<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 March 31, 1998
---------------
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:
Indicated the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 5, 1998
- ------------------------------------- --------------------------------
Common Stock, $0.01 Par Value 40,314,556 Shares
1
<PAGE>
COMMERCIAL FEDERAL CORPORATION
-------------------------------
FORM 10-Q
---------
INDEX
-----
- --------------------------------------------------------------------------------
Part I. Financial Information Page Number
--------------------- -----------
Item 1. Financial Statements:
Consolidated Statement of Financial Condition as of
March 31, 1998 and June 30, 1997 3
Consolidated Statement of Operations for the Three
and Nine Months Ended March 31, 1998 and 1997 4-5
Consolidated Statement of Cash Flows for the Nine
Months Ended March 31, 1998 and 1997 6-7
Notes to Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-22
Part II. Other Information
-----------------
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
Signature Page 24
- --------------------------------------------------------------------------------
2
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
-----------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) March 31, June 30,
ASSETS 1998 1997
- --------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Cash (including short-term investments of $3,931 at March 31, 1998) $ 93,678 $ 101,171
Investment securities available for sale, at fair value 178,476 61,184
Mortgage-backed securities available for sale, at fair value 204,994 238,185
Loans held for sale, net 256,913 82,552
Investment securities held to maturity (fair value of $454,685 and $456,316) 448,941 458,517
Mortgage-backed securities held to maturity (fair value of $803,500 and $858,485) 801,123 858,121
Loans and leases receivable, net of allowances of $56,518 and $53,685 6,073,996 5,904,994
Federal Home Loan Bank stock 108,511 81,209
Interest receivable, net of reserves of $313 and $262 52,162 53,204
Real estate, net 21,962 20,599
Premises and equipment, net 100,306 98,206
Prepaid expenses and other assets 113,419 115,929
Goodwill and core value of deposits, net of
accumulated amortization of $26,001 and $20,679 74,228 55,408
- --------------------------------------------------------------------------------------------------------------
Total Assets $ 8,528,709 $ 8,129,279
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 5,222,085 $ 5,148,407
Advances from Federal Home Loan Bank 2,054,686 1,545,326
Securities sold under agreements to repurchase 434,986 639,294
Other borrowings 107,921 156,102
Interest payable 35,795 29,006
Other liabilities 83,495 97,592
- --------------------------------------------------------------------------------------------------------------
Total Liabilities 7,938,968 7,615,727
- --------------------------------------------------------------------------------------------------------------
Commitments and contingencies -- --
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 50,000,000 shares authorized;
40,306,274 and 38,903,000 shares issued and outstanding 403 282
Additional paid-in capital 214,069 179,726
Retained earnings 374,457 333,645
Unrealized holding gain (loss) on securities available for sale, net 812 (101)
- --------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 589,741 513,552
- --------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 8,528,709 $ 8,129,279
- --------------------------------------------------------------------------------------------------------------
</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 Nine Months Ended
March 31, March 31,
------------------------ -------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans and leases receivable $ 125,042 $ 115,823 $ 373,510 $ 341,818
Mortgage-backed securities 17,129 19,122 51,701 60,686
Investment securities 12,167 8,979 36,605 26,710
- ---------------------------------------------------------------------------------------------------------------------------
Total interest income 154,338 143,924 461,816 429,214
Interest Expense:
Deposits 60,898 62,557 185,759 189,080
Advances from Federal Home Loan Bank 27,468 18,015 80,273 56,957
Securities sold under agreements to repurchase 7,446 10,033 25,074 26,580
Other borrowings 2,720 2,307 8,705 8,152
- ---------------------------------------------------------------------------------------------------------------------------
