<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly period ended September 30, 1997
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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 (I.R.S. Employer
incorporation or organization) Identification Number)
2120 South 72nd Street, Omaha, Nebraska 68124
- -------------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
(402) 554-9200
-----------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 7, 1997
- --------------------------------- ------------------------------------
Common Stock, $0.01 Par Value 21,591,576 Shares
1
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COMMERCIAL FEDERAL CORPORATION
------------------------------
FORM 10-Q
---------
INDEX
-----
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Part I. Financial Information Page Number
--------------------- -----------
<S> <C>
Item 1. Financial Statements:
Consolidated Statement of Financial Condition as of
September 30, 1997 and June 30, 1997 3
Consolidated Statement of Operations for the Three
Months Ended September 30, 1997 and 1996 4
Consolidated Statement of Cash Flows for the Three
Months Ended September 30, 1997 and 1996 5 - 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 19
Part II. Other Information
-----------------
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
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</TABLE>
2
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
PART I. FINANCIAL INFORMATION
-----------------------------
Item I. Financial Statements
----------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) September 30, June 30,
ASSETS 1997 1997
- ----------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Cash (including short-term investments of $1,500 at September 30, 1997) $ 40,401 $ 55,809
Investment securities available for sale, at fair value 98,386 19,930
Mortgage-backed securities available for sale, at fair value 231,540 195,766
Loans held for sale, net 91,984 68,658
Investment securities held to maturity (fair value of $373,771 and $377,096) 373,778 379,127
Mortgage-backed securities held to maturity (fair value of $808,724 and $829,929) 803,075 829,997
Loans receivable, net of allowances of $47,870 and $48,390 5,199,836 5,190,081
Federal Home Loan Bank stock 87,738 72,452
Interest receivable, net of reserves of $221 and $183 41,987 44,521
Real estate, net 18,316 19,728
Premises and equipment, net 83,590 84,116
Prepaid expenses and other assets 89,881 88,302
Goodwill and core value of deposits, net of
accumulated amortization of $21,951 and $20,404 46,631 48,178
- ----------------------------------------------------------------------------------------------------------------------
Total Assets $ 7,207,143 $ 7,096,665
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 4,258,902 $ 4,378,919
Advances from Federal Home Loan Bank 1,715,312 1,415,506
Securities sold under agreements to repurchase 564,294 639,294
Other borrowings 103,900 128,982
Interest payable 32,750 24,992
Other liabilities 87,712 82,866
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities 6,762,870 6,670,559
- ----------------------------------------------------------------------------------------------------------------------
Commitments and contingencies -- --
- ----------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
21,581,704 and 21,552,837 shares issued and outstanding 216 216
Additional paid-in capital 148,886 147,857
Retained earnings 294,047 278,450
Unrealized holding gain (loss) on securities available for sale, net 1,124 (417)
- ----------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 444,273 426,106
- ----------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 7,207,143 $ 7,096,665
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Three Months Ended
September 30,
--------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest Income:
Loans receivable $ 106,983 $ 98,547
Mortgage-backed securities 16,792 19,215
Investment securities 8,577 5,024
- -----------------------------------------------------------------------------------------------------
Total interest income 132,352 122,786
Interest Expense:
Deposits 54,400 54,790
Advances from Federal Home Loan Bank 23,004 19,378
Securities sold under agreements to repurchase 9,375 6,363
Other borrowings 2,571 1,963
- -----------------------------------------------------------------------------------------------------
Total interest expense 89,350 82,494
Net Interest Income 43,002 40,292
Provision for Loan Losses (2,100) (1,658)
- -----------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 40,902 38,634
Other Income (Loss):
Loan servicing fees 7,772 7,327
Retail fees and charges 4,367 3,923
Real estate operations (174) 216
Gain on sales of loans 232 105
Other operating income 3,921 2,032
- -----------------------------------------------------------------------------------------------------
Total other income 16,118 13,603
Other Expense:
General and administrative expenses -
Compensation and benefits 12,151 10,581
Occupancy and equipment 4,242 4,003
Data processing 2,327 2,104
Regulatory insurance and assessments 945 2,747
Advertising 2,495 1,650
Other operating expenses 6,945 8,237
- -----------------------------------------------------------------------------------------------------
General and administrative expenses before
Federal deposit insurance special assessment 29,105 29,322
Federal deposit insurance special assessment -- 27,062
- -----------------------------------------------------------------------------------------------------
Total general and administrative expenses 29,105 56,384
Amortization of goodwill and core value of deposits 1,547 2,385
- -----------------------------------------------------------------------------------------------------
Total other expense 30,652 58,769
Income (Loss) Before Income Tax Provision (Benefit) 26,368 (6,532)
Income Tax Provision (Benefit) 9,260 (2,482)
- -----------------------------------------------------------------------------------------------------
Net Income (Loss) $ 17,108 $ (4,050)
- -----------------------------------------------------------------------------------------------------
Per Common Share:
Net Income (Loss) $ .78 $ (.18)
Dividends Declared $ .07 $ .067
- -----------------------------------------------------------------------------------------------------
Average Common and Common Equivalent Shares Outstanding 21,960,954 22,113,829
- -----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Three Months Ended
September 30,
-------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 17,108 $ (4,050)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Amortization of goodwill and core value of deposits 1,547 2,385
Provision for loss on loans and real estate 2,140 1,648
Depreciation and amortization 2,022 1,920
Accretion of deferred discounts and fees, net (42) (465)
Amortization of mortgage servicing rights 1,996 2,243
Amortization of deferred compensation on restricted
stock and premiums on other borrowings 250 290
Gain on sales of real estate, loans and loan servicing rights, net (642) (184)
Stock dividends from Federal Home Loan Bank (1,413) (1,168)
Proceeds from the sale of loans 133,581 185,158
Origination of loans for resale (42,503) (57,184)
Purchases of loans for resale (114,366) (126,196)
Decrease in interest receivable 2,534 1,031
Increase in interest payable and other liabilities 12,601 27,843
Other items, net (5,454) (9,967)
---------- ---------
Total adjustments (7,749) 27,354
---------- --------
Net cash provided by operating activities 9,359 23,304
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans (145,905) (162,621)
Repayment of loans, net of originations 120,603 101,136
Principal repayments of mortgage-backed securities held to maturity 42,645 33,943
