle.............. $ 1.93 $ (.92) $ 1.82 $ 1.54
Cumulative effect of change in accounting
principle, net.............................. -- (.35) (.03) --
------------- ------------- ----------- -----------
Net Income (Loss)......................... $ 1.93 $ (1.27) $ 1.79 $ 1.54
============= ============= =========== ===========
Dividends Declared Per Common Share.............. $ .310 $ .140 $ .275 $ .250
============= ============= =========== ===========
See accompanying Notes to Consolidated Financial Statements.
78
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Six Months
Year Ended Ended Year Ended June 30,
- December 31, December 31, ------------------
2001 2000 2000 1999
- ------------ ------------ -------- --------
(Dollars in Thousands)
Net Income (Loss)............................................. $ 97,682 $(69,501) $104,008 $ 92,392
Other Comprehensive Income (Loss):
Unrealized holding gains (losses) on securities available
for sale................................................. 28,890 77,728 (12,242) (10,443)
Fair value adjustment on interest rate swap agreements..... (72,661) (92,749) -- --
Fair value change in interest only strips.................. 1,901 (2,347) 2,057 --
Reclassification of net losses (gains) included in net
income (loss) pertaining to:.............................
Securities sold........................................ (18,298) 29,970 -- (4,376)
Termination of swap agreements......................... -- 38,209 -- --
Amortization of fair value adjustments of interest
rate swap agreements................................. 2,034 170 -- --
-------- -------- -------- --------
Other Comprehensive Income (Loss) Before Income Taxes
and Cumulative Effect of Change in Accounting Priniciple.... (58,134) 51,628 (10,185) (14,819)
Income Tax Provision (Benefit)................................ (21,691) 20,250 (3,807) (5,187)
-------- -------- -------- --------
Other Comprehensive Income (Loss) Before Cumulative
Effect of Change in Accounting Principle.................... (36,443) 31,378 (6,378) (9,632)
Cumulative Effect of Change in Accounting Principle, Net of
Tax Benefit................................................. -- (30,760) -- --
-------- -------- -------- --------
Other Comprehensive Income (Loss)............................. (36,443) 618 (6,378) (9,632)
-------- -------- -------- --------
Comprehensive Income (Loss)................................... $ 61,239 $(68,883) $ 97,630 $ 82,760
======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
79
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unearned
Accumulated Employee
Other Stock
Additional Comprehensive Ownership
Common Paid-in Retained Income Plan
Stock Capital Earnings (Loss), Net Shares Total
------ ---------- -------- ------------- --------- --------
(Dollars in Thousands)
Balance, June 30, 1998.............. $587 $337,697 $534,245 $ 70 $(11,404) $861,195
Issuance of 979,856 shares under
certain compensation and
employee plans................. 10 14,279 -- -- -- 14,289
Issuance of 1,378,580 shares of
common stock................... 14 32,401 -- -- -- 32,415
Restricted stock and
deferred compensation
plans, net..................... -- 2,192 -- -- -- 2,192
Commitment of release of ESOP
shares......................... -- -- -- -- 11,404 11,404
Termination of ESOP plans........ -- 13,954 -- -- -- 13,954
Purchase and cancellation of
1,500,000 shares of common
stock.......................... (15) (36,203) -- -- -- (36,218)
Cash dividends declared.......... -- -- (15,108) -- -- (15,108)
Net income....................... -- -- 92,392 -- -- 92,392
Other comprehensive loss......... -- -- -- (9,632) -- (9,632)
---- -------- -------- -------- -------- --------
Balance, June 30, 1999.............. 596 364,320 611,529 (9,562) -- 966,883
Issuance of 102,535 shares under
certain compensation and
employee plans................. 1 2,388 -- -- -- 2,389
Restricted stock and deferred
compensation plans, net........ -- 784 -- -- -- 784
Purchase and cancellation of
3,773,500 shares of common
stock.......................... (38) (63,857) -- -- -- (63,895)
Cash dividends declared.......... -- -- (15,813) -- -- (15,813)
Net income....................... -- -- 104,008 -- -- 104,008
Other comprehensive loss......... -- -- -- (6,378) -- (6,378)
---- -------- -------- -------- -------- --------
Balance, June 30, 2000.............. $559 $303,635 $699,724 $(15,940) $ -- $987,978
==== ======== ======== ======== ======== ========
80
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY--(Continued)
Unearned
Accumulated Employee
Other Stock
Additional Comprehensive Ownership
Common Paid-in Retained Income Plan
Stock Capital Earnings (Loss), Net Shares Total
------ ---------- -------- ------------- --------- ---------
(Dollars in Thousands)
Balance, June 30, 2000.............. $559 $ 303,635 $699,724 $(15,940) $ -- $ 987,978
Issuance of 51,144 shares under
certain compensation and
employee plans................. 1 800 -- -- -- 801
Restricted stock and deferred
compensation plans, net........ -- 360 -- -- -- 360
Purchase and cancellation of
2,765,400 shares of common
stock.......................... (28) (48,925) -- -- -- (48,953)
Cash dividends declared.......... -- -- (7,564) -- -- (7,564)
Net loss......................... -- -- (69,501) -- -- (69,501)
Other comprehensive income....... -- -- -- 618 -- 618
---- --------- -------- -------- ---- ---------
Balance, December 31, 2000.......... 532 255,870 622,659 (15,322) -- 863,739
Issuance of 428,620 shares under
certain compensation and
employee plans................. 5 5,426 -- -- -- 5,431
Restricted stock and deferred
compensation plans, net........ -- 303 -- -- -- 303
Purchase and cancellation of
7,662,600 shares of common
stock.......................... (77) (180,800) -- -- -- (180,877)
Cash dividends declared.......... -- -- (15,181) -- -- (15,181)
Net income....................... -- -- 97,682 -- -- 97,682
Other comprehensive loss......... -- -- -- (36,443) -- (36,443)
---- --------- -------- -------- ---- ---------
Balance, December 31, 2001.......... $460 $ 80,799 $705,160 $(51,765) $ -- $ 734,654
==== ========= ======== ======== ==== =========
See accompanying Notes to Consolidated Financial Statements.
81
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30,
----------------------
Six Months
Year Ended Ended
December 31, December 31,
2001 2000 2000 1999
------------- ------------- --------- -----------
(Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)........................................ $ 97,682 $ (69,501) $ 104,008 $ 92,392
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Cumulative effect of changes in accounting
principles, net..................................... -- 19,125 1,776 --
Amortization of core value of deposits................ 7,211 3,903 8,563 8,984
Amortization of goodwill.............................. 8,134 4,250 8,673 6,718
Provision for losses on loans......................... 38,945 27,854 13,760 12,400
Depreciation and amortization......................... 18,841 9,968 20,414 18,172
Amortization of deferred discounts and fees, net...... 3,947 1,493 581 2,542
Amortization of mortgage servicing rights............. 17,092 4,558 8,703 12,021
Valuation adjustment of mortgage servicing rights..... 19,058 583 -- --
Deferred tax provision (benefit)...................... (15,422) (30,965) 34,302 17,093
Loss (gain) on sales of real estate and loans, net.... (9,564) 17,593 (1,258) (4,618)
Loss (gain) on sales of securities and change in fair
value of derivatives, net........................... (15,422) 69,462 -- (4,376)
Gain on sales of facilities........................... (18,304) (2,516) (8,506) (1,076)
Stock dividends from Federal Home Loan Bank........... -- -- (7,479) (10,827)
Proceeds from sales of
mortgage-backed securities--trading................. -- 65,596 -- --
Proceeds from sales of
investment securities--trading...................... -- 339,123 -- --
Proceeds from sales of loans.......................... 2,745,118 631,542 761,960 1,958,807
Origination of loans for resale....................... (913,931) (199,364) (185,994) (479,852)
Purchases of loans for resale......................... (2,098,729) (445,265) (525,236) (1,411,210)
Increase in bank owned life insurance................. (13,872) (713) -- --
Decrease (increase) in interest receivable............ 11,878 (2,544) (4,478) 1,261
Increase (decrease) in interest payable and other
liabilities......................................... 86,050 23,337 17,587 (22,804)
Other items, net...................................... (81,103) (54,215) (63,949) 33,911
------------- ------------- --------- -----------
Total adjustments................................. (208,512) 482,805 79,419 137,146
------------- ------------- --------- -----------
Net cash (used) provided by operating
activities................................... $ (110,830) $ 413,304 $ 183,427 $ 229,538
============= ============= ========= ===========
82
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
Year Ended June 30,
------------------------
Six Months
Year Ended Ended
December 31, December 31,
2001 2000 2000 1999
------------- ------------- ----------- -----------
(Dollars in Thousands)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of loans.................................... $ (489,976) $ (283,198) $(1,430,920) $(1,531,385)
Proceeds from sales of securitized loans.............. -- 1,633,330 -- --
Repayment of loans, net of originations............... 903,881 144,025 222,190 1,122,811
Principal repayments of mortgage-backed securities
available for sale.................................. 711,280 107,684 45,869 69,559
Purchases of mortgage-backed securities available for
sale................................................ (1,074,215) (909,599) -- (446,186)
Proceeds from sales of mortgage-backed securities
available for sale.................................. 102,131 463,257 -- 209,789
Principal repayments of mortgage-backed securities
held to maturity.................................... -- -- 195,043 290,726
Purchases of mortgage-backed securities held to
maturity............................................ -- -- (160,073) (218,479)
Maturities and repayments of investment securities
held to maturity.................................... -- -- 41,207 339,089
Purchases of investment securities held to maturity... -- -- (105,865) (666,574)
Purchases of investment securities available for sale. (1,475,511) (467,033) -- (33,901)
Proceeds from sales of investment securities available
for sale............................................ 977,146 269,007 -- 30,153
Maturities and repayments of investment securities
available for sale.................................. 135,363 23,439 10,170 170,196
Purchase of bank-owned life insurance................. -- (200,000) -- --
Proceeds from sales of Federal Home Loan Bank stock... 69,889 15,841 3,571 13,691
Purchases of Federal Home Loan Bank stock............. (72,299) (11,622) (57,719) (51,213)
Divestiture of branches, net.......................... (259,102) -- -- --
Acquisitions, net of cash paid........................ -- -- -- (88,351)
Proceeds from sales of real estate.................... 19,554 11,372 24,371 17,183
Payments to acquire real estate....................... (2,285) (278) (406) (613)
Purchases of premises and equipment, net.............. (12,349) (5,074) (8,298) (40,675)
Other items, net...................................... (2,639) (4,911) (5,826) (3,820)
------------- ------------- ----------- -----------
Net cash (used) provided by investing
activities.................................. $ (469,132) $ 786,240 $(1,226,686) $ (818,000)
============= ============= =========== ===========
83
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS--(Continued)
Six Months Year Ended June 30,
Year Ended Ended ------------------
December 31, December 31, -------------------
2001 2000 2000 1999
------------ ------------ ----------- -----------
(Dollars in Thousands)
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits.......................... $ (851,697) $ 363,986 $ (325,809) $ (211,102)
Proceeds from Federal Home Loan Bank advances............ 1,807,060 400,000 3,413,000 2,400,000
Repayments of Federal Home Loan Bank advances............ (444,450) (1,884,120) (1,995,350) (1,386,781)
Proceeds from securities sold under agreements to
repurchase............................................. 264,073 4,727 12,902 25,000
Repayments of securities sold under agreements to
repurchase............................................. (69,066) (31,201) (107,143) (235,955)
Proceeds from issuances of other borrowings.............. 187,195 -- 50,000 152,200
Repayments of other borrowings........................... (37,338) (4,211) (80,742) (23,423)
Purchases of swaption agreements......................... (68,344) -- -- --
Payments of cash dividends on common stock............... (15,239) (7,755) (15,776) (13,539)
Repurchases of common stock.............................. (180,877) (48,953) (63,895) (36,218)
Issuance of common stock................................. 4,579 775 2,363 45,095
Other items, net......................................... (1,527) -- -- 9,448
---------- ----------- ----------- -----------
Net cash provided (used) by financing
activities................................... 594,369 (1,206,752) 889,550 724,725
---------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS
Increase (decrease) in net cash position................. 14,407 (7,208) (153,709) 136,263
Balance, beginning of year............................... 192,358 199,566 353,275 217,012
---------- ----------- ----------- -----------
Balance, end of year..................................... $ 206,765 $ 192,358 $ 199,566 $ 353,275
========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest expense...................................... $ 581,524 $ 338,028 $ 583,440 $ 506,137
Income taxes, net..................................... 31,049 (12,361) 6,514 54,110
Non-cash investing and financing activities:
Securities transferred from held-to-maturity to
trading............................................. -- 432,596 -- --
Securities transferred from held-to-maturity to
available for sale.................................. -- 1,318,599 -- --
Loans exchanged for mortgage-backed
securities.......................................... 41,910 3,543 42,635 20,773
Loans transferred to real estate...................... 41,371 6,998 24,002 17,671
Loans to facilitate the sale of real estate........... 180 -- -- 259
Common stock received in connection with
employee benefit and incentive plans, net........... (114) -- (135) (475)
See accompanying Notes to Consolidated Financial Statements.
84
COMMERCIAL FEDERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts)
Note 1. Summary of Significant Accounting Policies
Nature of Business
The Corporation is a unitary non-diversified savings and loan holding
company whose primary asset is the Bank. The Bank is a consumer-oriented
financial institution that emphasizes single-family residential and
construction real estate lending, consumer lending, commercial real estate
lending, commercial and agribusiness lending, community banking operations,
retail deposit activities, mortgage banking, and other retail financial
services. The Bank conducts loan origination activities through its branch
office network, loan offices of its wholly-owned mortgage banking subsidiary
and a nationwide correspondent network.
Basis of Consolidation
The consolidated financial statements are prepared on an accrual basis and
include the accounts of Commercial Federal Corporation, its wholly-owned
subsidiary, Commercial Federal Bank, a Federal Savings Bank, and all
majority-owned subsidiaries of the Corporation and Bank. All significant
intercompany balances and transactions have been eliminated. Certain amounts in
the prior periods presented have been reclassified to conform to the December
31, 2001, presentation for comparative purposes.
Change in Fiscal Year End
On August 14, 2000, the Board of Directors approved a change in the
Corporation's fiscal year end from June 30 to December 31. This change was
effective December 31, 2000. As a result, the Corporation reported a six month
transition period from July 1, 2000, through December 31, 2000, reflecting the
Corporation's six months of operations, comprehensive income (loss), cash flows
and changes in stockholders' equity.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosures of contingent assets and liabilities, at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For the purpose of reporting cash flows, cash and cash equivalents include
cash, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for a one-day period.
Securities
Securities are classified in one of three categories and accounted for as
follows:
. debt securities that the Corporation has the positive intent and ability
to hold to maturity are classified as "held-to-maturity securities,"
. debt and equity securities that are bought and held principally for the
purpose of selling them in the near term are classified as "trading
securities" and
. debt and equity securities not classified as either held-to-maturity
securities or trading securities are classified as "available-for-sale
securities."
85
Held to maturity securities are reported at amortized cost. Trading
securities are reported at fair value, with unrealized gains and losses
included in earnings. Available-for-sale securities are reported at fair value,
with unrealized gains and losses excluded from earnings and reported net of
deferred income taxes as a separate component of accumulated other
comprehensive income (loss).
Premiums and discounts are amortized over the contractual lives of the
related securities on the level yield method. Any unrealized losses on
securities reflecting a decline in their fair value considered to be other than
temporary are charged against earnings. Realized gains or losses on securities
available for sale are based on the specific identification method and are
included in results of operations on the trade date of the sales transaction.
Loans
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity are recorded at the contractual amounts owed by
borrowers less unamortized discounts, net of premiums, undisbursed funds on
loans in process, deferred loan fees and allowance for loan losses. Interest on
loans is accrued to income as earned, except that interest is not accrued on
first mortgage loans contractually delinquent 90 days or more. Any related
discounts or premiums on loans purchased are amortized into interest income
using the level yield method over the contractual lives of the loans, adjusted
for actual prepayments. Loan origination fees, commitment fees and direct loan
origination costs are deferred and recognized over the estimated average life
of the loan as a yield adjustment.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to make the payments as they
become due. When the interest accrual is discontinued, all unpaid accrued
interest is reversed reducing interest income. Interest income is subsequently
recognized only to the extent that cash payments are received.
Loans held for sale are carried at the lower of aggregate cost or fair value
except for loans designated as a hedge which are carried at fair value. Fair
value is determined by outstanding commitments from investors or current
investor yield requirements calculated on an aggregate loan basis. Valuation
adjustments, if necessary, are recorded in current operations.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance for estimated credit
losses inherent in the loan portfolio as of the balance sheet date. The
allowance for loan losses is increased by charges to income and decreased by
charge-offs, net of recoveries. The allowance for loan losses consists of two
elements. The first element is an allocated allowance established for
specifically identified loans that are evaluated individually for impairment
and are considered to be individually impaired. A loan is considered impaired
when, based on current information and events, it is probable that the
Corporation will be unable to collect the scheduled payments of principal and
interest when due according to the contractual terms of the loan agreement.
Impairment is measured by (i) the fair value of the collateral if the loan is
collateral dependent (the primary method used by the Corporation), (ii) the
present value of expected future cash flows, or (iii) the loan's obtainable
market price. The second element is an estimated allowance established for
impairment on each of the Corporation's pools of outstanding loans. These
estimated allowances are based on several analysis factors including the
Corporation's past loss experience, general economic and business conditions,
geographic and industry concentrations, credit quality and delinquency trends,
and known and inherent risks in each of the portfolios. These evaluations are
inherently subjective as they require revisions as more information becomes
available.
Real Estate
Real estate includes real estate acquired through foreclosure, real estate
in judgment and real estate held for investment. Real estate held for
investment includes equity in unconsolidated joint ventures and investment in
real estate partnerships.
86
Real estate acquired through foreclosure and in judgment are recorded at the
lower of cost or fair value less estimated costs to sell at the date of
foreclosure. After foreclosure, impairment losses are recorded when the
carrying value exceeds the fair value less estimated costs to sell the property.
Real estate held for investment is stated at the lower of cost or net
realizable value. Cost includes acquisition costs plus construction costs of
improvements, holding costs and costs of amenities. Joint venture and
partnership investments are carried on the equity method of accounting not to
exceed net realizable value, where applicable. The Corporation's ability to
recover the carrying value of real estate held for investment (including
capitalized interest) is based upon future sales of land or projects. The
ability to sell this real estate is subject to market conditions and other
factors which may be beyond the Corporation's control.
Mortgage Servicing Rights
Mortgage servicing rights are established based on the cost of acquiring the
right to service mortgage loans or the allocated fair value of servicing rights
retained on originated loans sold. These costs are initially capitalized and
then amortized proportionately over the period based on the ratio of net
servicing income received in the current period to total net servicing income
projected to be realized from the mortgage servicing rights. Projected net
servicing income is determined on the basis of the estimated future balance of
the underlying mortgage loan portfolio. This portfolio decreases over time from
scheduled loan amortization and prepayments. The Corporation estimates future
prepayment rates based on relevant characteristics of the servicing portfolio,
such as loan types, interest rate stratification and recent prepayment
experience, as well as current interest rate levels, market forecasts and other
economic conditions.