Total interest expense 98,532 92,912 299,811 280,769
Net Interest Income 55,806 51,012 162,005 148,445
Provision for Loan and Lease Losses (2,400) (3,128) (10,845) (8,019)
- ---------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan and Lease Losses 53,406 47,884 151,160 140,426
Other Income:
Loan servicing fees 9,785 10,469 29,498 30,434
Retail fees and charges 5,620 5,353 17,088 15,748
Real estate operations (199) (136) 559 1,012
Gain on sales of loans 292 350 1,137 993
Gain on sales of mortgage-backed securities 468 -- 1,494 100
Other operating income 3,863 4,260 15,262 10,518
- ---------------------------------------------------------------------------------------------------------------------------
Total other income 19,829 20,296 65,038 58,805
Other Expense:
General and administrative expenses -
Compensation and benefits 16,937 15,486 50,572 46,497
Occupancy and equipment 5,519 4,931 16,335 14,725
Data processing 7,057 2,780 12,521 7,706
Regulatory insurance and assessments 1,021 986 3,103 6,250
Advertising 2,829 2,317 8,373 6,559
Merger expenses 11,471 -- 12,657 --
Other operating expenses 11,776 9,019 31,491 27,202
- ---------------------------------------------------------------------------------------------------------------------------
General and administrative expenses before
Federal deposit insurance special assessment 56,610 35,519 135,052 108,939
Federal deposit insurance special assessment -- -- -- 27,539
- ---------------------------------------------------------------------------------------------------------------------------
Total general and administrative expenses 56,610 35,519 135,052 136,478
Amortization of goodwill and core value of deposits 1,966 2,858 5,322 8,853
- ---------------------------------------------------------------------------------------------------------------------------
Total other expense 58,576 38,377 140,374 145,331
Income Before Income Taxes and Extraordinary Items 14,659 29,803 75,824 53,900
Provision for Income Taxes 6,465 10,198 28,287 18,804
- ---------------------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Items 8,194 19,605 47,537 35,096
Extraordinary Items - Loss on Early Retirement of Debt,
Net of Tax Benefit of $316 -- -- -- (583)
- ---------------------------------------------------------------------------------------------------------------------------
Net Income $ 8,194 $ 19,605 $ 47,537 $ 34,513
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------- ---------------------------
1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding used in basic earnings per share calculation 39,978,614 38,667,348 39,227,633 38,827,114
Add assumed exercise of outstanding stock options
as adjustments for dilutive securities 424,003 624,902 600,800 590,472
----------- ---------- ---------- ----------
Weighted average number of common shares
outstanding used in diluted earnings per share calculation 40,402,617 39,292,250 39,828,433 39,417,586
- -------------------------------------------------------------------------------------------------------------------------
Basic earnings per share:
Income before extraordinary items $ .20 $ .51 $ 1.21 $ .90
Extraordinary items -- -- -- (.01)
----------- ---------- ---------- ----------
Net income $ .20 $ .51 $ 1.21 $ .89
=========== ========== ========== ==========
Diluted earnings per share:
Income before extraordinary items $ .20 $ .50 $ 1.19 $ .89
Extraordinary items -- -- -- (.01)
----------- ---------- ---------- ----------
Net income $ .20 $ .50 $ 1.19 $ .88
=========== ========== ========== ==========
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Nine Months Ended
March 31,
------------------------------------
1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 47,537 $ 34,513
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Extraordinary items, net of tax benefit -- 583
Amortization of goodwill and core value of deposits 5,322 8,853
Provision for loss on loans and real estate 11,041 8,401
Depreciation and amortization 7,311 7,009
Accretion of deferred discounts and fees, net (548) (2,722)
Amortization of mortgage servicing rights 7,587 7,074
Amortization of deferred compensation on restricted
stock and premiums on other borrowings 733 884
Gain on sales of real estate, loans and loan servicing rights, net (2,699) (2,557)
Gain on sales of mortgage-backed securities (1,494) (100)
Stock dividends from Federal Home Loan Bank (5,477) (3,713)
Proceeds from the sale of loans 644,542 696,449
Origination of loans for resale (444,223) (359,548)
