Edgar Filing: COMMERCIAL FEDERAL CORP

FORM 10-K/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

(Amendment No. 2)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE YEAR ENDED DECEMBER 31, 2002

Commission File Number: 1-11515

COMMERCIAL FEDERAL CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Nebraska		47-0658852
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer 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
Shareholder Rights Plan		New York Stock Exchange
7.95% Subordinated Notes due December 2006		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

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes x No ¨

The aggregate market value of the voting stock held by non-affiliates of the registrant, based upon the average high and low sales price of the registrant’s common stock as quoted on the New York Stock Exchange on June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,255,891,676. As of March 14, 2003, there were issued and outstanding 43,744,050 shares of the registrant’s common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders—See Part III.

COMMERCIAL FEDERAL CORPORATION

FORM 10-K/A

DECEMBER 31, 2002

INTRODUCTORY NOTE

The purpose of this Form 10-K/A (Amendment No. 2) is to restate the accompanying consolidated statements of financial condition of Commercial Federal Corporation (the “Corporation”) as of December 31, 2002, 2001 and 2000, and the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2002, for the six months ended December 31, 2000, and for the year ended June 30, 2000. Subsequent to the issuance of the Corporation’s consolidated financial statements and the filing of its 2002 Annual Report on Form 10-K with the Securities and Exchange Commission, management of the Corporation determined that the accounting for certain components of a bank owned life insurance policy (“BOLI”) was incorrect. The effects of the error (“BOLI adjustment”) were spread over a 12-quarter period beginning with the three months ended December 31, 2000, when the bank owned life insurance policy was first acquired, through the September 30, 2003 quarter. The accounting policy the Corporation previously used resulted in the overstatement of total assets, total stockholders’ equity, other non-interest income and net income by a like amount.

The aggregate effects of this BOLI adjustment were to reduce previously reported net income for 2002 by $1.5 million, to $107.0 million ($2.36 per basic share and $2.33 per diluted share), a decrease of $.03 per basic share and $.04 per diluted share as compared to amounts previously reported; to reduce previously reported net income for 2001 by $877,000, to $96.8 million ($1.94 per basic share and $1.92 per diluted share), a decrease of $.01 per basic and diluted share as compared to amounts previously reported; and for the six months ended December 31, 2000, to increase the previously reported net loss by $4.1 million, to $73.6 million ($1.35 loss per basic and diluted share), increasing the loss per basic and diluted share by $.08 per share as compared to amounts previously reported. Total assets and total stockholders’ equity decreased by $6.4 million, $5.0 million and $4.1 million, respectively, at December 31, 2002, 2001 and 2000, respectively. See Note 1 for additional information on the BOLI adjustment.

The Corporation also restated its consolidated statement of financial condition to (i) reflect mortgage loans eligible for repurchase at the Corporation’s option and without prior authorization from the Government National Mortgage Association (“GNMA”) as loans held for sale and (ii) reclassify the principal amount of mortgage loans actually repurchased from GNMA from other assets to loans held for sale. These GNMA restatements properly reflect loans held for sale at fair value, GNMA loans actually repurchased, and other borrowings for the GNMA optional repurchase loans as of December 31, 2002 and 2001. See Note 1 for additional information on these GNMA loans.

In addition, this restatement reflects other reclassifications the Corporation has made to conform to its 2003 financial statement presentations in the accompanying consolidated statements of financial condition and operations. See Note 1 for additional information on these other reclassifications.

The Corporation issued a press release on January 29, 2004, which it filed as an exhibit to a Current Report Form 8-K on the same date, and stated management’s intention to restate these financial statements. The Corporation is also restating its financial reports for the first three quarters of 2003 as reflected in the Form 10-Q/A’s of the Corporation filed concurrently with this Form 10-K/A.

This Amendment No. 2 on Form 10-K/A makes revisions to Item 1 (Business), Item 5 (Market for Commercial Federal Corporation’s Common Equity and Related Stockholder Matters), Item 6 (Selected Financial Data), Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations), Item 8 (Financial Statements and Supplementary Data), Item 14 (Controls and Procedures) and Item 15 (Exhibits, Financial Statement Schedules, and Reports on Form 8-K).

The principal effects of these changes on the accompanying financial statements are presented in Note 1 to the Corporation’s consolidated financial statements. For purposes of this Form 10-K/A, and in accordance with Rule 12b-15 under the Securities and Exchange Act of 1934, as amended, the Corporation has amended and restated in its entirety each item of the Corporation’s Form 10-K for the year ended December 31, 2002, which has been affected by these restatements. This Form 10-K/A does not reflect events occurring after the filing of the original Form 10-K, or modify or update those disclosures in any way, except as required to reflect the effects of these restatements.

COMMERCIAL FEDERAL CORPORATION

FORM 10-K/A INDEX



			Page No.
PART I	Item 1.	Business	3

PART II	Item 5.	Market for Commercial Federal Corporation’s Common Equity and Related Stockholder Matters	45

	Item 6.	Selected Financial Data	46

	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	48

	Item 8.	Financial Statements and Supplementary Data	79


PART IV	Item 14.	Controls and Procedures	143
	Item 15.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	144

SIGNATURES			145

PART I

ITEM 1. BUSINESS

Forward Looking Statements

This document contains certain statements that are not historical fact but are forward-looking statements that involve inherent risks and uncertainties. Management cautions readers that a number of important factors could cause actual results to differ materially from those in the forward looking statements. Factors that might cause a difference include, but are not limited to: fluctuations in interest rates, inflation, the effect of regulatory or government legislative changes, expected cost savings and revenue growth not fully realized, the progress of strategic initiatives and whether realized within expected time frames, general economic conditions, adequacy of allowance for credit losses, costs or difficulties associated with restructuring initiatives, technology changes and competitive pressures in the geographic and business areas where Commercial Federal Corporation conducts its operations. These forward-looking statements are based on management’s current expectations. Actual results in future periods may differ materially from those currently expected because of various risks and uncertainties.

General

Commercial Federal Corporation (the “Corporation”) was incorporated in the state of Nebraska on August 18, 1983, as a unitary non-diversified savings and loan holding company. The primary purpose of the Corporation was to acquire all of the capital stock of Commercial Federal Bank, a Federal Savings Bank (the “Bank”) in connection with the Bank’s 1984 conversion from mutual to stock ownership. A secondary purpose was to provide the structure to expand and diversify the Corporation’s financial services to activities allowed by regulation to a unitary savings and loan holding company. The general offices of the Corporation are located at 13220 California Street, Omaha, Nebraska 68154.

The primary subsidiary of the Corporation is the Bank. The Bank was originally chartered in 1887 and converted to a federally chartered mutual savings and loan association in 1972. On December 31, 1984, the Bank completed its conversion from mutual to stock ownership and became a wholly-owned subsidiary of the Corporation. On August 27, 1990, the Bank’s federal charter was amended from a savings and loan to a federal savings bank.

The assets of the Corporation, on an unconsolidated basis, substantially consist of 100% of the Bank’s common stock. The Corporation has no significant independent source of income, and therefore depends almost exclusively on cash distributions from the Bank to meet its funding requirements. During the calendar year ended December 31, 2002, the Corporation incurred interest expense on its subordinated extendible notes, cumulative trust preferred securities and unsecured term notes and revolving line of credit. Interest was payable monthly on the subordinated extendible notes, and quarterly on the cumulative trust preferred securities, the unsecured term note and the line of credit. On December 31, 2002, the Corporation redeemed the $45.0 million of cumulative trust preferred securities of the CFC Preferred Trust. These securities were callable after May 14, 2002. The redemption price totaling $46.1 million consisted of the $45.0 million plus accrued interest of $1.1 million. In addition, on December 30, 2002, the Corporation entered into a term and revolving credit agreement totaling $104.0 million. This credit facility is in the form of an unsecured, five-year term note due December 31, 2007, totaling $94.0 million and an unsecured revolving note totaling $10.0 million due December 31, 2003, renewable annually. On December 30, 2002, the $94.0 million term note was drawn down to repay the term note due June 30, 2004, for $49.4 million including accrued interest. The remaining proceeds of $44.6 million were used to redeem the 9.375% cumulative trust preferred securities that were paid off in full by the Corporation on December 31, 2002. This term note had an outstanding principal balance of $94.0 million at December 31, 2002. Terms of the note require quarterly principal payments of $2.4 million and quarterly interest payable at a monthly adjustable rate priced at 100 basis points below the lender’s national base rate, or 3.25% at December 31, 2002. For additional information on the debt of the Corporation see Note 14 “Other Borrowings” to the Consolidated Financial Statements that are filed under Item 8 of this Form 10-K/A Annual Report for the year ended December 31, 2002 (the “Report”).

The Corporation began repurchasing its common stock in April 1999. For the year ended December 31, 2002, the Corporation purchased and cancelled 1,057,700 shares of its common stock at a cost of $25.7 million. Since the first repurchase was announced in April 1999, the Corporation has purchased and canceled 16,759,200 shares of its common stock through December 31, 2002, at a cost of $355.7 million. The Corporation also pays operating expenses primarily for shareholder and stock related expenditures such as the annual report, proxy, corporate filing fees and assessments and certain costs directly attributable to the holding company. In addition, common stock cash dividends totaling $15.8 million, or $.35 per common share, were declared during the year ended December 31, 2002.

The Bank pays cash distributions to the Corporation on a periodic basis primarily to cover the amount of the principal and interest payments on the Corporation’s debt, to fund the Corporation’s common stock repurchases and to repay the Corporation for the common stock cash dividends paid to the Corporation’s shareholders. During the year ended December 31, 2002, the Corporation received cash distributions totaling $85.0 million from the Bank. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) — Liquidity and Capital Resources” under Item 7 of this Report for additional information.

The Bank operates as a federally chartered savings institution with deposits insured by the Savings Association Insurance Fund (“SAIF”) and the Bank Insurance Fund (“BIF”) both administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is a community banking institution offering commercial and consumer banking services including mortgage loan origination and servicing, commercial and industrial lending, small business banking, construction lending, cash management, brokerage and insurance services, and Internet banking.

At December 31, 2002, the Corporation had assets of $13.1 billion and stockholders’ equity of $750.1 million, and operated 189 branches located in Colorado (44), Iowa (40), Nebraska (40), Kansas (26), Oklahoma (19), Missouri (14) and Arizona (6). The Bank is one of the largest retail financial institutions in the Midwest and, based upon total assets at December 31, 2002, the Corporation was the 8th largest publicly-held thrift institution holding company in the United States. In addition, the Corporation serviced a loan portfolio totaling $15.6 billion at December 31, 2002, with approximately $11.5 billion in loans serviced for third parties and $4.1 billion in loans serviced for the Bank. See “MD&A — General” under Item 7 of this Report.

The operations of the Corporation are significantly influenced by general economic conditions, by inflation and changing prices, by the related monetary, fiscal and regulatory policies of the federal government and by the policies of financial institution regulatory authorities, including the Office of Thrift Supervision (“OTS”), the Board of Governors of the Federal Reserve System and the FDIC. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for mortgage and commercial financing, consumer loans and other types of loans, which, in turn, are affected by the interest rates at which such financings may be offered, the availability of funds, and other factors, such as the supply of housing for mortgage loans and regional economic situations.

The Bank is a member of the Federal Home Loan Bank (“FHLB”) of Topeka, which is one of the 12 regional banks comprising the FHLB System. The Bank is further subject to regulations of the Federal Reserve Board, which governs reserves required to be maintained against deposits and certain other matters. As a federally chartered savings bank, the Bank is subject to numerous restrictions on operations and investments imposed by applicable statutes and regulations. See “Regulation” section of this Report.

Corporate Highlights

The Corporation’s business and earnings are sensitive to general business and economic conditions in the United States and, in particular, the Midwestern states where it has significant operations. These conditions include short-term and long-term interest rates, inflation, monetary supply, fluctuations in both debt and equity capital markets, the strength of the national and local economies and consumer spending, borrowing and savings habits. A continued economic downturn, an increase in unemployment or higher interest rates could decrease the demand for loans and other products and services and result in a deterioration in credit quality and loan performance and collectibility. Higher interest rates also could increase the Corporation’s cost to borrow funds and increase the rate the Corporation pays on deposits.

The long-term economic and political effects of terrorism and international hostilities are uncertain which could result in a further economic slowdown that could negatively affect the Corporation’s financial condition. These events could adversely affect the Corporation’s business and operating results in other ways that presently cannot be predicted. In addition, a continued economic slowdown could negatively impact the purchasing and decision making activities of the Corporation’s customers. If terrorist activity, international hostilities or other factors cause a further economic decline, the financial condition and operating results of the Corporation could be materially adversely affected.

The Corporation’s earnings also are significantly affected by the fiscal and monetary policies of the federal government and its agencies. The policies of the Federal Reserve Board impact the Corporation significantly. The Federal Reserve Board regulates the supply of money and credit in the United States. Its policies directly and indirectly influence the rate of interest earned on loans and paid on borrowings and interest-bearing deposits and can also affect the value of financial instruments the Corporation holds. Those policies determine to a significant extent the Corporation’s cost of funds for lending and investing. Changes in those policies are beyond the Corporation’s control and are difficult to predict.

Accounting for Goodwill

Effective January 1, 2002, the Corporation adopted the provisions of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”), which required that the amortization of goodwill cease, and that goodwill be evaluated for impairment at the reporting unit level. No impairment losses were recognized in 2002. For calendar year 2002, amortization of goodwill totaling $7.8 million that would have been recorded prior to the implementation of this statement, was not recorded against current operations. See Note 11 “Intangible Assets” to the Consolidated Financial Statements under Item 8 of this Report for additional information.

Mortgage Banking Operations

Historically low interest rates in 2002 generated record volumes of mortgage loan demand contributing to pre-tax gains on the sales of mortgage loans totaling $36.2 million in 2002. These low interest rates also increased mortgage loan pay-downs which in turn caused an increase in amortization expense of mortgage servicing rights and the valuation allowances for impairment losses on mortgage servicing rights during 2002. The amortization expense of mortgage servicing rights increased $13.9 million over 2001 to $31.0 million for 2002. In addition, valuation adjustments for impairment losses totaling $60.4 million were recorded during the year ended December 31, 2002, compared to $19.1 million during 2001. During the year ended December 31, 2002, the Corporation sold available-for-sale investment and mortgage-backed securities totaling approximately $1.1 billion resulting in pre-tax gains of $35.9 million. These net gains were recognized to partially offset the valuation adjustment losses recognized on the mortgage servicing rights portfolio during 2002.

Redemption of Cumulative Trust Preferred Securities

On December 31, 2002, the Corporation redeemed the $45.0 million fixed-rate 9.375% cumulative trust preferred securities of the CFC Preferred Trust. The redemption price totaling $46.1 million consisted of 1,800,000 shares (liquidation amount of $25.00 per security) totaling $45.0 million plus accrued interest totaling approximately $1.1 million. These cumulative trust preferred securities were originally issued on May 14, 1997, and were due May 15, 2027. The redemption of the cumulative trust preferred securities resulted in the Corporation recognizing $1.8 million in expense on the write-off on the related deferred debt issuance costs. These costs are classified in other operating expenses in the Consolidated Statement of Operations for 2002.