The Corporation reports mortgage servicing rights at the lower of amortized
cost or fair value. The carrying value of mortgage servicing rights is adjusted
by the fair value of any related interest rate floor agreements and possible
impairment losses. The fair value of mortgage servicing rights is determined
based on the present value of estimated expected future cash flows, using
assumptions as to current market discount rates and prepayment speeds. Mortgage
servicing rights are stratified by loan type and interest rate for purposes of
impairment measurement. Loan types include government, conventional and
adjustable-rate mortgage loans. Impairment losses are recognized to the extent
the unamortized mortgage servicing rights for each stratum exceed the current
fair value of that stratum. Impairment losses by stratum are recorded as
reductions in the carrying value of the asset through a valuation allowance
with a corresponding reduction to loan servicing income. Individual allowances
for each stratum are adjusted in subsequent periods to reflect changes in
impairment. Valuation allowances totaling $19,641,000 and $583,000,
respectively, were outstanding at December 31, 2001 and 2000. No valuation
allowance was necessary as of June 30, 2000 or 1999.
Premises and Equipment
Land is carried at cost. Buildings, building improvements, leasehold
improvements and furniture, fixtures and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation is calculated on a
straight-line basis over the estimated useful lives of the related assets.
Estimated lives are 10 to 50 years for buildings and three to 15 years for
furniture, fixtures and equipment. Leasehold improvements are generally
amortized on the straight-line method over the terms of the respective leases.
Betterments are capitalized and maintenance and repairs are charged to expense
as incurred.
Intangible Assets
Intangible assets consist primarily of goodwill and core value of deposits.
Goodwill represents the excess of the purchase price over the fair value of the
net identifiable assets acquired in business combinations. Core value of
deposits represents the identifiable intangible value assigned to core deposit
bases arising from purchase acquisitions. The Corporation reviews its
intangible assets for impairment at least annually or whenever events or
87
changes in circumstances indicate that the carrying amount of the intangible
asset may not be recoverable. An impairment loss would be recognized if the sum
of expected future cash flows (undiscounted and without interest charges)
resulting from the use of the asset is less than the carrying amount of the
asset. If an assessment indicates that the value of the intangible asset may be
impaired, then an impairment loss is recognized for the difference between the
carrying value of the asset and its estimated fair value.
Core value of deposits is amortized on an accelerated basis over a period
not to exceed 10 years. Goodwill is amortized on a straight-line basis over
periods up to 25 years. Effective January 1, 2002, the Corporation adopted the
provisions of SFAS No. 142, "Goodwill and Other Intangible Assets," which
requires that upon initial adoption, amortization of goodwill will cease, and
the carrying value of goodwill will be evaluated for impairment. Thereafter,
goodwill will be evaluated at least annually for impairment.
Derivative Financial Instruments
Effective July 1, 2000, derivatives are recognized as either assets or
liabilities in the consolidated statement of financial condition and measured
at fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation. For a derivative designated as hedging the exposure to variable
cash flows of a forecasted transaction (referred to as a cash flow hedge), the
effective portion of the derivative's gain or loss is initially reported as a
component of accumulated other comprehensive income (loss) and subsequently
reclassified into earnings when the forecasted transaction affects earnings.
The ineffective portion of the gain or loss is reported in earnings
immediately. For a derivative designated as hedging the exposure to changes in
fair value of an asset and liability (referred to as a fair value hedge), any
gain or loss associated with the derivative is reported in earnings along with
the change in fair value of the asset or liability being hedged. For a
derivative not designated as a hedging instrument, the gain or loss is
recognized in earnings in the period of change.
When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the consolidated statement of financial condition at its fair value,
and gains and losses that were accumulated in other comprehensive income (loss)
will be recognized immediately in earnings. When the hedged forecasted
transaction is no longer probable, but is reasonably possible, the accumulated
gain or loss remains in accumulated other comprehensive income (loss) and will
be recognized when the transaction affects earnings; however, prospective hedge
accounting for this transaction is terminated. In all other situations in which
hedge accounting is discontinued, the derivative will be carried at its fair
value on the consolidated statement of financial condition, with changes in its
fair value recognized in current period earnings.
On the date the Corporation enters into a derivative contract, management
designates the derivative as a hedge of the identified cash flow exposure, fair
value exposure, or as a "no hedging" derivative. If a derivative does not
qualify in a hedging relationship, the derivative is recorded at fair value and
changes in its fair value are reported currently in earnings.
The Corporation formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. In this documentation, the
Corporation specifically identifies the asset, liability, firm commitment, or
forecasted transaction that has been designated as a hedged item and states how
the hedging instrument is expected to hedge the risks related to the hedged
item. The Corporation formally measures effectiveness of its hedging
relationships both at the hedge inception and on an ongoing basis in accordance
with its risk management policy.
Income Taxes
The Corporation files a consolidated federal income tax return and separate
state income tax returns. The Corporation and its subsidiaries entered into a
tax-sharing agreement that provides for the allocation and payment
88
of federal and state income taxes. The provision for income taxes of each
corporation is computed on a separate company basis, subject to certain
adjustments. The Corporation calculates income taxes on the liability method.
Under the liability method the net deferred tax asset or liability is
determined based on the tax effects of the differences between the book and tax
bases of the various assets and liabilities of the Corporation giving current
recognition to changes in tax rates and laws.
Earnings (Loss) per Common Share
Basic earnings (loss) per share is computed by dividing income (loss)
available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock (i) were exercised or converted into common stock or (ii) resulted
in the issuance of common stock that then shared in the earnings of the entity.
The conversion of 279,783 stock options during the six months ended December
31, 2000, in which the Corporation incurred a loss before cumulative effect of
change in accounting principle, is not assumed in computing the diluted loss
per share since the effect is anti-dilutive.
89
Note 2. Investment Securities
Investment securities are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized
December 31, 2001 Cost Gains Losses Fair Value
----------------- ---------- ---------- ---------- ----------
Available for sale:
U.S. Treasury and other Government agency obligations. $ 846,795 $ 8,480 $(7,144) $ 848,131
States and political subdivisions..................... 177,459 3,306 (1,171) 179,593
Other securities...................................... 118,472 4,490 (342) 122,621
---------- ------- ------- ----------
$1,142,726 $16,276 $(8,657) $1,150,345
========== ======= ======= ==========
Weighted average interest rate........................ 5.48%
==========
Gross Gross
Amortized Unrealized Unrealized
December 31, 2000 Cost Gains Losses Fair Value
----------------- --------- ---------- ---------- ----------
Available for sale:
U.S. Treasury and other Government agency obligations. $534,283 $ 4,895 $(4,676) $534,502
States and political subdivisions..................... 137,208 4,359 (204) 141,363
Other securities...................................... 93,848 1,495 (71) 95,272
-------- ------- ------- --------
$765,339 $10,749 $(4,951) $771,137
======== ======= ======= ========
Weighted average interest rate........................ 6.51%
========
On July 1, 2000, pursuant to the provisions of SFAS No. 133, investment
securities with an amortized cost of $893,419,000 and a fair value of
$828,516,000 were transferred from securities held to maturity to securities
available for sale (fair value of $491,865,000) and trading securities (fair
value of $336,651,000). See Note 22 "Cumulative Effect of Changes in Accounting
Principles" for additional information. All of the trading securities
transferred at July 1, 2000, were sold during the three months ended September
30, 2000. At December 31, 2001 and 2000, the Corporation did not have any
investment securities classified as held to maturity or trading in its
portfolio.
Gross Gross
Amortized Unrealized Unrealized
June 30, 2000 Cost Gains Losses Fair Value
------------- --------- ---------- ---------- ----------
Available for sale:
U.S. Treasury and other Government agency obligations. $ 71,591 $ -- $ (3,535) $ 68,056
States and political subdivisions..................... 2,491 -- (69) 2,422
-------- ---- -------- --------
$ 74,082 $ -- $ (3,604) $ 70,478
======== ==== ======== ========
Weighted average interest rate........................ 6.61%
========
Held to maturity:
U.S. Treasury and other Government agency obligations. $826,043 $ 1 $(61,629) $764,415
States and political subdivisions..................... 49,224 143 (1,700) 47,667
Other securities...................................... 47,422 -- (1,718) 45,704
-------- ---- -------- --------
$922,689 $144 $(65,047) $857,786
======== ==== ======== ========
Weighted average interest rate........................ 6.68%
========
90
At December 31, 2001 and 2000, the Corporation recorded unrealized gains on
securities available for sale as net increases to accumulated other
comprehensive income (loss) totaling $7,619,000 and $5,798,000, respectively,
net of deferred taxes of $2,721,000 and $2,148,000, respectively. At June 30,
2000, the Corporation recorded unrealized losses on securities available for
sale as a decrease to accumulated other comprehensive income (loss) totaling
$3,604,000, net of deferred tax benefits of $1,345,000.
The amortized cost and fair value of investment securities by contractual
maturity at December 31, 2001, are shown below. Expected maturities may differ
from contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
Available for Sale
---------------------
Amortized Fair
Cost Value
---------- ----------
Due in one year or less............... $ 950 $ 956
Due after one year through five years. 201,581 209,927
Due after five years through ten years 682,158 678,723
Due after ten years................... 258,037 260,739
---------- ----------
$1,142,726 $1,150,345
========== ==========
Activity from the sales of investment securities available for sale for the
respective periods is summarized as follows:
Gross Gross Net
Realized Realized Gain
Proceeds Gains Losses (Loss)
-------- -------- -------- --------
Year Ended December 31, 2001...... $977,146 $20,954 $ (6,227) $ 14,727
Six Months Ended December 31, 2000 269,007 2,466 (14,210) (11,744)
Fiscal Year Ended June 30:
2000........................... -- -- -- --
1999........................... 30,153 491 -- 491
At December 31, 2001 and 2000, and June 30, 2000, investment securities
totaling $58,606,000, $132,033,000 and $90,567,000, respectively, were pledged
primarily to secure public funds, interest rate swap agreements and securities
sold under agreements to repurchase.
Note 3. Mortgage-Backed Securities
Mortgage-backed securities are summarized as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2001 Cost Gains Losses Value
----------------- ---------- ---------- ---------- ----------
Available for sale:
Federal Home Loan Mortgage Corporation... $ 53,660 $ 1,274 $ (7) $ 54,927
Government National Mortgage Association. 260,358 4,528 (120) 264,766
Federal National Mortgage Association.... 101,646 1,999 (270) 103,375
Collateralized Mortgage Obligations...... 1,382,117 21,773 (5,292) 1,398,598
Other.................................... 7,970 95 (3) 8,062
---------- ------- ------- ----------
$1,805,751 $29,669 $(5,692) $1,829,728
========== ======= ======= ==========
Weighted average interest rate........... 6.42%
==========
91
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 2000 Cost Gains Losses Value
----------------- ---------- ---------- ---------- ----------
Available for sale:
Federal Home Loan Mortgage Corporation... $ 75,454 $ 557 $ (582) $ 75,429
Government National Mortgage Association. 322,658 1,996 (2,108) 322,546
Federal National Mortgage Association.... 64,298 897 (376) 64,819
Collateralized Mortgage Obligations...... 1,014,809 15,209 (329) 1,029,689
Other.................................... 22,086 10 (69) 22,027
---------- ------- ------- ----------
$1,499,305 $18,669 $(3,464) $1,514,510
========== ======= ======= ==========
Weighted average interest rate........... 6.79%
==========
On July 1, 2000, pursuant to the provisions of SFAS No. 133, mortgage-backed
securities with an amortized cost of $857,776,000 and a fair value of
$835,052,000 were transferred from securities held to maturity to securities
available for sale (fair value of $767,542,000) and trading securities (fair
value of $67,510,000) . See Note 22 "Cumulative Effect of Changes in Accounting
Principles" for additional information. All of the trading securities
transferred at July 1, 2000, were sold during the three months ended September
30, 2000. At December 31, 2001 and 2000, the Corporation did not have any
mortgage-backed securities classified as held to maturity or trading in its
portfolio.
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 2000 Cost Gains Losses Value
------------- --------- ---------- ---------- --------
Available for sale:
Federal Home Loan Mortgage Corporation.... $ 77,912 $ 57 $ (4,644) $ 73,325
Government National Mortgage Association.. 34,290 -- (941) 33,349
Federal National Mortgage Association..... 241,956 53 (16,153) 225,856
Collateralized Mortgage Obligations....... 28,006 -- (2,173) 25,833
Other..................................... 4,491 28 (126) 4,393
-------- ------ -------- --------
$386,655 $ 138 $(24,037) $362,756
======== ====== ======== ========
Weighted average interest rate............ 6.20%
========
Held to maturity:
Federal Home Loan Mortgage Corporation.... $201,191 $ 767 $ (7,953) $194,005
Government National Mortgage Association.. 343,623 97 (8,289) 335,431
Federal National Mortgage Association..... 73,116 654 (2,146) 71,624
Collateralized Mortgage Obligations....... 231,183 19 (4,975) 226,227
Privately Issued Mortgage Pool Securities. 8,269 524 (985) 7,808
-------- ------ -------- --------
$857,382 $2,061 $(24,348) $835,095
======== ====== ======== ========
Weighted average interest rate............ 6.58%
========
92
Mortgage-backed securities held to maturity at June 30, 2000, are classified
by type of interest payment and contractual maturity term as follows:
Amortized Weighted
Cost Fair Value Rate
--------- ---------- --------
Adjustable rate.................... $309,855 $304,130 6.74%
Fixed rate, 5-year term............ 12,072 11,998 6.50
Fixed rate, 7-year term............ 3,008 2,985 5.50
Fixed rate, 15-year term........... 203,140 193,156 6.11
Fixed rate, 30-year term........... 98,124 96,599 7.42
-------- -------- ----
626,199 608,868 6.63
Collateralized mortgage obligations 231,183 226,227 6.46
-------- -------- ----
$857,382 $835,095 6.58%
======== ======== ====
At December 31, 2001 and 2000, the Corporation recorded unrealized gains on
securities available for sale as net increases to accumulated other
comprehensive income (loss) totaling $23,977,000 and $15,205,000, respectively,
net of deferred income taxes of $6,474,000 and $5,654,000. At June 30, 2000,
the Corporation recorded unrealized losses on securities available for sale as
a decrease to accumulated other comprehensive income (loss) totaling
$23,899,000, net of deferred income tax benefits of $8,907,000.
Activity from the sales of mortgage-backed securities available for sale for
the respective periods is summarized as follows:
Gross Gross
Realized Realized Net Gain
Proceeds Gains Losses (Loss)
-------- -------- -------- --------
Year Ended December 31, 2001...... $102,131 $3,571 $ -- $ 3,571
Six Months Ended December 31, 2000 463,257 876 (19,102) (18,226)
Fiscal Year Ended June 30:
2000........................... -- -- -- --
1999........................... 209,789 3,885 -- 3,885
At December 31, 2001 and 2000, and June 30, 2000, mortgage-backed securities
totaling $909,987,000, $296,749,000 and $542,947,000, respectively, were
pledged as collateral primarily for collateralized mortgage obligations, public
funds, advances from the Federal Home Loan Bank, securities sold under
agreements to repurchase and interest rate swap agreements.
Note 4. Loans Held for Sale
Loans held for sale at December 31, 2001 and 2000, and June 30, 2000,
totaled $470,647,000, $242,200,000 and $183,356,000, respectively, with
weighted average rates of 6.30%, 8.57% and 8.15%. Loans held for sale are
secured by single-family residential properties totaling $470,527,000 at
December 31, 2001, with a weighted average rate of 6.30%, consisting of fixed
and adjustable rate mortgage loans totaling $345,319,000 and $125,208,000,
respectively. Leases included with loans held for sale totaled $120,000 at
December 31, 2001.
Loans held for sale were secured by single-family residential properties
totaling $189,489,000 at December 31, 2000, with a weighted average rate of
7.70%, consisting of fixed and adjustable rate mortgage loans totaling
$148,916,000 and $40,573,000, respectively. Leases included with loans held for
sale totaled $52,711,000 at December 31, 2000, and consisted of fixed rate
leases with a weighted average rate of 11.72%. Loans held for sale were secured
by single-family residential properties totaling $182,977,000 at June 30, 2000,
with a weighted average rate of 8.15%, consisting of fixed and adjustable rate
mortgage loans totaling $175,716,000 and $7,261,000, respectively. Leases
included with loans held for sale at June 30, 2000, totaled $379,000.
93
Note 5. Loans Receivable
Loans receivable are summarized as follows:
December 31,
---------------------- June 30,
2001 2000 2000
---------- ---------- -----------
Conventional mortgage loans... $4,370,697 $5,138,977 $ 6,806,222
FHA and VA loans.............. 231,899 304,535 500,363
Commercial real estate loans.. 1,324,748 1,138,038 985,008
Construction loans............ 783,451 717,594 570,803
Consumer and other loans...... 1,519,755 1,612,369 1,588,056
---------- ---------- -----------
8,230,550 8,911,513 10,450,452
Unamortized premiums, net..... 9,088 160 743
Unearned income............... -- -- (16,714)
Deferred loan costs, net...... 5,073 18,704 24,665
Loans-in-process.............. (209,574) (196,940) (164,313)
Allowance for loan losses..... (102,359) (82,263) (70,497)
---------- ---------- -----------
$7,932,778 $8,651,174 $10,224,336
========== ========== ===========
Weighted average interest rate 7.43% 8.21% 7.87%
========== ========== ===========
Real estate loans at the periods indicated were secured by properties
located primarily in the following states:
December 31,
----------- June 30,
2001 2000 2000
---- ---- --------
Residential real estate (includes conventional, FHA and VA loans and loans held for
sale):
Colorado........................................................................ 16% 17% 17%
Nebraska........................................................................ 12 11 13
Kansas.......................................................................... 10 9 11
Other 47 states................................................................. 62 63 59
--- --- ---
100% 100% 100%
=== === ===
Commercial real estate:
Colorado........................................................................ 24% 23% 26%
Iowa............................................................................ 15 17 16
Kansas.......................................................................... 9 9 11
Other states (29, 24 and 24 states, respectively)............................... 52 51 47
--- --- ---
100% 100% 100%
=== === ===
Nonperforming loans at December 31, 2001 and 2000, and June 30, 2000,
aggregated $93,847,000, $95,871,000 and $65,012,000, respectively. Of the
nonperforming loans at December 31, 2001, approximately 18% were secured by
properties located in Kansas, 11% in Nevada, 10% in Iowa, and the remaining 61%
in 38 other states. Of the nonperforming loans at December 31, 2000,
approximately 25% were secured by properties located in Nevada, 17% in Kansas,
and 13% in Iowa and the remaining 55% in 39 other states. Of the nonperforming
loans at June 30, 2000, approximately 20% were secured by properties located in
Iowa, 8% in Kansas, 7% each in Florida and Maryland and the remaining 58% in 46
other states.