Principal repayments of mortgage-backed securities available for sale 7,017 8,550
Purchase of mortgage-backed securities available for sale (40,175) --
Maturities and repayments of investment securities held to maturity 45,374 25,704
Purchases of investment securities available for sale (78,674) --
Purchases of investment securities held to maturity (39,951) (64,906)
Purchases of mortgage loan servicing rights (2,913) (1,780)
Proceeds from sale of mortgage loan servicing rights 387 --
Proceeds from sale of Federal Home Loan Bank stock -- 8,500
Purchases of Federal Home Loan Bank stock (13,873) (1,670)
Proceeds from sale of real estate 5,337 1,994
Payments to acquire real estate (1,028) (458)
Purchases of premises and equipment, net (1,496) (964)
Other items, net (1,112) (710)
---------- ---------
Net cash used by investing activities (103,764) (53,282)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Three Months Ended
September 30,
--------------------------------
1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in deposits $ (120,017) $ (29,732)
Proceeds from Federal Home Loan Bank advances 461,000 --
Repayment of Federal Home Loan Bank advances (161,220) (156,250)
Proceeds from securities sold under agreements to repurchase -- 300,000
Repayment of securities sold under agreements to repurchase (75,000) (55,000)
Proceeds from issuances of other borrowings -- 46,000
Repayment of other borrowings (25,103) (19,029)
Payment of cash dividends on common stock (1,508) (1,509)
Repurchase of common stock -- (49,239)
Issuance of common stock 845 510
------------ ------------
Net cash provided by financing activities 78,997 35,751
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
(Decrease) increase in net cash position (15,408) 5,773
Balance, beginning of year 55,809 35,827
------------ ------------
Balance, end of period $ 40,401 $ 41,600
============ ============
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest expense $ 81,532 $ 75,182
Income taxes, net 5,520 1,549
Non-cash investing and financing activities -
Loans exchanged for mortgage-backed securities 16,075 15,839
Loans transferred to real estate 1,186 4,664
Loans to facilitate the sale of real estate -- 107
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements
6
<PAGE>
COMMERCIAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997
(Unaudited)
- --------------------------------------------------------------------------------
A. BASIS OF CONSOLIDATION AND PRESENTATION:
----------------------------------------
The unaudited consolidated financial statements are prepared on an accrual basis
and include the accounts of Commercial Federal Corporation (the Corporation) and
its wholly-owned subsidiary, Commercial Federal Bank, a Federal Savings Bank
(the Bank), and all majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
The accompanying interim consolidated financial statements have not been audited
by independent auditors. However, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary to fairly
present the financial statements have been included. The consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Corporation's June 30, 1997, Annual Report to
Stockholders. The results of operations for the three month period ended
September 30, 1997, is not necessarily indicative of the results which may be
expected for the entire fiscal year 1998. Certain amounts in the prior fiscal
year period have been reclassified for comparative purposes.
B. PENDING ACQUISITIONS:
---------------------
During the three months ended September 30, 1997, the Corporation entered into
definitive agreements to acquire three financial institutions: Liberty Financial
Corporation, Mid Continent Bancshares, Inc., and First National Bank Shares,
LTD. These pending acquisitions will add 59 branches to the Corporation's
existing network and approximately $1.2 billion in total assets, approximately
$924.0 million in deposits and approximately $1.3 billion in loans serviced for
others.
Liberty Financial Corporation. On August 18, 1997, the Corporation entered into
a reorganization and merger agreement with Liberty Financial Corporation
(Liberty), a privately held commercial bank and thrift holding company. Under
the terms of the merger agreement, the Corporation will acquire in a tax-free
reorganization all 8,748,500 outstanding shares of Liberty's common stock in
exchange for the Corporation's common stock. Based on the Corporation's closing
stock price on September 30, 1997, of $47.125, the transaction would result in
the exchange of approximately 2,677,041 shares of the Corporation's common stock
with an aggregate value of approximately $126,156,000.
At September 30, 1997, Liberty had assets of approximately $638,500,000,
deposits of approximately $557,100,000 and stockholders' equity of approximately
$43,400,000. Liberty operates 36 branches in Iowa and six in the metropolitan
area of Tucson, Arizona. This pending acquisition, which is subject to
regulatory approvals, Liberty shareholders' approval and other conditions, is
expected to be completed by March 31, 1998. This acquisition is expected to be
accounted for as a pooling of interests.
Mid Continent Bancshares, Inc. On September 2, 1997, the Corporation entered
into a reorganization and merger agreement with Mid Continent Bancshares, Inc.
(Mid Continent), parent company of Mid-Continent Federal Savings Bank. Under the
terms of the merger agreement, the Corporation will acquire in a tax-free
reorganization all 1,958,250 outstanding shares of Mid Continent's common stock
in exchange for the Corporation's common stock. Based on the Corporation's
closing price on September 30, 1997, of $47.125, the transaction would result in
the exchange of approximately 1,702,306 shares of the Corporation's common stock
with an aggregate value of approximately $80,221,000.
At September 30, 1997, Mid Continent had total assets of approximately
$404,800,000, deposits of approximately $236,300,000 and stockholders' equity of
approximately $39,700,000. Mid Continent operates ten branches located in
Kansas. This pending acquisition, which is subject to receipt of regulatory
approvals, Mid Continent shareholders' approval and other conditions, is
expected to close by March 31, 1998. This acquisition is expected to be
accounted for as a pooling of interests.
First National Bank Shares, LTD. On September 11, 1997, the Corporation entered
into a reorganization and merger agreement with First National Bank Shares, LTD
(First National), parent company of First United National Bank and Trust
Company. Under the terms of the merger agreement, the Corporation will acquire
all of the outstanding shares of First National's common stock in exchange for
the Corporation's common stock. Based on the Corporation's closing price on
September 30, 1997, of $47.125, the transaction would result in the exchange of
approximately 661,905 shares of the Corporation's common stock with a total
aggregate value approximating $31,192,000.
7
<PAGE>
B. PENDING ACQUISITIONS (Continued):
---------------------------------
At September 30, 1997, First National had assets of approximately $151,600,000,
deposits of approximately $130,800,000 and stockholders' equity of approximately
$11,000,000. First National operates seven branches located in Kansas. This
pending acquisition, which is subject to receipt of regulatory approvals, First
National shareholders' approval and other conditions, is expected to close
during the quarter ending March 31, 1998. This acquisition is expected to be
accounted for as a purchase with core value of deposits resulting from this
transaction to be amortized on an accelerated basis over a period not to exceed
10 years and goodwill, if any, to be amortized on a straight line basis over a
period not to exceed 20 years.