Purchases of loans for resale (371,192) (320,164)
Decrease in interest receivable 3,124 2,691
Decrease in interest payable and other liabilities (18,969) (1,898)
Other items, net (3,738) (26,534)
------------ -----------
Total adjustments (168,680) 14,708
------------ -----------
Net cash provided (used) by operating activities (121,143) 49,221
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans (576,322) (556,930)
Repayment of loans, net of originations 342,289 208,778
Principal repayments of mortgage-backed securities held to maturity 146,133 103,936
Purchase of mortgage-backed securities available for sale (40,757) (18,115)
Proceeds from sale of mortgage-backed securities available for sale 69,468 80,372
Principal repayments of mortgage-backed securities available for sale 54,407 34,372
Maturities and repayments of investment securities held to maturity 310,060 99,657
Purchases of investment securities held to maturity (284,445) (208,033)
Purchases of investment securities available for sale (79,753) (10,886)
Maturities and repayments of investment securities available for sale 12,926 10,656
Proceeds from sale of investment securities available for sale 8,137 22,034
Purchases of mortgage loan servicing rights (9,035) (8,920)
Proceeds from sale of mortgage loan servicing rights 412 --
Purchases of Federal Home Loan Bank stock (22,426) (4,299)
Proceeds from sale of Federal Home Loan Bank stock 933 21,502
Proceeds from sale of real estate 13,462 12,048
Payments to acquire real estate (2,639) (867)
Acquisitions, net of cash received 4,197 7,339
Purchases of premises and equipment, net (7,063) (7,715)
Other items, net (9,678) (873)
------------ -----------
Net cash used by investing activities (69,694) (215,944)
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Nine Months Ended
March 31,
--------------------------------------
1998 1997
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits $ (68,303) $ 55,676
Proceeds from Federal Home Loan Bank advances 832,380 832,455
Repayment of Federal Home Loan Bank advances (317,398) (928,295)
Proceeds from securities sold under agreements to repurchase 100,000 375,000
Repayment of securities sold under agreements to repurchase (305,388) (95,000)
Proceeds from issuances of other borrowings 11,950 100,135
Repayment of other borrowings (62,417) (79,334)
Payment of cash dividends on common stock (5,187) (4,966)
Repurchase of common stock -- (49,324)
Issuance of common stock 2,870 1,398
Other items, net 2,639 (1,500)
------------ ------------
Net cash provided by financing activities 191,146 206,245
- ------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase in net cash position 309 39,522
Balance, beginning of year 101,171 70,077
Adjustment to convert acquistions to June 30 fiscal year end (7,802) (5,860)
------------ ------------
Balance, end of period $ 93,678 $ 103,739
============ ============
- ------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest expense $ 293,594 $ 280,231
Income taxes, net 30,715 13,094
Non-cash investing and financing activities -
Loans exchanged for mortgage-backed securities 122,752 34,292
Loans transferred to real estate 4,891 12,593
Loans to facilitate the sale of real estate 302 107
Common stock issued in connection with acquisitions of businesses 32,267 19,420
Common stock issued in connection with stock options exercised, net 2,127 --
Common stock tendered and withheld in connection with stock
options exercised (5,855) --
- ------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
7
<PAGE>
COMMERCIAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED MARCH 31, 1998
(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.
During the three months ended March 31, 1998, the Corporation consummated the
acquisitions of First National Bank Shares, LTD, (First National), Liberty
Financial Corporation (Liberty) and Mid Continent Bancshares, Inc. (Mid
Continent). The accounts and results of operations of First National are
reflected in the Corporation's consolidated financial statements beginning
January 30, 1998 since the acquisition was accounted for as a purchase. The
Liberty and Mid Continent acquisitions were accounted for as pooling of
interests and, accordingly, the Corporation's historical consolidated financial
statements were restated for all periods prior to these acquisitions to include
the accounts and results of operations of Liberty and Mid Continent. See Note B
for additional information regarding these mergers.