Also included in loans at December 31, 2001 and 2000, and June 30, 2000 and
1999, were loans with carrying values of $3,141,000, $4,285,000, $5,431,000 and
$9,729,000, respectively, the terms of which have
94
been modified in troubled debt restructurings. During the year ended December
31, 2001, the six months ended December 31, 2000, and fiscal years ended June
30, 2000 and 1999, the Corporation recognized interest income on these loans
aggregating $236,000, $176,000, $430,000 and $470,000, respectively. Under
their original terms the Corporation would have recognized interest income of
$268,000, $194,000, $494,000 and $526,000, respectively. At December 31, 2001,
the Corporation had no material commitments to lend additional funds to
borrowers whose loans were subject to troubled debt restructurings. Impaired
loans, a portion of which are included in the balances for troubled debt
restructurings at December 31, 2001 and 2000, and June 30, 2000, and the
resulting interest income as originally contracted and as recognized, was not
material for either the year ended December 31, 2001, the six months ended
December 31, 2000, or fiscal years 2000 and 1999.
At December 31, 2001 and 2000, and June 30, 2000, the Corporation pledged
real estate loans totaling $3,733,629,000, $3183,309,000 and $4,864,455,000,
respectively, as coll,ateral for Federal Home Loan Bank advances and other
borrowings.
Note 6. Real Estate
Real estate is summarized as follows:
December 31,
--------------- June 30,
2001 2000 2000
------- ------- --------
Real estate owned and in judgment............................................. $45,194 $25,539 $21,250
Real estate held for investment, which includes equity in unconsolidated joint
ventures and investments in real estate partnerships, net................... 12,282 12,792 17,879
------- ------- -------
$57,476 $38,331 $39,129
======= ======= =======
At December 31, 2001, real estate is comprised primarily of residential real
estate (63%) and commercial real estate (37%). At December 31, 2000, and June
30, 2000, real estate was comprised primarily of commercial real estate (59%
and 57%, respectively) with the difference in residential real estate. Real
estate at December 31, 2001, was located primarily in Nevada (38%) and Nebraska
(22%) with the remaining 40% in 33 other states and the District of Columbia.
At December 31, 2000, real estate was located primarily in Nebraska (32%) and
Kansas (19%) with the remaining 49% in 34 other states and at June 30, 2000,
real estate was located primarily in Nebraska (24%) and Missouri (22%) with the
remaining 54% in 36 other states.
95
Note 7. Allowance for Losses on Loans
An analysis of the allowance for losses on loans is summarized as follows:
Balance, June 30, 1998.................................. $ 64,757
Provision charged to operations......................... 12,400
Charges................................................. (15,760)
Recoveries.............................................. 3,674
Allowances acquired in acquisitions..................... 17,307
Change in estimate of allowance for bulk purchased loans (1,959)
--------
Balance, June 30, 1999.................................. 80,419
Provision charged to operations......................... 13,760
Charges................................................. (24,162)
Recoveries.............................................. 5,833
Change in estimate of allowance for bulk purchased loans (5,294)
--------
Balance, June 30, 2000.................................. 70,556
Provision charged (credited) to operations.............. 27,854
Charges................................................. (16,908)
Recoveries.............................................. 2,548
Change in estimate of allowance for bulk purchased loans (87)
Charge-offs to allowance for bulk purchased loans....... (28)
Reduction to allowance on sale of securitized loans..... (496)
--------
Balance, December 31, 2000.............................. 83,439
Provision charged to operations......................... 38,945
Charges................................................. (25,074)
Recoveries.............................................. 5,318
Change in estimate of allowance for bulk purchased loans (172)
Reduction to allowance on sale of securitized loans..... (5)
--------
Balance, December 31, 2001.............................. $102,451
========
--------
Activity and balances for allowance for losses established on loans held for
sale are included above.
Note 8. Mortgage Banking Activities
The Corporation's mortgage banking subsidiary services real estate loans for
investors that are not included in the accompanying consolidated financial
statements. Mortgage servicing rights are established based on the cost of
acquiring the right to service mortgage loans or the allocated fair value of
servicing rights retained on originated loans sold. The mortgage banking
subsidiary also services a substantial portion of the Corporation's real estate
loan portfolio.
During 2001, the Corporation securitized and sold mortgage loans totaling
$2,260,050,000 for a pre-tax gain of $4,784,000. During 2000, the Corporation
securitized and sold $2,241,503,000 in mortgage loans and recognized a pre-tax
loss of $18,023,000. As part of these sales transactions, the Corporation
retains servicing responsibilities and received annual servicing fees ranging
from .25% to .53% of the outstanding balances of the loans. The average service
fee collected by the Corporation was .35% for the year ended December 31, 2001,
and .36 % for the six months ended December 31, 2000. In addition, the
Corporation retains the rights of cash flows remaining, after investors in the
securitization trust have received their contractual payments, which are
referred to as "interest only strips." These retained interests are subordinate
to investors' interests. The investors and securitization trusts have no
recourse to the Corporation's other assets for failure of debtors to pay when
due.
The gain or loss recognized on the sale of mortgage loans is determined by
allocating the carrying amount between the loans sold and the interest only
strips based on their relative fair values at the date of the transfer.
96
Fair values are based on quoted market prices, if available. However, quotes
are generally not available for interest only strips, so the Corporation
generally estimates fair value based on the present value of future expected
cash flows using management's best estimates of the key assumptions -
prepayment speeds, credit losses, weighted-average lives and discount rates
commensurate with the risks involved.
The following are the key assumptions used in measuring the fair values of
mortgage servicing rights and interest only strips for the sales of mortgage
loans for the periods indicated:
Mortgage Servicing Rights Interest Only Strips
------------------------- -------------------------
Conventional Governmental Conventional Governmental
------------ ------------ ------------ ------------
YEAR ENDED DECEMBER 31, 2001:
Prepayment speed................... 7.3%--63.2% 7.1%--48.9% 7.6%--51.7% 8.5%--38.2%
Weighted average prepayment speed.. 15.1% 13.3% 14.6% 14.8%
Discount rate...................... 9.5%--13.4% 11.8%--14.5% 11.2%--19.5% 13.5%
Weighted average life (in years)... n/a n/a 1.8--11.2 2.4--10.8
Expected credit losses............. n/a n/a none none
SIX MONTHS ENDED DECEMBER 31, 2000:
Prepayment speed................... 4.1%--62.3% 5.3%--63.3% 4.9%--48.5% 6.1%--43.9%
Weighted average prepayment speed.. 12.4% 12.0% 9.5% 10.4%
Discount rate...................... 10.0%--12.0% 12.0%--12.9% 11.5%--15.0% 15.0%
Weighted average life (in years)... n/a n/a 4.3--8.3 6.4--10.4
Expected credit losses............. n/a n/a none none
Loan servicing includes collecting and remitting loan payments, accounting
for principal and interest, holding advance payments by borrowers for taxes and
insurance, making inspections as required of the mortgage premises, collecting
amounts due from delinquent mortgagors, supervising foreclosures in the event
of unremedied defaults and generally administering the loans for the investors
to whom they have been sold. The amount of loans serviced for others at
December 31, 2001 and 2000, and June 30, 2000 and 1999, was $9,488,621,000,
$9,100,938,000, $7,271,014,000, and $7,448,814,000, respectively. Custodial
escrow balances maintained in connection with loan servicing totaled
approximately $100,181,000, $102,797,000, $118,390,000 and $120,246,000 at
December 31, 2001 and 2000, and June 30, 2000, and 1999.
The mortgage servicing portfolio is covered by servicing agreements pursuant
to the mortgage-backed securities programs of GNMA, FNMA and FHLMC. Under these
agreements, the Corporation may be required to advance funds temporarily to
make scheduled payments of principal, interest, taxes or insurance if the
borrower fails to make such payments. Although the Corporation cannot charge
any interest on these advance funds, the Corporation typically recovers the
advances within a reasonable number of days upon receipt of the borrower's
payment. In the absence of any payment, advances are recovered through FHA
insurance, VA guarantees or FNMA or FHLMC reimbursement provisions in
connection with loan foreclosures. The amount of funds advanced by the
Corporation for these servicing agreements is not material.
97
Mortgage servicing rights are included in the Consolidated Statement of
Financial Condition under the caption "other assets." The activity of mortgage
servicing rights is summarized as follows:
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, ------------------
2000 2000 2000 1999
------------ ------------ ------- --------
Beginning balance........................................... $111,110 $ 86,371 $84,752 $ 67,836
Mortgage servicing rights retained through loan sales....... 40,994 9,938 10,402 28,661
Mortgage servicing rights retained on securitized loans sold -- 18,551 -- --
Amortization expense........................................ (17,092) (4,558) (8,703) (12,021)
Other items, net (principally hedge activity)............... 1,263 1,391 (80) 276
-------- -------- ------- --------
136,275 111,693 86,371 84,752
Valuation adjustments....................................... (19,058) (583) -- --
-------- -------- ------- --------
Ending balance.............................................. $117,217 $111,110 $86,371 $ 84,752
======== ======== ======= ========
The activity of the valuation allowances on mortgage servicing rights is
summarized as follows:
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, -------------------
2001 2000 2000 1999
------------ ------------ ---- ----
Beginning balance.............. $ 583 $ -- $-- $--
Additions charged to operations 19,058 583 -- --
------- ---- --- ---
Ending balance................. $19,641 $583 $-- $--
======= ==== === ===
At December 31, 2001 and 2000, and June 30, 2000 and 1999, the fair value of
the Corporation's mortgage servicing rights totaled approximately $120,193,000,
$133,454,000, $134,057,000 and $106,906,000, respectively.
The key assumptions used in measuring the fair values and the sensitivity of
the fair values of mortgage servicing rights were as follows at December 31:
2001 2000
-------------------------- ---------------------------
Conventional Governmental Conventional Governmental
------------ ------------- ------------- -------------
Fair value....................................... $ 63,006 $ 57,187 $ 65,724 $ 67,730
Prepayment speed................................. 7.1%--63.2% 0%--59.3% 5.3%--71.0% 0%--63.3%
Weighted average prepayment speed................ 16.1% 16.4% 12.3% 12.7%
Impact on fair value of 10% adverse change... $ 3,243 $ 2,831 $ 3,207 $ 3,490
Impact on fair value of 20% adverse change... $ 6,199 $ 5,452 $ 5,884 $ 6,071
Discount rate.................................... 9.6%--13.2% 11.4%--11.9% 10.1%--12.0% 12.2%--13.5%
Impact on fair value of 10% adverse change... $ 1,878 $ 2,041 $ 2,240 $ 2,247
Impact on fair value of 20% adverse change... $ 3,641 $ 3,952 $ 4,346 $ 4,366
98
The key assumptions used in measuring the fair values (which are the same as
the carrying values) and the sensitivity of the fair values of interest only
strips were as follows at December 31:
2001 2000
------------------------- -------------------------
Conventional Governmental Conventional Governmental
------------ ------------ ------------ ------------
Fair value....................................... $ 6,557 $ 1,728 $ 4,161 $ 1,734
Prepayment speed................................. 7.6%--62.1% 8.5%--53.2% 6.7--48.5% 6.5%--43.9%
Weighted average prepayment speed................ 15.2% 16.7% 10.1% 13.0%
Impact on fair value of 10% adverse change... $ 321 $ 91 $ 516 $ 184
Impact on fair value of 20% adverse change... $ 616 $ 173 $ 617 $ 223
Discount rate.................................... 11.4% 13.5% 11.5% 15.0%
Impact on fair value of 10% adverse change... $ 220 $ 64 $ 506 $ 173
Impact on fair value of 20% adverse change... $ 425 $ 123 $ 602 $ 204
Weighted average life (in years)................. 2.9--6.3 3.3--6.6 4.3--9.6 4.2--7.8
Expected credit losses........................... none none none none
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a variation in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, in the tables,
the effect of a variation in a particular assumption on the fair value of the
mortgage servicing rights or interest only strips is calculated without
changing any other assumption; in reality, changes in one factor may result in
changes in another (for example, increases in market interest rates may result
in lower prepayments and increased credit losses) which might magnify or
counteract the sensitivities. Further, these sensitivities show only the change
in the asset balances and do not show any expected changes in the fair value of
instruments used to manage the prepayment risks associated with these assets,
as discussed in Note 14, "Derivative Financial Instruments," or what actions
management may take to offset any adverse valuation adjustments.
A summary of certain cash flows received from and paid to securitization
trusts is as follows:
Six Months
Year Ended Ended
December 31, December 31,
2001 2000
------------ ------------
Proceeds from new securitizations...................... $2,285,590 $2,225,743
Servicing fees received, including interest only strips 34,330 14,187
Purchases of delinquent or foreclosed assets........... 438,956 70,001
Servicing advances..................................... 512,683 283,237
Repayments of servicing advances....................... 512,045 281,593
The following presents quantitative information about delinquencies, net
credit losses, and components of the Corporation's managed mortgage loan
portfolio at December 31:
2001 2000
----------- -----------
Mortgage loans held in portfolio.......................... $ 4,602,596 $ 5,443,512
Mortgage loans serviced for others........................ 9,488,621 9,100,938
Mortgage loans held for sale.............................. 470,527 189,489
----------- -----------
Total managed mortgage loans........................... $14,561,744 $14,733,939
=========== ===========
Principal amount of managed loans 90 days or more past due $ 192,446 $ 194,600
=========== ===========
At December 31, 2001 and 2000, and June 30, 2000 and 1999, there were no
commitments to purchase mortgage loan servicing rights or to sell any bulk
packages of mortgage servicing rights.
99
Note 9. Premises and Equipment
Premises and equipment are summarized as follows:
December 31,
----------------- June 30,
2001 2000 2000
-------- -------- --------
Land................................... $ 39,092 $ 38,433 $ 41,231
Buildings and improvements............. 109,658 118,815 123,276
Leasehold improvements................. 5,180 5,889 7,066
Furniture, fixtures and equipment...... 117,821 115,659 131,636
-------- -------- --------
271,751 278,796 303,209
Less accumulated depreciation and
amortization......................... 113,060 111,586 121,517
-------- -------- --------
$158,691 $167,210 $181,692
======== ======== ========
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expenses, totaled $18,841,000, $9,968,000, $20,414,000,
and $18,172,000 for the year ended December 31, 2001, the six months ended
December 31, 2000, and for fiscal years 2000 and 1999, respectively. Rent
expense totaled $6,554,000, $3,075,000, $6,335,000, and $4,489,000 for the year
ended December 31, 2001, the six months ended December 31, 2000, and for fiscal
years 2000 and 1999. The Bank has operating lease commitments on certain
premises and equipment. Annual minimum operating lease commitments as of
December 31, 2001, are as follows: 2002--$5,109,000; 2003--$4,560,000;
2004--$3,366,000; 2005--$2,321,000; 2006--$1,658,000; 2007 and
thereafter--$10,415,000.
Note 10. Intangible Assets
An analysis of intangible assets is summarized as follows:
Core Value
of Deposits Goodwill Total
----------- -------- --------
Balance, June 30, 1998........................... $34,824 $ 42,362 $ 77,186
Additions relating to acquisitions............... 35,265 155,928 191,193
Amortization expense............................. (8,984) (6,718) (15,702)
------- -------- --------
Balance, June 30, 1999........................... 61,105 191,572 252,677
Final purchase accounting adjustments relating to
acquisitions................................... (9,702) 6,830 (2,872)
Amortization expense............................. (8,563) (8,673) (17,236)
Write-offs due to branch sales and closings...... (352) (1,367) (1,719)
------- -------- --------
Balance, June 30, 2000........................... 42,488 188,362 230,850
Amortization expense............................. (3,903) (4,250) (8,153)
Write-offs due to branch sales and closings...... (2,376) (12,894) (15,270)
------- -------- --------
Balance, December 31, 2000....................... 36,209 171,218 207,427
Amortization expense............................. (7,211) (8,134) (15,345)
Write-offs due to branch divestitures............ (265) (367) (632)
------- -------- --------
Balance, December 31, 2001....................... $28,733 $162,717 $191,450
======= ======== ========
No impairment adjustment was necessary to intangible assets for the year
ended December 31, 2001, the six months ended December 31, 2000, or for fiscal
years 2000 or 1999.
100
Note 11. Deposits
Deposits are summarized as follows:
December 31 , 2001 December 31 , 2000 June 30, 2000
----------------- ----------------- ----------------
Description and interest rates Amount % Amount % Amount %
------------------------------ ---------- ----- ---------- ----- ---------- -----
Passbook accounts (average of 4.73%,
5.34% and 4.48%)..................... $1,939,596 30.3% $1,861,074 24.2% $1,575,380 21.5%
NOW accounts (average of .37%, .61% and
.71%)................................ 1,198,646 18.7 1,065,970 13.8 1,028,640 14.0
Market rate savings (average of 2.77%,
3.82% and 4.01%)..................... 304,620 4.8 382,344 5.0 531,317 7.3
---------- ----- ---------- ----- ---------- -----
Total savings (no stated maturities)... 3,442,862 53.8 3,309,388 43.0 3,135,337 42.8
---------- ----- ---------- ----- ---------- -----
Certificates of deposits:
Less than 2.00%...................... 45,207 .7 1,968 -- -- --
2.00%--2.99%........................ 562,840 8.8 78 -- 7,685 .1
3.00%--3.99%........................ 537,808 8.4 6,119 .1 6,740 .1
4.00%--4.99%........................ 825,086 12.9 583,156 7.6 771,419 10.5
5.00%--5.99%........................ 611,563 9.6 1,251,274 16.3 2,007,819 27.4
6.00%--6.99%........................ 257,613 4.0 2,313,213 30.0 1,328,741 18.1
7.00%--7.99%........................ 112,885 1.8 227,833 3.0 70,974 1.0
8.00% and over...................... 658 -- 1,457 -- 1,785 --
---------- ----- ---------- ----- ---------- -----
Total certificates of deposit (fixed
maturities; average of 5.51%, 5.88%
and 5.31%)........................... 2,953,660 46.2 4,385,098 57.0 4,195,163 57.2
---------- ----- ---------- ----- ---------- -----
$6,396,522 100.0% $7,694,486 100.0% $7,330,500 100.0%
========== ===== ========== ===== ========== =====
Interest expense on deposit accounts is summarized as follows:
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, -------------------
2001 2000 2000 1999
------------ ------------ -------- --------
Passbook accounts...................... $ 64,399 $ 45,823 $ 59,215 $ 41,616
NOW accounts........................... 4,180 3,162 7,423 12,223
Market rate savings.................... 9,298 8,616 31,077 26,993
Certificates of deposit................ 232,490 126,978 227,959 242,026
-------- -------- -------- --------
$310,367 $184,579 $325,674 $322,858
======== ======== ======== ========
101
At December 31, 2001, scheduled maturities of certificates of deposit are as
follows:
Year Ending December 31,
-----------------------------------------------------------------
Rate 2002 2003 2004 2005 2006 Thereafter Total
---- ---------- -------- ------- ------- ------- ---------- ----------
Less than 2.00%........... $ 45,201 $ -- $ 6 $ -- $ -- $ -- $ 45,207
2.00%--2.99%.............. 442,149 119,573 1,116 -- 2 -- 562,840
3.00%--3.99%.............. 431,391 82,930 22,836 606 45 -- 537,808
4.00%--4.99%.............. 555,071 178,215 41,445 15,284 32,206 2,865 825,086
5.00%--5.99%.............. 567,382 38,646 1,719 1,278 1,309 1,229 611,563
6.00%--6.99%.............. 252,492 2,791 954 1,256 72 48 257,613
7.00%--7.99%.............. 111,772 233 272 558 37 13 112,885
8.00% and over............ 58 39 16 8 78 459 658
---------- -------- ------- ------- ------- ------ ----------
$2,405,516 $422,427 $68,364 $18,990 $33,749 $4,614 $2,953,660
========== ======== ======= ======= ======= ====== ==========
Certificates of deposit in amounts of $100,000 or more totaled $484,120,000,
$916,526,000 and $693,420,000, respectively, at December 31, 2001 and 2000, and
June, 30, 2000. The total amount of brokered certificates of deposit were
$52,967,000, $322,149,000 and $82,366,000, respectively, at December 31, 2001
and 2000, and June 30, 2000.