Segment Reporting

Effective January 1, 2002, the Corporation’s operations were realigned into four lines of business operations for management reporting purposes: Commercial Banking, Mortgage Banking, Retail Banking and Treasury. Before this realignment, the Corporation identified and utilized two lines of business: Community Banking and Mortgage Banking. This realignment was made to allow management to make more well-informed operating decisions, to focus resources to benefit both the Corporation and its customers, and to assess performance and

products on a continuous basis. See “MD&A — Operating Results by Segment” under Item 7 of this Report and Note 25 “Segment Information” to the Consolidated Financial Statements under Item 8 of this Report for additional information.

Dissolution of Mortgage Banking Subsidiary

Effective October 1, 2002, Commercial Federal Mortgage Corporation (“CFMC”), the Bank’s wholly-owned full-service mortgage banking subsidiary, was dissolved. All real estate lending, secondary marketing, mortgage servicing and foreclosure activities are now conducted through the Bank. This dissolution had no effect on the Corporation’s financial position, liquidity or results of operations.

Common Stock Repurchases

During the year ended December 31, 2002, the Corporation continued to repurchase its outstanding common stock. On February 28, 2002, and on November 25, 2002, the Board of Directors authorized repurchases for 500,000 shares and 5,000,000 shares, respectively, of the Corporation’s outstanding common stock. During 2002, the Corporation purchased 1,057,700 shares of its common stock at a cost of $25.7 million.

Regulatory Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial position and results of operations. The regulations require the Bank to meet specific capital adequacy guidelines. Prompt corrective action provisions contained in the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) require specific capital ratios to be considered well-capitalized. At December 31, 2002, the Bank exceeded the minimum requirements for the well-capitalized category. As of December 31, 2002, the most recent notification from the OTS categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action provisions under FDICIA. There are no conditions or events since such notification that management believes have changed the Bank’s classification. See “Regulation — Regulatory Capital Requirements” and Note 18 “Regulatory Capital” to the Consolidated Financial Statements under Item 8 of this Report.

Supervisory Goodwill Lawsuit

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 million. The Bank also assumed a lawsuit in the merger with Mid Continent Bancshares, Inc. (“Mid Continent”), a fiscal year 1998 acquisition, against the United States also relating to a supervisory goodwill claim filed by the former company. The litigation status and process of these legal actions, as well as that of numerous actions brought by others alleging similar claims with respect to supervisory goodwill and regulatory capital credits, make the value of the claims asserted by the Bank (including the Mid Continent claim) uncertain as to their ultimate outcome, and contingent on a number of factors and future events which are beyond the control of the Bank, both as to substance, timing and the dollar amount of damages that may be awarded to the Bank and the Corporation if they finally prevail in this litigation.

On March 25, 1998, the Corporation filed a motion for summary judgment and the United States filed a cross motion for summary judgment on the question of liability for breach of contract. On March 24, 2003, the Corporation received an order from the United States Court of Federal Claims denying its motion for summary

judgment seeking to establish liability for breach of contract and granting the United States government’s cross motion seeking to establish no liability for breach of contract with respect to the Corporation’s acquisition of Empire Savings Building and Loan (“Empire”). In the litigation, the Corporation alleged that with respect to its 1987 acquisition of Empire, the Federal Home Loan Bank Board promised that $190 million of goodwill (the amount by which Empire’s liabilities exceeded its assets) would be included in the Bank’s regulatory capital as well as the $60 million of preferred stock issued by the Bank to fund the acquisition of Empire. The United States Court of Federal Claims granted the Corporation’s motion for summary judgment and denied the United States government’s cross-motion for summary judgment on the question of liability for breach of contract with respect to the Corporation’s acquisition of the savings deposits of Territory Savings and Loan Association (“Territory”) whereby the Bank accepted a five year $20 million promissory note from the Federal Savings and Loan Insurance Corporation (“FSLIC”) as part of the FSLIC’s payment for the Bank’s assumption of Territory’s savings deposits. In the litigation, the Corporation alleged that the FSLIC promised that the Bank could include the promissory note in its regulatory capital. The Corporation is currently considering its options in light of the order recently issued by the United States Court of Federal Claims.

Other Information

Additional information concerning the general business of the Corporation during the year ended December 31, 2002, is included in the following sections of this Report and under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Item 8 “Notes to the Consolidated Financial Statements” of this Report. Additional information concerning the Bank’s regulatory capital requirements and other regulations which affect the Corporation is included in the “Regulation” section of this Report.

Additional Information

The Corporation makes its annual, current and quarterly reports available, free of charge, on its corporate web site, www.comfedbank.com, as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. Other information on the Corporation and the Bank are also available on this web site. All information and reports on the Corporation’s web site is not incorporated by reference to this annual report Form 10-K/A.

Lending Activities

General

The Corporation’s lending activities focus on the origination of first mortgage loans for the purpose of financing or refinancing single-family residential properties, single-family residential construction loans, commercial real estate loans, commercial operating loans, consumer and home improvement loans. Commercial real estate loans, commercial operating and consumer loans have been emphasized during the year ended December 31, 2002. The origination activity of these loans has increased significantly over 2001. Management plans to continue to expand the Corporation’s commercial lending activity in 2003 and beyond. Residential loan origination activity, including activity through correspondents, increased significantly in calendar year 2002 due to the low interest rate environment generating new residential loan volumes as well as a large volume of loan refinancing activity compared to prior years. See “Loan Activity” section of this Report.

The functions of processing and servicing real estate loans, including responsibility for servicing the Corporation’s loan portfolio, had been conducted by CFMC, the Bank’s wholly-owned mortgage banking subsidiary. Effective October 1, 2002, CFMC was dissolved. All real estate lending, secondary marketing, mortgage servicing and foreclosure activities are now conducted through the Bank. The Corporation conducts loan origination activities primarily through its branch office network to increase the volume of single-family residential loan originations and take advantage of its extensive branch network. The Corporation will continue to originate real estate loans through its branches, loan offices and through its nationwide correspondent network.

At December 31, 2002, the Corporation’s total loan and mortgage-backed securities portfolio was $10.3 billion, representing 78.3% of its $13.1 billion of total assets. Mortgage-backed securities totaled $1.6 billion at December 31, 2002, representing 15.9% of the Corporation’s total loan and mortgage-backed securities portfolio. The Corporation’s total loan and mortgage-backed securities portfolio was secured primarily by real estate at December 31, 2002.

Commercial real estate and land loans are secured by various types of commercial properties including office buildings, shopping centers, warehouses and other income producing properties. Commercial lending increased during 2002 and is expected to significantly expand for the Corporation in the future. The Corporation’s single-family residential construction lending activity is primarily attributable to operations in Las Vegas, Nevada and in its primary market areas. Multi-family residential loans consist of loans secured by various types of properties, including townhomes, condominiums and apartment projects with more than four dwelling units.

The Corporation’s primary area of loan production is the origination of loans secured by existing single-family residences. Adjustable-rate single-family residential loans are originated for retention in the Corporation’s loan portfolio to match more closely the repricing of the Corporation’s interest-bearing liabilities as a result of changes in interest rates and for sale in the secondary market. Fixed-rate single-family residential loans are originated using underwriting guidelines, appraisals and documentation which are acceptable to the Federal Home Loan Mortgage Corporation (“FHLMC”), the Government National Mortgage Association (“GNMA”) and the Federal National Mortgage Association (“FNMA”) to facilitate the sale of such loans to such agencies in the secondary market. The Corporation also originates fixed-rate single-family residential loans using internal lending policies in accordance with what management believes are prudent underwriting standards but which may not strictly adhere to FHLMC, GNMA and FNMA guidelines. Fixed-rate single-family residential loans are originated or purchased for the Corporation’s loan portfolio if such loans have characteristics which are consistent with the Corporation’s asset and liability goals and long-term interest rate yield requirements. At December 31, 2002, fixed-rate single-family residential loans remained consistent at $2.5 billion compared to December 31, 2001. The adjustable-rate portfolio decreased to $2.1 billion at December 31, 2002, compared to $2.2 billion at December 31, 2001. The net decrease in adjustable-rate residential loans is due to the low mortgage rate environment in 2002 where many adjustable-rate loans were refinanced into low interest fixed-rate loans.

The Corporation’s commercial and multi-family real estate loans are primarily secured by properties located within the Corporation’s primary market areas. The Corporation continues to build on its commercial relationships. In the fourth quarter of 2001, the Corporation started a new internet-based full-service cash management program. This service allows businesses access to electronic banking features such as funds transfers, debit consumer accounts, payment of vendors, direct payroll deposit, wire transfers and other services. These loans, which are subject to prudent credit review and other underwriting standards and collection procedures, are expected to constitute a greater portion of the Corporation’s lending business in the future.

In addition to real estate loans, the Corporation originates consumer, automobile, home improvement, agricultural, commercial business and savings account loans as well as consumer credit cards through the Corporation’s branch and loan office network and direct mail solicitation. Management intends to continue to increase its consumer loan origination activity with strict adherence to prudent underwriting and credit review procedures.

Regulatory guidelines generally limit loans and extensions of credit to one borrower. At December 31, 2002, all loans were within the regulatory limitation of $209.2 million to one borrower.

Composition of Loan Portfolio

The following table sets forth the composition of the Corporation’s loan and mortgage-backed securities portfolios (including loans held for sale and mortgage-backed securities available for sale) as of the dates indicated below. The following table excludes mortgage loans held for sale related to the GNMA optional repurchase program totaling $45.9 million and $44.3 million at December 31, 2002 and 2001, respectively. There were no mortgage loans held for sale related to the GNMA optional repurchase program in periods prior to December 31, 2001. Other than as disclosed below, there were no concentrations of loans which exceeded 10% of total loans at December 31, 2002.


	December 31,												June 30,
	2002				2001				2000				2000				1999				1998
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in Thousands)
Loan Portfolio
Conventional real estate mortgage loans:
Loans on existing properties—
Single-family residential	$	4,334,628	41.4	%	$	4,437,766	42.1	%	$	5,015,369	47.0	%	$	6,684,993	56.4	%	$	6,268,958	57.8	%	$	5,476,608	60.2	%
Multi-family residential		273,071	2.6			324,602	3.1			232,203	2.2			193,711	1.6			182,510	1.7			169,860	1.9
Land		53,920	.5			38,797	.4			32,558	.3			30,138	.3			105,504	.9			22,582	.2
Commercial real estate		1,455,864	13.9			1,324,748	12.6			1,138,038	10.7			985,008	8.3			756,412	7.0			494,325	5.4

Total		6,117,483	58.4			6,125,913	58.2			6,418,168	60.2			7,893,850	66.6			7,313,384	67.4			6,163,375	67.7

Construction loans—
Single-family residential		294,962	2.9			304,638	2.9			258,972	2.4			245,302	2.1			241,548	2.2			279,437	3.1
Multi-family residential		133,248	1.3			120,826	1.1			99,041	.9			51,845	.4			25,893	.2			2,979	-—
Land		182,261	1.7			178,675	1.7			143,602	1.4			121,396	1.0			-—	-—			2,803	-—
Commercial real estate		159,627	1.5			179,312	1.7			215,979	2.0			152,260	1.3			78,908	.8			40,479	.5

Total		770,098	7.4			783,451	7.4			717,594	6.7			570,803	4.8			346,349	3.2			325,698	3.6

FHA and VA loans		270,825	2.6			270,193	2.6			351,376	3.3			579,021	4.9			463,437	4.3			468,503	5.1

Total real estate loans		7,158,406	68.4			7,179,557	68.2			7,487,138	70.2			9,043,674	76.3			8,123,170	74.9			6,957,576	76.4

Mortgage-backed securities		1,632,622	15.6			1,829,728	17.4			1,514,510	14.2			1,221,831	10.3			1,277,575	11.8			1,083,789	11.9

Total real estate loans and mortgage-backed securities		8,791,028	84.0			9,009,285	85.6			9,001,648	84.4			10,265,505	86.6			9,400,745	86.7			8,041,365	88.3

Consumer, commercial and other loans—
Home improvement and other consumer loans		1,480,486	14.1			1,330,877	12.6			1,361,354	12.8			1,292,806	10.9			1,114,583	10.3			809,671	8.9
Commercial loans		187,647	1.8			170,280	1.6			228,426	2.1			179,703	1.5			186,242	1.7			155,617	1.8
Savings account loans		10,450	.1			18,598	.2			22,589	.2			21,297	.2			19,125	.2			21,948	.2
Leases		117	—			160	—			53,836	.5			94,694	.8			122,704	1.1			73,395	.8

Total consumer and other loans		1,678,700	16.0			1,519,915	14.4			1,666,205	15.6			1,588,500	13.4			1,442,654	13.3			1,060,631	11.7

Total loans	$	10,469,728	100.0	%	$	10,529,200	100.0	%	$	10,667,853	100.0	%	$	11,854,005	100.0	%	$	10,843,399	100.0	%	$	9,101,996	100.0	%

(Continued on next page)

Composition of Loan Portfolio (continued)


	December 31,															June 30,
	2002					2001					2000					2000					1999					1998
	Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
	(Dollars in Thousands)

Balance forward of total loans Add (subtract):	$	10,469,728		100.0	%	$	10,529,200		100.0	%	$	10,667,853		100.0	%	$	11,854,005		100.0	%	$	10,843,399		100.0	%	$	9,101,996		100.0	%

Unamortized premiums, net of discounts		16,055					8,984					160					(670	)				10,138					14,161

Unearned income		—					—					—					(16,730	)				(22,543	)				(13,253	)

Deferred loan costs, net		8,617					5,819					20,250					26,374					11,809					24,178

Fair market valuation		17,867					1,175					—					—					—					—

Loans in process		(201,769	)				(209,574	)				(196,940	)				(164,313	)				(153,124	)				(112,781	)

Allowance for loan losses		(106,291	)				(102,451	)				(83,439	)				(70,556	)				(80,419	)				(64,757	)

Allowance for losses on mortgage-backed securities		—					—					—					(280	)				(322	)				(419	)

Loan portfolio	$	10,204,207				$	10,233,153				$	10,407,884				$	11,627,830				$	10,608,938				$	8,949,125

For additional information regarding the Corporation’s loan portfolio and mortgage-backed securities, see Note 4 “Mortgage-Backed Securities,” Note 5 “Loans Held for Sale” and Note 6 “Loans Receivable” to the Consolidated Financial Statements under Item 8 of this Report.

The table below sets forth the geographic distribution of the Corporation’s total real estate loan portfolio (excluding mortgage-backed securities, consumer and other loans, and before any reduction for unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan costs, unearned income and allowance for loan losses) as of the dates indicated. The following table excludes mortgage loans held for sale related to the GNMA optional repurchase program totaling $45.9 million and $44.3 million at December 31, 2002 and 2001, respectively. There were no mortgage loans held for sale related to the GNMA optional repurchase program in periods prior to December 31, 2001.