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, the required restatement of
all periods prior to the mergers with Liberty and Mid Continent and the merger
expenses and other nonrecurring charges recorded during the first nine months of
fiscal year 1998) 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 and nine month periods ended March 31, 1998,
are not necessarily indicative of the results which may be expected for the
entire fiscal year 1998. Certain amounts in the prior fiscal year periods have
been reclassified for comparative purposes.
B. CONSUMMATED ACQUISITIONS:
-------------------------
First National Bank Shares, LTD. On January 30, 1998, the Corporation
consummated its acquisition of First National, parent company of First United
National Bank and Trust Company. Under the terms of the merger agreement, all of
the outstanding shares of First National's common stock were exchanged for
992,842 shares of the Corporation's common stock. Based on the Corporation's
closing price on January 30, 1998, of $32.50 per share, the exchange of the
Corporation's common stock resulted in a total aggregate value approximating
$32,267,000. At January 30, 1998, before purchase accounting adjustments, First
National had assets of approximately $147,800,000, deposits of approximately
$131,300,000 and stockholders' equity of approximately $12,000,000. First
National operated seven branches located in Kansas. This acquisition has been
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 to be amortized on a straight line basis over a period not
to exceed 20 years. The acquisition and operations of First National are not
material to the Corporation.
Liberty Financial Corporation. On February 13, 1998, the Corporation
consummated its acquisition of Liberty, a privately held commercial bank and
thrift holding company. Pursuant to the terms of the merger agreement, all
8,748,500 outstanding shares of Liberty's common stock were exchanged for
4,015,555 shares of the Corporation's common stock (exchange ratio of .459 based
on an average closing price of $33.7062) for total consideration of
approximately $135,349,000. Liberty operated 38 branches in Iowa and seven in
the metropolitan area of Tucson, Arizona and at January 31, 1998, had assets of
approximately $658,100,000, deposits of approximately $569,800,000 and
stockholders' equity of approximately $50,100,000. This acquisition was
accounted for as a pooling of interests.
Mid Continent Bancshares, Inc. On February 27, 1998, the Corporation consummated
its acquisition of Mid Continent, parent company of Mid-Continent Federal
Savings Bank. Pursuant to the terms of the merger agreement, all outstanding
shares of Mid Continent's common stock were exchanged for 2,641,945 shares of
the Corporation's common stock (exchange ratio of 1.3039 based on an average
closing price of $32.9156) for total consideration of approximately $86,961,000.
Mid Continent operated ten branches located in Kansas and at February 27, 1998,
had total assets of approximately $405,700,000, deposits of approximately
$258,600,000 and stockholders' equity of approximately $41,200,000. This
acquisition was accounted for as a pooling of interests.
8
<PAGE>
B. CONSUMMATED ACQUISITIONS (Continued):
-------------------------------------
The following table summarizes results of operations of the Corporation, Liberty
and Mid Continent for the six months ended December 31, 1997, as separately
reported prior to the mergers, that are included in results of operations for
the nine months ended March 31, 1998:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Mid
(In Thousands) Corporation Liberty Continent Combined
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total interest income and other income $ 299,735 $ 33,997 $ 18,955 $ 352,687
Total interest expense 179,473 12,745 9,061 201,279
Net income 34,868 2,644 1,831 39,343
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table reconciles revenue and earnings previously reported by the
Corporation to give effect to the mergers currently presented in the financial
statements for the three and nine months ended March 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Mid
(In Thousands) Corporation Liberty Continent Combined
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Three months ended March 31, 1997:
Total interest income and other income $ 140,179 $ 15,034 $ 9,007 $ 164,220
Total interest expense 82,814 5,804 4,294 92,912
Net income 16,177 2,301 1,127 19,605
Nine months ended March 31, 1997:
Total interest income and other income $ 419,057 $ 43,248 $ 25,714 $ 488,019
Total interest expense 250,758 17,734 12,277 280,769