At December 31, 2001 and 2000, and June 30, 2000, deposits of certain state
and municipal agencies and other various non-retail entities were
collateralized by mortgage-backed securities with carrying values of
$120,223,000, $187,965,000 and $302,984,000 and investment securities with
carrying values of $8,252,000, $48,245,000 and $82,039,000, respectively. In
compliance with regulatory requirements, at December 31, 2001 and 2000, and
June 30, 2000, the Corporation maintained $21,177,000, $23,851,000 and
$74,285,000, respectively, in cash on hand and deposits at the Federal Reserve
Bank. The funds at the Federal Reserve Bank were held in noninterest earning
reserves against certain transaction checking accounts and nonpersonal
certificates of deposit.
102
Note 12. Advances from the Federal Home Loan Bank
The Corporation was indebted to the Federal Home Loan Bank as follows:
December 31, 2001
---------------------------------
Interest Weighted
Rate Average
Range Rate Amount
------------ -------- ----------
Scheduled Maturities Due:
Within 1 year............ 1.78% - 7.20% 3.68% $2,417,675
Over 1 year to 2 years... 2.06 - 7.69 6.92 204,050
Over 2 years to 3 years.. 1.85 - 6.55 6.39 300,050
Over 3 years to 4 years.. 6.55 - 6.55 6.55 50
Over 4 years to 5 years.. 2.42 - 6.55 2.42 100,050
Over 5 years............. 4.30 - 7.29 5.76 1,906,200
---- ---- ---- ----------
1.78% - 7.69% 4.76% 4,928,075
==== ==== ====
Fair value of embedded calls 10,981
----------
$4,939,056
==========
December 31, 2000 June 30, 2000
--------------------------------- ---------------------------------
Interest Weighted Interest Weighted
Rate Average Rate Average
Range Rate Amount Range Rate Amount
------------ -------- ---------- ------------ -------- ----------
Scheduled Maturities Due:
Within 1 year........... 5.82% - 9.90% 7.31% $ 735,840 5.82% - 8.31% 6.87% $1,772,592
Over 1 year to 2 years.. 6.22 - 9.95 8.85 319,625 6.22 - 7.04 6.80 152,640
Over 2 years to 3 years. 6.54 - 7.69 7.19 204,000 6.54 - 7.69 7.20 317,825
Over 3 years to 4 years. 6.39 - 6.77 6.52 300,000 -- -- -- --
Over 4 years to 5 years. -- -- -- -- 6.23 - 6.72 6.40 300,000
Over 5 years............ 4.30 - 7.33 5.59 2,006,000 4.18 - 7.29 5.20 2,506,525
---- ---- ---- ---------- ---- ---- ---- ----------
4.30% - 9.95% 6.41% $3,565,465 4.18% - 8.31% 5.98% $5,049,582
==== ==== ==== ========== ==== ==== ==== ==========
Fixed-rate advances totaling $1,706,000,000 at December 31, 2001, are
convertible into adjustable-rate advances at the option of the Federal Home
Loan Bank. At December 31, 2001, these convertible advances had call dates
ranging from January 2002 to March 2003. All of these advances have scheduled
maturities due over five years. At December 31, 2000, and June 30, 2000,
convertible advances totaled $1,706,000,000 and $2,346,000,000, respectively.
At December 31, 2001 and 2000, and June 30, 2000, outstanding advances were
collateralized by real estate loans totaling $3,733,629,000, $3,813,309,000 and
$5,864,455,000, respectively, and mortgage-backed securities totaling
$516,454,000, $98,191,000 and $197,137,000. The Corporation is also required to
hold shares of Federal Home Loan Bank stock in an amount at least equal to the
greater of 1.0% of certain of its residential mortgage loans or 5.0% of its
outstanding advances. The Corporation was in compliance with this requirement
at December 31, 2001 and 2000, and June 30, 2000, holding Federal Home Loan
Bank stock totaling $253,946,000, $251,537,000 and $255,756,000, respectively.
At December 31, 2001 and 2000, and June 30, 2000, there were no commitments for
advances from the Federal Home Loan Bank.
103
Note 13. Other Borrowings
Other borrowings consist of the following:
December 31,
----------------- June 30,
2001 2000 2000
-------- -------- --------
Federal funds, interest 1.72%, due January 2, 2002................... $130,000 $ -- $ --
Securities sold under agreements to repurchase....................... 201,912 6,905 33,379
Term note, adjustable interest, due June 30, 2004.................... 54,375 63,438 65,250
Revolving line of credit, adjustable interest, due June 30, 2004..... 10,000 10,000 10,000
Guaranteed preferred beneficial interests in the Corporation's junior
subordinated debentures, interest 9.375%, due May 15, 2027......... 45,000 45,000 45,000
Subordinated extendible notes, interest 7.95%, due December 1, 2006.. 21,725 50,000 50,000
Subordinated notes, adjustable interest, due December 8, 2011........ 30,000 -- --
Subordinated notes, adjustable interest, due December 18, 2031....... 20,000 -- --
Other borrowings..................................................... 7,201 -- 2,397
-------- -------- --------
$520,213 $175,343 $206,026
======== ======== ========
At December 31, 2001, securities sold under agreements to repurchase carried
a weighted average rate of 4.30% with $1,912,000 maturing overnite,
$100,000,000 maturing December 31, 2006, and $100,000,000 maturing March 29,
2011. At December 31, 2001, mortgage backed securities and investment
securities with carrying values totaling $224,734,000 and $10,023,000,
respectively, and fair values totaling $226,292,000 and $9,802,000,
respectively, were pledged as collateral. At December 31, 2000, securities sold
under agreements to repurchase matured overnight at an interest rate of 4.91%
and were collateralized by an investment security with a carrying value
totaling $19,928,000 and a fair value totaling $19,575,000. At June 30, 2000,
securities sold under agreements to repurchase had a weighted average rate of
4.99% with $8,379,000 maturing overnight and $25,000,000 maturing in September
2000. Mortgage-backed securities with carrying values totaling $32,035,000 and
fair values totaling $30,681,000 were pledged as collateral.
During July 1999, the Corporation entered into a term and revolving credit
agreement totaling $82,500,000. This credit facility is in the form of an
unsecured, five-year term note due June 30, 2004. In July 1999, $72,500,000 was
drawn down to refinance a term note for $32,500,000 and to pay in full
$40,000,000 of one-year purchase notes from an acquisition. At December 31,
2001, this term note had a remaining principal balance of $54,375,000. Terms of
the note require quarterly principal payments of $1,812,500 and quarterly
interest payable at a monthly adjustable rate priced at 100 basis points below
the lender's national base rate, or 3.75% at December 31, 2001. The unsecured
revolving line of credit with a balance of $10,000,000 has interest rate terms
the same as the term note.
Effective May 14, 1997, CFC Preferred Trust, a special-purpose wholly-owned
trust subsidiary of the Corporation, completed an offering of 1,800,000 shares
(issue price of $25.00 per share) totaling $45,000,000 of fixed-rate 9.375%
cumulative trust preferred securities due May 15, 2027. Also, effective May 14,
1997, the Corporation purchased all of the common securities of CFC Preferred
Trust for $1,391,775. CFC Preferred Trust invested the total proceeds of
$46,391,775 received in 9.375% junior subordinated deferrable interest
debentures (the "Debentures") issued by the Corporation. Interest paid on the
Debentures is distributed to holders of the cumulative trust preferred
securities and to the Corporation as holder of the common securities. Under
current tax law, distributions to the holders of the cumulative trust preferred
securities are tax deductible for the Corporation. The Debentures, unsecured,
rank junior and are subordinate in right of payment of all senior debt of the
Corporation. The obligations of the Corporation under the Debentures, the
indenture, the relevant trust agreement and the guarantees constitute a full
and unconditional guarantee by the Corporation of the obligations of the trust
under the trust preferred securities and rank subordinate and junior in right
of payment to all liabilities of the Corporation. The distribution rate payable
on the cumulative trust preferred securities is cumulative and payable
quarterly in arrears. The Corporation has the right, subject to events of
default, to defer payments of interest on the Debentures by extending the
interest payment periods not exceeding 20 consecutive quarters. No extension
104
period may extend beyond the redemption or maturity date of the Debentures. The
Debentures mature on May 15, 2027, which may be shortened to not earlier than
May 15, 2002, if certain conditions are met. The cumulative trust preferred
securities would qualify as Tier 1 capital of the Corporation should the
Corporation become subject to the Federal Reserve capital requirements for bank
holding companies.
On December 2, 1996, the Corporation issued $50,000,000 of fixed-rate
subordinated extendible notes due December 1, 2006 (the "Notes"). Contractual
interest on the Notes is paid monthly and was set at 7.95% until December 1,
2001. The interest rate for the Notes was reset at the Corporation's option on
December 1, 2001, at 7.95% until December 1, 2004, the next reset date selected
by management. This interest rate of 7.95% exceeds 105% of the effective
interest rate on comparable maturity U. S. Treasury obligations, as defined in
the Indenture. These notes were redeemable by the holders on December 1, 2001.
A total of $28,275,000 was redeemed, leaving an outstanding balance of
$21,725,000 at December 31, 2001. The Corporation and noteholders may elect to
redeem the Notes in whole on December 1, 2004, the next interest reset date, at
par plus accrued interest. The Notes are unsecured general obligations of the
Corporation. The Indenture, among other provisions, limits the ability of the
Corporation to pay cash dividends or to make other capital distributions under
certain circumstances.
On November 28, 2001, the Bank issued and sold $30,000,000 of floating rate
subordinated debt securities due December 8, 2011. Interest is payable
semi-annually in arrears on June 8 and December 8 of each year commencing on
June 8, 2002. The initial interest rate is 6.01% through June 8, 2002, and
resets semi-annually on each successive interest payment date equal to the
six-month LIBOR plus 3.75%. The interest rate shall not exceed 12.50%. These
subordinated debt securities are not redeemable, unless certain events occur,
as defined in the Indenture. The subordinated debt securities, unsecured, rank
junior and are subordinate in right of payment of all senior debt of the Bank.
On December 18, 2001, the Bank issued and sold $20,000,000 of floating rate
junior subordinated debentures due December 18, 2031. Interest is payable
quarterly in arrears on March 18, June 18, September 18 and December 18 of each
year commencing on March 18, 2002. The initial interest rate is 5.60% through
March 18, 2002, and resets quarterly on each successive interest payment date
equal to the three-month LIBOR plus 3.60%. The interest rate shall not exceed
12.50% prior to December 18, 2011. These junior subordinated debentures may be
redeemed by the Bank on or after December 18, 2006, and on any subsequent
interest reset date through September 18, 2030, and any time after September
30, 2030, with proper notice. The junior subordinated debentures, unsecured,
rank junior and are subordinate in right of payment of all senior debt of the
Bank.
The $30,000,000 of subordinated debt securities and the $20,000,000 of
junior subordinated debentures are includable as part of supplementary Tier 2
regulatory capital for the Bank. Proceeds from these issuances were utilized by
the Bank to make capital distributions to the Corporation. On November 30,
2001, a distribution for $30,000,000 was used to redeem $28,275,000 of the
Corporation's 7.95% subordinated extendible notes and to repurchase common
stock. On January 10, 2002, a distribution for $20,000,000 was used to repay
$7,000,000 of the Corporation's revolving line of credit and to repurchase
common stock.
Other borrowings at December 31, 2001, consist of United States Treasury Tax
and Loan borrowings totaling $7,201,000 and bearing an interest rate of 1.38%
at December 31, 2001. These borrowings are an open- ended interest bearing note
that are callable by the United States Treasury and, at December 31, 2001, are
secured by mortgage-backed securities with a book value totaling $27,620,000.
At June 30, 2000, other borrowings consisted of notes issued in conjunction
with collateralized mortgage obligations, due in varying amounts through 2019,
and secured by FNMA and FHLMC mortgage-backed securities with book values
totaling $7,331,000. These notes were paid in full in December 2000.
Contractual principal maturities of other borrowings as of December 31,
2001, for the next five years are as follows: 2002--$146,363,000;
2003--$7,250,000; 2004--$49,875,000; 2005--zero; 2006--$121,725,000; 2007 and
thereafter--$195,000,000.
105
Note 14. Derivative Financial Instruments
The Corporation utilizes derivative financial instruments as part of an
overall interest rate risk management strategy.
Interest Rate Swap Agreements
The Corporation is exposed to interest rate risk relating to the variable
cash flows of certain deposit liabilities and FHLB advances attributable to
changes in market interest rates. As part of its overall strategy to manage the
level of exposure to the risk of interest rates adversely affecting net
interest income the Corporation uses interest rate swap agreements that have
offsetting characteristics from the hedged deposit liabilities and FHLB
advances. These derivatives are designated and qualify as cash flow hedges with
the fair value gain or loss reported as a component of accumulated other
comprehensive income (loss). The fair value of the interest rate swaps at
December 31, 2001 and 2000, totaled approximately $109,913,000 and $37,252,000,
respectively, which represents the amount that would need to be paid if the
swap agreements were terminated.
The following summarizes the Corporation's interest rate swap agreements by
maturity dates at December 31:
2001 2000
-------------------------- --------------------------
Interest Rate Interest Rate
Notional --------------- Notional ---------------
Amount Paying Receiving Amount Paying Receiving
- ---------- ------ --------- ---------- ------ ---------
Scheduled Maturities Due:
2001.................. $ 50,000 6.21% 6.04%
2002.................. $ 100,000 5.98% 1.75% 100,000 5.98 5.86
2003.................. 400,000 5.65 1.83 400,000 5.65 6.84
2004.................. 600,000 6.14 1.82 600,000 6.14 6.16
2005.................. 250,000 6.38 1.75 250,000 6.38 5.93
Thereafter............ 1,270,000 5.74 2.16 150,000 5.42 5.90
---------- ---- ---- ---------- ---- ----
$2,620,000 5.89% 1.98% $1,550,000 5.99% 6.26%
========== ==== ==== ========== ==== ====
The following summarizes the Corporation's interest rate swap agreements by
maturity date at June 30, 2000:
Interest Rate
Notional ---------------
Amount Paying Receiving
---------- ------ ---------
Scheduled Maturities Due:
2001.................. $ 140,000 6.00% 6.16%
2002.................. 100,000 7.07 6.76
2003.................. 200,000 6.71 6.34
2004.................. 500,000 6.01 6.05
2005.................. 800,000 6.28 6.31
Thereafter............ 800,000 7.07 6.67
---------- ---- ----
$2,540,000 6.53% 6.39%
========== ==== ====
Under the interest rate swap agreements the Corporation pays fixed rates of
interest and receives variable rates of interest. The variable interest rates
were based on either the 13-week average yield of the three-month U.S. Treasury
bill or the three-month LIBOR average. Net interest settlement was quarterly.
Net interest expense on the swap agreements totaled $45,744,000, $415,000,
$2,869,000 and $2,849,000, respectively, for the year ended December 31, 2001,
the six months ended December 31, 2000, and fiscal years 2000 and 1999.
106
The interest rate swap agreements were collateralized by investment
securities with carrying values of $40,331,000 at December 31, 2001, by
investment securities with carrying values of $63,860,000 at December 31, 2000,
and by mortgage-backed securities with carrying values of $8,528,000 at June
30, 2000. Entering into interest rate swap agreements involves the credit risk
of dealing with intermediary and primary counterparties and their ability to
meet the terms of the respective contracts. The Corporation is exposed to
credit loss in the event of nonperformance by the counterparties to the
interest rate swaps if the Corporation is in a net interest receivable position
at the time of potential default by the counterparties. At December 31, 2001
and 2000, and June 30, 2000, the Corporation was in a net interest payable
position. The Corporation does not anticipate nonperformance by the
counterparties.
For the six months ended December 31, 2000, the Corporation incurred losses
on terminated interest rate swap agreements totaling $8,601,000 since the
related hedged FHLB advances and deposit liabilities were not paid. This loss
is included in other comprehensive income (loss) and is being reflected in
operations as the related interest expense on the designated FHLB advances and
deposit liabilities is incurred. The amortization of these losses on these
terminated interest rate swap agreements for the year ended December 31, 2001,
and the six months ended December 31, 2000, totaled $2,034,000 and $170,000,
respectively. At December 31, 2001, the unamortized balance of these losses
totaled approximately $6,398,000. In addition, during the six months ended
December 31, 2000, the Corporation recorded a net loss of $38,209,000 on the
termination of swap agreements due to the repayment of the related hedged FHLB
advances.
Swaption Agreements
The Corporation has $1,000,000,000 of 10 year fixed-rate FHLB advances with
interest rates ranging from 4.30% to 5.40%, maturity dates ranging from
February 2009 to July 2009 and call dates ranging from January 2002 to May
2002. The call options expose the Corporation to interest rate risk. The
Corporation entered into swaption agreements to hedge the exposure to changes
in the fair value of the calls embedded in the FHLB advances, which are
recorded as fair value hedges. These agreements represent purchased options to
enter into interest rate agreements whereby the Corporation would pay fixed
rates of interest and receive variable rates of interest. All terms of the
swaption agreements exactly match the terms of these FHLB advances. In the
event any of these FHLB advances are called, the Corporation will exercise its
corresponding option to enter into a swap agreement paying a fixed rate of
interest on the swap equal to the existing fixed rate on the FHLB advance. At
December 31, 2001, the fair value on the rights of the swaption agreements was
recorded as an asset of $78,220,000.
Interest Rate Floor Agreements
The Corporation is also exposed to interest rate risk relating to the
potential decrease in the value of mortgage servicing rights due to increased
prepayments on mortgage servicing loans resulting from declining interest
rates. As part of its overall strategy to manage the level of exposure to the
risk of interest rates adversely affecting the value of mortgage servicing
rights due to impairment exposure, the Corporation uses interest rate floor
agreements to protect the fair value of the mortgage servicing rights. By
purchasing floor agreements, the Corporation would be paid cash based on the
differential between a short-term rate and the strike rate, applied to the
notional principal amount, should the current short-term rate fall below the
strike rate level of the agreement. These derivatives are not designated and do
not qualify as hedges under SFAS No. 133, and therefore, receive a "no hedging"
designation.
At December 31, 2001 and 2000, the Corporation had interest rate floor
agreements with notional amounts totaling $630,000,000 and $505,000,000,
respectively, with a fair value gain of $3,071,000 and $1,809,000,
respectively, representing the amount that would be received to terminate the
floor agreements. The interest rate floor agreements at December 31, 2001, had
strike rates ranging from 3.84% to 6.32% and mature between January 2002 and
March 2006. At June 30, 2000, the Corporation had interest rate floor
agreements with notional amounts totaling $335,000,000.