	December 31,												June 30,
	2002				2001				2000				2000				1999				1998
State	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in Thousands)
Colorado	$	1,165,297	16.3	%	$	1,302,407	18.1	%	$	1,436,156	19.2	%	$	1,647,963	18.2	%	$	1,686,667	20.8	%	$	1,710,256	24.6	%
Iowa		829,101	11.6			776,131	10.8			716,499	9.6			818,293	9.0			737,677	9.1			676,099	9.7
Nebraska		718,466	10.0			735,495	10.2			723,068	9.7			1,073,664	11.9			1,014,198	12.5			985,906	14.2
Kansas		625,109	8.7			668,161	9.3			658,366	8.8			954,020	10.5			860,740	10.6			678,734	9.8
Arizona		464,294	6.5			437,640	6.1			381,628	5.1			351,001	3.9			253,480	3.1			180,740	2.6
Massachusetts		424,513	5.9			156,477	2.2			203,742	2.7			188,500	2.1			62,233	.8			55,902	.8
Missouri		391,314	5.5			395,378	5.5			345,931	4.6			380,653	4.2			329,985	4.1			185,282	2.7
Oklahoma		353,780	4.9			363,114	5.1			378,789	5.1			459,315	5.1			382,474	4.7			318,198	4.6
Nevada		226,695	3.2			232,017	3.2			253,057	3.4			207,364	2.3			160,643	2.0			130,159	1.9
Georgia		180,924	2.5			198,719	2.8			254,097	3.4			302,929	3.3			232,128	2.9			227,971	3.3
Virginia		179,119	2.5			159,396	2.2			153,731	2.0			240,818	2.7			206,814	2.5			161,793	2.3
California		151,489	2.1			196,487	2.7			180,254	2.4			192,598	2.1			247,835	3.0			148,401	2.1
Minnesota		144,629	2.0			120,501	1.7			120,579	1.6			125,979	1.4			92,964	1.1			62,765	.9
Texas		132,126	1.9			185,555	2.6			188,700	2.5			205,783	2.3			184,313	2.3			158,614	2.3
Maryland		129,417	1.8			121,036	1.7			123,827	1.7			208,833	2.3			183,460	2.2			157,180	2.3
Florida		123,334	1.7			170,526	2.4			191,265	2.6			268,492	3.0			242,972	3.0			123,528	1.8
Ohio		90,880	1.3			100,478	1.4			110,181	1.5			143,992	1.6			122,146	1.5			93,325	1.3
Washington		88,694	1.2			89,053	1.2			99,303	1.3			113,932	1.3			93,956	1.2			91,670	1.3
Illinois		80,768	1.1			72,156	1.0			102,066	1.3			137,217	1.5			131,098	1.6			111,142	1.6
North Carolina		79,401	1.1			115,151	1.6			148,086	2.0			135,085	1.5			118,207	1.4			60,634	.9
Michigan		68,453	1.0			41,601	.6			66,295	.9			55,349	.6			29,505	.4			38,495	.5
Alabama		63,028	.9			74,949	1.0			86,709	1.1			125,767	1.4			90,675	1.1			50,285	.7
Connecticut		61,480	.9			57,582	.8			66,068	.9			83,567	.9			71,696	.9			64,975	.9
Utah		35,396	.5			37,459	.5			36,510	.5			53,060	.6			39,336	.5			25,444	.4
New Jersey		28,439	.4			38,876	.5			54,139	.7			71,352	.8			82,068	1.0			98,061	1.4
Pennsylvania		27,313	.4			31,376	.5			40,319	.5			51,811	.6			55,130	.7			59,083	.8
Indiana		21,066	.3			28,293	.4			38,986	.5			63,255	.7			66,727	.8			40,357	.6
New York		16,318	.2			21,296	.3			27,439	.4			31,548	.3			39,146	.5			38,382	.5
Other states		257,563	3.6			252,247	3.6			301,348	4.0			351,534	3.9			304,897	3.7			224,195	3.2

Total	$	7,158,406	100.0	%	$	7,179,557	100.0	%	$	7,487,138	100.0	%	$	9,043,674	100.0	%	$	8,123,170	100.0	%	$	6,957,576	100.0	%

The following table presents the composition of the Corporation’s total real estate portfolio (excluding mortgage-backed securities, consumer and other loans, and before any reduction for unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan costs, unearned income and allowance for loan losses) by state and property type at December 31, 2002:


State	Conventional Residential 1-4 Units			FHA/VA Residential Loans			Multi- Family			Land Loans			Sub Total			Commercial Real Estate Loans			Total			% of Total
	(Dollars in Thousands)
Colorado	$	611,720		$	17,972		$	85,165		$	36,154		$	751,011		$	414,286		$	1,165,297		16.3	%
Iowa		433,705			11,485			68,235			60,403			573,828			255,273			829,101		11.6
Nebraska		501,175			41,394			36,652			16,131			595,352			123,114			718,466		10.0
Kansas		401,572			52,021			31,616			7,902			493,111			131,998			625,109		8.7
Arizona		242,331			14,829			18,919			34,487			310,566			153,728			464,294		6.5
Massachusetts		422,960			—			474			—			423,434			1,079			424,513		5.9
Missouri		202,431			21,017			46,100			6,038			275,586			115,728			391,314		5.5
Oklahoma		184,753			12,656			55,633			7,321			260,363			93,417			353,780		4.9
Nevada		65,676			2,592			26,675			65,465			160,408			66,287			226,695		3.2
Georgia		154,687			9,795			—			—			164,482			16,442			180,924		2.5
Virginia		172,478			6,641			—			—			179,119			—			179,119		2.5
California		74,058			2,769			7,174			52			84,053			67,436			151,489		2.1
Minnesota		121,501			4,380			6,675			184			132,740			11,889			144,629		2.0
Texas		60,744			7,531			3,746			—			72,021			60,105			132,126		1.9
Maryland		117,257			11,945			—			—			129,202			215			129,417		1.8
Florida		90,508			3,198			6,931			—			100,637			22,697			123,334		1.7
Ohio		86,399			2,814			1,198			—			90,411			469			90,880		1.3
Washington		75,167			9,044			793			—			85,004			3,690			88,694		1.2
Illinois		76,033			4,433			—			24			80,490			278			80,768		1.1
North Carolina		66,029			861			—			—			66,890			12,511			79,401		1.1
Michigan		64,423			3,490			—			—			67,913			540			68,453		1.0
Alabama		55,838			7,190			—			—			63,028			—			63,028		.9
Connecticut		56,701			107			2,417			2,006			61,231			249			61,480		.9
Utah		20,992			7,514			935			—			29,441			5,955			35,396		.5
New Jersey		27,923			516			—			—			28,439			—			28,439		.4
Pennsylvania		25,123			1,970			206			14			27,313			—			27,313		.4
Indiana		16,265			4,801			—			—			21,066			—			21,066		.3
New York		11,967			54			—			—			12,021			4,297			16,318		.2
Other states		189,174			7,806			6,775			—			203,755			53,808			257,563		3.6

Total	$	4,629,590		$	270,825		$	406,319		$	236,181		$	5,542,915		$	1,615,491		$	7,158,406		100.0	%

% of Total		64.7	%		3.8	%		5.6	%		3.3	%		77.4	%		22.6	%		100.0	%

The above table excludes mortgage loans held for sale related to the GNMA optional repurchase program totaling $45.9 million at December 31, 2002.

Contractual Principal Repayments

The following table sets forth certain information at December 31, 2002, regarding the dollar amount of all loans and mortgage-backed securities maturing in the Corporation’s portfolio based on contractual terms to maturity. This repayment information excludes scheduled payments or an estimate of possible prepayments. Demand loans (loans having no stated schedule of repayments and no stated maturity) and overdrafts are reported as due in one year or less. Since prepayments significantly shorten the average life of loans and mortgage-backed securities, management believes that the following table will bear little resemblance to what will be the actual repayments. Loan balances have not been reduced for (1) unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan costs and allowance for loan losses or (2) nonperforming loans. The following table excludes mortgage loans held for sale related to the GNMA optional repurchase program totaling $45.9 million at December 31, 2002.


	Due During the Year Ended December 31,
	2003		2004-2007		After 2007		Total
	(In Thousands)
Principal Repayments
Real estate loans:
Single-family residential (1)—
Fixed-rate	$	73,390	$	184,939	$	2,288,951	$	2,547,280
Adjustable-rate		23,689		36,259		1,998,225		2,058,173
Multi-family residential, land and commercial real estate—
Fixed-rate		74,533		472,665		200,403		747,601
Adjustable-rate		71,987		103,915		859,352		1,035,254

		243,599		797,778		5,346,931		6,388,308

Construction loans:
Fixed-rate		108,821		12,487		6,488		127,796
Adjustable-rate		613,380		6,495		22,427		642,302

		722,201		18,982		28,915		770,098

Consumer and other loans:
Fixed-rate		74,349		735,960		555,108		1,365,417
Adjustable-rate		76,919		23,124		213,240		313,283

		151,268		759,084		768,348		1,678,700

Mortgage-backed securities:
Fixed-rate		100,786		473,190		906,056		1,480,032
Adjustable-rate		3,640		16,666		132,284		152,590

		104,426		489,856		1,038,340		1,632,622

Total principal repayments	$	1,221,494	$	2,065,700	$	7,182,534	$	10,469,728

(1)

Includes conventional, FHA and VA mortgage loans.

Scheduled contractual principal repayments do not reflect the actual maturities of the assets. The average maturity of loans is substantially less than their average contractual terms. This is due primarily to prepayments and, in the case of conventional mortgage loans, due-on-sale clauses, which generally give the Corporation the right to declare a loan immediately due and payable in the event that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are substantially higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are substantially higher than current mortgage loan rates. Under the latter circumstances, the weighted average yield on loans decreases as higher yielding loans are repaid.

The following table sets forth the amount of all loans and mortgage-backed securities due after December 31, 2003 (January 1, 2004, and thereafter), which have fixed interest rates and those which have adjustable interest rates. These loans and mortgage-backed securities have not been reduced for (1) unamortized premiums (net of discounts), undisbursed loan proceeds, deferred loan costs and allowance for loan losses or (2) nonperforming loans. The following table excludes mortgage loans held for sale related to the GNMA optional repurchase program totaling $45.9 million at December 31, 2002.


	Fixed-Rate		Adjustable Rate		Total
	(In Thousands)
Real estate loans:
Single-family residential	$	2,473,890	$	2,034,484	$	4,508,374
Multi-family residential, land and commercial real estate		673,068		963,267		1,636,335
Construction loans		18,975		28,922		47,897
Consumer and other loans		1,291,068		236,364		1,527,432
Mortgage-backed securities		1,379,246		148,950		1,528,196

Total principal repayments due after December 31, 2003	$	5,836,247	$	3,411,987	$	9,248,234

Residential Loans

The Corporation originates and purchases both fixed-rate and adjustable-rate mortgage loans secured by single-family units through its branch network, its loan offices and a nationwide correspondent network. Such residential mortgage loans are either:

•

conventional mortgage loans which comply with the requirements for sale to, or conversion into, securities issued by FNMA or FHLMC (“conforming loans”),

•

mortgage loans which exceed the maximum loan amount allowed by FNMA or FHLMC but which otherwise generally comply with FNMA and FHLMC loan requirements, or mortgage loans not exceeding the maximum loan amount allowed by FNMA or FHLMC but do not meet all of the conformity requirements of FNMA and FHLMC (“nonconforming loans”) or

•

FHA/VA loans which qualify for sale in the form of securities guaranteed by GNMA.

The Corporation originates substantially all conforming or nonconforming loans with loan-to-value ratios at or below 80.0% unless the borrower obtains private mortgage insurance (which premium the borrower pays with their mortgage payment) for the Corporation’s benefit covering that portion of the loan in excess of 80.0% of the appraised value or purchase price, whichever is less. Occasional exceptions to the 80.0% loan-to-value ratio for mortgage loans are made for loans to facilitate the resolution of nonperforming assets.

Fixed-rate residential mortgage loans generally are originated with terms of 15 and 30 years and are amortized on a monthly basis with principal and interest due each month. Adjustable-rate residential mortgage loans are also originated with terms of 15 and 30 years. However, certain adjustable-rate loans contain provisions which permit the borrower, at the borrower’s option, to convert at certain periodic intervals over the life of the loan to a long-term fixed-rate loan. The adjustable-rate loans generally have interest rates which are scheduled to adjust at six and 12 month intervals based upon various indices, including the Treasury Constant Maturity Index or the Eleventh District Federal Home Loan Bank Cost of Funds Index. The amount of any such interest rate increase is limited to one or two percentage points annually and four to six percentage points over the life of the loan. Certain adjustable-rate loans are also offered which have interest rates fixed over annual periods ranging from two through seven years, in addition to ten years, with such loans repricing annually after the fixed interest-rate term. The Corporation applies its underwriting criteria to such loans based on the amount of the loan for which the borrower could qualify at the indexed rate. At December 31, 2002, approximately .90%, or $43.9 million, of the Corporation’s residential real estate loan portfolio was 90 days or more delinquent compared to .99%, or $49.9 million, at December 31, 2001.

Construction Loans

During the years ended December 31, 2002 and 2001, the six months ended December 31, 2000, and the fiscal year ended June 30, 2000, the Corporation originated $792.3 million, $728.4 million, $342.1 million and $608.1 million, respectively, of construction loans. The Corporation conducts its construction lending operations in its primary market areas and Las Vegas, Nevada. The residential construction lending operations, which loans are subject to prudent credit review and other underwriting standards and procedures, are expected to continue to increase over prior periods. At December 31, 2002, approximately ..52%, or $2.3 million, of the Corporation’s residential construction loan portfolio was 90 days or more delinquent compared to .53%, or $3.0 million, at December 31, 2001.

Construction financing is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property’s value at completion of construction and the total estimated cost, including interest. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Corporation may be required to advance funds beyond the amount originally committed to permit completion of the project. If the estimate of value proves to be inaccurate, the Corporation may be confronted, at or prior to the maturity of the loan, with a project having a value which is insufficient to assure full repayment.

Commercial Real Estate and Land Loans

The Corporation originated commercial real estate and land loans totaling $805.6 million, $768.6 million, $291.2 million and $347.0 million, respectively, during the years ended December 31, 2002 and 2001, the six months ended December 31, 2000, and the fiscal year ended June 30, 2000. Commercial real estate lending entails significant additional risks compared with residential real estate lending. These additional risks are due to larger loan balances which are more sensitive to economic conditions, business cycle downturns and construction related risks. The payment of principal and interest due on the Corporation’s commercial real estate loans is substantially dependent upon the performance of the projects securing the loans. As an example, to the extent that the occupancy and rental rates on the secured commercial real estate are not high enough to generate the income necessary to make payments, the Corporation could experience an increased rate of delinquency and could be required either to declare the loans in default and foreclose upon the properties or to make concessions on the terms of the repayment of the loans. At December 31, 2002, approximately .98%, or $18.1 million, of the Corporation’s commercial real estate and land loans were 90 days or more delinquent compared to 1.36%, or $23.3 million, at December 31, 2001.

The aggregate amount of loans which a federal savings institution may make on the security of liens on nonresidential real property may not exceed 400.0% of the institution’s total risk-based capital as determined under current regulatory capital standards. This limitation totaled approximately $3.5 billion at December 31, 2002, compared to $1.9 billion of commercial real estate and land loans outstanding at December 31, 2002. This restriction has not and is not expected to materially affect the Corporation’s business.

Consumer Loans

Federal regulations permit federal savings institutions to make secured and unsecured consumer loans up to 35.0% of an institution’s total regulatory assets. Any loans in excess of 30.0% of assets may only be made directly to the borrower and cannot involve the payment of any finders or referral fees. In addition, a federal savings institution has lending authority above the 35.0% category for certain consumer loans, such as home equity loans, property improvement loans, mobile home loans and savings account secured loans. Consumer loans originated by the Corporation are primarily second mortgage loans, loans to depositors on the security of their savings accounts and loans secured by automobiles. The Corporation has increased its secured consumer lending activities in order to meet its customers’ financial needs and will continue to increase such lending activities in the future in its primary market areas.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee of such loans such as the Corporation, and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of the underlying collateral. At December 31, 2002, approximately .48%, or $8.1 million, of the Corporation’s consumer loans are 90 days or more delinquent compared to .44%, or $6.9 million, at December 31, 2001.