Net income 27,034 4,286 3,193 34,513
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
Results of operations for Liberty were reported on a calendar year basis prior
to its merger into the Corporation. However, in restating prior periods for the
most recent fiscal year, Liberty's accounts and results of operations were
conformed to the Corporation's four quarters ended June 30, 1997. Accordingly,
in changing fiscal years, Liberty's accounts and results of operations for the
six months ended June 30, 1996, were excluded from reported results of
operations for the restated combined companies. As such, the following table
summarizes the details of changes in retained earnings for such period:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(In Thousands)
- --------------------------------------------------------------------------------------------------
<S> <C>
Balance, June 30, 1996 (restated) $ 283,525
Reported net income for fiscal year June 30, 1997 (restated) 54,417
Cash dividends declared during fiscal year ended June 30, 1997 (restated) (6,668)
Results of Liberty operations for the six months ended June 30, 1996,
adjusted for pooling of interests, net of cash dividend of $479 2,371
---------
Balance, June 30, 1997 (restated) $ 333,645
- --------------------------------------------------------------------------------------------------
</TABLE>
C. MERGER EXPENSES AND OTHER NONRECURRING CHARGES:
-----------------------------------------------
The Corporation incurred merger expenses and other nonrecurring charges totaling
$18,907,000 and $22,524,000, respectively, for the three and nine months ended
March 31, 1998, associated with the Liberty and Mid Continent acquisitions and
the impairment in the value of certain computer systems and software pursuant to
systems conversions necessitated by Year 2000 compliance. During the three
months ended March 31, 1998 the Corporation finalized its Year 2000 plans
resulting in the recorded impairment reducing to fair value the carrying amount
of such computer systems and software which will be depreciated until their
disposal at the date of conversion. Other nonrecurring charges not classified in
the "merger expenses" category are included in certain other categories of the
Consolidated Statement of Operations and are so noted on the following table.
9
<PAGE>
C. MERGER-EXPENSES AND OTHER NONRECURRING CHARGES (Continued):
-----------------------------------------------------------
The following table summarizes the merger-related and other nonrecurring charges
for the three and nine months ended March 31, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Nine Months
(In Thousands) Ended March 31, 1998 Ended March 31, 1998
- ---------------------------------------------------------------- ------------------------ -----------------------------
<S> <C> <C>
Merger charges:
Transaction costs related to the combinations $ 4,740 $ 5,926
Employee severance and other termination costs 5,183 5,183
Costs to combine operations 1,548 1,548
-------- --------
11,471 12,657
Other nonrecurring charges:
Additional loan loss reserves - (provision for loan and lease losses) -- 2,431
Reserves on leasing operations - (other operating income) 597 597
Impairment in the value of computer systems and related software
necessitated by Year 2000 compliance - (data processing) 4,314 4,314
Conforming accounting practices of combining companies -
(compensation and other operating expenses) 2,525 2,525
-------- --------
Total merger and nonrecurring charges, before income taxes $ 18,907 $ 22,524
Income tax benefit (5,363) (6,755)
-------- --------
Total merger expenses and nonrecurring charges, after-tax $ 13,544 $ 15,769
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
D. PENDING ACQUISITIONS:
---------------------
Perpetual Midwest Financial, Inc. On December 15, 1997, the Corporation entered
into a reorganization and merger agreement with Perpetual Midwest Financial,
Inc. (Perpetual), parent company of Perpetual Savings Bank, FSB. Under the
terms of the merger agreement, the Corporation will acquire in a tax-free
reorganization all of the outstanding shares of Perpetual's common stock in
exchange for the Corporation's common stock. Perpetual's shareholders will
receive .8636 shares of the Corporation's common stock for each outstanding
share of Perpetual's common stock. Based on the Corporation's closing price on
March 31, 1998, of $36.375 per share, the transaction would result in the
exchange of approximately 1,533,548 shares of the Corporation's common stock
with a total aggregate value of approximately $55,783,000.