107
Interest Rate Cap Agreements
During fiscal year 2000, the Corporation entered into three interest rate
cap agreements totaling $300,000,000. These interest rate cap agreements were
called in June 2000, resulting in a net loss of $69,000. These agreements would
have paid interest quarterly when the three-month LIBOR exceeded 7.5%.
Throughout the life of these agreements, the Corporation did not owe any
interest to the counterparty. The premiums received totaled $4,800,000.
Premiums amortized to income during fiscal 2000 totaled $699,000.
Commitments
Mandatory forward sales commitments are used by the Corporation in the
management of its loan activities, other than loans held for investment. The
objective of these transactions is to reduce interest rate exposure on loan
production. Mandatory forward sales commitments obligate both the Corporation
and the buyer to trade loans at a specified price at the settlement date.
Beginning in 2001, the Corporation designated mandatory forward sales
commitments to sell residential mortgage loans as hedging the change in fair
value of loans held for sale. At December 31, 2001, these commitments totaling
$445,000,000 had a fair value gain of $3,060,000. Mandatory forward sales
commitments, which were excluded from hedge designation and the assessment of
effectiveness, resulted in a net loss of $1,100,000 during the year ended
December 31, 2001. This net loss is included in Gain (Loss) on Sales of Loans
in the Consolidated Statement of Operations. At December 31, 2000, the
Corporation had mandatory forward sales commitments totaling $237,683,000 with
a fair value gain of $2,085,000.
At December 31, 2001 and 2000, the Corporation had conforming loan
commitments for loans held for sale totaling $161,203,000 and $85,219,000,
respectively, consisting primarily of fixed-rate loans with fair values of
$68,000 and $354,000, respectively. These conforming loan commitments do not
qualify as hedges under SFAS No. 133 and therefore, receive a "no hedging"
designation.
Note 15. Income Taxes
The following is a comparative analysis of the federal and state income tax
provision (benefit):
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, -------------------
2001 2000 2000 1999
------------ ------------ ------- -------
Current:
Federal.......................... $ 56,014 $ 11,276 $19,757 $42,937
State............................ 1,221 (2) 1,210 3,230
-------- -------- ------- -------
57,235 11,274 20,967 46,167
-------- -------- ------- -------
Deferred:
Federal.......................... (13,287) (33,362) 36,689 16,789
State............................ (574) 2,397 (2,387) 304
-------- -------- ------- -------
(13,861) (30,965) 34,302 17,093
-------- -------- ------- -------
Total income tax provision (benefit) $ 43,374 $(19,691) $55,269 $63,260
======== ======== ======= =======
108
The following is a reconciliation of the statutory federal income tax rate
to the consolidated effective tax rate:
Six Months Year Ended
Year Ended Ended June 30,
December 31, December 31, ----------
2001 2000 2000 1999
------------ ------------ ---- ----
Statutory federal income tax rate............................ 35.0% (35.0)% 35.0% 35.0%
Increase in value of Bank owned life insurance............... (3.5) -- -- --
Amortization of discounts, premiums and intangible assets.... 1.9 2.0 1.7 1.4
Tax exempt interest.......................................... (2.6) (1.9) (1.2) (.8)
Nondeductible exit costs and termination benefits, merger and
other nonrecurring expenses................................ -- 6.3 .2 4.9
Income tax credits........................................... (.5) (.7) (.4) (.4)
State income taxes, net of federal income taxes.............. .3 2.2 (.5) 1.5
Other items, net............................................. .1 (1.0) (.5) (1.0)
---- ----- ---- ----
Effective tax rate........................................... 30.7% (28.1)% 34.3% 40.6%
==== ===== ==== ====
The components of deferred tax assets and liabilities are as follows:
December 31,
------------------ June 30,
2001 2000 2000
-------- -------- --------
Deferred tax assets:
Interest rate swap agreements........ $ 43,969 $ 13,794 $ --
Allowance for losses on loans and
real estate not currently
deductible......................... 39,212 35,095 27,285
State net operating loss
carryforwards...................... 12,247 10,357 7,678
Basis differences between tax and
financial reporting arising from
acquisitions....................... 8,217 9,214 9,743
Employee benefits.................... 4,408 5,007 3,993
Other items.......................... 8,452 10,403 9,806
-------- -------- --------
116,505 83,870 57,702
Valuation allowance..................... (15,845) (10,911) (5,074)
-------- -------- --------
100,660 72,959 52,628
-------- -------- --------
Deferred tax liabilities:
Mortgage servicing rights............ 14,572 17,520 9,327
Federal Home Loan Bank stock......... 14,838 20,238 21,557
Real estate investment trust
deferred income.................... 10,380 10,010 35,688
Core value of acquired deposits...... 8,633 10,318 12,041
Differences between book and tax
basis of premises and equipment.... 7,845 7,967 8,749
Mark-to-market of securities
available for sale................. 7,200 940 --
Deferred loan fees................... 2,595 3,492 4,337
Other items.......................... 5,489 7,574 8,419
-------- -------- --------
71,552 78,059 100,118
-------- -------- --------
Net deferred tax asset (liability)...... $ 29,108 $ (5,100) $(47,490)
======== ======== ========
At December 31, 2001, the Corporation and certain subsidiaries had state net
operating loss carryforwards totaling approximately $186,214,000 available for
income tax purposes. A valuation allowance was established for these
carryforwards which expire through 2021. The valuation allowance is primarily
attributable to state deferred tax assets at December 31, 2001. The valuation
allowance increased to $15,845,000 at December 31, 2001, compared to
$10,911,000 at December 31, 2000, and $5,074,000 at June 30, 2000, primarily
due to increases in state net operating loss carryforwards available for income
tax purposes.
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 December 31, 2001, these reserves totaled approximately
$105,266,000 with an unrecognized deferred tax liability approximating
$38,527,000. This unrecognized deferred tax liability could be recognized in
the future, in whole or in part, if there is a change in federal tax law, the
Bank fails to meet certain definitional tests and other conditions in the
federal tax law, certain distributions are made with respect to the stock of
the Bank, or the bad debt reserves are used for any purpose other that
absorbing bad debt losses.
Note 16. Stockholders' Equity and Regulatory Restrictions
Effective December 18, 1998, the Corporation's Shareholder Rights Plan was
amended primarily to extend the expiration date of such rights to December 19,
2008, unless earlier redeemed by the Corporation. In December 1988, the Board
of Directors adopted a Shareholder Rights Plan and declared a dividend of stock
purchase rights. This dividend consisted of one primary right and one secondary
right for each outstanding share of common stock payable on December 30, 1988,
and for each share of common stock issued by the Corporation at any time after
December 30, 1988, and prior to the earlier of the occurrence of certain events
or expiration of these rights. These rights are attached to and trade only
together with the common stock shares. The provisions of the Shareholder Rights
Plan are designed to protect the interests of the stockholders of record in the
event of an unsolicited or hostile attempt to acquire the Corporation at a
price or on terms that are not fair to all shareholders. Unless rights are
exercised, holders have no rights as a stockholder of the Corporation (other
than rights resulting from such holder's ownership of common shares),
including, without limitation, the right to vote or to receive dividends. At
December 31, 2001, no such rights were exercised.
The Corporation is authorized to issue 10,000,000 shares of preferred stock
having a par value of $.01 per share. None of the shares of the authorized
preferred stock have been issued. The Board of Directors is authorized to
establish and state voting powers, designation preferences, and other special
rights of these shares and their qualifications, limitations and restrictions.
The preferred stock may rank prior to the common stock as to dividend rights,
liquidation preferences, or both, and may have full or limited voting rights.
The capital distribution regulations of the OTS permit the Bank to pay
capital distributions during a calendar year up to 100.0% of its retained net
income for the current calendar year combined with the Bank's retained net
income for the preceding two calendar years without requiring an application to
be filed with the OTS. Retained net income is net income determined in
accordance with generally accepted accounting principles less total capital
distributions declared. At December 31, 2001, the Bank's total distributions
exceeded its retained net income by $228,154,000 under this regulation thereby
requiring the Bank to file an application with the OTS for any proposed capital
distributions. Applicable regulations require approval by the OTS of any
proposed dividends and, in some cases, could prohibit the payment of dividends.
In April 1999, the Corporation began repurchasing its outstanding common
stock. From April 1999 through December 31, 2000, the Corporation purchased
8,038,900 shares of its common stock at a cost of $149,066,000. On May 7, 2001,
a repurchase for 5,000,000 shares was authorized. The Corporation purchased
4,201,500 shares of its common stock under this authorization at a cost of
$103,439,000 during 2001. This repurchase was completed on January 28, 2002,
with the remaining 798,500 shares costing $19,474,000. During 2001, the
Corporation purchased a total of 7,662,600 shares of its common stock at a
total cost of $180,877,000.
Note 17. Regulatory Capital
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Regulators can initiate certain mandatory, and
possibly additional discretionary, actions if the Bank fails to meet minimum
capital requirements. These actions could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital classification is also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.
110
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following table. Prompt corrective action provisions pursuant to FDICIA require
specific supervisory actions as capital levels decrease. To be considered
well-capitalized under the regulatory framework for prompt corrective action
provisions under FDICIA, the Bank must maintain certain minimum capital ratios
as set forth below. The Bank exceeded the minimum requirements for the
well-capitalized category for all periods presented.
The following presents the Bank's regulatory capital levels and ratios
relative to its minimum capital requirements:
As of December 31, 2001
-------------------------------
Actual Capital Required Capital
-------------- ---------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
OTS capital adequacy:
Tangible capital.................................. $706,534 5.58% $190,045 1.50%
Core capital...................................... 709,770 5.60 380,188 3.00
Risk-based capital................................ 850,713 11.38 597,976 8.00
FDICIA regulations to be classified well-capitalized:
Tier 1 leverage capital........................... 709,770 5.60 633,646 5.00
Tier 1 risk-based capital......................... 709,770 9.50 448,482 6.00
Total risk-based capital.......................... 850,713 11.38 747,470 10.00
As of December 31, 2000
-------------------------------
Actual Capital Required Capital
-------------- ---------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
OTS capital adequacy:
Tangible capital.................................. $800,630 6.51% $184,557 1.50%
Core capital...................................... 805,693 6.55 369,267 3.00
Risk-based capital................................ 879,845 11.84 594,373 8.00
FDICIA regulations to be classified well-capitalized:
Tier 1 leverage capital........................... 805,693 6.55 615,444 5.00
Tier 1 risk-based capital......................... 805,693 10.84 445,780 6.00
Total risk-based capital.......................... 879,845 11.84 742,966 10.00
As of June 30, 2000
-------------------------------
Actual Capital Required Capital
-------------- ---------------
Amount Ratio Amount Ratio
-------- ----- -------- -----
OTS capital adequacy:
Tangible capital.................................. $890,051 6.55% $203,743 1.50%
Core capital...................................... 896,091 6.59 407,667 3.00
Risk-based capital................................ 961,520 12.59 610,757 8.00
FDICIA regulations to be classified well-capitalized:
Tier 1 leverage capital........................... 896,091 6.59 679,445 5.00
Tier 1 risk-based capital......................... 896,091 11.74 458,067 6.00
Total risk-based capital.......................... 961,520 12.59 763,446 10.00
As of December 31, 2001, the most recent notification from the OTS
categorized the Bank as "well-capitalized" under the regulatory framework for
prompt corrective action provisions under FDICIA. There are no conditions or
events since such notification that management believes have changed the Bank's
classification.
Note 18. Commitments and Contingencies
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
111
extend credit, standby letters of credit, financial guarantees on certain loans
sold with recourse and on other contingent obligations. These instruments
involve elements of credit and interest rate risk in excess of the amount
recognized in the Consolidated Statement of Financial Condition. The
contractual amounts of these instruments represent the maximum credit risk to
the Corporation. The Corporation uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.
The following table presents outstanding commitments, excluding undisbursed
portions of loans in process, as follows:
At December 31, At
----------------- June 30,
2001 2000 2000
-------- -------- --------
Originate residential mortgage loans........................... $180,129 $ 73,169 $143,394
Purchase residential mortgage loans............................ 75,086 49,048 102,347
Originate commercial real estate loans......................... 151,361 110,776 127,545
Originate consumer, commercial operating and agricultural loans 13,874 18,034 17,572
Unused lines of credit for commercial and consumer use......... 182,945 217,801 218,887
Purchase investment securities................................. 805 41,893 1,500
-------- -------- --------
$604,200 $510,721 $611,245
======== ======== ========
Loan commitments, which are funded subject to certain limitations, extend
over various periods of time. Generally, unused loan commitments are canceled
upon expiration of the commitment term as outlined in each individual contract.
These outstanding loan commitments to extend credit do not necessarily
represent future cash requirements since many of the commitments may expire
without being drawn upon. The Corporation evaluates each customer's credit
worthiness on a separate basis and requires collateral based on this
evaluation. Collateral consists mainly of residential family units and personal
property.
At December 31, 2001 and 2000, and June 30, 2000, the Corporation had
approximately $445,000,000, $176,862,000 and $240,714,000, respectively, in
mandatory forward delivery commitments to sell residential mortgage loans. At
December 31, 2001 and 2000, and June 30, 2000, loans sold subject to recourse
provisions totaled approximately $8,750,000, $12,912,000 and $13,178,000,
respectively, which represents the total potential credit risk associated with
these particular loans. Any credit risk would, however, be offset by the value
of the single-family residential properties that collateralize these loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a
material adverse effect on the Corporation's financial position or results of
operations.
On September 12, 1994, the Bank and the Corporation commenced litigation
relating to supervisory goodwill against the United States in the United States
Court of Federal Claims seeking to recover monetary relief for the government's
refusal to honor certain contracts that it had entered into with the Bank. The
suit alleges that such governmental action constitutes a breach of contract and
an unlawful taking of property by the United States without just compensation
or due process in violation of the Constitution of the United States. The
Corporation and the Bank are pursuing alternative damage claims of up to
approximately $230,000,000. The Bank also assumed a lawsuit in the merger with
Mid Continent against the United States also relating to a supervisory goodwill
claim filed by the former Mid Continent. The litigation status and process of
these legal actions, as well as that of numerous actions brought by others
alleging similar claims with respect to supervisory goodwill and regulatory
capital credits, make the value of the claims asserted by the Bank (including
the Mid Continent claim) uncertain as to their ultimate outcome, and contingent
on a number of factors and future events which are beyond the control of the
Bank, both as to substance, timing and the dollar amount of damages that may be
awarded to the Bank and the Corporation if they finally prevail in this
litigation.
112
Note 19. Employee Benefit and Incentive Plans
Retirement Savings Plan
The Corporation maintains a contributory deferred savings 401(k) plan
covering substantially all employees. The Corporation's matching contributions
are equal to 100% of the first 8% of participant contributions. Participants
vest immediately in their own contributions. For contributions of the
Corporation, participants vest over a five-year period and, thereafter, vest
100% on an annual basis if employed on the last day of each calendar year.
Contribution expense was $3,668,000, $2,091,000, $3,926,000 and $3,737,000 for
the year ended December 31, 2001, the six months ended December 31, 2000, and
fiscal years 2000 and 1999, respectively.
Stock Option and Incentive Plans
The Corporation maintains the 1996 Stock Option and Incentive Plan (the
"1996 Plan"), the 1984 Stock Option and Incentive Plan, as amended (the "1984
Plan"), and various stock option and incentive plans assumed in certain mergers
since 1995. These plans permit the granting of stock options, restricted stock
awards and stock appreciation rights. The Corporation's stock options expire
over periods not to exceed 10 years from the date of grant with the option
price equal to market value on the date of grant. Stock options either are
exercisable and vest on the date of grant or over various periods not exceeding
three years. Recipients of restricted stock have the usual rights of a
shareholder, including the rights to receive dividends and to vote the shares;
however, the common stock will not be vested until certain restrictions are
satisfied. The term of the 1984 Plan extends to July 31, 2002, and the term of
the 1996 Plan to September 11, 2006.
The following table presents the activity of all stock option plans for each
of the two fiscal years ended June 30, 2000, the six months ended December 31,
2000, and the year ended December 31, 2001, and the stock options outstanding
at the end of the respective periods:
Stock Weighted Average Aggregate
Option Shares Price Per Share Amount
------------- ---------------- ---------
Outstanding at June 30, 1998............................ 2,864,256 $19.11 $ 54,723
Granted.............................................. 766,825 24.19 18,549
Exercised............................................ (1,000,491) 12.78 (12,785)
Canceled............................................. (41,483) 32.32 (1,357)
---------- ------ --------
Outstanding at June 30, 1999............................ 2,589,107 22.84 59,130
Granted.............................................. 796,756 15.49 12,342
Exercised............................................ (184,845) 11.58 (2,141)
Canceled............................................. (251,216) 27.49 (6,906)
---------- ------ --------
Outstanding at June 30, 2000............................ 2,949,802 21.16 62,425
Granted.............................................. 92,935 16.08 1,494
Exercised............................................ (64,650) 12.96 (838)
Canceled............................................. (143,107) 23.59 (3,376)
---------- ------ --------
Outstanding at December 31, 2000........................ 2,834,980 21.06 59,705
Granted.............................................. 1,086,468 21.71 23,583
Exercised............................................ (354,009) 13.03 (4,613)
Canceled............................................. (335,317) 22.70 (7,612)
---------- ------ --------
Outstanding at December 31, 2001........................ 3,232,122 $21.99 $ 71,063
========== ====== ========
Exercisable at December 31, 2001........................ 2,133,635 $22.88 $ 48,818
========== ====== ========
Shares available for future grants at December 31, 2001:
1984 Plan............................................ 120,300
1996 Plan............................................ 1,123,800
113
The following table summarizes information about the Corporation's stock
options outstanding at December 31, 2001:
Shares Subject to Outstanding Options Shares Exercisable
--------------------------------------------------------- ---------------------
Weighted Average Weighted Weighted
Stock Option Remaining Average Stock Option Average
Range of Exercise Shares Contractual Life Exercise Shares Exercise
Prices Outstanding in Years Price Exercisable Price
------------------ ------------ ---------------- -------- ------------ --------
$ 2.23 - $ 6.26 9,591 2.30 $ 6.22 9,591 $ 6.22
9.01 - 12.61 166,725 4.96 11.09 166,725 11.09
13.77 - 15.69 677,421 8.04 15.40 372,812 15.16
16.43 - 18.50 210,568 6.96 17.54 210,568 17.54
22.00 - 23.08 1,152,376 8.51 22.08 358,498 22.26
24.19 - 25.26 513,214 7.33 24.22 513,214 24.22
34.16 502,227 6.37 34.16 502,227 34.16
- --------- ---- ------ --------- ------
$ 2.23 - $34.16 3,232,122 7.59 $21.99 2,133,635 $22.88
============ ========= ==== ====== ========= ======
During the year ended December 31, 2001, a total of 957,808 options were
granted to executives, managers and employees under the 1996 Plan. During the
six months ended December 31, 2000, and fiscal year 2000, a total of 50,000
options and 653,538 options, respectively, were granted to executives and
managers under the 1996 Plan.