Loan Sales

In addition to originating loans for its portfolio, the Corporation participates in secondary mortgage market activities by selling whole and securitized loans to institutional investors or other financial institutions with the Corporation generally retaining the right to service such loans. Substantially all of the Corporation’s secondary mortgage market activity is with GNMA, FNMA and FHLMC. Conventional conforming loans are either sold for cash as individual whole loans to FNMA or FHLMC, or pooled in exchange for securities issued by FNMA or FHLMC which are then sold to investment banking firms. FHA and VA loans are originated or purchased by the Corporation and either are retained for the Corporation’s real estate loan portfolio or are pooled to form GNMA securities which are subsequently sold to investment banking firms or retained by the Bank.

During the years ended December 31, 2002 and 2001, the six months ended December 31, 2000, and the fiscal year ended June 30, 2000, the Corporation sold an aggregate of $3.4 billion, $2.7 billion, $2.3 billion and $762.1 million, respectively, in mortgage loans. These sales resulted in net realized gains during calendar years 2002 and 2001 totaling $28.5 million and $4.8 million, respectively, and net losses of $18.0 million and $110,000, respectively, during the six months ended December 31, 2000, and the fiscal year ended June 30, 2000. Of the amount of mortgage loans sold during the years ended December 31, 2002 and 2001, the six months ended December 31, 2000, and fiscal year 2000, $3.3 billion, $2.3 billion, $2.2 billion and $742.4 million, respectively, were sold in the secondary market, and the remaining balances were sold to other institutional investors. At December 31, 2002, the carrying value of loans held for sale totaled $914.5 million compared to $381.4 million at December 31, 2001.

Mortgage loans are generally sold in the secondary mortgage market without recourse to the Corporation in the event of borrower default, subject to certain limitations applicable to VA loans. Historical losses realized by the Corporation as a result of limitations applicable to VA loans have been immaterial on an annual basis. However, in connection with a 1987 acquisition of a financial institution, the Bank assumed agreements providing for recourse in the event of default on obligations transferred in connection with sales of certain securities by such institution. At December 31, 2002 and 2001, the remaining balance of these loans sold with recourse totaled $4.3 million and $8.8 million, respectively.

Loan Activity

The following table sets forth the Corporation’s loan and mortgage-backed securities activity for the periods as indicated:


	Year Ended December 31,				Six Months Ended December 31, 2000		Year Ended June 30, 2000
	2002		2001		Six Months Ended December 31, 2000		Year Ended June 30, 2000
	(In Thousands)
Originations:
Real estate loans-
Residential loans	$	1,601,121	$	1,201,279	$	357,465	$	672,295
Construction loans		792,290		728,432		342,102		608,145
Commercial real estate and land loans		805,639		768,578		291,237		346,979
Consumer and other loans		1,058,210		1,343,577		530,862		1,289,878

Loans originated	$	4,257,260	$	4,041,866	$	1,521,666	$	2,917,297


Purchases:
Mortgage loans-
Residential loans	$	3,613,275	$	2,613,945	$	718,495	$	1,697,395
Bulk residential loan purchases		—		—		—		207,494
Commercial loans		—		19,075		9,968		51,267
Mortgage-backed securities		818,299		1,074,215		909,599		160,073

Loans purchased	$	4,431,574	$	3,707,235	$	1,638,062	$	2,116,229


Securitizations:
Mortgage loans securitized into mortgage-backed securities held by the Bank	$	76,947	$	41,910	$	3,543	$	42,635


Sales:
Mortgage loans	$	3,361,384	$	2,736,379	$	2,282,895	$	762,070
Mortgage-backed securities		50,739		93,281		549,834		—

Loans sold	$	3,412,123	$	2,829,660	$	2,832,729	$	762,070

Loan Servicing for Other Institutions

The Corporation services substantially all of the mortgage loans that it originates and purchases (whether retained for the Bank’s portfolio or sold in the secondary market), thereby generating ongoing loan servicing fees. The Corporation also periodically purchases mortgage servicing rights. At December 31, 2002, the Corporation was servicing approximately 136,200 loans and participations for others with principal balances aggregating $11.5 billion, compared to 133,400 loans and participations for others with principal balances totaling $9.5 billion at December 31, 2001.

Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, holding escrow (impound funds) for payment of taxes and insurance, making inspections as required of the mortgage premises, collecting amounts due from delinquent mortgagors, supervising foreclosures in the event of unremedied defaults and generally administering the loans for the investors to whom they have been sold.

The Corporation receives fees for servicing mortgage loans for others, ranging generally from .18% to ..57% per annum on the declining principal balances of the loans. The average service fee collected by the Corporation was .33%, .35%, .36% and .39%, respectively, for the years ended December 31, 2002 and 2001, the six months ended December 31, 2000, and the fiscal year ended June 30, 2000. The Corporation’s servicing portfolio is subject to reduction primarily by reason of normal amortization and prepayment of outstanding mortgage loans. In general, the value of the Corporation’s loan servicing portfolio may also be adversely affected as mortgage interest rates decline and loan prepayments increase. It is expected that income generated from the Corporation’s loan servicing portfolio also will decline in such an environment. This negative effect on the Corporation’s income may be offset somewhat by a rise in origination and servicing fee income attributable to new loan originations, which historically have increased in periods of low mortgage interest rates. The weighted average mortgage loan note rate of the Corporation’s servicing portfolio at December 31, 2002, was 6.82% compared to 7.16% at December 31, 2001.

At December 31, 2002 and 2001, approximately 95.3% and 92.9%, respectively, of the Corporation’s mortgage servicing portfolio for other institutions was covered by servicing agreements pursuant to the mortgage-backed securities programs of GNMA, FNMA and FHLMC. Under these agreements, the Corporation may be required to advance funds temporarily to make scheduled payments of principal, interest, taxes or insurance if the borrower fails to make such payments. Although the Corporation cannot charge any interest on these advanced funds, the Corporation typically recovers the advances within a reasonable number of days upon receipt of the borrower’s payment, or in the absence of such payment, advances are recovered through FHA insurance, VA guarantees or FNMA or FHLMC reimbursement provisions in connection with loan foreclosures. During the years ended December 31, 2002 and 2001, the average amount of funds advanced by the Corporation pursuant to servicing agreements totaled approximately $4.3 million and $2.4 million, respectively.

Interest Rates and Loan Fees

Interest rates charged by the Corporation on its loans are primarily determined by secondary market yield requirements and competitive loan rates offered in its lending areas. In addition to interest earned on loans, the Corporation receives loan origination fees for originating certain loans. These fees are a percentage of the principal amount of the mortgage loan and are charged to the borrower.

Loan Commitments

At December 31, 2002, the Corporation had issued commitments totaling $1.4 billion, excluding the undisbursed portion of loans in process, to fund and purchase loans and to extend credit on consumer and commercial unused lines of credit. These commitments are generally expected to settle within three months following December 31, 2002. These outstanding loan commitments to extend credit do not necessarily represent future cash requirements since many of the commitments may expire without being drawn. Additionally, mortgage loan commitments included in total commitments include loans in the process of approval for which the Corporation has rate lock commitments. The Corporation anticipates that normal amortization and prepayments of loan and mortgage-backed security principal will be sufficient to fund these loan commitments. See “MD&A — Liquidity and Capital Resources” under Item 7 of this Report.

Collection Procedures

If a borrower fails to make required payments on a loan, the Corporation generally will take immediate action to satisfy its claim against the security on the loan. If a delinquency cannot otherwise be cured, the Corporation records a notice of default and commences foreclosure proceedings. When a trustee sale is held, the Corporation generally acquires title to the property. The property may then be sold for cash or with financing conforming to normal loan requirements, or it may be sold or financed with a “loan to facilitate” involving terms more favorable to the borrower than those permitted by applicable regulations for new loans.

Asset Quality

Nonperforming Assets

Loans are reviewed on a regular basis and, except for first mortgage loans and credit cards, are placed on a nonaccruing status when either principal or interest is 90 days or more past due. Interest accrued and unpaid at the time a loan is placed on nonaccruing status is charged against interest income. Subsequent payments are generally first applied to interest income up to the amount charged off and then to the outstanding principal balance. First mortgage loans are placed on a nonaccruing status if four or more monthly payments are missed. Credit cards continue to accrue interest up to 120 days past due at which time the credit card balance plus accrued interest are charged off.

Real estate acquired by the Corporation as a result of foreclosure or by deed in lieu of foreclosure is classified as real estate owned. At foreclosure, such property is stated at the lower of cost or fair value, minus estimated costs to sell. Subsequent impairment losses are recorded when the carrying value exceeds the fair value minus estimated costs to sell the property.

In certain circumstances the Corporation does not immediately foreclose when a delinquency is not cured promptly, particularly when the borrower does not intend to abandon the collateral, since by not foreclosing the risk of ownership would still be retained by the borrower. The evaluation of borrowers and collateral may involve determining that the most economic way to reduce the Corporation’s risk of loss may be to allow the borrower to remain in possession of the property and to restructure the debt as a troubled debt restructuring. In these circumstances, the Corporation would strive to ensure that the borrower’s continued participation in and management of the collateral does not put the Corporation at further risk of loss. In situations in which the borrower is not performing under the restructured terms, foreclosure proceedings are commenced when legally allowable.

A troubled debt restructuring is a loan on which the Corporation, for reasons related to the debtor’s financial difficulties, grants a concession to the debtor, such as a reduction in the loan’s interest rate, a reduction in the face amount of the debt, or an extension of the maturity date of the loan, that the Corporation would not otherwise consider. A loan classified as a troubled debt restructuring may be reclassified as current if such loan has returned to a performing status at a market rate of interest for at least eight to twelve months, the loan-to-value ratio is 80.0% or less, the cash flows generated from the collateralized property support the loan amount subject to minimum debt service coverage as defined and overall applicable economic conditions are favorable. Such loan balances decreased to $1.5 million at December 31, 2002, compared to $3.1 million at December 31, 2001, and $4.3 million at December 31, 2000.

The Corporation’s nonperforming assets totaled $114.0 million at December 31, 2002, a decrease of $17.5 million, or 13.3%, compared to December 31, 2001. This decrease is due to decreases totaling $10.7 million in nonperforming loans, $5.2 million in foreclosed real estate and $1.6 million in troubled debt restructurings. At December 31, 2001, nonperforming assets totaled $131.5 million, an increase of $17.7 million, or 15.6%, compared to December 31, 2000. This increase is the result of a net increase totaling $19.2 million in foreclosed real estate partially offset by net decreases in troubled debt restructurings and nonperforming loans totaling $1.2 million and $299,000, respectively. At December 31, 2000, nonperforming assets totaled $113.8 million, an increase of $25.1 million, or 28.3% compared to June 30, 2000, primarily as a result of an increase of $29.9 million in nonperforming loans partially offset by decreases of $3.6 million in foreclosed real estate and $1.1 million in troubled debt restructurings. For a discussion of the major components of the changes in nonperforming assets at December 31, 2002, compared to December 31, 2001, see “MD&A — Provision for Loan Losses” under Item 7 of this Report.

The following table sets forth information with respect to the Corporation’s nonperforming assets as follows:


	December 31,									June 30,
	2002			2001			2000			2000			1999			1998
	(Dollars in Thousands)
Loans accounted for on a nonaccrual basis: (1)
Real estate—
Residential (2)	$	46,394		$	52,792		$	68,978		$	37,535		$	49,061		$	43,212
Commercial		17,890			23,423			4,446			2,550			12,220			1,369
Consumer and other loans		8,130			6,929			10,019			13,466			8,734			4,785

Total nonperforming loans		72,414			83,144			83,443			53,551			70,015			49,366

Foreclosed real estate:
Commercial		2,550			8,762			10,198			12,862			8,880			8,945
Residential		37,458			36,446			15,824			16,803			14,384			8,821

Total		40,008			45,208			26,022			29,665			23,264			17,766

Troubled debt restructurings: (3)
Commercial		1,547			3,057			4,195			5,259			9,534			3,524
Residential		—			84			90			172			195			778

Total		1,547			3,141			4,285			5,431			9,729			4,302

Nonperforming assets	$	113,969		$	131,493		$	113,750		$	88,647		$	103,008		$	71,434

Nonperforming loans to loans receivable (4)		.93	%		1.02	%		.96	%		.52	%		.75	%		.65	%
Nonperforming assets to total assets		.87	%		1.02	%		.91	%		.64	%		.81	%		.69	%
Allowance for loan losses	$	106,291		$	102,451		$	83,439		$	70,556		$	80,419		$	64,757
Allowance for loan losses to:
Loans receivable (4)		1.36	%		1.25	%		.96	%		.69	%		.86	%		.85	%
Total nonperforming assets		93.26	%		77.91	%		73.35	%		79.59	%		78.07	%		90.65	%
Total nonperforming loans		146.78	%		123.22	%		100.00	%		131.75	%		114.86	%		131.18	%
Nonresidential nonperforming assets		352.93	%		242.94	%		289.14	%		206.68	%		204.28	%		347.73	%

(1)

Excluding credit card loans, no interest income was recorded on loans contractually past due 90 days or more during the years ended December 31, 2002 and 2001, the six months ended December 31, 2000, or during the fiscal years ended June 30, 2000, 1999 and 1998. Had these nonaccruing loans, excluding credit card loans, been current in accordance with their original terms and outstanding throughout this year or since origination, the Corporation would have recorded gross interest income on these loans totaling $6.5 million, $6.4 million, $5.3 million, $3.8 million, $4.2 million and $4.3 million, respectively, during the aforementioned periods. Credit card loans continue to accrue interest up to 120 days past due at which point the credit card loan balances plus accrued interest are charged off.

(2)

Nonperforming residential real estate loans at December 31, 2001 and 2000, and June 30, 2000, have been restated due to a change in determining past due loans. During 2002, the Corporation changed its method of determining delinquent residential real estate loans to a method where the number of days past due are determined by the number of contractually delinquent loan payments. Previous to this change, the Corporation utilized a methodology where the loan system converted monthly loan payments missed on a loan to days past due. This change in determining these delinquent loans conforms the Corporation’s reporting with the Bank’s regulatory thrift financial reporting. This change in methods reduced nonperforming residential real estate loans previously reported by $10.7 million, $12.4 million and $11.5 million, respectively, at December 31, 2001 and 2000, and June 30, 2000. The June 30, 1999 and 1998, balances have not been restated.

(3)

During the years ended December 31, 2002 and 2001, the six months ended December 31, 2000, and the fiscal years ended June 30, 2000, 1999 and 1998, the Corporation recognized interest income on loans classified as troubled debt restructurings aggregating $224,000, $236,000, $176,000, $430,000, $470,000 and $380,000, respectively, whereas under their original terms the Corporation

would have recognized interest income of $255,000, $268,000, $194,000, $494,000, $526,000 and $499,000, respectively. At December 31, 2002, the Corporation had no commitments to lend additional funds to borrowers whose loans were subject to troubled debt restructuring.

(4)

Ratios are calculated based on the net book value of loans receivable before deducting allowance for loan losses at the respective dates. Excludes loans held for sale.

The preceding table excludes nonperforming loans held for sale totaling $32.0 million and $37.9 million, respectively, at December 31, 2002 and 2001, related to the GNMA optional repurchase program. There were no nonperforming loans held for sale at December 31, 2000, and June 30, 2000, 1999 and 1998. Loans held for sale are accounted for at the lower of aggregate cost or market value, with valuation changes included as adjustments to gain or loss on the sale of these loans.

