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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
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
--------------------------------------------------
(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.
================================================================================
This Amendment No. 1 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2001 is being filed to correct four typographical errors
in Item 8 (Financial Statements and Supplementary Data) as follows:
(i) the entry for the deferred tax provision (benefit) for the year ended
December 31, 2001 as shown in the Consolidated Statement of Cash Flows; page 82;
(ii) the entry for the fair value change in interest only strips as shown in the
Consolidated Statement of Comprehensive Income (Loss) for the six months ended
December 31, 2000; page 79; (iii) the total amount of mandatory forward sales
commitments at December 31, 2000 as disclosed in Footnote 14 (Derivative
Financial Instruments) of the Notes to the Consolidated Financial Statements;
and (iv) an entry for Other Items in a table showing the components of the
Deferred Tax Asset as of June 30, 2000 as disclosed in Footnote 15 (Income
Taxes) of the Notes to the Consolidated Financial Statements.
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 (1,700) 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)...................... (13,861) (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 Ended Year Ended June 30,
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 (1,172) 179,593
Other securities...................................... 118,472 4,490 (341) 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, $3,183,309,000 and $4,864,455,000,
respectively, as collateral 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
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 $176,862,000 with
a fair value loss 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 9,003
-------- -------- --------
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.
132
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: April 11, 2002 By: /s/ DAVID S. FISHER
-----------------------------
David S. Fisher
Executive Vice President
and Chief Financial
Officer