At March 31, 1998, Perpetual had total assets of approximately $402,000,000,
deposits of approximately $320,600,000, and stockholders' equity of
approximately $36,100,000. Perpetual operates five branches located in Iowa.
This pending acquisition is expected to be completed May 29, 1998 and to be
accounted for as a pooling of interests.
AmerUs Bank. On February 11, 1998, the Corporation entered into a stock
purchase agreement to acquire AmerUs Bank, a wholly-owned subsidiary of AmerUs
Group Co. AmerUs Bank is a federally chartered savings bank headquartered in
Des Moines, Iowa. Under the terms of the agreement, the Corporation will
acquire through a taxable acquisition all of the outstanding shares of AmerUs
Bank's common stock. As of March 31, 1998, the total purchase consideration
approximates $205,434,000 and consists of (i) cash totaling approximately
$95,750,000 (subject to certain adjustments), (ii) a one-year promissory note
for $40,000,000 with interest based on 150 basis points over the one-year
Treasury bill rate, and (iii) either 1,915,709 shares of the Corporation's
common stock or the cash equivalent of such shares ($69,684,000 at March 31,
1998) subject to election by the
Corporation.
At March 31, 1998, AmerUs Bank had total assets of approximately $1.365 billion,
deposits of approximately $991.7 million and stockholder's equity of
approximately $104.1 million. AmerUs Bank operates 48 branches located in Iowa
(27), Missouri (8), Nebraska (6), Kansas (4), Minnesota (2) and South Dakota
(1). This pending acquisition, which is subject to regulatory approvals and
certain other conditions, is expected to close in the third quarter of calendar
year 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 other intangibles
including goodwill to be amortized on a straight line basis over a period not to
exceed 20 years.
10
<PAGE>
D. PENDING ACQUISITIONS (Continued):
---------------------------------
First Colorado Bancorp, Inc. On March 9, 1998, the Corporation entered into a
reorganization and merger agreement with First Colorado Bancorp, Inc. (First
Colorado). Under the terms of the agreement, the Corporation will acquire in a
tax-free reorganization all of the outstanding shares of First Colorado's common
stock equal to 30 divided by the average closing price (as defined) of the
Corporation's common stock for a 15 day period prior to closing. Such value is
based on an exchange ratio which will float between the Corporation's average
stock prices of $31 to $38 per share. The exchange ratio is fixed at .9677 if
the Corporation's stock price is below $31 per share and at .7895 if the
Corporation's stock price is above $38 per share. Based on the Corporation's
closing stock price of $36.375 at March 31, 1998, the transaction has an
aggregate value of approximately $504,778,000 or $30 per share (exchange ratio
of .8247 totaling 13,877,060 shares of the Corporation's common stock).
First Colorado, headquartered in Lakewood, Colorado, is a unitary savings and
loan holding company and parent of First Federal Bank of Colorado, a federally
chartered stock savings bank that operates 27 branches in Colorado, with
23 branches located in the Denver metropolitan area and four in Colorado's
western slope region. At March 31, 1998, First Colorado had assets of
approximately $1.559 billion, deposits of approximately $1.189 billion and
stockholders' equity of approximately $212.8 million. This pending acquisition
is subject to regulatory approvals, stockholder approval by both the Corporation
and First Colorado shareholders and other conditions outlined in the agreement.
Special stockholder meetings are scheduled for July 3, 1998 for the Corporation
and July 13, 1998 for First Colorado. This pending acquisition is expected to be
completed during the September 30, 1998 quarter and to be accounted for as a
pooling of interests.
E. COMMITMENTS AND CONTINGENCIES:
-----------------------------
At March 31, 1998, the Corporation issued commitments, excluding undisbursed
portions of loans in process, of approximately $474,950,000 as follows:
$323,521,000 to originate loans, $128,033,000 to purchase loans and $23,396,000
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. In addition, at March
31, 1998, the Corporation had approximately $420,835,000 in mandatory forward
delivery commitments to sell residential mortgage loans. Loans sold subject to
recourse provisions totaled approximately $24,987,000, 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. The Bank
filed a motion for summary judgement in March 1998. The former Mid Continent
also filed a similar lawsuit and a motion for summary judgement. The Corporation
would be entitled to any potential awards from Mid Continent lawsuit.