The geographic concentration of nonperforming loans as of the dates indicated was as follows:


	December 31,						June 30,
State	2002		2001		2000		2000		1999		1998
	(In Thousands)
Iowa	$	9,716	$	8,589	$	11,367	$	12,135	$	6,111	$	4,013
Oklahoma		9,622		2,440		3,000		2,070		3,568		3,178
Kansas		9,074		15,542		5,528		3,966		15,552		6,030
Nevada		6,650		10,122		23,932		1,656		1,651		1,198
Nebraska		3,525		5,028		2,999		2,140		2,455		2,595
Maryland		3,134		3,667		2,925		3,334		2,712		2,258
Florida		3,093		2,999		3,422		3,628		4,356		1,502
Colorado		2,242		5,527		1,725		1,712		2,646		4,065
Texas		2,058		2,236		1,304		1,524		1,378		2,028
Arizona		1,953		2,423		1,111		572		450		1,195
Alabama		1,939		2,075		1,741		1,145		863		1,307
Virginia		1,901		1,741		1,864		2,126		1,691		1,479
Ohio		1,852		1,986		2,651		2,271		1,818		722
Georgia		1,686		2,854		3,127		2,036		2,752		2,127
North Carolina		1,314		656		1,479		1,056		907		293
Missouri		1,296		1,841		1,433		900		3,241		1,944
Illinois		1,209		1,048		1,212		866		1,325		1,579
California		1,100		1,159		2,505		2,082		3,988		3,377
Pennsylvania		671		943		646		814		844		852
Minnesota		633		804		499		313		590		1,004
Michigan		527		442		471		497		725		310
Washington		473		830		588		509		690		182
Connecticut		365		1,013		432		253		605		752
New Jersey		361		556		934		972		1,414		1,277
New York		276		457		980		771		686		671
Other states		5,744		6,166		5,568		4,203		6,997		3,428

Nonperforming loans	$	72,414	$	83,144	$	83,443	$	53,551	$	70,015	$	49,366

Nonperforming loans at December 31, 2002, consisted of the following types and number of loans:


	Amount		Number of Loans
	(Dollars in Thousands)
Residential real estate loans	$	43,939	750
Commercial real estate loans		15,306	40
Residential construction loans		2,243	10
Commercial construction loans		2,796	3
Consumer loans		4,820	467
Agricultural loans		1,865	23
Commercial and other operating loans		1,334	28
Small business loans		111	3

	$	72,414	1,324

The geographic concentration of foreclosed real estate as of the dates indicated was as follows:


	December 31,						June 30,
State	2002		2001		2000		2000			1999			1998
	(In Thousands)
Nevada	$	22,182	$	21,892	$	167	$	333		$	657		$	138
Iowa		2,799		2,167		1,905		2,016			3,595			1,345
Missouri		2,427		4,593		4,147		8,725			4,811			465
Kansas		1,980		1,580		6,997		5,753			1,809			1,876
Nebraska		1,685		1,691		944		796			1,196			5,417
Illinois		1,465		1,539		1,955		2,179			2,069			373
Oklahoma		1,257		955		770		1,913			1,292			1,299
Georgia		694		1,051		451		386			301			140
Colorado		591		444		791		1,119			2,768			2,825
Florida		583		702		1,410		1,422			1,180			297
Arizona		462		4,417		401		171			582			—
Maryland		446		823		839		531			471			1,315
Ohio		345		706		967		550			678			—
Pennsylvania		199		336		79		126			377			111
Minnesota		89		78		99		163			627			456
New Jersey		80		21		269		102			122			317
Indiana		68		62		431		559			395			29
California		67		69		443		626			1,098			52
Texas		5		9		525		503			85			445
Other states		2,584		2,073		2,432		1,917			2,224			1,338
Reserves		—		—		—		(225	)		(3,073	)		(472	)

Foreclosed real estate	$	40,008	$	45,208	$	26,022	$	29,665		$	23,264		$	17,766

At December 31, 2002, foreclosed real estate totaling $40.0 million (432 properties) consisted of residential real estate totaling $37.5 million (418 properties) or 93.6% of the total and commercial real estate totaling $2.5 million (14 properties). The real estate located in Nevada primarily consists of a residential master planned community property totaling $22.2 million at December 31, 2002. The Corporation continues to develop and manage this property while listing such property for sale.

Under the Corporation’s credit policies and practices, certain real estate loans meet the definition of impaired loans under Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” and Statement of Financial Accounting Standards No. 118, “Accounting by Creditors for Impairment of a Loan — Income Recognition and Disclosures.” A loan is considered impaired when it is probable that the Corporation, based upon current information, will not collect amounts due, both principal and interest, according to the contractual terms of the loan agreement. Loan impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the observable market price of the loan or the fair value of the collateral if the loan is collateral dependent. Certain loans are exempt from the provisions of the aforementioned accounting statements, including large groups of smaller-balance homogenous loans that are collectively evaluated for impairment which, for the Corporation, include one-to-four family first mortgage loans and consumer loans.

Loans reviewed for impairment by the Corporation are primarily commercial loans and loans modified in a troubled debt restructuring. The Corporation’s impaired loan identification and measurement processes are conducted in conjunction with the Corporation’s review of classified assets and adequacy of its allowance for possible loan losses. Specific factors utilized in the impaired loan identification process include, but are not limited to, delinquency status, loan-to-value ratio, debt coverage and certain other conditions pursuant to the

Corporation’s classification policy. At December 31, 2002, the Corporation had impaired loans totaling $13.3 million, net of specific reserves. Troubled debt restructurings totaling $1.1 million, net of specific reserves totaling $475,000, are classified as impaired loans and included in the table for nonperforming assets. At December 31, 2001, impaired loans totaled approximately $17.3 million.

Classification of Assets

Savings institutions are required to review their assets on a regular basis and, as warranted, classify them as “substandard,” “doubtful,” or “loss” as defined by OTS regulations. Adequate valuation allowances are required to be established for assets classified as substandard or doubtful. If an asset is classified as a loss, the institution must either establish a specific valuation allowance equal to the amount classified as loss or charge off such amount. An asset which does not currently warrant classification as substandard but which possesses credit deficiencies or potential weaknesses deserving close attention is required to be designated as “special mention.” In addition, a savings institution is required to set aside adequate valuation allowances to the extent that any affiliate possesses assets which pose a risk to the savings institution. The OTS has the authority to approve, disapprove or modify any asset classification or any amount established as an allowance pursuant to such classification. The Corporation generally charges off the amount of loans classified as loss. At December 31, 2002, the Corporation had $75.3 million in assets classified as special mention, $146.6 million in assets classified as substandard, $3.6 million in assets classified as doubtful and no assets classified as loss. Substantially all nonperforming assets at December 31, 2002, are classified as substandard pursuant to applicable asset classification standards. Of the Corporation’s loans which were not classified at December 31, 2002, there were no loans where known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of the borrowers to comply with present loan repayment terms.

Loan and Real Estate Review Policy

Management of the Corporation has the responsibility for establishing policies and procedures for the timely evaluation of the credit risk in the Corporation’s loan and real estate portfolios. Management is also responsible for the determination of all specific and estimated provisions for loan losses and impairments for real estate losses, taking into consideration a number of factors, including changes in the composition of the Corporation’s loan portfolio and real estate balances, current economic conditions, including real estate market conditions in the Corporation’s lending areas that may affect the borrower’s ability to make payments on loans, regular examinations by the Corporation’s credit review team of the quality of the overall loan and real estate portfolios, and regular review of specific problem loans and real estate.

Management also has the responsibility of ensuring timely charge-offs of loan and real estate balances, as appropriate, when general and economic conditions warrant a change in the value of these loans and real estate. To ensure that credit risk is properly and timely monitored, this responsibility has been delegated to a credit review team which consists of key personnel of the Corporation knowledgeable in the specific areas of loan and real estate valuation.

The objectives of the credit review team are:

•

to examine the risk of collectibility of the Corporation’s loans and the likelihood of liquidation of real estate and other assets and their book value,

•

to confirm problem assets at the earliest possible time,

•

to assure an adequate level of allowances for loan losses to cover identified and anticipated credit risks,

•

to monitor the Corporation’s compliance with established policies and procedures, and

•

to provide the Corporation’s management with information obtained through the asset review process.

Effective January 1, 2002, the Corporation amended its policy for calculating reserves on the loan portfolio by classifying the credit risk of the portfolio into eight categories compared to six at December 31, 2001. Classes one through four represent varying degrees of pass rated credits, or minimal credit risk. Classes five (special mention), six (substandard), seven (doubtful) and eight (loss), mirror regulatory definitions and are consistent between all commercial loan types. Also, due to the increase in the size of the small business loan portfolio, such loans have been broken out from consumer loans and are subject to new reserve percentages. These changes were designed to more accurately reflect the inherent risk in the Corporation’s loan portfolio and the current economic environment.

The credit review team analyzes all significant loans and real estate of the Corporation for appropriate levels of reserves on loans and impairment losses on real estate based on varying degrees of loan or real estate value weakness. These types of loans and real estate are assigned a credit risk rating as follows:


Credit Risk Rating Class		Credit Quality
One		Excellent
Two		Good
Three		Satisfactory
Four		Acceptable
Five		Special Mention
Six		Substandard
Seven		Doubtful
Eight		Loss

Loans with minimal credit risk (not adversely classified or with a credit risk rating of one to five) generally have reserves established on the basis of the Corporation’s historical loss experience and various other factors. Loans adversely classified (substandard, doubtful, loss or with a credit risk rating of six to eight) have greater levels of reserves established, including specific reserves if applicable, to recognize impairment in the value of loans. Impairment losses are recorded on real estate when the fair value less estimated selling costs of the property is less than the carrying value of the property.

It is management’s responsibility to maintain a reasonable allowance for loan losses applicable to all categories of loans through periodic charges to operations. Management employs a systematic methodology to determine the amount of specific allowances allocated to specific loans. Specific loans that are impaired, or any portion impaired, may be allocated a specific allowance equal to the amount of impairment or, instead of establishing a specific allowance, the impaired portion also may be 100% charged off when management determines such amount to be uncollectable. The estimated allowances established on each of the Corporation’s specific pools of outstanding loan portfolios is based on a minimum and maximum percentage range of the specific portfolios as follows:


Type of Loan and Status	Minimum Loan Loss Percentage		Maximum Loan Loss Percentage
Residential real estate loans:
Current	.15	%	.25	%
90 days delinquent (or classified substandard)	7.50		10.00
Commercial real estate loans:
Class 1—excellent	.25		.50
Class 2—good	.60		1.20
Class 3—satisfactory	.85		1.70
Class 4—acceptable	1.35		2.70
Class 5—special mention	5.00		10.00
Class 6—substandard	10.00		20.00
Class 7—doubtful	50.00		100.00
Class 8—loss	100.00		100.00


Type of Loan and Status	Minimum Loan Loss Percentage		Maximum Loan Loss Percentage
Construction loans:
Class 1—excellent	.30	%	.60	%
Class 2—good	.65		1.30
Class 3—satisfactory	.90		1.80
Class 4—acceptable	1.40		2.80
Class 5—special mention	5.00		10.00
Class 6—substandard	10.00		20.00
Class 7—doubtful	50.00		100.00
Class 8—loss	100.00		100.00
Commercial operating loans:
Class 1—excellent	.45		.90
Class 2—good	.80		1.60
Class 3—satisfactory	1.05		2.10
Class 4—acceptable	1.55		3.10
Class 5—special mention	5.00		10.00
Class 6—substandard	10.00		20.00
Class 7—doubtful	50.00		100.00
Class 8—loss	100.00		100.00
Agricultural loans:
Class 1—excellent	.55		1.10
Class 2—good	.90		1.80
Class 3—satisfactory	1.15		2.30
Class 4—acceptable	1.65		3.30
Class 5—special mention	5.00		10.00
Class 6—substandard	10.00		20.00
Class 7—doubtful	50.00		100.00
Class 8—loss	100.00		100.00
Consumer loans:
Current—auto	1.75		2.50
Current—indirect	2.75		3.50
Current—home equity	.75		1.50
Current—all other	2.75		3.50
Substandard and 90 days delinquent	20.00		30.00
120 days delinquent (unsecured balances of consumer loans 120 days delinquent are generally written off)	100.00		100.00
Small business loans:
Pass	2.00		4.00
Special mention	2.00		10.00
Substandard	30.00		50.00
Doubtful/loss	100.00		100.00
Credit card/taxsaver:
Current standard	4.00		5.00
Current taxsaver	.75		1.50
Substandard and 90 days delinquent	20.00		30.00
120 days delinquent (credit cards 120 days delinquent are generally written off)	100.00		100.00
Commercial leases:
Pass	2.00		4.00
Special mention	2.00		10.00
Substandard	30.00		50.00
Doubtful/loss	100.00		100.00

Allowance for Losses on Loans

The allowance for loan losses is based upon management’s continuous evaluation of the collectibility of outstanding loans which takes into consideration such factors as changes in the composition of the loan portfolio and economic and business conditions that may affect the borrower’s ability to pay, credit quality and delinquency trends, regular examinations by the Corporation’s credit review team of specific problem loans and of the overall portfolio quality and real estate market conditions in the Corporation’s lending areas.

Management determines the elements of the allowance through two methods. The first valuation process is the analysis of specific loans for individual impairment. This impairment is measured according to the provisions of Statements of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” and No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures.” Management applies specific monitoring policies and procedures that vary according to the relative risk profile and other characteristics of the loans within the various loan portfolios. Management completes periodic specific credit evaluations on commercial real estate, construction, commercial operating, and agricultural loans and loan relationships with committed balances in excess of $1.0 million. Management reviews these loans to assess the ability of the borrower to service all principal and interest obligations and, as a result, may adjust the risk grade accordingly and the corresponding classification. Loans and loan relationships in these portfolios which possess, in management’s estimation, potential or well defined weaknesses which could affect the full collection of the Corporation’s contractual principal and interest are evaluated under more stringent reporting and oversight procedures. These specific loans are classified as either special mention, substandard, doubtful or loss. The loans, or a portion of a loan, classified as loss are allocated a specific allowance equal to 100% of the amount of the loan, or such loan is charged off.

The second valuation process in determining the estimated allowance is based on minimum and maximum range percentages applied to each of the Corporation’s pools of outstanding loan portfolios. The Corporation’s residential, consumer and credit card portfolios are relatively homogenous. Generally, no single loan is individually significant in terms of its size or potential loss. Therefore, management reviews these portfolios by analyzing their performance as a specific pool against which management estimates an allowance for impairment. Management’s determination of the level of the reserve within the minimum and maximum percentages for these homogenous pools rests upon various judgments and assumptions used to determine the impairment related to the risk characteristics of the specific portfolio pools. The minimum and maximum range percentages are evaluated at least on a quarterly basis for appropriateness based on historical write-offs, delinquency trends, economic conditions and other factors.

The Corporation’s policy is to charge-off loans or portions thereof against the allowance for loan losses in the period in which loans or portions thereof are determined to be uncollectable. When the Corporation records charge-offs on these loans, it typically also begins the foreclosure process of taking possession of the real estate which served as collateral for such loans. A majority of the Corporation’s loans are collateralized by residential or commercial real estate. Therefore, the collectibility of such loans is susceptible to changes in prevailing real estate market conditions and other factors which can cause the fair value of the collateral to decline below the loan balance. Recoveries of loan charge-offs occur when the loan payments are received on the deficient loan in excess of the remaining recorded book balance of the loan. Upon foreclosure and conversion of the loan into foreclosed real estate, the Corporation may realize income to real estate operations through the disposition of such real estate when the sale proceeds exceed the carrying value of the real estate.