The Board of Directors received their fees as discounted stock options under
the 1996 Plan for 68,660 shares, 42,935 shares and 83,218 shares, respectively,
during the year ended December 31, 2001, the six months ended December 31,
2000, and fiscal year 2000. Director compensation expense resulting from the
issuance of these stock options totaled $321,000, $558,000 and $168,000 for the
respective periods. During the year ended December 31, 2001, and during fiscal
years 2000 and 1999, non-incentive stock options for 60,000 shares, 60,000
shares and 50,000 shares, respectively, also were granted to directors under
the 1996 Plan.
The Corporation applies APB Opinion No. 25 in accounting for its stock
option and incentive plans so no compensation cost is recognized for stock
options granted. The effect on the Corporation's net income (loss) and earnings
(loss) per share is presented in the following table as if compensation cost
was determined based on the fair value at the grant dates for stock options
awarded pursuant to the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation."
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, -------------------
2001 2000 2000 1999
------------ ------------ -------- -------
Net income (loss):
As reported............ $97,682 $(69,501) $104,008 $92,392
Pro forma.............. 95,150 (69,883) 102,400 84,101
Earnings (loss) per share:
Basic--
As reported............ $ 1.95 $ (1.27) $ 1.79 $ 1.55
Pro forma.............. 1.90 (1.28) 1.76 1.41
Diluted--
As reported............ $ 1.93 $ (1.27) $ 1.79 $ 1.54
Pro forma.............. 1.91 (1.28) 1.79 1.42
114
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option-pricing model with the weighted-average assumptions
used as follows:
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, --------------------
2001 2000 2000 1999
------------ ------------ ------------ -------
Dividend yield................. 1.26%--1.95% 1.51%--2.27% 1.47%--2.25% 1.07%
Expected stock price volitility 29% 29% 29% 26%
Risk-free interest rates....... 4.17%--5.03% 5.07%--5.93% 5.97%--6.75% 5.50%
Expected option lives.......... 6 years 6 years 6 years 6 years
Restricted stock may also be granted for awards earned under management
incentive plans. On the grant dates of December 31, 2001, and June 30, 1999,
the Corporation issued restricted stock for 84,030 shares and 39,072 shares,
respectively, with an aggregate market value of $1,975,000 and $906,000,
respectively. No awards were granted for the six months ended December 31,
2000, or fiscal year 2000. The awards of restricted stock vest 20% on each
anniversary of the grant date, provided that the employee has completed the
specified service requirement, or earlier under certain conditions. Total
deferred compensation on the unvested restricted stock totaled $2,193,000,
$503,000, $805,000, and $1,887,000 at December 31, 2001 and 2000, and June 30,
2000 and 1999, respectively, and is recorded as a reduction of stockholders'
equity. The value of the restricted shares is amortized to compensation expense
over the five-year vesting period. Compensation expense applicable to the
restricted stock totaled $196,000, $177,000, $607,000 and $960,000 for the year
ended December 31, 2001, the six months ended December 31, 2000, and fiscal
years 2000 and 1999, respectively.
Postretirement Benefits
The Corporation recognizes the cost of providing postretirement benefits
other than pensions over the employee's period of service. The determination of
the accrued liability requires a calculation of the accumulated postretirement
benefit obligation which represents the actuarial present value of
postretirement benefits to be paid out in the future (primarily health care
benefits to be paid to retirees) that have been earned as of the end of the
year. The Corporation's postretirement benefit plan is unfunded and amounts are
not material.
Note 20. Exit Costs and Termination Benefits
August 2000 Key Strategic Initiatives
On August 14, 2000 the Board of Directors approved a series of strategic
initiatives aimed at improving the overall operations of the Corporation. Key
initiatives included:
. A complete balance sheet review including the disposition of over $2.0
billion in low-yielding and higher risk investments and residential
mortgage loans. The proceeds from these dispositions were to be used
to reduce high-cost borrowings, repurchase additional shares of common
stock and reinvest in lower risk securities.
. A thorough assessment of the Bank's delivery and servicing systems.
. The sale of the leasing company acquired in a February 1998
acquisition.
. Acceleration of the disposition of other real estate owned.
. A management restructuring to further streamline the organization and
improve efficiencies as well as the appointment of a new chief
operating officer.
. A program to further strengthen the commercial lending portfolio by
actively recruiting new lenders in order to accelerate the growth in
loans experienced over the past year, while maintaining credit quality.
115
. A change in the Corporation's fiscal year end from June 30 to December
31.
. An expansion of the Corporation's common stock repurchase program by
up to 10% of its outstanding shares, or approximately 5,500,000 shares.
During the six months ended December 31, 2000, the Corporation transferred
$1,751,195,000 of held-to-maturity securities to the trading and available for
sale portfolios. The transfer of these securities resulted in an after-tax loss
of $18,483,000 recorded against current operations on July 1, 2000, as a
cumulative adjustment of a change in accounting principle, net of income tax
benefits of $9,952,000. During the six months ended December 31, 2000, the
Corporation also sold investment securities and mortgage-backed securities
totaling $1,166,953,000 resulting in pre-tax losses of $29,970,000 and
securitized residential loans totaling $1,651,578,000 resulting in a pre-tax
loss of $18,248,000. Proceeds from these sales were used to purchase
lower-risk, higher-yielding assets, repay FHLB advances and repurchase common
stock. The balance sheet restructuring was completed during the six months
ended December 31, 2000.
Under this initiative, the Corporation closed or consolidated 12 branches
and sold 34 branches in 2001. The branches were located in Iowa (22), Kansas
(11), Missouri (6), Nebraska (3), Oklahoma (3) and Arizona (1). Deposits
totaling $446,267,000 were associated with these branch sales. During the year
ended December 31, 2001, the Corporation realized net gains totaling
$18,304,000 relating to the sold branches. These gains were from the premiums
received on the sales of deposits, loans and fixed assets. Severance costs
associated with right-sizing branch personnel and expenses to close branches
totaled $1,979,000. Four branches in Minnesota with deposits totaling
approximately $20,000,000 are remaining to be sold as of December 31, 2001. It
is anticipated that these four branches will be sold by June 30, 2002. During
the six months ended December 31, 2000, the Corporation recorded a pre-tax
charge of $16,992,000 related to exit costs and write-offs of intangible assets
associated with these branch divestitures.
The leasing portfolio was reclassified to held for sale during the six
months ended December 31, 2000. A substantial portion of the leasing portfolio
was sold in February 2001 with the closing of the transaction in April 2001.
Additional expenses to finalize this transaction totaling $754,000 were
recorded in the first quarter of 2001. Adjustment to fair value and additional
expenses totaling $4,602,000 were recorded as exit costs and termination
benefits during the six months ended December 31, 2000.
The Corporation purchased 7,662,500 shares of its common stock during 2001
at a cost of $180,877,000. Of this amount, a total of 4,201,500 shares costing
$103,439,000 were purchased during 2001 under the 5,500,000 shares
authorization.
During the six months ended December 31, 2000, the Corporation recorded
$2,119,000 as exit costs and termination benefits related to the outplacement
of personnel. These costs consist of severance, benefits and related
professional services. The Corporation also incurred fees totaling $2,887,000
for consulting services during the six months ended December 31, 2000. The
consulting services were related to the identification and implementation of
these key strategic initiatives.
November 1999 Initiative
On November 5, 1999, the Corporation announced an initiative to integrate
the Corporation's new data processing system to support community-banking
operations. Major aspects of the plan included 21 branches to be sold or
closed, the elimination of 121 positions and the consolidation of the
correspondent loan servicing operations. Implementation of this plan resulted
in charges totaling $3,941,000 that was recorded in fiscal year 2000. The plan
eliminated 121 positions with personnel costs consisting of severance, benefits
and related professional services totaling $1,564,000. The plan also included
the consolidation of the correspondent loan servicing functions to Omaha,
Nebraska from Wichita, Kansas and Denver, Colorado. The portion of the plan
relating to eliminating positions and consolidating the loan servicing
operations was completed by June 30, 2000. The 21 branches to be sold and
closed were located in Iowa (15), Kansas (5) and Missouri (1). Direct and
116
incremental costs associated with this part of the plan totaled $2,377,000. Six
branches were sold or closed as of June 30, 2000.
During the six months ended December 31, 2000, 14 remaining branches were
sold or closed with one remaining branch considered part of the August 2000
branch divestitures. The Corporation realized net gains totaling $2,524,000
during the six months ended December 31, 2000, primarily from the branches
sold. These gains were from premiums realized on the sales of deposits, loans
and fixed assets.
Total exit costs and termination benefits relating to the 2000 and 1999
initiatives are summarized below for the following periods:
Six Months Year
Year Ended Ended Ended
December 31, December 31, June 30,
2001 2000 2000
------------ ------------- ---------
Branch sales and closings.................................... $ 1,979 $ 16,992 $ 2,377
Exiting leasing operations................................... 754 4,602 --
Management restructuring and personnel outplacement.......... -- 2,119 1,564
Consulting services.......................................... -- 2,887 --
Various other charges........................................ 5 1,688 --
------------- ------------- ---------
2,738 28,288 3,941
Less net gains on the sales of branches...................... (18,304) (2,524) --
------------- ------------- ---------
Total exit costs and termination benefits (gains), before tax (15,566) 25,764 3,941
Income tax expense (benefit), net............................ 5,448 (4,653) (1,037)
------------- ------------- ---------
Total exit costs and termination benefits (gains), after tax. $ (10,118) $ 21,111 $ 2,904
============= ============= =========
117
Note 21. Change in Fiscal Year End
Effective July 1, 2000, the Corporation changed its fiscal year from a
twelve month period ending June 30 to a twelve month period ending December 31.
The Corporation's consolidated financial statements include the six-month
transition period from July 1, 2000, to December 31, 2000.
The following table presents certain financial information for the six
months ended December 31, 2000, to the comparable six month period ending
December 31, 1999:
2000 1999
----------- -----------
(Unaudited)
Total interest income.......................................................... $ 498,732 $ 455,881
Total interest expense......................................................... 344,297 281,936
Provision for loan losses...................................................... (27,854) (6,760)
Total other income (loss)...................................................... (40,106) 54,016
Total other expense............................................................ 156,542 137,022
----------- -----------
Income (loss) before income taxes and cumulative effect of change in accounting
principle.................................................................... (70,067) 84,179
Income tax provision (benefit)................................................. (19,691) 29,206
----------- -----------
Income (loss) before cumulative effect of change in accounting principle....... (50,376) 54,973
Cumulative effect of change in accounting principle, net of tax benefit........ (19,125) (1,776)
----------- -----------
Net income (loss).............................................................. $ (69,501) $ 53,197
=========== ===========
Per common share:
Income (loss) before cumulative effect of change in accounting principle.... $ (.92) $ .93
Cumulative effect of change in accounting principle, net.................... (.35) (.03)
----------- -----------
Net income (loss).............................................................. $ (1.27) $ .90
=========== ===========
Dividends declared per common share............................................ $ .140 $ .135
=========== ===========
Weighted average shares outstanding............................................ 54,705,067 59,418,005
=========== ===========
Note 22. Cumulative Effect of Change in Accounting Principle
Accounting for Derivative Instruments and Hedging Activities
Effective July 1, 2000, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 required the recognition of
all derivative financial instruments as either assets or liabilities in the
statement of financial condition and measurement of those instruments at fair
value. Changes in the fair values of those derivatives are reported in current
operations or other comprehensive income depending on the use of the derivative
and whether it qualifies for hedge accounting. The accounting for gains and
losses associated with changes in the fair value of a derivative and the effect
on the consolidated financial statements will depend on its hedge designation
and whether the hedge is highly effective in achieving offsetting changes in
the fair value or cash flows of the asset or liability hedged. Under the
provisions of SFAS No. 133, the method used for assessing the effectiveness of
a hedging derivative, as well as the measurement approach for determining the
ineffective aspects of the hedge, must have been established at the inception
of the hedge.
The Corporation identified four types of derivative instruments which were
recorded on the Corporation's Consolidated Statement of Financial Condition on
July 1, 2000. The derivative instruments are interest rate swap agreements,
interest rate floor agreements, forward loan sales commitments and fixed-rate
conforming loan commitments.
118
The interest rate swap agreements are used to synthetically extend the
maturities of certain deposits and FHLB advances for asset liability management
and interest rate risk management purposes. Since the swap agreements qualify
as a cash flow hedge under SFAS No. 133, the fair value of these agreements
totaling $8,686,000 was recorded as a credit to other comprehensive income in
stockholders' equity at July 1, 2000, net of income taxes of $3,238,000, or
$5,448,000 after-tax.
The interest rate cap agreements, interest rate floor agreements, forward
loan sales commitments and the conforming loan commitments did not qualify for
hedge accounting or were not designed hedges so their fair value adjustments
were recorded to operations. The fair value of these derivatives totaling
$1,002,000 was recorded as a charge to operations on July 1, 2000, as part of a
cumulative effect of a change in accounting principle.
Under the provisions of SFAS No. 133, on July 1, 2000, the Corporation
transferred substantially all of its securities from the held-to-maturity
portfolio to the available-for-sale and trading portfolios as follows:
Securities Transferred
------------------------------------
Available for
Sale (at Trading (at Total Fair Total Book Pre-tax
Security Fair Value) Fair Value) Value Value Loss
-------- ------------- ----------- ---------- ---------- --------
Investment securities..... $ 491,865 $336,651 $ 828,516 $ 893,419 $(64,903)
Mortgage-backed securities 767,542 67,510 835,052 857,776 (22,724)
---------- -------- ---------- ---------- --------
$1,259,407 $404,161 $1,663,568 $1,751,195 $(87,627)
========== ======== ========== ========== ========
As of July 1, 2000, the transfer of the securities had the following effect
on operations and other comprehensive income (loss):
Adjustment to
Adjustment Other
to Comprehensive Total
Operations Income (Loss) Adjustments
---------- ------------- -----------
Pre-tax loss on securities $(28,435) $(59,192) $(87,627)
Income tax benefit........ 9,952 22,984 32,936
-------- -------- --------
Net loss.................. $(18,483) $(36,208) $(54,691)
======== ======== ========
119
Adopting the provisions of SFAS No. 133 on July 1, 2000, which included the
transfer of securities and recording the fair value of the derivative
instruments, had the following effect on operations and other comprehensive
income (loss):
Pre-tax
Gain Income Net Gain
(Loss) Taxes (Loss)
-------- ------- --------
Recorded to current operations as a cumulative effect
of a change in accounting principle:
Transfer of securities from held-to-maturity to trading........ $(28,435) $ 9,952 $(18,483)
Fair value of interest rate floor agreements................... (316) 114 (202)
Fair value of forward loan sales commitments................... (1,420) 510 (910)
Fair value of conforming loan commitments...................... 734 (264) 470
-------- ------- --------
$(29,437) $10,312 $(19,125)
======== ======= ========
Recorded to other comprehensive income (loss) as a
cumulative effect of a change in accounting principle:
Transfer of securities from held-to-maturity to available for sale $(59,192) $22,984 $(36,208)
Fair value of interest rate swap agreements....................... 8,686 (3,238) 5,448
-------- ------- --------
$(50,506) $19,746 $(30,760)
======== ======= ========
All of the securities in the trading portfolio were sold during the three
months ended September 30, 2000. Future changes in fair value on the remaining
available-for-sale portfolio are adjusted through other comprehensive income
(loss).
The following reflects the net changes in accumulated other comprehensive
income (loss) for the six months ended December 31, 2000:
Six Months Ended December 31, 2000
-------------------------------------------
Implementation Reclassification
Balance, of SFAS Net Changes of Net Balance
June 30, No. 133 in Fair Gains (Losses) December 31,
2000 on July 1, 2000 Values to Earnings 2000
-------- --------------- ----------- ---------------- ------------
Securities available for sale $(27,503) $(59,192) $ 77,728 $29,970 $ 21,003
Interest rate swap agreements -- 8,686 (92,749) 38,379 (45,684)
Interest only strips......... 2,057 -- (2,160) 460 357
-------- -------- -------- ------- --------
(25,446) (50,506) (17,181) 68,809 (24,324)
Income tax effect............ 9,506 19,746 (16,457) (3,793) 9,002
-------- -------- -------- ------- --------
Net changes.................. $(15,940) $(30,760) $(33,638) $65,016 $(15,322)
======== ======== ======== ======= ========
Reporting the Costs of Start-Up Activities
Effective July 1, 1999, the Corporation adopted the provisions of Statement
of Position 98-5 "Reporting the Costs of Start-Up Activities," which required
that costs of start-up activities and organizational costs be expensed as
incurred. The effect of adopting the provisions of this statement was to record
a charge of $1,776,000 net of an income tax benefit of $978,000, or $.03 per
diluted share, as a cumulative effect of a change in accounting principle for
the fiscal year ended June 30, 2000. These costs consist of organizational
costs primarily associated with the creation of a real estate investment trust
subsidiary and start-up costs of the proof of deposit department for processing
customer transactions following the conversion of the Corporation's deposit
system.
120
Note 23. Acquisitions
Fiscal Year 1999 Acquisitions
On March 1, 1999, the Corporation acquired Midland for total consideration
of $83,000,000. Midland Bank operated eight branches in the greater Kansas
City, Missouri area. At February 28, 1999, Midland had total assets of
$399,200,000, deposits of $353,100,000 and stockholders' equity of $24,200,000.
This acquisition was accounted for as a purchase. Core value of deposits
totaling $9,298,000 is amortized on an accelerated basis over 10 years.
Goodwill totaling $54,389,000 was amortized on a straight-line basis over 25
years. The effect of the Midland acquisition on the Corporation's consolidated
financial statements as if this acquisition had occurred at the beginning of
fiscal year 1999 is not material.
On August 14, 1998, the Corporation acquired First Colorado for 18,278,789
shares of its common stock. This acquisition was accounted for as a pooling of
interests. First Colorado operated 27 branches in Colorado. At July 31, 1998,
First Colorado had assets of $1,572,200,000, deposits of $1,192,700,000 and
stockholders' equity of $254,700,000.
On July 31, 1998, the Corporation acquired AmerUs for total consideration of
$178,269,000. AmerUs operated 47 branches located in Iowa, Missouri, Nebraska,
Kansas, Minnesota and South Dakota. At July 31, 1998, before purchase
accounting adjustments, AmerUs had total assets of $1,266,800,000, deposits of
$949,700,000 and stockholder's equity of $84,800,000. This acquisition was
accounted for as a purchase. Core value of deposits totaling $16,242,000 is
amortized on an accelerated basis over 10 years. Goodwill totaling $107,739,000
was amortized on a straight-line basis over 25 years. The accounts and
consolidated results of operations for fiscal year 1999 include the results of
AmerUs beginning July 31, 1998. The following table summarizes results on an
audited consolidated pro forma basis for the fiscal year ended June 30, 1999,
as though this purchase had occurred at the beginning of the period:
Total interest income and other income $921,607
Net income............................ 69,345
Diluted earnings per common share..... 1.15
Note 24. Merger Expenses and Other Nonrecurring Charges
During fiscal year 1999 the Corporation incurred merger expenses and other
nonrecurring charges totaling $30,043,000 ($27,089,000 after tax). The merger
expenses totaled $29,917,000 and were associated with the First Colorado
acquisition and the termination of three employee stock ownership plans
acquired in mergers. Other nonrecurring net charges totaled $126,000 but were
not classified in the merger expenses category of general and administrative
expenses.