Pursuant to the aforementioned merger agreements entered into this first quarter
of fiscal year 1998, the Corporation will issue approximately 5,041,252 of
additional shares of its common stock. Accordingly, at the Corporation's annual
meeting to be held on November 18, 1997, shareholders are being asked to vote on
a proposed amendment to the Corporation's Articles of Incorporation to increase
the number of authorized shares of common stock from 25,000,000 shares to
50,000,000 shares.
C. COMMITMENTS AND CONTINGENCIES:
------------------------------
At September 30, 1997, the Corporation had issued commitments, excluding
undisbursed portions of loans in process, of approximately $216,554,000 as
follows: $127,389,000 to originate loans, $70,790,000 to purchase loans and
$18,375,000 to provide consumers unused lines of credit. Loan commitments, which
are funded subject to certain limitations, extend over various periods of time.
Generally, unused loan commitments are canceled upon expiration of the
commitment term as outlined in each individual contract. These outstanding loan
commitments to extend credit do not necessarily represent future cash
requirements since many of the commitments may expire without being drawn upon.
Loans sold subject to recourse provisions totaled approximately $28,818,000,
which represents the total potential credit risk associated with these
particular loans. Such credit risk would, however, be offset by the value of the
single-family residential properties which collateralize these loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse effect on the Corporation's financial position or results of operations.
On September 13, 1994, the Bank commenced litigation against the United States
in the United States Court of Federal Claims seeking to recover monetary relief
for the government's refusal to honor certain contracts between the Bank and the
Federal Savings and Loan Insurance Corporation. The suit alleges that such
governmental action constitutes breach of contract and an unlawful taking of
property by the United States without just compensation or due process in
violation of the Constitution of the United States. The litigation status and
process of the multiple legal actions, such as that instituted by the Bank with
respect to supervisory goodwill and regulatory capital credits, make the value
of the claims asserted by the Bank uncertain as to ultimate outcome and
contingent on a number of factors and future events which are beyond the control
of the Bank, both as to substance, timing and the dollar amount of damages which
may be awarded to the Bank if it finally prevails in this litigation.
D. CURRENT ACCOUNTING PRONOUNCEMENTS:
----------------------------------
Earnings Per Share:
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, entitled "Earnings Per
Share" (SFAS No. 128). This statement establishes standards for computing and
presenting earnings per share (EPS) and simplifies the standards for computing
earnings per share previously found in Accounting Principles Board Opinion No.
15, "Earnings Per Share." SFAS No. 128 supersedes Accounting Principles Board
Opinion No. 15 and its interpretations and supersedes or amends other accounting
pronouncements related to current computations of EPS. The statement replaces
the presentation of primary EPS with a presentation of basic EPS. It also
requires dual presentation with equal prominence of basic and diluted EPS for
income from continuing operations and for net income on the face of the income
statement for all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Basic EPS excludes
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock or
resulted in the issuance of common stock that then shared in the earnings of the
entity.
8
<PAGE>
D. CURRENT ACCOUNTING PRONOUNCEMENTS (Continued):
----------------------------------------------
The provisions of SFAS No. 128 are effective for financial statements for both
interim and annual periods ending after December 15, 1997, or for the quarter
ended December 31, 1997, for the Corporation, with all prior period EPS data
restated to conform with SFAS No. 128. The following table reflects basic and
diluted EPS pursuant to the provisions of SFAS No. 128 for the three months
ended September 30:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ 17,108,000 $ (4,050,000)
- --------------------------------------------------------------------------------------------
Weighted average number of common shares
outstanding used in Basic EPS calculation 21,571,349 21,821,275
Add assumed exercise of outstanding stock options
as adjustments for dilutive securities 389,605 292,554
------------ ------------
Weighted average number of common shares
outstanding used in Diluted EPS calculation 21,960,954 22,113,829
- --------------------------------------------------------------------------------------------
Basic EPS:
Net income (loss) $ .79 $ (.19)
============ ============
Diluted EPS:
Net income (loss) $ .78 $ (.18)
============ ============
- --------------------------------------------------------------------------------------------
</TABLE>
Reporting Comprehensive Income:
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130 entitled "Reporting Comprehensive Income" (SFAS No. 130). This statement
establishes standards for reporting and display of comprehensive income and its
components in a full set of financial statements. Comprehensive income is the
total of reported net income and all other revenues, expenses, gains and losses
that under generally accepted accounting principles bypass reported net income.
SFAS No. 130 requires that comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements with the aggregate amount of comprehensive income reported in that
same financial statement. SFAS No. 130 permits the statement of changes in
stockholders' equity to be used to meet this requirement. Companies are
encouraged, but not required, to display the components of other comprehensive
income below the total for net income in the statement of operations or in a
separate statement of comprehensive income. Companies are also required to
display the cumulative total of other comprehensive income for the period as a
separate component of equity in the statement of financial position.
This statement is effective for fiscal years beginning after December 15, 1997,
or July 1, 1998, for the Corporation, with earlier application permitted.
Companies are also required to report comparative totals for comprehensive
income in interim reports. Management of the Corporation will adopt the
provisions of this statement, which are only of a disclosure nature, effective
July 1, 1998.
Disclosures About Segments of an Enterprise and Related Information:
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 entitled "Disclosures About Segments of an Enterprise and Related
Information" (SFAS No. 131). This statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," and utilizes the "management
approach" for segment reporting. The management approach is based on the way
that the chief operating decision maker organizes segments within a company for
making operating decisions and assessing performance. Reportable segments are
based on any manner in which management disaggregates its company such as by
products and services, geography, legal structure and management structure. SFAS
No. 131 requires disclosures for each segment that are similar to those required
under current standards with the addition of quarterly disclosure requirements
and more specific and detailed geographic disclosures especially by countries as
opposed to broad geographic regions. This statement also requires descriptive
information about the way the operating segments were determined, the
products/services provided by the operating segments, the differences between
the measurements used in reporting segment information and those used in the
general purpose financial statements, and the changes in the measurement of
segment amounts from period to period.
The provisions of SFAS No. 131 are effective for fiscal years beginning after
December 15, 1997, or July 1, 1998, for the Corporation, with earlier
application permitted. SFAS No. 131 does not need to be applied to interim
statements in the initial year of application but such comparative information
will be required in interim statements for the second year. Comparative
information for earlier years must be restated in the initial year of
application. Management of the Corporation will adopt the provisions of this
statement, which are only of a disclosure nature, effective July 1, 1998.