Although management believes that the Corporation’s allowance for loan losses is adequate to reflect the risk inherent in its portfolios, there can be no assurance that the Corporation will not experience increases in its nonperforming assets, that it will not increase the level of its allowances in the future or that significant provisions for losses will not be required based on factors such as deterioration in market conditions, changes in borrowers’ financial conditions, delinquencies and defaults. In addition, regulatory agencies review the adequacy of the allowance for loan losses on a regular basis as an integral part of their examination process. Such agencies may require additions to the allowance based on their judgments of information available to them at the time of their examinations.

The following table sets forth the activity in the Bank’s allowance for loan losses for the periods as indicated:


	Year Ended December 31,						Six Months Ended December 31, 2000			Year Ended June 30,
	2002			2001			Six Months Ended December 31, 2000			2000			1999			1998
	(Dollars in Thousands)
Allowance for loan losses at beginning of year	$	102,451		$	83,439		$	70,556		$	80,419		$	64,757		$	60,929
Loans charged-off:
Single-family residential		(4,743	)		(2,405	)		(909	)		(1,874	)		(2,542	)		(2,838	)
Multi-family residential and commercial real estate		(8,247	)		(1,054	)		(2,564	)		(1,938	)		(71	)		—
Consumer and other		(19,703	)		(21,615	)		(13,435	)		(20,350	)		(13,147	)		(11,319	)

Loans charged-off		(32,693	)		(25,074	)		(16,908	)		(24,162	)		(15,760	)		(14,157	)


Recoveries:
Single-family residential		—			6			9			81			210			254
Multi-family residential and commercial real estate		60			—			—			5			—			2,822
Consumer and other		5,615			5,312			2,539			5,747			3,464			1,740

Recoveries		5,675			5,318			2,548			5,833			3,674			4,816

Net loans charged-off		(27,018	)		(19,756	)		(14,360	)		(18,329	)		(12,086	)		(9,341	)
Provision charged to operations		31,002			38,945			27,854			13,760			12,400			13,853
Activity of combining companies to convert to June 30 fiscal year		—			—			—			—			—			390
Allowances acquired in acquisitions		—			—			—			—			17,307			1,273
Change in estimate of allowance for bulk purchased loans		(144	)		(172	)		(87	)		(5,294	)		(1,959	)		(2,324	)
Charge-off to allowance for bulk purchased loans		—			—			(28	)		—			—			(23	)
Charge-off to allowance on sale of securitized loans		—			(5	)		(496	)		—			—			—

Allowance for loan losses at end of year	$	106,291		$	102,451		$	83,439		$	70,556		$	80,419		$	64,757

Ratio of net loans charged-off to average loans receivable outstanding during the period		.34	%		.23	%		.14	%		.19	%		.14	%		.13	%

Average balance of outstanding loans receivable	$	7,951,229		$	8,440,881		$	10,049,346		$	9,710,022		$	8,736,470		$	7,441,677

Investment Activities

Management believes that the Bank’s procedures for managing liquidity are sufficient to ensure its safe and sound operation. The Corporation’s management objective is to invest primarily in short-term liquid assets so as to maintain liquidity at a level sufficient to assure adequate funds, taking into account anticipated cash flows and available sources of credit, to allow future flexibility to meet withdrawal requests, to fund loan commitments, to maximize income while protecting against credit risks and to manage the repricing characteristics of the Corporation’s assets and liabilities. Such liquid funds are managed in an effort to produce the highest yield consistent with maintaining safety of principal. The relative size and mix of investment securities in the Corporation’s portfolio are based on management’s judgment compared to the yields and maturities available on other investment securities. The Corporation emphasizes low credit risk in selecting investment options.

The following table sets forth the carrying value of the Corporation’s investment securities and short-term cash investments as of the dates indicated as follows:


	December 31,						June 30, 2000
	2002		2001		2000		June 30, 2000
	(In Thousands)
U.S. Treasury and other Government agency obligations	$	882,017	$	848,131	$	534,502	$	894,099
Obligations of states and political subdivisions		228,648		179,593		141,363		51,646
Other debt securities		185,385		122,621		95,272		47,422

Total investment securities		1,296,050		1,150,345		771,137		993,167
Interest-earning cash on deposit and federal funds		505		590		1,283		1,086

Total investments	$	1,296,555	$	1,150,935	$	772,420	$	994,253

The following table sets forth the scheduled maturities, amortized cost, market values and weighted average yields for the Corporation’s investment securities at December 31, 2002:


	One Year or Less				Over One Within Five Years				Over Five Within Ten Years				More Than Ten Years				Total
	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Market Value		Average Yield
	(Dollars in Thousands)
U.S. Treasury and other Government agency obligations	$	—	—	%	$	114,256	5.30	%	$	650,876	4.61	%	$	68,810	1.94	%	$	833,942	$	882,017	4.50	%
States and political subdivisions		1,185	5.22			16,174	6.09			15,916	4.87			182,365	4.85			215,640		228,648	4.94
Other debt securities		—	—			45,133	5.98			23,183	6.43			110,797	3.56			179,113		185,385	4.58

Total	$	1,185	5.22	%	$	175,563	5.55	%	$	689,975	4.68	%	$	361,972	3.92	%	$	1,228,695	$	1,296,050	4.61	%

For further information regarding the Corporation’s investment securities, see Note 3 “Investment Securities” to the Consolidated Financial Statements under Item 8 of this Report.

Sources of Funds

General

Deposits have historically been the major source of the Corporation’s funds for lending and other investment purposes. In addition to deposits, the Corporation derives funds from principal and interest repayments on loans and mortgage-backed securities, sales of loans, FHLB advances, prepayment and maturity of investment securities, and other borrowings. At December 31, 2002, deposits made up 54.1% of total interest-bearing liabilities compared to 54.0% at December 31, 2001, and 67.3% at December 31, 2000. Deposit levels are significantly influenced by general interest rates, economic conditions and competition. Other borrowings, primarily FHLB advances, are utilized to compensate for any decreases in the normal or expected inflow of deposits.

Deposits

The Corporation’s deposit strategy is to emphasize acquisition and retention of consumer and commercial deposits acquired through the retail branch network. Deposits are acquired through extensive marketing and advertising efforts and product promotion, such as offering a variety of checking accounts and deposit programs to satisfy customer needs. The Corporation has increased its non-interest bearing checking accounts and plans to increase such non-interest checking accounts in the future. In addition, the Corporation intends to continue pricing its certificates of deposit products at rates that minimize the Corporation’s total costs of funds while still allowing the Corporation to retain the customer deposit and the overall customer relationship. The competition for certificates of deposit is very strong in a market of shrinking funds as individuals continually seek the most attractive investment alternatives available. Rates on deposits are priced based on the competitive environment, what is considered necessary in order to retain the customer deposit and relationship, and other investment opportunities available to the customers. In addition, rates on deposits are based upon the Corporation’s desire to control the flow of funds in its deposit accounts according to its business objectives and the cost of alternative sources of funds.

The Corporation’s core deposits (checking accounts, money market accounts and savings accounts) increased $150.7 million to $3.6 billion at December 31, 2002, compared to $3.4 billion at December 31, 2001. Non-interest bearing checking accounts totaled $974.5 million at December 31, 2002, compared to $699.9 million at December 31, 2001.

Fixed-term, fixed-rate certificates of deposit at December 31, 2002, represented 44.2% (or $2.8 billion) of total deposits compared to 46.2% (or $3.0 billion) of total deposits at December 31, 2001. The Corporation offers certificate accounts with terms ranging from one month to 120 months. The net decrease totaling $108.2 million in certificates of deposits comparing December 31, 2002, to December 31, 2001, is due primarily to the Corporation’s planned run-off of higher costing certificates of deposit accounts from single service customer households according to the Corporation’s business plan. In addition, the sale of four branches in Minnesota during 2002 contributed to the decline in certificate of deposit balances.

For additional information on the Corporation’s deposits, see Note 12 “Deposits” to the Consolidated Financial Statements under Item 8 of this Report.

The following table sets forth the balances and percentages of the various types of deposits offered by the Corporation at the dates indicated and the change in the amount of deposits between such dates:


	December 31, 2002							December 31, 2001							December 31, 2000							June 30, 2000
	Amount		% of Deposits		Increase (Decrease)			Amount		% of Deposits		Increase (Decrease)			Amount		% of Deposits		Increase (Decrease)			Amount		% of Deposits
	(Dollars in Thousands)

Savings accounts	$	1,618,593	25.1	%	$	(321,003	)	$	1,939,596	30.3	%	$	78,522		$	1,861,074	24.2	%	$	285,694		$	1,575,380	21.5	%
Checking accounts		1,469,330	22.8			270,684			1,198,646	18.7			132,676			1,065,970	13.8			37,330			1,028,640	14.0
Money market accounts		505,679	7.9			201,059			304,620	4.8			(77,724	)		382,344	5.0			(148,973	)		531,317	7.3
Certificates of deposit		2,845,439	44.2			(108,221	)		2,953,660	46.2			(1,431,438	)		4,385,098	57.0			189,935			4,195,163	57.2

Total deposits	$	6,439,041	100.0	%	$	42,519		$	6,396,522	100.0	%	$	(1,297,964	)	$	7,694,486	100.0	%	$	363,986		$	7,330,500	100.0	%

The following table shows the composition of average deposit balances and average rates for the periods as indicated:


	Year Ended December 31,								Six Months Ended December 31, 2000				Year Ended June 30, 2000
	2002				2001				Six Months Ended December 31, 2000				Year Ended June 30, 2000
	Average Balance		Avg. Rate		Average Balance		Avg. Rate		Average Balance		Avg. Rate		Average Balance		Avg. Rate
	(Dollars in Thousands)

Savings accounts (1)	$	1,802,558	4.32	%	$	1,958,022	4.73	%	$	1,703,299	5.34	%	$	1,320,996	4.48	%
Checking accounts		1,278,541	.11			1,119,219	.37			1,031,255	.61			1,041,483	.71
Money market acounts		314,243	1.32			335,798	2.77			448,043	3.82			774,660	4.01
Certificates of deposit		2,862,960	3.36			3,709,030	5.51			4,283,327	5.88			4,295,975	5.31

Average deposit accounts (2)	$	6,258,302	2.87	%	$	7,122,069	4.36	%	$	7,465,924	4.90	%	$	7,433,114	4.38	%

(1)

The average rate is affected by interest expense on interest rate swap agreements totaling $50.4 million, $28.1 million, $1.0 million and $2.9 million for the respective periods.

(2)

The average balances reflect the sales of deposits totaling $25.3 million, $446.3 million, $30.2 million and $10.4 million for the respective periods pursuant to branch divestiture initiatives.

The following table sets forth the Corporation’s certificates of deposit (fixed maturities) classified by rates at the periods as indicated:


	December 31,						June 30, 2000
Rate	2002		2001		2000		June 30, 2000
	(In Thousands)

Less than 2.00%	$	672,486	$	45,207	$	1,968	$	—
2.00%—2.99%		986,701		562,840		78		7,685
3.00%—3.99%		705,000		537,808		6,119		6,740
4.00%—4.99%		418,350		825,086		583,156		771,419
5.00%—5.99%		55,487		611,563		1,251,274		2,007,819
6.00%—6.99%		5,681		257,613		2,313,213		1,328,741
7.00% and over		1,734		113,543		229,290		72,759

Certificates of deposit	$	2,845,439	$	2,953,660	$	4,385,098	$	4,195,163

The following table presents the outstanding amount of certificates of deposit in amounts of $100,000 or more by time remaining until maturity at the periods as indicated:


	December 31,						June 30, 2000
Maturity Period	2002		2001		2000		June 30, 2000
	(In Thousands)

Three months or less	$	180,134	$	256,828	$	353,172	$	208,258
Over three through six months		196,738		69,244		222,913		117,680
Over six through twelve months		183,690		87,912		279,053		254,141
Over twelve months		99,868		70,136		61,388		113,341

Total	$	660,430	$	484,120	$	916,526	$	693,420

Borrowings

The Corporation has also relied upon other borrowings, primarily advances from the FHLB, as additional sources of funds. The maximum amount of FHLB advances which the FHLB will advance for purposes other than meeting deposit withdrawals fluctuates from time to time in accordance with federal regulatory policies. The Corporation is required to maintain an investment in FHLB stock in an amount equal to the greater of 1.0% of the aggregate unpaid loan principal of the Corporation’s loans secured by home mortgage loans, home purchase contracts and similar obligations, or 5.0% of advances from the FHLB to the Corporation. The Corporation is also required to pledge such stock as collateral for FHLB advances. In addition to this collateral requirement, the Corporation is required to pledge additional collateral which may be unencumbered whole residential first mortgage loans with an aggregate unpaid principal amount equal to 158.0% of the Corporation’s total outstanding FHLB advances. Alternatively, the Corporation can pledge 90.0% of the market value of U.S. government or U.S. government agency guaranteed securities, including mortgage-backed securities, as collateral for the outstanding FHLB advances. Pursuant to these requirements, as of December 31, 2002, the Corporation had pledged $4.7 billion of its real estate loans and $691.7 million of its mortgage backed securities and held FHLB stock totaling $283.2 million.

At December 31, 2002, the Corporation had advances totaling $4.8 billion from the FHLB at interest rates ranging from 1.35% to 7.69% and at a weighted average rate of 4.66%. At December 31, 2001, and December 31, 2000, such advances from the FHLB totaled $4.9 billion and $3.6 billion, respectively, at weighted average rates of 4.76% and 6.41%. Fixed-rate advances totaling $1.7 billion at December 31, 2002, with a weighted average rate of 5.29% are convertible into adjustable-rate advances at the option of the FHLB with call dates ranging from January 2003 to March 2003. Such convertible advances all have scheduled maturities due over five years. See Note 15 “Derivative Financial Instruments” to the Consolidated Financial Statements under Item 8 of this Report for additional information relating to the Corporation’s hedging strategies for the management of interest rate risk involving FHLB advances.

Set forth below is certain information relating to the Corporation’s FHLB advances and securities sold under agreements to repurchase at the dates and for the periods indicated:


	Year Ended December 31,						Six Months Ended December 31, 2000			Year Ended June 30, 2000
	2002			2001			Six Months Ended December 31, 2000			Year Ended June 30, 2000
	(Dollars in Thousands)
FHLB Advances:
Balance at end of year	$	4,848,997		$	4,939,056		$	3,565,465		$	5,049,582
Maximum month-end balance	$	5,508,180		$	4,928,075		$	5,180,560		$	5,049,582
Average balance	$	5,204,501		$	4,265,468		$	4,883,700		$	4,373,510
Weighted average interest rate during the year		4.68	%		5.49	%		6.10	%		5.51	%
Weighted average interest rate at end of year		4.66	%		4.76	%		6.41	%		5.98	%

Repurchase Agreements:
Balance at end of year	$	400,446		$	201,912		$	6,905		$	33,379
Maximum month-end balance	$	402,228		$	201,912		$	33,411		$	132,432
Average balance	$	353,977		$	82,215		$	18,692		$	69,763
Weighted average interest rate during the year		3.93	%		5.32	%		4.98	%		5.62	%
Weighted average interest rate at end of year		3.30	%		4.30	%		4.91	%		4.99	%

For additional information on the Corporation’s FHLB advances, securities sold under agreements to repurchase and other borrowings, see Note 13 “Advances from the Federal Home Bank” and Note 14 “Other Borrowings” to the Consolidated Financial Statements under Item 8 of this Report.