121
Note 25. Financial Information (Parent Company Only)
CONDENSED STATEMENT OF FINANCIAL CONDITION
December 31, June 30,
- ------------------- ----------
2001 2000 2000
- -------- ---------- ----------
A S S E T S
------
Cash............................................................ $ 13,416 $ 36,026 $ 44,374
Investment securities available for sale, at fair value......... -- 302 562
Investment securities held to maturity (fair value of $8,614)... -- -- 8,711
Other assets.................................................... 2,805 4,100 3,571
Equity in CFC Preferred Trust................................... 1,392 1,392 1,392
Equity in Commercial Federal Bank............................... 854,176 999,914 1,120,268
-------- ---------- ----------
Total Assets............................................. $871,789 $1,041,734 $1,178,878
======== ========== ==========
L I A B I L I T I E S A N D S T O C K H O L D E R S' E Q U I T Y
---------------------------------
Liabilities:
Other liabilities............................................ $ 4,643 $ 8,165 $ 19,258
Term note.................................................... 54,375 63,438 65,250
Revolving line of credit..................................... 10,000 10,000 10,000
Subordinated extendible notes................................ 21,725 50,000 50,000
Junior subordinated deferrable interest debentures........... 46,392 46,392 46,392
-------- ---------- ----------
Total Liabilities........................................ 137,135 177,995 190,900
-------- ---------- ----------
Stockholders' Equity............................................ 734,654 863,739 987,978
-------- ---------- ----------
Total Liabilities and Stockholders' Equity............... $871,789 $1,041,734 $1,178,878
======== ========== ==========
122
CONDENSED STATEMENT OF OPERATIONS
Six Months
Year Ended Ended Year Ended June 30,
December 31, December 31, ------------------
2001 2000 2000 1999
------------ ------------ -------- --------
Revenues:
Dividend income from the Bank.............................. $ 216,000 $ 57,000 $117,818 $ 67,904
Interest income............................................ 1,304 902 767 2,373
Other income (loss)........................................ 26 (235) 54 362
Expenses:
Interest expense........................................... (12,601) (7,620) (14,526) (13,175)
Operating expenses......................................... (981) (1,255) (1,218) (8,557)
--------- --------- -------- --------
Income before income taxes, extraordinary items and equity
in undistributed earnings (losses) of subsidiaries.......... 203,748 48,792 102,895 48,907
Income tax benefit............................................ (4,215) (2,994) (5,430) (4,042)
--------- --------- -------- --------
Income before extraordinary items and equity in
undistributed earnings (losses) of subsidiaries............. 207,963 51,786 108,325 52,949
Cumulative effect of change in accounting principle, net...... -- -- (12) --
--------- --------- -------- --------
Income before equity in undistributed earnings (losses) of
subsidiaries................................................ 207,963 51,786 108,313 52,949
Equity in undistributed (overdistributed) earnings (losses) of
subsidiaries................................................ (110,281) (121,287) (4,305) 39,443
--------- --------- -------- --------
Net income (loss)...................................... $ 97,682 $ (69,501) $104,008 $ 92,392
========= ========= ======== ========
123
CONDENSED STATEMENT OF CASH FLOWS
Six Months
Year Ended Ended
December 31, December 31,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................ $ 97,682 $(69,501)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Cumulative effect of change in accounting principle, net...... -- --
Equity in undistributed (overdistributed) losses (earnings)
of subsidiaries............................................. 110,281 121,287
Other items, net.............................................. (2,009) (11,177)
--------- --------
Total adjustments......................................... 108,272 110,110
--------- --------
Net cash provided by operating activities................. 205,954 40,609
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale.. 121 8,122
Maturities and repayments of investment securities available
for sale....................................................... 180 666
Purchase of investment securities held to maturity............... -- --
Purchase of investment securities available for sale............. -- --
Payments for acquisitions........................................ -- --
Other items, net................................................. -- --
--------- --------
Net cash provided (used) by investing activities.......... 301 8,788
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable.......................... -- --
Payment of notes payable......................................... (37,338) (1,812)
Repurchases of common stock...................................... (180,877) (48,953)
Issuance of common stock......................................... 4,579 775
Payment of cash dividends on common stock........................ (15,239) (7,755)
Other items, net................................................. 10 --
--------- --------
Net cash (used) provided by financing activities.......... (228,865) (57,745)
--------- --------
CASH AND CASH EQUIVALENTS
(Decrease) increase in net cash position......................... (22,610) (8,348)
Balance, beginning of year....................................... 36,026 44,374
--------- --------
Balance, end of year............................................. $ 13,416 $ 36,026
========= ========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest expense.............................................. $ 14,841 $ 4,709
Income taxes, net............................................. 31,049 (12,791)
Non-cash investing and financing activities:
Securities transferred from held-to-maturity to available for
sale........................................................ -- 8,711
Common stock received in connection with employee
benefit and incentive plans, net............................ (114) --
Year Ended June 30,
-------------------
2000 1999
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)................................................ $104,008 $ 92,392
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Cumulative effect of change in accounting principle, net...... 12 --
Equity in undistributed (overdistributed) losses (earnings)
of subsidiaries............................................. 4,305 (39,443)
Other items, net.............................................. 9,457 16,639
-------- ---------
Total adjustments......................................... 13,774 (22,804)
-------- ---------
Net cash provided by operating activities................. 117,782 69,588
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale.. -- --
Maturities and repayments of investment securities available
for sale....................................................... -- --
Purchase of investment securities held to maturity............... (8,711) --
Purchase of investment securities available for sale............. (581) --
Payments for acquisitions........................................ -- (179,556)
Other items, net................................................. 30 2,479
-------- ---------
Net cash provided (used) by investing activities.......... (9,262) (177,077)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable.......................... 50,000 85,000
Payment of notes payable......................................... (47,250) (13,500)
Repurchases of common stock...................................... (63,895) (36,218)
Issuance of common stock......................................... 2,363 45,095
Payment of cash dividends on common stock........................ (15,776) (13,539)
Other items, net................................................. -- 11,058
-------- ---------
Net cash (used) provided by financing activities.......... (74,558) 77,896
-------- ---------
CASH AND CASH EQUIVALENTS
(Decrease) increase in net cash position......................... 33,962 (29,593)
Balance, beginning of year....................................... 10,412 40,005
-------- ---------
Balance, end of year............................................. $ 44,374 $ 10,412
======== =========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Cash paid (received) during the period for:
Interest expense.............................................. $ 16,611 $ 10,722
Income taxes, net............................................. 24,275 54,249
Non-cash investing and financing activities:
Securities transferred from held-to-maturity to available for
sale........................................................ -- --
Common stock received in connection with employee
benefit and incentive plans, net............................ (135) (475)
124
Note 26. Segment Information
The Corporation currently has two distinct lines of business operations for
the purposes of management reporting: Community Banking and Mortgage Banking.
These segments were determined based on the Corporation's financial accounting
and reporting processes. Management makes operating decisions and assesses
performance based on a continuous review of these two primary operations.
The Community Banking segment involves a variety of traditional banking and
financial services. These services include retail banking services, consumer
checking and savings accounts, and loans for consumer, commercial real estate,
residential mortgage and business purposes. Also included in this segment is
insurance and securities brokerage services. The Community Banking services are
offered through the Bank's branch network, ATMs, 24-hour telephone centers and
the Internet. Community Banking is also responsible for the Corporation's
investment and mortgage-backed securities portfolios and the corresponding
management of deposits, advances from the FHLB and certain other borrowings.
The Mortgage Banking segment involves the origination and purchase of
residential mortgage loans, the sale of these mortgage loans in the secondary
mortgage market, the servicing of mortgage loans and the purchase and
origination of rights to service mortgage loans. Mortgage Banking operations
are conducted through the Bank's branches, offices of a mortgage banking
subsidiary and a nationwide correspondent network of mortgage loan originators.
The Bank allocates expenses to the Mortgage Banking operation on terms that are
not necessarily indicative of those which would be negotiated between unrelated
parties. The Mortgage Banking segment also originates and sells loans to the
Bank. Substantially all loans sold to the Bank from the Mortgage Banking
operation are at net book value, resulting in no gains or losses. In fiscal
year 1999 and previous years, these sales were primarily at par such that the
Mortgage Banking operation recorded losses equal to the expenses it incurred
net of fees collected. All of these losses were deferred by the Bank and
amortized over the estimated life of the loans the Bank purchased.
The parent company includes interest income earned on intercompany cash
balances and intercompany transactions, interest expense on parent company debt
and operating expenses for general corporate purposes. The contribution of the
major business segments to the consolidated results for the periods indicated
is summarized in the following tables:
Community Mortgage Parent Eliminations/ Consolidated
Banking Banking Company Adjustments Total
----------- -------- -------- ------------- ------------
YEAR ENDED DECEMBER 31, 2001:
Net interest income (expense).. $ 286,506 $ 14,529 $(11,297) $ 17,691 $ 307,429
Provision for loan losses...... (38,354) (591) -- -- (38,945)
Total other income............. 122,864 31,080 105,745 (139,302) 120,387
Total other expense............ 218,869 28,086 981 (121) 247,815
Net income before income taxes. 152,147 16,932 93,467 (121,490) 141,056
Income tax provision (benefit). 41,402 6,187 (4,215) -- 43,374
Net income..................... 110,745 10,745 97,682 (121,490) 97,682
Total revenue.................. 963,261 45,609 107,049 (124,158) 991,761
Intersegment revenue........... 26,276 1,800 106,974
Depreciation and amortization.. 18,131 696 14 -- 18,841
Total assets................... 12,879,048 679,984 871,789 (1,529,236) 12,901,585
125
Community Mortgage Parent Eliminations/ Consolidated
Banking Banking Company Adjustments Total
----------- -------- ---------- ------------- ------------
SIX MONTHS ENDED
DECEMBER 31, 2000:
Net interest income (expense).......................... $ 141,772 $ 6,981 $ (6,718) $ 12,400 $ 154,435
Provision for loan losses.............................. (27,447) (407) -- -- (27,854)
Total other income (loss).............................. (46,196) 23,793 (64,522) 46,819 (40,106)
Total other expense.................................... 140,892 14,457 1,255 (62) 156,542
Net income (loss) before income taxes and
cumulative effect of change in accounting
principle............................................. (72,763) 15,910 (72,495) 59,281 (70,067)
Income tax provision (benefit)......................... (22,435) 5,738 (2,994) -- (19,691)
Income (loss) before cumulative effect of change in
accounting principle.................................. (50,328) 10,172 (69,501) 59,281 (50,376)
Cumulative effect of change in accounting principle,
net................................................... (18,483) (642) -- -- (19,125)
Net income (loss)...................................... (68,811) 9,530 (69,501) 59,281 (69,501)
Total revenue.......................................... 435,750 30,774 (63,620) 55,722 458,626
Intersegment revenue................................... 12,125 9,574 (63,579)
Depreciation and amortization.......................... 9,556 403 9 -- 9,968
Total assets........................................... 12,822,566 368,190 1,041,734 (1,692,186) 12,540,304
YEAR ENDED JUNE 30, 2000:
Net interest income (expense).......................... $ 310,923 $ 21,495 $ (13,759) $ 23,482 $ 342,141
Provision for loan losses.............................. (12,993) (767) -- -- (13,760)
Total other income..................................... 110,770 58,237 113,567 (180,735) 101,839
Total other expense.................................... 242,653 34,319 1,218 (9,023) 269,167
Net income before income taxes and cumulative
effect of change in accounting principle.............. 166,047 44,646 98,590 (148,230) 161,053
Income tax provision (benefit)......................... 46,711 13,988 (5,430) -- 55,269
Income before cumulative effect of change in
accounting principle.................................. 119,336 30,658 104,020 (148,230) 105,784
Cumulative effect of change
in accounting principle, net.......................... (1,759) (5) (12) -- (1,776)
Net income............................................. 117,577 30,653 104,008 (148,230) 104,008
Total revenue.......................................... 1,000,338 79,750 114,334 (164,893) 1,029,529
Intersegment revenue................................... 42,582 11,083 114,246
Depreciation and amortization.......................... 19,160 1,243 11 -- 20,414
Total assets........................................... 13,922,296 324,987 1,178,878 (1,633,123) 13,793,038
YEAR ENDED JUNE 30, 1999:
Net interest income (expense).......................... $ 312,502 $ 11,075 $ (10,802) $ 19,558 $ 332,333
Provision for loan losses.............................. (11,980) (420) -- -- (12,400)
Total other income..................................... 95,020 41,015 107,709 (153,729) 90,015
Total other expense.................................... 224,578 21,549 8,557 (388) 254,296
Net income before income taxes......................... 170,964 30,121 88,350 (133,783) 155,652
Income tax provision (benefit)......................... 57,474 9,828 (4,042) -- 63,260
Net income............................................. 113,490 20,293 92,392 (133,783) 92,392
Total revenue.......................................... 909,055 52,708 110,082 (142,476) 929,369
Intersegment revenue................................... 33,764 6,952 109,034
Depreciation and amortization.......................... 16,382 1,760 30 -- 18,172
Total assets........................................... 12,909,398 282,374 1,146,605 (1,562,915) 12,775,462
126
Note 27. Quarterly Financial Data (Unaudited)
The following summarizes the unaudited quarterly results of operations for
the periods indicated:
Quarter Ended
-------------------------------------------
December 31 September 30 June 30 March 31
----------- ------------ -------- --------
YEAR ENDED DECEMBER 31, 2001:
Total interest income............................ $208,519 $217,914 $220,863 $224,078
Net interest income.............................. 82,092 78,227 75,281 71,829
Provision for loan losses........................ (8,265) (19,800) (6,437) (4,443)
Gain (loss) on sales of securities and loans, net (185) 18,833 (1,076) 6,589
Net income....................................... 25,116 23,982 26,350 22,234
Earnings per common share:
Basic......................................... .54 .48 .51 .42
Diluted....................................... .53 .48 .51 .42
Dividends declared per share..................... .08 .08 .08 .07
Quarter Ended
-----------------------
December 31 September 30
----------- ------------
SIX MONTHS ENDED DECEMBER 31, 2000:
Total interest income.............................................. $247,017 $251,715
Net interest income................................................ 73,882 80,553
Provision for loan losses.......................................... (15,206) (12,648)
Loss on sales of securities and loans, net......................... (84,208) (3,277)
Cumulative effect of change in accounting principle, net........... -- (19,125)
Net loss........................................................... (47,675) (21,826)
Loss per basic and diluted common share:
Loss before cumulative effect of change in accounting principle. (.88) (.04)
Cumulative effect of change in accounting principle, net........ -- (.35)
Net loss........................................................ (.88) (.39)
Dividends declared per share....................................... .07 .07
127
Quarter Ended
------------------------------------------------
June 30 March 31 December 31 September 30
-------- --------- ------------ -------------
YEAR ENDED JUNE 30, 2000:
Total interest income....................................... $239,280 $ 232,529 $ 232,344 $ 223,537
Net interest income......................................... 83,125 85,071 86,338 87,607
Provision for loan losses................................... (3,300) (3,700) (3,460) (3,300)
Gain (loss) on sales of securities and loans, net........... (112) (239) 363 (122)
Cumulative effect of change in accounting principle, net.... -- -- -- (1,176)
Net income.................................................. 24,321 26,490 28,759 24,438
Earnings per basic and diluted common share:
Income before cumulative effect of change in accounting
principle.............................................. .43 .46 .49 .44
Cumulative effect of change in accounting principle, net. -- -- -- (.03)
Net income............................................... .43 .46 .49 .41
Dividends declared per share................................ .07 .07 .07 .065
YEAR ENDED JUNE 30, 1999:
Total interest income....................................... $220,706 $ 216,072 $ 203,715 $ 198,861
Net interest income......................................... 88,856 87,442 81,415 74,620
Provision for loan losses................................... (2,800) (2,800) (3,000) (3,800)
Gain on sales of securities and loans, net.................. 30 883 3,293 3,593
Net income.................................................. 29,874 16,169 31,226 15,123
Earnings per common share:
Basic.................................................... .49 .27 .53 .26
Diluted.................................................. .49 .27 .52 .25
Dividends declared per share................................ .065 .065 .065 .055
Note 28. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair
Value of Financial Instruments," requires that the Corporation disclose
estimated fair value amounts of its financial instruments. It is management's
belief that the fair values presented below are reasonable based on the
valuation techniques and data available to the Corporation as of December 31,
2001 and 2000, and June 30, 2000, as more fully described in the following
discussion. It should be noted that the operations of the Corporation are
managed from a going concern basis and not a liquidation basis. As a result,
the ultimate value realized for the financial instruments presented could be
substantially different when actually recognized over time through the normal
course of operations. The valuation does not consider the intangible franchise
value of the institution, which management believes to be substantial.
128
The following presents the carrying value and fair value of the specified
assets and liabilities held by the Corporation as of the dates indicated. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
December 31, 2001 December 31, 2000 June 30, 2000
--------------------- --------------------- -----------------------
Carrying Carrying Carrying
Value Fair Value Value Fair Value Value Fair Value
---------- ---------- ---------- ---------- ----------- -----------
FINANCIAL ASSETS
Cash (including short-term investments) $ 206,765 $ 206,765 $ 192,358 $ 192,358 $ 199,566 $ 199,566
Investment securities.................. 1,150,345 1,150,345 771,137 771,137 993,167 928,264
Mortgage-backed
securities........................... 1,829,728 1,829,728 1,514,510 1,514,510 1,220,138 1,197,851
Loans receivable, net.................. 8,403,425 8,561,303 8,893,374 8,927,404 10,407,692 10,190,988
Federal Home Loan Bank stock........... 253,946 253,946 251,537 251,537 255,756 255,756
Other assets--
Conforming loan commitments......... 68 68 354 354 n/a n/a
Interest rate floor agreements...... 3,071 3,071 1,809 1,809 n/a n/a
Forward loan sales commitments...... 3,060 3,060 -- -- n/a n/a
FINANCIAL LIABILITIES
Deposits:
Passbook accounts................... 1,939,596 1,939,596 1,861,074 1,861,074 1,575,380 1,575,380
NOW checking accounts............... 1,198,646 1,198,646 1,065,970 1,065,970 1,028,640 1,028,640
Market rate savings accounts........ 304,620 304,620 382,344 382,344 531,317 531,317
Certificates of deposit............. 2,953,660 2,961,651 4,385,098 4,368,094 4,195,163 4,149,657
---------- ---------- ---------- ---------- ----------- -----------
Total deposits.................... 6,396,522 6,404,513 7,694,486 7,677,482 7,330,500 7,284,994
Advances from Federal Home Loan Bank... 4,939,056 5,078,278 3,565,465 3,574,225 5,049,582 4,999,942
Other borrowings....................... 520,213 520,602 175,343 169,522 206,026 197,693
Other liabilities--
Forward loan sales commitments...... -- -- 2,085 2,085 n/a n/a
Interest rate swap agreements....... 109,913 109,913 37,252 37,252 n/a n/a
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Interest rate swap and floor agreements n/a n/a n/a n/a 417 8,788
Forward loan sales commitments......... n/a n/a n/a n/a -- (1,420)
Conforming loan commitments............ n/a n/a n/a n/a -- 733
129
The following sets forth the methods and assumptions used in determining the
fair value estimates for the Corporation's financial instruments at December
31, 2001 and 2000, and June 30, 2000.