9
<PAGE>
E. REGULATORY CAPITAL REQUIREMENTS:
--------------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following table of tangible, core and total risk-based capital. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under the
regulatory framework for Prompt Correction Action provisions under FDICIA, the
Bank must maintain minimum Tier I leverage, Tier I risk-based and total
risk-based capital ratios as set forth in the following table. At September 30,
1997, and June 30, 1997, the Bank exceeded the minimum requirements for the
well-capitalized category.
The following presents the Bank's regulatory capital levels and ratios relative
to its minimum capital requirements:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
As of September 30, 1997
--------------------------------------------------------------------------
Actual Capital Required Capital
-------------------------------- ------------------------------------
Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital $ 462,955 6.44% $ 107,763 1.50%
Core capital 474,229 6.59 215,865 3.00
Risk-based capital 511,024 13.92 293,804 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 474,229 6.59 359,775 5.00
Tier 1 risk-based capital 474,229 12.91 220,353 6.00
Total risk-based capital 511,024 13.92 367,256 10.00
- -------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
As of June 30, 1997
--------------------------------------------------------------------------
Actual Capital Required Capital
-------------------------------- ------------------------------------
Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------------------------------
OTS capital adequacy:
Tangible capital $ 446,291 6.31% $ 106,079 1.50%
Core capital 458,087 6.47 212,511 3.00
Risk-based capital 494,760 13.81 286,597 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 458,087 6.47 354,185 5.00
Tier 1 risk-based capital 458,087 12.79 214,948 6.00
Total risk-based capital 494,760 13.81 358,246 10.00
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
As of September 30, 1997, the most recent notification from the OTS categorized
the Bank as "well-capitalized" under the regulatory framework for Prompt
Corrective Action provisions under FDICIA. There are no conditions or events
since such notification that management believes have changed the Bank's
classification.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
The Corporation's principal asset is its investment in the capital stock of the
Bank, and because it does not generate any significant revenues independent of
the Bank, the Corporation's liquidity is dependent on the extent to which it
receives dividends from the Bank. The Bank's ability to pay dividends to the
Corporation is dependent on its ability to generate earnings and is subject to a
number of regulatory restrictions and tax considerations. Under capital
distribution regulations of the OTS, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed dividend,
has total capital that is at least equal to the amount of its fully phased-in
capital requirements (a "Tier I Association") is permitted to pay dividends
during a calendar year in an amount equal to the greater of (i) 75.0% of its net
income for the recent four quarters, or (ii) 100.0% of its net income to date
during the calendar year plus an amount that would reduce by one-half the amount
by which its ratio of total capital to assets exceeded its fully phased-in
risk-based capital ratio requirement at the beginning of the calendar year. At
September 30, 1997, the Bank qualified as a Tier I Association, and would be
permitted to pay an aggregate amount approximating $128.0 million in dividends
under these regulations. Should the Bank's regulatory capital fall below certain
levels, applicable law would require prior approval by the OTS of such proposed
dividends and, in some cases, would prohibit the payment of dividends.
At September 30, 1997, the cash of Commercial Federal Corporation (the parent
company) totaled $21.7 million. On August 11, 1997, the Corporation paid down
its five-year promissory term note by $21.0 million, and paid $1.0 million as a
scheduled principal payment on September 30, 1997, resulting in a remaining
principal balance of $4.0 million due September 30, 1998. The line of credit
available with the same financial institution totals $6.0 million, which, at
September 30, 1997, had not been drawn on. Such line of credit expires December
31, 1997. Due to the parent company's limited independent operations, management
believes that its cash balance at September 30, 1997, is currently sufficient to
meet operational needs. However, the parent company's ability to make future
interest and principal payments on its $50.0 million of 7.95% fixed-rate
subordinated extendible notes due December 1, 2006 (the Notes), on the $4.0
million promissory term note due December 31, 2001, and on its $46.4 million of
9.375% fixed-rate junior subordinated debentures due May 15, 2027 (the
Debentures), is dependent upon its receipt of dividends from the Bank.
Accordingly, on September 10, 1997, a dividend totaling $3.575 million was
declared by the Bank to be paid to the parent company. This dividend from the
Bank was paid to cover (i) interest payments totaling $1.064 million on the
parent company's debt, (ii) a principal payment of $1.0 million on the parent
company's promissory term note and (iii) the quarterly common stock cash
dividend totaling $1.511 million payable by the parent company to its
shareholders through September 30, 1997. The Bank will continue to pay dividends
to the parent company, pursuant to regulatory restrictions, to cover the cash
dividends on common stock that the parent company intends to continue to pay on
a quarterly basis and on future principal and interest payments on the parent
company's debt. A dividend totaling $3.122 million was declared by the Bank to
the parent company during the three months ended September 30, 1996. The parent
company also receives cash from the exercise of stock options and the sale of
common stock under its employee benefit plans, as well as from the Bank for
income tax benefits from operating losses of the parent company as provided in
the corporate tax sharing agreement.
The Corporation's primary sources of funds are (i) deposits, (ii) principal
repayments on loans, mortgage-backed and investment securities, (iii) advances
from the Federal Home Loan Bank (FHLB) of Topeka, (iv) cash generated from
operations and (v) securities sold under agreements to repurchase. As reflected
in the Consolidated Statement of Cash Flows, net cash flows provided by
operating activities totaled $9.4 million and $23.3 million, respectively, for
the three months ended September 30, 1997 and 1996. Amounts fluctuate from
period to period primarily as a result of mortgage banking activity relating to
the purchase and origination of loans for resale and the subsequent sale of such
loans.
Net cash flows used by investing activities totaled $103.8 million and $53.3
million, respectively, for the three months ended September 30, 1997 and 1996.
Amounts fluctuate from period to period primarily as a result of (i) principal
repayments on loans and mortgage-backed securities and (ii) the purchase and
origination of loans, mortgage-backed and investment securities. The pending
acquisitions of Liberty, Mid Continent and First National will have no material
effect on liquidity, except for the cash outlays relating to nonrecurring merger
related costs, since such transactions are structured to be consummated in an
exchange of common stock between the Corporation and these respective financial
institutions.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- --------------------------------------------
Net cash flows provided by financing activities totaled $79.0 million and $35.8
million, respectively, for the three months ended September 30, 1997 and 1996.