Customer Services

Retail management aggressively markets the Corporation’s various checking and loan products since these are the principal entry points for consumers seeking a banking relationship. The Corporation’s primary goal is to become the new customer’s primary bank so that the opportunity is there immediately and over time to cross-sell the Corporation’s numerous services to develop profitable household relationships. Accordingly, management continues to update the data processing equipment within the branch operations to provide a cost-effective and efficient delivery of services to the Corporation’s customers. Management has also been proactive in the implementation of new consumer-oriented technologies, including online banking and bill-paying through the Corporation’s web site at www.comfedbank.com. Management continues to strive to provide customers with the ability to bank when, where and how they choose. The Corporation utilizes a full-service cash management program to further develop the Corporation’s commercial banking relationships. The Corporation utilizes an internet-based cash management tool providing business owners access to full-service electronic banking. Services of this program, among others, include funds transfer, debit of consumer accounts, electronic payment of vendors, payroll direct deposits and wire transfers. In addition to online banking, the Corporation offers customers the ability to bank in person at our free-standing branch offices and supermarket locations, many of which offer extended weekday and weekend hours; by telephone, utilizing our 24-hour AccessNow automated customer service system tied to extended-hour operator availability; and by ATMs through the Corporation’s proprietary network and links to other national and international ATM services.

Subsidiaries

The Bank is permitted to invest an amount equal to 2.0% of its consolidated regulatory assets in capital stock and secured and unsecured loans in its service corporations, and an amount equal to an additional 1.0% of its consolidated regulatory assets when such additional investment is used for community development purposes. In addition, federal savings institutions meeting regulatory capital requirements and certain other tests may invest up to 50.0% of their regulatory core capital in conforming first mortgage loans to service corporations. Under such limitations, at December 31, 2002, the Bank was allowed to invest up to $384.0 million in the stock of, or loans to, service corporations (based upon the 3.0% limitation). As of December 31, 2002, the Bank’s investment in capital stock in its service corporations and their wholly-owned subsidiaries was $8.4 million.

Regulatory capital standards also contain a provision requiring that in determining capital compliance all savings associations must deduct from capital the amount of all post-April 12, 1989, investments in and extensions of credit to subsidiaries engaged in activities not permissible for national banks. Currently, the Bank has two subsidiaries (Commercial Federal Service Corporation and First Savings Investment Corporation) engaged in activities not permissible for national banks. Investments in such subsidiaries must be 100% deducted from capital. See “Regulation — Regulatory Capital Requirements.” At December 31, 2002, the total investment in such subsidiaries was $8.8 million which was deducted from capital. Capital deductions are not required for investment in subsidiaries engaged in non-national bank activities as agent for customers rather than as principal, subsidiaries engaged solely in mortgage banking activities, and certain other exempted subsidiaries.

The Bank is also required to give the FDIC and the Director of the OTS 30 days prior notice before establishing or acquiring a new subsidiary, or commencing any new activity through an existing subsidiary. Both the FDIC and the Director of the OTS have authority to order termination of subsidiary activities determined to pose a risk to the safety or soundness of the institution.

At December 31, 2002, the Bank had eleven wholly-owned subsidiaries, four of which own and operate certain real estate properties of the Bank. With the exception of the two real estate subsidiaries discussed above, these subsidiaries are classified as service corporations and are considered engaged in permissible activities therefore not requiring deductions from capital. Descriptions of the principal active subsidiaries of the Bank follow.

See Exhibit 21 “Subsidiaries of the Corporation” herein for a complete listing of all subsidiaries of the Corporation.

Commercial Federal Mortgage Corporation (“CFMC”)

Effective October 1, 2002, CFMC, the Bank’s wholly-owned full-service mortgage banking subsidiary, was dissolved. All real estate lending, secondary marketing, mortgage servicing and foreclosure activities are now conducted through the Bank. This dissolution had no effect on the Corporation’s financial position, liquidity or results of operations.

Commercial Federal Investment Services, Inc. (“CFIS”)

CFIS offers customers discount brokerage services in 48 of the Bank’s branch offices. CFIS provides investment advice and access to all major stock, bond, mutual fund, and option markets through a third party registered broker-dealer, who provides all support functions either independently or through affiliates.

Commercial Federal Insurance Corporation (“CFIC”)

CFIC serves as a full-service independent insurance agency, offering a full line of homeowners, commercial (including property and casualty), health, auto and life insurance products. Additionally, a wholly-owned subsidiary of CFIC provides reinsurance on credit life and disability policies written by an unaffiliated carrier for consumer loan borrowers of the Corporation.

Commercial Federal Service Corporation (“CFSC”)

CFSC was formed primarily to develop and manage real estate, principally apartment complexes located in eastern Nebraska, directly and through a number of limited partnerships. Subsidiaries of CFSC act as general partner and syndicator in many of the limited partnerships. Under the capital regulations previously discussed, the Bank’s investments in and loans to CFSC are fully excluded from regulatory capital. See “Regulation — Regulatory Capital Requirements.”

REIT Holding Company (“REIT”)

The real estate investment trust was formed to hold mortgage loan participation interests. All earnings from the REIT are derived from loan participation interests acquired from the Bank.

Employees

At December 31, 2002, the Corporation and its wholly-owned subsidiaries had approximately 2,800 employees. The Corporation provides its employees with a comprehensive benefit program, including major medical insurance, dental insurance, life and accidental death and dismemberment insurance, short and long-term disability coverage and a 401(k) plan. The Corporation also offers a tuition reimbursement program, an employee assistance program and discounts on loan rates and fees to its employees who qualify based on term of employment (except that no preferential rates or terms are offered to executive officers and senior management). The Corporation considers its employee relations to be good.

Competition

The Corporation faces strong competition in the attraction of deposits and in the origination of real estate, consumer and commercial loans. Its most direct competition for savings deposits has come historically from commercial banks and from thrift institutions located in its primary market areas. The Corporation’s primary market area for savings deposits includes Colorado, Iowa, Nebraska, Kansas, Oklahoma, Missouri and Arizona and, for loan originations, includes Colorado, Iowa, Nebraska, Kansas, Oklahoma, Missouri, Arizona and Las Vegas, Nevada (primarily residential construction lending). Management believes that the Corporation’s extensive branch network enables the Corporation to compete effectively for deposits and loans against other financial institutions. The Corporation has been able to attract savings deposits primarily by offering depositors a wide variety of deposit accounts, convenient branch locations, a full range of financial services and competitive rates of interest.

The Corporation’s competition for real estate, consumer and commercial loans comes principally from other thrift institutions, mortgage banking companies, commercial banks, insurance companies and other institutional lenders. The Corporation competes for loans principally through the efficiency and quality of the service provided to borrowers and the interest rates and loan fees charged.

Regulation

General

The Bank must comply with various regulations of both the OTS and the FDIC. The Bank’s lending activities and other investments must comply with federal statutory and regulatory requirements. The Bank must also comply with the reserve requirements of the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of the SAIF and depositors. Both the OTS and the FDIC have extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies regarding the classification of assets and the establishment of adequate allowance for loan losses. The OTS regularly examines the Bank and prepares reports to the Board of Directors of the Bank regarding any deficiencies. The Bank must also file reports with the OTS and the FDIC concerning its activities and financial condition and must obtain regulatory approval before engaging in certain transactions.

As a savings and loan holding company, the Corporation is also subject to the OTS’s regulation, examination, supervision and reporting requirements. In addition, since the Corporation’s common stock is registered under the Securities Exchange Act of 1934 Act, as amended (the “Exchange Act”), the Corporation is subject to regulation by the Securities and Exchange Commission (the “SEC”) under the federal securities laws and must comply with the Exchange Act information, proxy solicitation, insider trading restrictions and other requirements. Certain of these regulatory requirements are referred to within this “Regulation” section or appear elsewhere in this Report.

The Gramm-Leach-Bliley Act

On November 12, 1999, the Gramm-Leach-Bliley Act (the “GLB Act”) was signed into law. Effective March 11, 2000, the GLB Act authorized affiliations between banking, securities and insurance firms and authorized bank holding companies and national banks to engage in a variety of new financial activities. The GLB Act, however, prohibits future affiliations between existing unitary savings and loan holding companies, like the Corporation, and firms that are engaged in commercial activities and prohibits the formation of new unitary holding companies.

The GLB Act imposed new privacy requirements on financial institutions. Financial institutions are generally prohibited from disclosing customer information to non-affiliated third parties unless the customer has been given the opportunity to object and has not objected to such disclosure. Financial institutions are also required to disclose their privacy policies to customers annually. Financial institutions, however, must comply with state law if it is more protective of customer privacy than the GLB Act.

The GLB Act imposes certain burdens on the Corporation’s operations. From a competitive environment perspective, the GLB Act reduces the range of companies with which the Corporation may affiliate, although the GLB Act may facilitate affiliations with companies in the financial services industry.

Regulatory Capital Requirements

At December 31, 2002, the Bank exceeded all minimum regulatory capital requirements mandated by the OTS. The following table sets forth information relating to the Bank’s regulatory capital compliance at December 31, 2002:


	Actual			Requirement		Excess
	(Dollars in Thousands)
Bank’s stockholder’s equity	$	827,053
Add accumulated losses on certain available for sale securities and cash flow hedges, net		103,422
Less intangible assets		(185,082	)
Less investments in non-includable subsidiaries		(8,766	)

Tangible capital	$	736,627

Tangible capital to adjusted assets (1)		5.75	%	1.50	%	4.25	%

Tangible capital	$	736,627
Plus certain restricted amounts of other intangible assets		1,413
Less disallowed portion of mortgage servicing rights		(9,591	)

Core capital (Tier 1 capital)	$	728,449

Core capital to adjusted assets (2)		5.69	%	3.00	%(3)	3.69	%

Core capital	$	728,449
Less equity investments and other assets required to be deducted		(13,286	)
Plus qualifying subordinated debt		50,000
Plus qualifying loan loss allowances		99,508

Risk-based capital (Total capital)	$	864,671

Risk-based capital to risk-weighted assets (4)		10.87	%	8.00	%	2.87	%

(1)

Based on adjusted total assets totaling $12,806,808.

(2)

Based on adjusted total assets totaling $12,798,629.

(3)

This is the minimum percentage requirement for institutions that are not anticipating or experiencing significant growth and have well-diversified risks, including minimal interest rate risk exposure, excellent asset quality, high liquidity and stable and sufficient earnings. For all other institutions the minimum required ratio is 4.00%.

(4)

Based on risk-weighted assets totaling $7,957,705.

The Federal Deposit Insurance Corporation Improvement Act of 1991 established five regulatory capital categories: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized; and authorized banking regulatory agencies to take prompt corrective action with respect to institutions in the three undercapitalized categories. These corrective actions become increasingly more stringent as an institution’s regulatory capital declines. At December 31, 2002, the Bank exceeded the minimum requirements for the well-capitalized category as shown in the following table:


	Tier 1 Capital to Adjusted Total Assets		Tier 1 Capital to Risk- Weighted Assets		Total Capital to Risk- Weighted Assets
Percentage of adjusted assets	5.69	%	9.15	%	10.87	%
Minimum requirements to be classified well-capitalized	5.00	%	6.00	%	10.00	%

Under OTS capital regulations, the Bank must maintain “tangible” capital equal to 1.5% of adjusted total assets, “core” or “Tier 1” capital equal to 3.0% of adjusted total assets (4.0% for institutions other than the most highly rated institutions) and “total” or “risk-based” capital (a combination of core and “supplementary” capital)

equal to 8.0% of risk-weighted assets. In addition, the OTS can impose certain restrictions on savings associations that have a total risk-based capital ratio that is less than 8.0%, a ratio of Tier 1 capital to risk-weighted assets of less than 4.0% or a ratio of Tier 1 capital to adjusted total assets of less than 4.0% (or 3.0% if the institution is rated a Composite 1 under the regulatory CAMELS examination rating system).

Tangible capital is defined as common shareholders’ equity (including retained earnings), noncumulative perpetual preferred stock and related surplus, minority interests in the equity accounts of fully consolidated subsidiaries and certain nonwithdrawable accounts and pledged deposits, less intangible assets, non-mortgage servicing assets, and credit-enhancing interest-only strips above the amount that may be included in core capital. Tangible capital is increased by any accumulated net losses on certain available-for-sale securities and cash flow hedges, net of income taxes. These losses, classified in the Bank’s total stockholder’s equity under the caption “accumulated other comprehensive loss, net” totaled $103.4 million at December 31, 2002. Tangible capital is also reduced by an amount equal to the savings association’s debt and equity investments in subsidiaries engaged in activities not permissible for national banks. At December 31, 2002, the Bank had approximately $8.8 million of debt and equity invested in two subsidiaries which are engaged in activities not permissible for national banks that was deducted from capital. See “Business — Subsidiaries.”

Core capital consists of tangible capital plus restricted amounts of certain grandfathered intangible assets, purchased credit card relationships and mortgage and non-mortgage servicing rights. The Bank’s core capital totaling $728.4 million at December 31, 2002, includes $1.4 million of restricted amounts of certain intangible assets (core value of deposits) reduced by $9.6 million for the disallowed portion of mortgage servicing rights.

Risk-based capital is comprised of core capital and supplementary capital. Supplementary capital consists of certain preferred stock issues, nonwithdrawable accounts and pledged deposits that do not qualify as core capital, certain approved subordinated debt, certain other capital instruments and a portion of the Bank’s loan loss allowances. The portion of the allowances for loan losses includable in supplementary capital is limited to 1.25% of risk-weighted assets and totaled $99.5 million at December 31, 2002. Qualifying subordinated debt is included in supplementary capital and totaled $50.0 million at December 31, 2002. Supplementary capital at December 31, 2002, was required to be reduced by the amount of land the Bank acquired for investment purposes. Therefore, a total of $13.3 million in real estate held for investment was required to be deducted at December 31, 2002, in determining risk-based capital.

The risk-based capital requirement is measured against risk-weighted assets, which equal the sum of every on-balance-sheet asset and the credit-equivalent amount of every off-balance-sheet item after being multiplied by an assigned risk weight. The risk weights are determined by the OTS and range from 0% for cash to 100% for consumer loans, non-qualifying single-family, multi-family and residential construction loans and commercial real estate loans, repossessed assets and loans more than 90 days past due. OTS capital regulations require savings institutions to maintain minimum total capital, consisting of core capital plus supplementary capital (limited to 100% of core capital), equal to 8.0% of risk-weighted assets.

The OTS requires savings institutions with more than a “normal” level of interest rate risk to maintain additional total capital. A savings institution with a greater than normal interest rate risk is required to deduct from total capital, for purposes of calculating its risk-based capital requirement, an amount (the “interest rate risk component”) equal to one-half the difference between the institution’s measured interest rate risk and the normal level of interest rate risk, multiplied by the economic value of its total assets. The Bank has determined that, on the basis of current financial data, it will not be deemed to have more than a normal level of interest rate risk under the rule and therefore will not be required to increase its total capital as a result of the rule.