Cash and Short-Term Investments
The book value of cash and short-term investments is assumed to approximate
the fair value of these assets.
Investment Securities
Quoted market prices or dealer quotes were used to determine the fair value
of investment securities available for sale and held to maturity. At December
31, 2001 and 2000, all investment securities were classified as available for
sale.
Mortgage-Backed Securities
For mortgage-backed securities available for sale and held to maturity the
Corporation utilized quotes for similar or identical securities in an actively
traded market, where such a market exists, or obtained quotes from independent
security brokers to determine the fair value of these assets. At December 31,
2001 and 2000, all mortgage-backed securities were classified as available for
sale.
Loans Receivable, Net
The fair value of loans receivable was estimated by discounting anticipated
future cash flows using the current market rates at which similar loans would
be made to borrowers with similar credit ratings and for similar remaining
maturities. When using the discounting method to determine fair value, loans
were gathered by homogeneous groups with similar terms and conditions and
discounted at derived current market rates or rates at which similar loans
would be made to borrowers as of December 31, 2001 and 2000, and June 30, 2000.
The fair value of loans held for sale was determined based on quoted market
prices for the intended delivery vehicle of those loans, generally agency
mortgage-backed securities. In addition, when computing the estimated fair
value for all loans, allowances for loan losses were subtracted from the
calculated fair value for consideration of potential credit issues.
Federal Home Loan Bank Stock
The fair value of such stock approximates book value since the Corporation
is able to redeem this stock with the Federal Home Loan Bank at par value.
Deposits
The fair value of savings deposits were determined as follows: (i) for
passbook accounts, NOW checking accounts and market rate savings accounts, fair
value is determined to approximate the carrying value (the amount payable on
demand) since such deposits are primarily withdrawable immediately; (ii) for
certificates of deposit, the fair value has been estimated by discounting
expected future cash flows by derived current market rates offered on
certificates of deposit with similar remaining maturities as of December 31,
2001 and 2000, and June 30, 2000. In accordance with the provisions of this
statement, no value has been assigned to the Corporation's long-term
relationships with its deposit customers (core value of deposits intangible)
since such intangible is not a financial instrument as defined under this
statement.
Advances From Federal Home Loan Bank
The fair value of these advances was estimated by discounting the expected
future cash flows using current interest rates as of December 31, 2001 and
2000, and June 30, 2000, for advances with similar terms and remaining
maturities.
130
Other Borrowings
Included in other borrowings are subordinated extendible notes with carrying
values of $21,725,000 at December 31, 2001, and $50,000,000 at December 31,
2000, and June 30, 2000. Also included in other borrowings are the guaranteed
preferred beneficial interests in the Corporation's junior subordinated
debentures totaling $45,000,000 at December 31, 2001 and 2000, and June 30,
2000, and the subordinated debt securities for $30,000,000 and junior
subordinated debentures for $20,000,000 at December 31, 2001. The fair value of
such borrowings is based on quoted market prices or dealer quotes. The fair
value of other borrowings, excluding the aforementioned borrowings, was
estimated by discounting the expected future cash flows using derived interest
rates approximating market as of December 31, 2001 and 2000, and June 30, 2000,
over the contractual maturity of such other borrowings.
Derivative Financial Instruments
The fair value of the interest rate swap and floor agreements, obtained from
market quotes from independent security brokers, is the estimated amount that
would be paid to terminate the swap agreements and the estimated amount that
would be received to terminate the floor agreements.
The fair value of commitments to originate, purchase, and sell residential
mortgage loans was determined based on quoted market prices for forward
purchases and sales of such product. The fair value of commitments to originate
other loans was estimated by discounting anticipated future cash flows using
the current market rates at which similar loans would be made to borrowers with
similar credit ratings and for similar remaining maturities as of December 31,
2001 and 2000, and June 30, 2000.
Limitations
It must be noted that fair value estimates are made at a specific point in
time, based on relevant market information about the financial instruments
without attempting to estimate the value of anticipated future business,
customer relationships and the value of assets and liabilities that are not
considered financial instruments. These estimates do not reflect any premium or
discount that could result from offering the Corporation's entire holdings of a
particular financial instrument for sale at one time. Furthermore, since no
market exists for certain of the Corporation's financial instruments, fair
value estimates may be based on judgments regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with a high level of precision. Changes in
assumptions as well as tax considerations could significantly affect the
estimates. Accordingly, based on the limitations described above, the aggregate
fair value estimates as of December 31, 2001 and 2000, and June 30, 2000, are
not intended to represent the underlying value of the Corporation, on either a
going concern or a liquidation basis.
Note 29. Current Accounting Pronouncements
On July 20, 2001, Statement of Financial Accounting Standards No. 141
"Business Combinations" ("SFAS No. 141") was issued. This statement supercedes
APB Opinion No. 16 "Business Combinations." SFAS No. 141 requires that the
purchase method of accounting be applied to all business combinations initiated
after June 30, 2001. The use of the pooling-of-interests method is prohibited
under this statement.
Also on July 20, 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 142 which supercedes APB Opinion No. 17 "Intangible Assets."
The provisions of SFAS No. 142 require that upon initial adoption, amortization
of goodwill will cease, and the carrying value of goodwill will be evaluated
for impairment at the initial implementation. Identifiable intangible assets
will continue to be amortized over their useful lives and reviewed for
impairment under SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS No. 142 is effective for fiscal years beginning after
December 15, 2001, or as of January 1, 2002, for the Corporation. At December
31, 2001, goodwill and core value of deposits totaled $162,717,000 and
$28,733,000, respectively. Beginning January 1, 2002, goodwill will no longer
be subject to
131
amortization but will be evaluated at least annually for impairment. For
calendar year 2002, goodwill totaling $7,791,000, or approximately $.16 per
share, will not be amortized against current operations pursuant to this
statement. Management of the Corporation has not completed its overall
assessment of any additional effects of SFAS No. 142, and therefore has not
determined the total effect that the initial adoption of this statement will
have on the Corporation's financial position, liquidity or results of
operations.
On August 16, 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 "Accounting for Asset Retirement Obligations" ("SFAS No.
143"). The provisions of this statement require entities to record the fair
value of a liability for an asset retirement obligation in the period that it
is incurred. When the liability is initially recorded, the entity will
capitalize a cost by increasing the carrying amount of the related long-lived
asset. The liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, the entity either settles the obligation for its
recorded amount or incurs a gain or loss. SFAS No. 143 is effective for fiscal
years beginning after June 15, 2002, or as of January 1, 2003, for the
Corporation. Management of the Corporation does not believe that this statement
will have any material effect on the Corporation's financial position,
liquidity or results of operations.
On October 3, 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") that replaces SFAS No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
This statement developed on accounting model, based on the provisions of SFAS
No. 121, for long-lived assets to be disposed of by sale and addressed
implementation issues arising from SFAS No. 121. The accounting model for
long-lived assets to be disposed of by sale applies to all long-lived assets,
including discontinued operations, and replaces the provisions of APB Opinion
No. 30 "Reporting Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business," for the disposal of segments of a business. SFAS No.
144 requires that those long-lived assets be measured at the lower of carrying
amount or fair value less costs to sell, whether reported in continuing
operations or in discontinued operations. Therefore, discontinued operations
will no longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. SFAS No. 144 also broadens the
reporting of discontinued operations to include all components of an entity
with operations that can be distinguished from the rest of the entity and that
will be eliminated from the ongoing operations of the entity in a disposal
transaction. The provisions of SFAS No. 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001, or as of
January 1, 2002, for the Corporation. Provisions of this statement are
generally to be applied prospectively. Management of the Corporation is
currently evaluating the provisions of SFAS No. 144 but does not believe that
this statement will have any material effect on the Corporation's financial
position, liquidity or results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting and
financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF COMMERCIAL FEDERAL CORPORATION
The information under the section captioned "Proposal I--Election of
Directors" in the Corporation's proxy statement for the 2001 Annual Meeting of
Stockholders (the "Proxy Statement") contains information concerning the Board
of Directors of the Corporation and is incorporated herein by reference.
132
The executive officers of the Corporation and the Bank as of December 31,
2001, are as follows:
Age at
Name December 31, 2001 Current Position(s) as of December 31, 2001
---- ----------------- -------------------------------------------
William A. Fitzgerald 64 Chairman of the Board and Chief Executive Officer
Robert J. Hutchinson. 53 Director, President and Chief Operating Officer
David S. Fisher...... 45 Chief Financial Officer and Executive Vice President
Peter J. Purcell..... 42 Chief Information Officer and Executive Vice President
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. Mr. Fitzgerald joined Commercial Federal in 1955.
He was named Vice President in 1968, Executive Vice President in 1973,
President in 1974, Chief Executive Officer in 1983 and Chairman of the Board in
1994. Mr. Fitzgerald is well known in the banking community for his
participation in numerous industry organizations, including the Federal Home
Loan Bank Board, the Heartland Community Bankers, the Board of America's
Community Bankers and the Board of Governors of the Federal Reserve System
Thrift Institutions Advisory Council. Mr. Fitzgerald joined Commercial
Federal's Board of Directors in 1973.
Robert J. Hutchinson--Director, President and Chief Operating Officer of the
Corporation and the Bank. In April 2001, Mr. Hutchinson was appointed President
and Chief Operating Officer of the Corporation and the Bank and, in May 2001,
was named Director of both the Corporation and the Bank. Mr. Hutchinson served
as Senior Vice President of the retail financial services division of Michigan
National Bank. Prior to assuming responsibility for retail management in 1996,
Mr. Hutchinson was Senior Vice President of Small Business Banking for Michigan
National Bank, managing sales, credit management and back office operations for
both small business and mortgage, as well as non-branch delivery. Before
joining Michigan National Bank in 1994, Mr. Hutchinson was Senior Vice
President in charge of New York branches for Chemical Bank. He also held
progressively responsible product management and marketing positions with
Chemical Bank and with manufacturers Hanover Trust prior to its merger with
Chemical Bank in 1991.
David S. Fisher--Chief Financial Officer and Executive Vice President of the
Corporation and the Bank. Mr. Fisher joined the Bank in June 2000. Mr. Fisher
served as Senior Vice President and Treasurer of Associated Banc-Corp from May
1998 to May 2000 and was responsible for financial analysis and planning,
investments, funding, asset/liability management, treasury and investment
accounting functions. Previously, Mr. Fisher was Senior Vice President and
director of funds management and bank investments at First of America Bank
Corporation from 1988 to 1998.
Peter J. Purcell--Chief Information Officer and Executive Vice President of
the Corporation and the Bank. Mr. Purcell joined the Bank in December 2000.
Prior to joining the Corporation, Mr. Purcell was a Vice President at NCR from
April 1998 to May 2000. Before joining NCR, Mr. Purcell was President and Chief
Executive Officer of the Retail Delivery and Card Services Division of First of
America Bank Corporation. Mr. Purcell terminated employment on February 5, 2002.
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.
133
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
under the section captioned "Proposal I--Election of Directors" in the Proxy
Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this Report:
(1) Consolidated Financial Statements
a Independent Auditors' Report
b Consolidated Statement of Financial Condition at December 31, 2001
and 2000 and June 30, 2000
c Consolidated Statement of Operations for the Year Ended December 31,
2001, the Six Months Ended December 31, 2000, and the Years Ended
June 30, 2000 and 1999
d Consolidated Statement of Comprehensive Income (Loss) for the Year
Ended December 31, 2001, the Six Months Ended December 31, 2000, and
the Years Ended June 30, 2000 and 1999
e Consolidated Statement of Stockholders' Equity for the Year Ended
December 31, 2001, the Six Months Ended December 31, 2000, and the
Years Ended June 30, 2000 and 1999
f Consolidated Statement of Cash Flows for the Year Ended December 31,
2001, the Six Months Ended December 31, 2000, and the Years Ended
June 30, 2000 and 1999
g Notes to Consolidated Financial Statements
(2) Financial Statement Schedules:
All financial statement schedules have been omitted as the required
information is not applicable, not required or is included in the
consolidated financial statements or related notes included in Item 8 of
this Report.
(3) Exhibits:
See "Index to Exhibits" of this Report.
(B) Reports on Form 8-K:
On November 9, 2001, the Corporation filed a Form 8-K regarding the October
30, 2001, announcement that the interest rate would remain the same at 7.95%
on the Corporation's fixed-rate subordinated extendible notes due December
1, 2006. Contractual interest on these notes was set at 7.95% until
December 1, 2001, and is paid monthly. This interest rate exceeds 105% of
the effective interest rate on comparable maturity U.S. Treasury
obligations, as defined in the Indenture, and will remain effective until
December 1, 2004.
On December 14, 2001, the Corporation filed a Form 8-K regarding the
December 13, 2001, announcement that its 2001 earnings would exceed previous
consensus estimates. The Corporation also projected 2002 earnings per share
of more than $2.00 per share, or approximately $2.16 per share considering
the impact of SFAS No. 142 on the cessation of goodwill amortization.
(C) Exhibits to this Form 10-K are filed or incorporated by reference as listed
in the "Index to Exhibits" of this Report.
(D) No financial statement schedules required by Regulation S-X are filed, and
as such are excluded from the Annual Report as provided by Exchange Act
Rule 14a-3(b)(i).
134
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: March 29, 2002 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.
Signature Title Date
--------- ----- ----
/s/ William A. Fitzgerald Principal Executive Officer March 29, 2002
-----------------------------
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
/s/ David S. Fisher Principal Financial Officer March 29, 2002
-----------------------------
David S. Fisher
Executive Vice President
and Chief Financial Officer
/s/ GARY L. MATTER Principal Accounting Officer March 29, 2002
-----------------------------
Gary L. Matter
Senior Vice President,
Controller and Secretary
/s/ ROBERT J. HUTCHINSON Director March 29, 2002
-----------------------------
Robert J. Hutchinson
President and Chief Operating
Officer
/s/ TALTON K. ANDERSON Director March 29, 2002
-----------------------------
Talton K. Anderson
/s/ MICHAEL P. GLINSKY Director March 29, 2002
-----------------------------
Michael P. Glinsky
/s/ ROBERT F. KROHN Director March 29, 2002
-----------------------------
Robert F. Krohn
/s/ CARL G. MAMMEL Director March 29, 2002
-----------------------------
Carl G. Mammel
/s/ JAMES P. O'DONNELL Director March 29, 2002
-----------------------------
James P. O'Donnell
135
Signature Title Date
--------- ----- ----
/s/ ROBERT D. TAYLOR Director March 29, 2002
-----------------------------
Robert D. Taylor
/s/ ALDO J. TESI Director March 29, 2002
-----------------------------
Aldo J. Tesi
/s/ JOSEPH J. WHITESIDE Director March 29, 2002
-----------------------------
Joseph J. Whiteside
/s/ GEORGE R. ZOFFINGER Director March 29, 2002
-----------------------------
George R. Zoffinger
136
INDEX TO EXHIBITS
Exhibit
Number Identity of Exhibits
------- --------------------
3.1 Articles of Incorporation of Registrant, as amended and restated (incorporated by reference to the
Registrant's Current Report on Form 8-K dated July 3, 1998)
3.2 Bylaws of Registrant, as Amended and Restated (incorporated by reference to the Registrant's
Current Report on Form 8-K dated May 7, 2001)
4.1 Form of Certificate of Common Stock of Registrant (incorporated by reference to the Registrant's
Form S-1 Registration Statement No. 33-00330)
4.2 Shareholder Rights Agreement between Commercial Federal Corporation and Harris Trust and
Savings Bank, as amended (incorporated by reference to the Registrant's Form 10-Q Quarterly
Report for the Quarterly Period Ended September 30, 1998)
4.3 The Corporation hereby agrees to furnish upon request to the Securities and Exchange Commission a
copy of each instrument defining the rights of holders of the Cumulative Trust Preferred Securities
and the Subordinated Extendible Notes of the Corporation.
10.1 Employment Agreement with William A. Fitzgerald dated June 8, 1995 (incorporated by reference to
the Registrant's Form S-4 Registration Statement No. 33-60589)
10.2 Change of Control Executive Severance Agreement with William A. Fitzgerald dated June 8, 1995
(incorporated by reference to the Registrant's Form S-4 Registration Statement No. 33-60589)
10.4 Form of Change in Control Executive Severance Agreements entered into with Executive Vice
Presidents, Senior Vice Presidents and First Vice Presidents (incorporated by reference to the
Registrant's Form S-4 Registration Statement No. 33-60589)
10.5 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)
10.6 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)
10.7 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)
10.8 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 Commercial Federal Corporation 1996 Stock Option and Incentive Plan as Amended (incorporated
by reference to the Registrant's Form S-8 Registration Statement Nos. 333-20739 and 333-58607)
10.11 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)
10.12 Railroad Financial Corporation 1994 Stock Option and Incentive Plan (incorporated by reference to
the Registrant's Form S-8 Registration Statement No. 33-63629)
137
Exhibit
Number Identity of Exhibits
------- --------------------
10.13 Mid Continent Bancshares, Inc. 1994 Stock Option Plan (incorporated by reference to the
Registrant's Post-Effective Amendment No. 1 to Form S-4 under cover of Form S-8--File
No. 333-42817)
10.14 Perpetual Midwest Financial, Inc. 1993 Stock Option and Incentive Plan (incorporated by reference
to the Registrant's Post-Effective Amendment No. 1 to Form S-4 under cover of Form S-8--File
No. 333-45613)
10.15 First Colorado Bancorp, Inc. 1992 Stock Option Plan and First Colorado Bancorp, Inc. 1996 Stock
Option Plan (incorporated by reference to the Registrant's Post-Effective Amendment No. 1 to
Form S-4 under cover of Form S-8--File No. 333-49967)
10.15 Commercial Federal 401(k) Plan for Acquired Companies (incorporated by reference to the
Registrant's Form S-8 Registration Statement No. 333-91065)
10.16 Change of Control Executive Severance Agreement with David S. Fisher dated June 23, 2000
(incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended
June 30, 2000--File No. 1-11515)
10.17 Separation, Waiver and Release Agreement with James A. Laphen dated June 8, 2000 (incorporated
by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended June 30,
2000--File No. 1-11515)
10.18 Retirement, Waiver and Release Agreement with Gary D. White dated August 24, 2000
(incorporated by reference to the Registrant's Form 10-K Annual Report for the Fiscal Year Ended
June 30, 2000--File No. 1-11515)
10.19 Change of Control Executive Severance Agreement with Peter J. Purcell dated June 1, 2001
(incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the Quarterly
Period Ended June 30, 2001--File No. 1-11515)
10.20 Change of Control Executive Severance Agreement with Robert J. Hutchinson dated June 1, 2001
(incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the Quarterly
Period Ended June 30, 2001--File No. 1-11515)
10.21 Offer of Employment Agreement with Robert J. Hutchinson dated April 18, 2001 (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q for the Quarterly Period Ended June 30,
2001--File No. 1-11515)
10.22 Separation, Waiver and Release Agreement with Peter J. Purcell dated February 5, 2002 (filed
herewith)
21 Subsidiaries of the Corporation (filed herewith)
22 Consent of Independent Auditors (filed herewith)
138