Advances from the FHLB have been the primary sources to balance the
Corporation's funding needs during each of the periods presented. The
Corporation experienced net decreases in retail deposits of $120.0 million and
$29.7 million, respectively, for the three months ended September 30, 1997 and
1996. These decreases in deposits are primarily due to depositors leaving for
higher interest rates. The Corporation does not anticipate such outflow to
continue as experienced during the three months ended September 30, 1997. In
addition, during the three months ended September 30, 1996, the Corporation
utilized securities sold under agreements to repurchase primarily for liquidity
and asset liability management purposes. Also, during the three months ended
September 30, 1996, the Corporation borrowed $28.0 million to partially finance
the repurchase on August 21, 1996, of 1,875,150 shares of the Corporation's
common stock. As previously discussed, such note now has a principal balance of
$4.0 million due September 30, 1998.
The Corporation will continue to grow its franchise through an ongoing program
of selective acquisitions of other financial institutions. The Corporation has
considered and will continue to consider possible mergers with and acquisitions
of other selected financial institutions. Accordingly, during the quarter ended
September 30, 1997, the Corporation entered into merger agreements with Liberty,
Mid Continent and First National. See Note B in the Notes to the Consolidated
Financial Statements for additional information on these pending acquisitions.
Such acquisitions present the Corporation with the opportunity to further expand
its retail network in its existing markets; and to increase its earnings
potential by increasing its mortgage and consumer loan volumes funded by
deposits which generally bear lower rates of interest than alternative sources
of funds. Acquisition candidates are selected based on the extent to which
the candidate can enhance the Corporation's retail presence in new or existing
markets and complement the Corporation's present retail network.
At September 30, 1997, the Corporation had issued commitments totaling
approximately $216.6 million to fund and purchase loans as follows: $74.0
million of single-family adjustable-rate mortgage loans, $110.1 million of
single-family fixed-rate mortgage loans, $18.4 million of consumer loan lines of
credit and $14.1 million of commercial real estate loans. These outstanding loan
commitments to extend credit in order to originate loans or fund consumer loan
lines of credit do not necessarily represent future cash requirements since many
of the commitments may expire without being drawn. The Corporation expects to
fund these commitments, as necessary, from the sources of funds previously
described.
The maintenance of an appropriate level of liquid resources to meet not only
regulatory requirements but also to provide funding necessary to meet the
Corporation's current business activities and obligations is an integral element
in the management of the Corporation's assets. The Corporation is required by
federal regulation to maintain a minimum average daily balance of cash and
certain qualifying liquid investments equal to 5.0% of the aggregate of the
prior month's daily average savings deposits and short-term borrowings. The
Corporation's liquidity ratio was 5.35% at September 30, 1997. Liquidity levels
will vary depending upon savings flows, future loan fundings, cash operating
needs, collateral requirements and general prevailing economic conditions. The
Corporation does not foresee any difficulty in meeting its liquidity
requirements.
RESULTS OF OPERATIONS:
- ----------------------
Net income for the three months ended September 30, 1997, was $17.1 million, or
$.78 per share, compared to a net loss of $4.1 million, or $.18 loss per share,
for the three months ended September 30, 1996. The increase in net income for
the three months ended September 30, 1997, compared to the three months ended
September 30, 1996, is primarily due to a $27.1 million nonrecurring Federal
deposit insurance special assessment recorded in fiscal year 1997, net increases
of $2.7 million in net interest income and $2.5 million in total other income,
and net reductions of $838,000 and $217,000, respectively, in amortization
expense of intangible assets and general and administrative expenses. These
increases to net income were partially offset by net increases of $11.7 million
and $442,000, respectively, in the provision for income taxes and the provision
for loan losses.
12
<PAGE>
Net Interest Income:
- -------------------
Net interest income was $43.0 million for the three months ended September 30,
1997, compared to $40.3 million for the three months ended September 30, 1996,
resulting in an increase of $2.7 million, or 6.7%. The interest rate spread was
2.46% at September 30, 1997, compared to 2.37% at September 30, 1996, an
increase of nine basis points. During the three months ended September 30, 1997
and 1996, interest rate spreads were 2.36% and 2.40%, respectively, a decrease
of four basis points; and the yield on interest-earning assets was 2.52% and
2.54% over the same respective periods of time. The interest rate spreads were
lower for the current fiscal year quarter compared to the prior fiscal year
period primarily due to an increase of four basis points in rates on total
interest-bearing liabilities, primarily advances from the FHLB and certificates
of deposit. Net interest income increased for the three months ended September
30, 1997, over the three months ended September 30, 1996, due to the net
earnings balance increasing by $35.4 million over the respective three-month
period. The average balance of interest-earning assets increased $487.5 million
for the three months ended September 30, 1997, compared to the same period ended
September 30, 1996, while the average balance of interest-bearing liabilities
increased $452.1 million over the same respective period of time. The increases
in these average balances are due to the acquisitions of Heritage Financial,
Ltd. (Heritage) on October 1, 1996, and Investors Federal Savings (Investors) on
May 1, 1997, and to internal growth. The future trend in interest rate spreads
and net interest income will be dependent upon such factors as the composition
and size of the Corporation's interest-earning assets and interest-bearing
liabilities, the interest rate risk exposure of the Corporation, and the
maturity and repricing activity of interest-sensitive assets and liabilities, as
influenced by changes in and levels of both short-term and long-term market
interest rates.