In addition to these standards, the Director of the OTS is authorized to establish higher minimum levels of capital for a savings institution if the Director determines that such institution is in need of more capital in light of the particular circumstances of the institution. The Director of the OTS may treat the failure of any savings institution to maintain capital at or above such level as an unsafe or unsound practice and may issue a directive requiring any savings institution which fails to maintain capital at or above the minimum level required by the Director to submit and adhere to a plan for increasing capital. Such an order may be enforced in the same manner as an order issued by the FDIC.

Federal Home Loan Bank System

The Bank is a member of the FHLB of Topeka, which is one of 12 regional FHLBs. Each FHLB serves as a reserve or central bank for its member institutions within its assigned region. It is funded primarily from funds deposited by financial institutions and proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members in accordance with policies and procedures established by the Board of Directors of the FHLB of Topeka.

As a member of the FHLB of Topeka, the Bank must purchase and maintain shares of capital stock in the FHLB of Topeka in an amount at least equal to the greater of:

•

1.0% of the Bank’s aggregate unpaid principal of its residential mortgage loans, home purchase contracts, and similar obligations at the beginning of each year; or

•

5.0% of its then outstanding advances (borrowings) from the FHLB.

The Bank was in compliance with this requirement at December 31, 2002, with an investment in FHLB stock totaling $283.2 million.

Liquidity Requirements

The OTS issued a final rule effective July 18, 2001, whereby savings associations are only required to maintain sufficient liquidity to ensure their safe and sound operation. Management believes that the Bank’s procedures for managing liquidity are sufficient to ensure the Bank’s safe and sound operations.

Qualified Thrift Lender Test

Savings institutions like the Bank are required to satisfy a qualified thrift lender (“QTL”) test. To meet the QTL test, the Bank must maintain at least 65.0% of its portfolio assets (total assets less intangible assets, property the Bank uses in conducting its business and liquid assets in an amount not exceeding 20.0% of total assets) in “Qualified Thrift Investments.” Qualified Thrift Investments consist primarily of residential mortgage loans and mortgage-backed securities and other securities related to domestic, residential real estate or manufactured housing. The shares of stock the Bank owns in the FHLB of Topeka also qualify as Qualified Thrift Investments as do loans for educational purposes, loans to small businesses and loans made through credit cards or credit card accounts. Certain other types of assets also qualify as Qualified Thrift Investments subject to an aggregate limit of 20.0% of portfolio assets.

If the Bank satisfies the test, it will continue to enjoy full borrowing privileges from the FHLB of Topeka. If it does not satisfy the test it may lose it borrowing privileges and be subject to activities and branching restrictions applicable to national banks. Compliance with the QTL test is measured on a monthly basis and the Bank must meet the test in nine out of every 12 months. As of December 31, 2002, the Bank was in compliance with the QTL test with approximately 72.14% of the Bank’s portfolio assets invested in Qualified Thrift Investments.

Restrictions on Capital Distributions

The OTS limits the payment of dividends and other capital distributions (including stock repurchases and cash mergers) by the Bank. Under these regulations, a savings institution must submit notice to the OTS prior to making a capital distribution if:

•

the association does not qualify for expedited treatment under OTS application processing regulations,

•

it would not be well capitalized after the distribution,

•

the distribution would result in the retirement of any of the association’s common or preferred stock or debt counted as its regulatory capital, or

•

the association is a subsidiary of a holding company.

A savings association must file an application to the OTS and obtain its approval prior to paying a capital distribution if:

•

the association does not qualify for expedited treatment under OTS application processing regulations,

•

the association would not be adequately capitalized following the distribution,

•

the association’s total distributions for the calendar year exceeds the association’s net income for the calendar year to date plus its net income (less distributions) for the preceding two years, or

•

the distribution would otherwise violate applicable law or regulation or an agreement with or condition imposed by the OTS.

The Bank is currently required to file an application to the OTS prior to paying a capital distribution. During calendar year 2002 the Bank recorded net income of approximately $113.3 million and made capital distributions totaling $85.0 million. Total distributions exceeded the Bank’s retained net income for calendar year 2002 plus the preceding two years (the “retained net income standard”) by $226.3 million. Despite the above authority, the OTS may prohibit any savings institution from making a capital distribution if the OTS determined that the distribution constituted an unsafe or unsound practice. Furthermore, under the OTS’s prompt corrective action regulations the Bank would be prohibited from making any capital distributions if, after making the distribution, the Bank would not satisfy its minimum capital requirements.

Deposit Insurance

The SAIF insures the Bank’s deposit accounts up to applicable regulatory limits. The Bank also has a portion of deposits (approximately 14 %) acquired from acquisitions that are insured by the BIF. The FDIC establishes an assessment rate for deposit insurance premiums which protects the insurance fund and considers the fund’s operating expenses, case resolution expenditures, income and effect of the assessment rate on the earnings and capital of SAIF members. The SAIF assessment is based on the capital adequacy and supervisory rating of the institution and is assigned by the FDIC.

The FDIC’s assessment schedule for SAIF deposit insurance mandates the assessment rate for well-capitalized institutions. Institutions with the highest supervisory ratings are assessed at a zero rate and institutions in the lower risk classification are assessed at the rate of .27% of insured deposits. In addition, all institutions are required to pay assessments to help fund interest payments on certain bonds issued by the Financing Corporation. The Financing Corporation assessment rate is reset quarterly. The rates for each of the respective quarters during 2002 (annualized) were 1.82 basis points, 1.76 basis points, 1.72 basis points and 1.70 basis points, respectively.

Transactions with Related Parties

Generally, transactions between the Bank and any of its affiliates must comply with Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder as interpreted by the OTS. Section 23A limits the extent to which the savings institution or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10.0% of such institution’s capital stock and surplus, and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20.0% of such capital stock and surplus. Savings institutions are also prohibited from making loans to any affiliate that is not engaged in activities permissible to bank holding companies. Section 23B requires that such transactions be on terms as substantially the same, or at least as favorable, to the institution or subsidiary as those provided to a non-affiliate. An affiliate of a savings institution is any company or entity that controls, is controlled by or is under common control with the savings institution. In a holding company context, the parent holding company of a savings institution (such as the Corporation) and any companies that are controlled by such parent holding company are affiliates of the savings institution.

Loans to Executive Officers, Directors and Principal Stockholders

Savings institutions are also subject to the restrictions contained in Section 22(h) of the Federal Reserve Act and the Federal Reserve Board’s Regulation O thereunder on loans to executive officers, directors and principal stockholders. Under Section 22(h), loans to a director, executive officer and to a greater than 10.0% stockholder of a savings institution and certain affiliated interests of such persons, may not exceed, together with all other outstanding loans to such person and affiliated interests, the institution’s loans-to-one-borrower limit (generally equal to 15.0% of the institution’s unimpaired capital and surplus). Section 22(h) also prohibits the making of loans above amounts prescribed by the appropriate federal banking agency, to directors, executive officers and greater than 10.0% stockholders of a savings institution, and their respective affiliates, unless such loan is approved in advance by a majority of the board of directors of the institution with any “interested” director not participating in the voting. Regulation O prescribes the loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required as being the greater of $25,000 or 5.0% of capital and surplus (up to $500,000). Further, Section 22(h) requires that loans to directors, executive officers and principal stockholders be made on terms substantially the same as offered in comparable transactions to other persons. Section 22(h) also generally prohibits a depository institution from paying the overdrafts of any of its executive officers or directors.

Savings institutions must also comply with Section 22(g) of the Federal Reserve Act and Regulation O on loans to executive officers and the restrictions of 12 U.S.C. Section 1972 on certain tying arrangements and extensions of credit by correspondent banks. Pursuant to Section 22(g) of the Federal Reserve Act, the institution’s board of directors must approve loans to executive officers, directors and principal shareholders of the institution. Section 1972 also prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain exceptions. Section 1972 also prohibits extensions of credit to executive officers, directors, and greater than 10.0% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.

Federal Reserve System

Pursuant to current regulations of the Federal Reserve Board, a thrift institution must maintain average daily reserves equal to 3.0% on transaction account balances over $6.0 million and up to $42.1 million, plus 10.0% on the remainder. This percentage is subject to adjustment by the Federal Reserve Board. Because required reserves must be maintained in the form of vault cash or in a non-interest bearing account at a Federal Reserve Bank, the effect of the reserve requirement is to reduce the amount of the institution’s interest-earning assets. As of December 31, 2002, the Bank met its reserve requirements.

The USA PATRIOT Act

In response to the events of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), was signed into law on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions:

•

Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that includes, at a minimum: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program.

•

Section 326 authorizes the Secretary of the Department of the Treasury, in conjunction with other bank regulators, to issue regulations that provide for minimum standards with respect to customer identification at the time new accounts are opened.

•

Section 312 requires financial institutions that establish, maintain, administer or manage private banking accounts or correspondence accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering.

•

A prohibition against establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and certain record keeping obligations with respect to correspondent accounts of foreign banks.

•

Bank regulators are directed to consider a holding company’s effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications.

The federal banking agencies have begun to propose and implement regulations pursuant to the USA PATRIOT Act. These proposed and interim regulations require financial institutions to adopt the policies and procedures contemplated by the USA PATRIOT Act.

Savings and Loan Holding Company Regulation

The Corporation is a registered savings and loan holding company. As such, it is subject to OTS regulations, examinations, supervision and reporting requirements. As a subsidiary of a savings and loan holding company, the Bank is subject to certain restrictions in its dealings with the Corporation and any affiliates.

Activities Restrictions

Since the Corporation only owns one thrift institution, it is classified as a unitary savings and loan holding company. There are generally no restrictions on the activities of a unitary savings and loan holding company. However, if the Director of the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity that constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the Director of the OTS may impose restrictions to address such risk. If the Corporation were to acquire control of another savings institution, other than through merger or other business combination with the Bank, the Corporation would become a multiple savings and loan holding company. In addition, if the Bank fails to meet the QTL test, then the Corporation would also become subject to the activity restrictions applicable to multiple holding companies. A multiple savings and loan holding company may only engage in the following activities:

•

furnishing or performing management services for a subsidiary savings institution;

•

conducting an insurance agency or escrow business;

•

holding, managing, or liquidating assets owned by or acquired from a subsidiary savings institution;

•

holding or managing properties used or occupied by a subsidiary savings institution;

•

acting as trustee under deeds of trust;

•

those activities authorized by regulation as of March 5, 1987, to be engaged in by multiple holding companies; or

•

those activities authorized by the Federal Reserve Board as permissible for bank holding companies, unless the Director of the OTS by regulation prohibits or limits such activities.

The Corporation would also have to register as a bank holding company and become subject to applicable restrictions unless the Bank requalified as a QTL within one year thereafter. See “Regulation — Qualified Thrift Lender Test.”

Restrictions on Acquisitions

The Corporation must obtain the prior approval of the OTS before acquiring control of any other savings institution. Except with the prior approval of the Director of the OTS, no director or officer of a savings and loan holding company or person owning or controlling by proxy or otherwise more than 25.0% of such company’s stock, may also acquire control of any savings institution, other than a subsidiary savings institution, or of any other savings and loan holding company.

The Director of the OTS may only approve acquisitions resulting in the formation of a multiple savings and loan holding company which controls savings institutions in more than one state if:

•

the multiple savings and loan holding company involved controls a savings institution which operated a home or branch office in the state of the institution to be acquired as of March 5, 1987;

•

the acquired is authorized to acquire control of the savings institution pursuant to the emergency acquisition provisions of the Federal Deposit Insurance Act; or

•

the statutes of the state in which the institution to be acquired is located specifically permit institutions to be acquired by state-chartered institutions or savings and loan holding companies located in the state where the acquiring entity is located (or by a holding company that controls such state-chartered savings institutions).

Sarbanes-Oxley Act of 2002

On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 (the “Act”) which mandated a variety of reforms intended to address corporate and accounting fraud. The Act provides for the establishment of a new Public Company Accounting Oversight Board (“PCAOB”) which will enforce auditing, quality control and independence standards for firms that audit SEC-reporting companies and will be funded by fees from all SEC reporting companies. The Act imposes higher standards for auditor independence and restricts provision of consulting services by auditing firms to companies they audit. Any non-audit services being provided to an audit client will require preapproval by the Corporation’s audit committee members. In addition, certain audit partners must be rotated periodically. The Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.

Longer prison terms will also be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from trading during retirement plan “blackout” periods, and loans to company executives are restricted. In addition, a

provision directs that civil penalties levied by the SEC as a result of any judicial or administrative action under the Act be deposited in a fund for the benefit of harmed investors. Directors and executive officers must also report most changes in their ownership of a company’s securities within two business days of the change.

The Act also increases the oversight and authority of audit committees of publicly traded companies. Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, all SEC reporting companies must disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the SEC rules) and if not, why not. Audit committees of publicly traded companies will have authority to retain their own counsel and other advisors funded by the company. Audit committees must establish procedures for the receipt, retention and treatment of complaints regarding accounting and auditing matters and procedures for confidential, anonymous submission of employee concerns regarding questionable accounting or auditing matters.

Beginning six months after the SEC determines that the PCAOB is able to carry out its functions, it will be unlawful for any person that is not a registered public accounting firm (“RPAF”) to audit an SEC-reporting company. Under the Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company’s chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the Corporation’s financial statements for the purpose of rendering the financial statement’s materially misleading. The Act also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to shareholders. The Act requires the RPAF that issues the audit report to attest to and report on management’s assessment of the Corporation’s internal controls. In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) generally accepted accounting principles and filed with the SEC reflect all material correcting adjustments that are identified by a RPAF in accordance with generally accepted accounting principles and the rules and regulations of the SEC.

Although the Corporation anticipates it will incur additional expense in complying with the provisions of the Act and the related rules, management does not expect that such compliance will have a material impact on the Corporation’s financial condition or results of operations. Certain provisions of the Act were effective immediately upon passage or at various times in 2002. Other provisions of the Act will be effective throughout 2003.

Taxation

The Corporation is subject to the provisions of the Internal Revenue Code of 1986, as amended. The Corporation and its subsidiaries, including the Bank, file a consolidated federal income tax return based on a June 30 fiscal year end compared to a December 31 year end for accounting reporting purposes. Consolidated taxable income is determined on an accrual basis. The Internal Revenue Service has completed examination of the Corporation’s consolidated federal income tax returns through June 30, 1999, with no material effect on the Corporation’s results of operations.

The State of Nebraska imposes a franchise tax on all financial institutions. Under the franchise tax, the Bank cannot join in the filing of a consolidated return with the Corporation (which is filed separately). The Bank is assessed at a rate of $.47 per $1,000 of average deposits. The franchise tax is limited to 3.81% of the Bank’s income before tax (including subsidiaries) as reported on the Bank’s consolidated books and records. The Corporation also pays franchise or state income taxes in a number of jurisdictions in which the Corporation or its subsidiaries conduct business. For further information regarding federal and state income taxes payable by the Corporation, see Note 16 “Income Taxes” to the Consolidated Financial Statements under Item 8 of this Report.

PART II

ITEM 5. MARKET FOR COMMERCIAL FEDERAL CORPORATION’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Corporation’s common stock is traded on the New York Stock Exchange under the symbol “CFB.” The following table sets forth the high, low and closing sales prices and dividends declared for the periods indicated for the common stock:


	Common Stock Price						Dividends Declared
Quarter Ended	High		Low		Close		Dividends Declared
December 31, 2002	$	24.20	$	19.31	$	23.35	$	.09
September 30, 2002		28.31		20.75		21.77		.09
June 30, 2002		30.00		26.37		29.00		.09
March 31, 2002		26.90		23.20		26.90		.08

December 31, 2001		26.40		22.15		23.50		.08