The following table presents certain information concerning yields earned on
interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the periods presented:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
For the Three
Months Ended At
September 30, September 30,
-------------------------- ------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average yield on:
Loans 8.11% 8.15% 8.11% 8.15%
Mortgage-backed securities 6.45 6.58 6.79 6.73
Investments 6.77 6.08 6.84 6.35
- ----------------------------------------------------------------------------------------------------------
Interest-earning assets 7.75 7.75 7.81 7.79
- ----------------------------------------------------------------------------------------------------------
Weighted average rate paid on:
Savings deposits 3.19 3.12 3.12 3.23
Other time deposits 5.76 5.74 5.76 5.76
Advances from FHLB 5.97 5.70 5.85 5.83
Securities sold under agreements
to repurchase 6.04 6.42 6.03 6.17
Other borrowings 8.80 10.66 8.83 10.35
- ----------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 5.39 5.35 5.35 5.42
- ----------------------------------------------------------------------------------------------------------
Interest rate spread 2.36% 2.40% 2.46% 2.37%
- ----------------------------------------------------------------------------------------------------------
Net annualized yield on
interest-earning assets 2.52% 2.54% 2.65% 2.54%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
Net Interest Income (Continued):
- --------------------------------
The table below presents average interest-earning assets and average
interest-bearing liabilities, interest income and interest expense, and average
yields and rates during the three months ended September 30, 1997. The following
table includes nonaccruing loans averaging $37.8 million for the three months
ended September 30, 1997, as interest-earning assets at a yield of zero percent:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Three Months Ended
September 30, 1997
----------------------------------------------
Annualized
Average Yield/
(Dollars in Thousands) Balance Interest Rate
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest-earning assets:
Loans $ 5,273,688 $ 106,983 8.11%
Mortgage-backed securities 1,040,872 16,792 6.45
Investments 506,973 8,577 6.77
- -------------------------------------------------------------------------------------------------------------------
Interest-earning assets 6,821,533 132,352 7.75
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 1,269,136 10,188 3.19
Other time deposits 3,043,060 44,212 5.76
Advances from FHLB 1,529,606 23,004 5.97
Securities sold under
agreements to repurchase 607,772 9,375 6.04
Other borrowings 116,874 2,571 8.80
- -------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 6,566,448 89,350 5.39
- -------------------------------------------------------------------------------------------------------------------
Net earnings balance $ 255,085
===========
Net interest income $ 43,002
=========
Interest rate spread 2.36%
- -------------------------------------------------------------------------------------------------------------------
Net annualized yield on
interest-earnings assets 2.52%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
During the three months ended September 30, 1997, the Corporation experienced
higher costs on interest-bearing liabilities primarily due to increases in the
interest rates on FHLB advances (27 basis points) and certificates of deposit
(two basis points). The net earnings balance (the difference between average
interest-bearing liabilities and average interest-earning assets) increased by
$35.4 million for the three months ended September 30, 1997, compared to the
three months ended September 30, 1996, primarily due to the acquisition of
Heritage (which was acquired, in part, through the issuance of common stock),
the acquisition of Investors and net internal growth with earnings retention.
14
<PAGE>
Net Interest Income (Continued):
- --------------------------------
The table below presents the dollar amount of changes in interest income and
expense for each major component of interest-earning assets and interest-bearing
liabilities, respectively, and the amount of change in each attributable to: (i)
changes in volume (change in volume multiplied by prior year rate), and (ii)
changes in rate (change in rate multiplied by prior year volume). The net change
attributable to change in both volume and rate, which cannot be segregated, has
been allocated proportionately to the change due to volume and the change due to
rate. The following table demonstrates the effect of the increased volume of
interest-earning assets and interest-bearing liabilities, the changes in
interest rates and the effect on the interest rate spreads previously discussed:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Three Months Ended
September 30, 1997 Compared
to September 30, 1996
---------------------------
(In Thousands) Increase (Decrease) Due to
- -------------------------------------------------------------------------------------------------
Volume Rate Net
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income:
Loans $ 9,202 $ (766) $ 8,436
Mortgage-backed securities (2,049) (374) (2,423)
Investments 2,945 608 3,553
- -------------------------------------------------------------------------------------------------
Interest income 10,098 (532) 9,566
- -------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 1,092 183 1,275
Other time deposits (1,873) 208 (1,665)
Advances from FHLB 2,698 928 3,626
Securities sold under agreements to repurchase 3,412 (400) 3,012
Other borrowings 997 (389) 608
- -------------------------------------------------------------------------------------------------
Interest expense 6,326 530 6,856
- -------------------------------------------------------------------------------------------------
Effect on net interest income $ 3,772 $ (1,062) $ 2,710
- -------------------------------------------------------------------------------------------------
</TABLE>
The net improvements due to changes in volume for the three months ended
September 30, 1997, compared to September 30, 1996, reflect the net growth the
Corporation has experienced, both internally and from acquisitions. The net
decreases due to changes in rates between the three-month periods ended
September 30, 1997 and 1996, primarily reflect the increase in rates on
interest-bearing liabilities, primarily FHLB advances.
Provision for Loan Losses and Real Estate Operations:
- -----------------------------------------------------
The Corporation recorded loan loss provisions totaling $2.1 million and $1.7
million, respectively, for the three months ended September 30, 1997, compared
to the three months ended September 30, 1996. The loan loss provision is higher
compared to the three months ended September 30, 1996, due primarily to a larger
amount of general reserves recorded in the current fiscal year quarter to cover
consumer loan losses. The provision for loan losses for the three months ended
September 30, 1997, is consistent with the provision recorded during the second,
third and fourth quarters of fiscal year 1997. The allowance for loan losses
is based management's continuous evaluation of the collectibility of outstanding
loans, which takes into consideration such factors as changes in the composition
of the loan portfolio and economic conditions that may affect the borrower's
ability to pay, regular examinations by the Corporation's credit review group of
specific problem loans and of the overall portfolio quality and real estate
market conditions in the Corporation's lending areas.
The Corporation recorded a net loss from real estate operations of $174,000 for
the three months ended September 30, 1997, compared to net income of $216,000
for the three months ended September 30, 1996. Real estate operations reflect
provisions for real estate losses, net real estate operating activity, and gains
and losses on dispositions of real estate. The decrease in real estate
operations for the three months ended September 30, 1997, compared to the three
months ended September 30, 1996, is primarily due to an increase in capitalized
lot development costs in the prior fiscal year quarter compared to the current
fiscal year quarter.
15
<PAGE>
Provision for Loan Losses and Real Estate Operations (Continued):
- -----------------------------------------------------------------
Nonperforming assets are monitored on a regular basis by the Corporation's
internal credit review and asset workout groups. Nonperforming assets increased
$12,000 at September 30, 1997, compared to June 30, 1997, resulting from a net
increase of $3.3 million in nonperforming loans partially offset by net
decreases of $1.9 million and $1.4 million, respectively, in real estate and
troubled debt restructurings. Nonperforming assets as of the dates indicated are
summarized as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
September 30, June 30, September 30,
(Dollars in Thousands) 1997 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans:
Residential real estate $ 37,441 $ 34,348 $ 34,705
Commercial real estate 388 424 3,346
Consumer 2,243 2,042 1,480
- ----------------------------------------------------------------------------------------------------------------------
Total 40,072 36,814 39,531
- ----------------------------------------------------------------------------------------------------------------------
Real estate:
Commercial 7,706 8,417 10,602
Residential 7,452 8,599 7,124
- ----------------------------------------------------------------------------------------------------------------------
Total 15,158 17,016 17,726
- ----------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings:
Commercial 7,442 8,857 12,909
Residential 814 787 909
- ----------------------------------------------------------------------------------------------------------------------
Total 8,256 9,644 13,818
- ----------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 63,486 $ 63,474 $ 71,075
- ----------------------------------------------------------------------------------------------------------------------
Nonperforming loans to total loans .74% .68% .81%
Nonperforming assets to total assets .88% .89% 1.07%
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses:
Other loans (1) $ 37,753 $ 37,658 $ 37,350
Bulk purchased loans (2) 10,197 10,809 12,197
- ----------------------------------------------------------------------------------------------------------------------
Total $ 47,950 $ 48,467 $ 49,547
- ----------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to total loans .89% .90% 1.01%
Allowance for loan losses to total nonperforming assets 75.53% 76.36% 69.71%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $80,000, $77,000, and $78,000, at September 30, 1997, June 30,
1997, and September 30, 1996, respectively, in general allowance for losses
established primarily to cover risks associated with borrowers'
delinquencies and defaults on loans held for sale.
(2) Represents the allowance for loan losses for single-family residential
whole loans purchased between January 1991 and June 30, 1992 (bulk
purchased loans), which had been allocated from the amount of net discounts
associated with the Corporation's purchase of these loans to provide for
the credit risk associated with such bulk purchased loans. These bulk
purchased loans had principal balances of $469.4 million, $494.6 million,
and $560.1 million, respectively, at September 30, 1997, June 30, 1997, and
September 30, 1996. These allowances are available only to absorb losses
associated with respective bulk purchased loans and are not available to
absorb losses from other loans.
16
<PAGE>
Provision for Loan Losses and Real Estate Operations (Continued):
- -----------------------------------------------------------------
The ratio of nonperforming loans to total loans was .74% at September 30, 1997,
based on loan balances of $5.407 billion, compared to .68% and .81%,
respectively, at June 30, 1997, and September 30, 1996, based on respective loan
balances approximating $5.377 billion and $4.903 billion. The ratio of
nonperforming assets to total assets was .88% at September 30, 1997, compared to
.89% and 1.07% at June 30, 1997, and September 30, 1996, respectively. Ratios
for nonperforming loans to total loans increased compared to June 30, 1997, due
to increases in such nonperforming loans, primarily delinquent residential
loans, and improved compared to September 30, 1996, due primarily to net
increases in total loans. Ratios for nonperforming assets to total assets remain
relatively unchanged compared to June 30, 1997, and improved compared to
September 30, 1996, due to net improvements in total nonperforming assets as
well as an increase in total assets. The percentage of allowance for loan losses
to total loans decreased compared to June 30, 1997, and September 30, 1996,
primarily due to net increases in total loans and to decreases in the allowance
for loan losses from loan repayments for bulk purchased loans. The total
allowance for loan losses to total nonperforming assets remain relatively
unchanged comparing September 30, 1997, to June 30, 1997, and increased compared
to September 30, 1996, primarily due to a net decrease in total nonperforming
assets.
Nonperforming loans at September 30, 1997, increased by $3.3 million compared to
June 30, 1997, primarily due to net increases totaling $2.7 million, $419,000
and $201,000, respectively, in delinquent residential real estate, residential
construction real estate and consumer loans. These increases were offset by a
net decrease of $36,000 in delinquent commercial real estate loans. The net
decrease in real estate of $1.9 million at September 30, 1997, compared to June
30, 1997, is due primarily to the disposition of certain residential and
commercial real estate totaling $4.4 million and $1.6 million, respectively,
offset primarily by the addition of residential real estate properties totaling
$3.0 million and the capitalization of lot development costs totaling $1.0
million. The net decrease of $1.4 million in troubled debt restructurings at
September 30, 1997, compared to June 30, 1997, is primarily attributable to
transfers to nonperforming loans.
Loan Servicing Fees:
- --------------------
Fees from loans serviced for other institutions totaled $7.8 million and $7.3
million, respectively, for the three months ended September 30, 1997 and 1996.
The increase comparing the respective periods is primarily due to increases in
the average size of the Corporation's loan servicing portfolio. At September 30,
1997 and 1996, the Corporation's mortgage servicing portfolio approximated
$5.881 billion and $5.875 billion, respectively.
The value of the Corporation's loan servicing portfolio increases as mortgage
interest rates rise and loan prepayments decrease. It is expected that income
generated from the Corporation's loan servicing portfolio will increase in such
an environment. However, this positive effect on the Corporation's income is
offset, in part, by a decrease in additional servicing fee income attributable
to new loan originations, which historically decrease in periods of higher, or
increasing, mortgage interest rates, and by an increase in expenses from loan
production costs since a portion of such costs cannot be deferred due to lower
loan originations. Conversely, the value of the Corporation's loan servicing
portfolio will decrease as mortgage interest rates decline.
Retail Fees and Charges:
- ------------------------
Retail fees and charges totaled $4.4 million and $3.9 million, respectively, for
the three months ended September 30, 1997 and 1996. The net increase of $444,000
primarily results from increases in certain checking account fees and VISA check
card fees primarily due to a significant increase in the number of retail
checking accounts at September 30, 1997, compared to September 30, 1996.
Gain on Sales of Loans:
- -----------------------
The Corporation sold loans to third parties through its mortgage banking
operations resulting in net pre-tax gains of $232,000 and $105,000,
respectively, on loans sold totaling $133.3 million and $185.1 million,
respectively, for the three months ended September 30, 1997 and 1996. Mortgage
loans are generally sold in the secondary market with loan servicing retained
and without recourse to the Corporation. The net gains are attributable to the
relatively stable interest rate environments over the respective periods.
17
<PAGE>
Other Operating Income:
- -----------------------
Other operating income totaled $3.6 million and $2.0 million, respectively, for
the three months ended September 30, 1997, and 1996. The major components of
other operating income are from brokerage and credit life and disability
commissions which increased $384,000 and $185,000, respectively, for the three
months ended September 30, 1997, compared to September 30, 1996, and from
insurance commissions, which decreased $59,000 for the three months ended
September 30, 1997, compared to 1996. Also contributing to the increase in other
operating income for the three months ended September 30, 1997, compared to 1996
are receipts from bankruptcy settlements totaling $402,000, excess trustee
funds on debt payoff totaling $478,000 and a net pre-tax gain of $355,000 on the
sale of loan servicing rights, all of which were recorded in the current fiscal
year quarter.
General and Administrative Expenses:
- ------------------------------------
General and administrative expenses, excluding the $27.1 million nonrecurring
industry-wide Federal deposit insurance special assessment recorded in the first
quarter of fiscal year 1997, totaled $29.1 million and $29.3 million,
respectively, for the three months ended September 30, 1997, compared to the
three months ended September 30, 1996. The net decrease of $217,000 for the
three months ended September 30, 1997, compared to the three months ended
September 30, 1996, was primarily due to net decreases of $1.8 million in
regulatory insurance and assessments and $1.3 million in other operating
expenses partially offset by net increases in compensation and benefits of $1.6
million, advertising of $845,000, occupancy and equipment of $239,000 and data
processing of $223,000.
The decrease in regulatory insurance and assessments of $1.8 million is
substantially due to the revised rate structure on insured deposits adopted by
the Federal Deposit Insurance Corporation after the recapitalization of the
Savings Association Insurance Fund. The Corporation's annual deposit insurance
rate in effect prior to this recapitalization (and for the three months ended
September 30, 1996) was .23% of insured deposits which was reduced to .064% of
insured deposits effective January 1, 1997, and thereafter. The net decrease of
$1.3 million in other operating expenses resulted primarily from nonrecurring
expenses totaling $2.3 million recorded in the prior fiscal year quarter related
to the repurchase of 1,875,150 shares of the Corporation's common stock. These
decreases were offset primarily by increased marketing costs for checking
accounts and related products and consumer loans totaling $845,000, higher loan
production costs, net increases in operating expenses due to the Heritage and
Investors acquisitions, increased data processing costs and other net increases
in employee benefits, rent and occupancy and other operating expenses resulting
primarily from branch expansion over the prior fiscal year period and other
expenses incurred on an indirect basis attributable to such branch expansion and
acquisitions.
18
<PAGE>
Amortization of Goodwill and Core Value of Deposits:
- ----------------------------------------------------
Amortization of goodwill and core value of deposits totaled $1.5 million and
$2.4 million, respectively, for the three months ended September 30, 1997,
compared to the three months ended September 30, 1996. The net decrease of
$838,000 for the three months ended September 30, 1997, is due primarily to the
reduction in the current fiscal year quarter in amortization expense of core
value of deposits since certain amounts from acquisitions became fully
amortized as of April 30, 1997.
Income Tax Provision (Benefit):
- -------------------------------
For the three months ended September 30, 1997, the provision for income taxes
totaled $9.3 million compared to an income tax benefit of $2.5 million for the
three months ended September 30, 1996. The effective income tax rate for the
three months ended September 30, 1997, was 35.1% compared to 38.0% for the three
months ended September 30, 1996. The effective tax rates for both periods vary
from the applicable statutory rates primarily due to the nondeductibility of
amortization of goodwill and core value of deposits, and certain merger and
acquisition costs, in relation to the level of taxable income for the respective
periods.
19
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). Exhibits:
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedules (EDGAR)
(b). Reports on Form 8-K:
During the three months ended September 30, 1997, the Corporation
filed three Current Reports on Form 8-K announcing definitive
agreements to acquire three other financial institutions. On
August 18, 1997, the Corporation entered into a reorganization
and merger agreement with Liberty Financial Corporation, a
privately held commercial bank and thrift holding company,
headquartered in West Des Moines, Iowa. On September 2, 1997, the
Corporation entered into a reorganization and merger agreement
with Mid Continent Bancshares, Inc., parent company of Mid-
Continent Federal Savings Bank, headquartered in El Dorado,
Kansas. On September 11, 1997, the Corporation entered into a
reorganization and merger agreement with First National Bank
Shares, LTD, parent company of First United National Bank and
Trust Company, headquartered in Great Bend, Kansas. See Note B to
the Consolidated Financial Statements for additional information.
20
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL FEDERAL CORPORATION
(Registrant)
Date: November 14, 1997 /s/ James A. Laphen
----------------- -------------------------------------------
James A. Laphen, President, Chief
Operating Officer and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
Date: November 14, 1997 /s/ Gary L. Matter
----------------- -------------------------------------------
Gary L. Matter, Senior Vice President,
Controller and Secretary
(Principal Accounting Officer)
21
<PAGE>
EXHIBIT INDEX
-------------
Page No.
- -------------------------------------------------------------------------------
Exhibit 11. Computation of Earnings Per Share 23
Exhibit 27. Financial Data Schedules (EDGAR only) --
22
<PAGE>
COMMERCIAL FEDERAL CORPORATION Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARES:
- -----------------------------------------------------------------------------------------------
Three Months Ended
September 30,
----------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) $ 17,108,299 $ (4,049,927)
============= =============
- -----------------------------------------------------------------------------------------------
PRIMARY:
- --------
Weighted average common shares outstanding 21,571,349 21,821,275
Add shares applicable to stock options using average
market price 389,605 292,554
------------- -------------
Total average common and common equivalent
shares outstanding 21,960,954 22,113,829
============= =============
Net income (loss) per common and common equivalent share $ .78 $ (.18)
============= =============
- -----------------------------------------------------------------------------------------------
FULLY DILUTED (1):
- ------------------
Weighted average common shares outstanding 21,571,349 21,821,275
Add shares applicable to stock options using the
period-end market price if higher than average
market price and other dilutive factors 427,276 321,942
------------- -------------
Total average common and common equivalent
shares outstanding assuming full dilution 21,998,625 22,143,217
============= =============
Net income (loss) per common share assuming full dilution $ .78 $ (.18)
============= =============
- -----------------------------------------------------------------------------------------------
</TABLE>
(1) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3.0%.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 38,901
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,500
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 329,926
<INVESTMENTS-CARRYING> 1,176,853
<INVESTMENTS-MARKET> 1,182,495
<LOANS> 5,291,820
<ALLOWANCE> 47,950
<TOTAL-ASSETS> 7,207,143
<DEPOSITS> 4,258,902
<SHORT-TERM> 1,546,476
<LIABILITIES-OTHER> 120,462
<LONG-TERM> 837,030
0
0
<COMMON> 216
<OTHER-SE> 444,057
<TOTAL-LIABILITIES-AND-EQUITY> 7,207,143
<INTEREST-LOAN> 106,983
<INTEREST-INVEST> 25,369
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 132,352
<INTEREST-DEPOSIT> 54,400
<INTEREST-EXPENSE> 89,350
<INTEREST-INCOME-NET> 43,002
<LOAN-LOSSES> 2,100
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 30,652
<INCOME-PRETAX> 26,368
<INCOME-PRE-EXTRAORDINARY> 17,108
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,108
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
<YIELD-ACTUAL> 2.65
<LOANS-NON> 40,072
<LOANS-PAST> 0
<LOANS-TROUBLED> 8,256
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 48,467
<CHARGE-OFFS> 2,302
<RECOVERIES> 219
<ALLOWANCE-CLOSE> 47,950
<ALLOWANCE-DOMESTIC> 10,197
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 37,753
</TABLE>