11
<PAGE>
F. CURRENT ACCOUNTING PRONOUNCEMENTS:
----------------------------------
Earnings Per Share:
The Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 128, entitled "Earnings Per Share" (SFAS No. 128) effective
December 15, 1997, and accordingly, restated all prior period earnings per share
to conform with SFAS No. 128. This statement 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.
Reporting Comprehensive Income:
In June 1997, the Financial Accounting Standards Board (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.
12
<PAGE>
G. 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 March 31,
1998, 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 March 31, 1998
-----------------------------------------------------------------
Actual Capital Required Capital
-------------------------- --------------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital $ 559,868 6.59% $ 127,366 1.50%
Core capital 570,117 6.71 255,040 3.00
Risk-based capital 614,983 13.51 364,164 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 570,117 6.71 425,067 5.00
Tier 1 risk-based capital 570,117 12.52 273,123 6.00
Total risk-based capital 614,983 13.51 455,205 10.00
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
<CAPTION>
As of June 30, 1997
--------------------------------------------------------------------
Actual Capital Required Capital
----------------------------- ----------------------------
Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital $ 527,738 6.53% $ 121,173 1.50%
Core capital 539,534 6.67 242,700 3.00
Risk-based capital 581,108 13.85 335,718 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 539,534 6.67 404,500 5.00
Tier 1 risk-based capital 539,534 12.86 251,789 6.00
Total risk-based capital 581,108 13.85 419,648 10.00
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
As of March 31, 1998, 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.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
During February 1998, the Corporation consummated the acquisitions of Liberty
and Mid Continent. These acquisitions were accounted for as pooling of interests
and, accordingly, the Corporation's historical consolidated financial statements
were restated for all periods prior to these acquisitions to include the
accounts and results of operations of Liberty and Mid Continent.
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 March
31, 1998, the Bank qualified as a Tier I Association, and would be permitted to
pay an aggregate amount approximating $117.9 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 March 31, 1998, the cash of Commercial Federal Corporation (the parent
company) totaled $31.2 million. On August 11, 1997, the Corporation paid down
its five-year promissory term note by $21.0 million, and paid scheduled
principal payments totaling $1.0 million each quarter, resulting in a remaining
principal balance of $2.0 million with $1.0 million due June 30, 1998 and $1.0
million due September 30, 1998. Due to the parent company's limited independent
operations, management believes that its cash balance at March 31, 1998 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 $2.0 million promissory term note due September 30, 1998, 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, excluding any prior activity of Liberty and Mid Continent, for the
three and nine months ended March 31, 1998, dividends totaling $5.415 million
and $14.002 million, respectively, were paid by the Bank to the parent company.
These dividends from the Bank were paid to cover (i) interest payments totaling
$5.470 million on the parent company's debt, (ii) principal payments of $3.0
million on the parent company's promissory term note and (iii) the quarterly
common stock cash dividends totaling $5.532 million payable by the parent
company to its common stock shareholders through March 31, 1998. 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. Dividends totaling $34.7
million were paid by the Bank to the parent company during the nine months ended
March 31, 1997. 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 used by operating
activities totaled $121.1 million for the nine months ended March 31, 1998, and
net cash flows provided by operating activities totaled $49.2 million for the
nine months ended March 31, 1997. 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 $69.7 million and $215.9
million, respectively, for the nine months ended March 31, 1998 and 1997.
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
acquisitions of First National, Liberty, and Mid Continent (all consummated in
the current fiscal year quarter) had no material effect on liquidity, except for
the cash outlays relating to nonrecurring merger related costs, since such
transactions were consummated in an exchange of common stock between the
Corporation and these respective financial institutions.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- --------------------------------------------
Net cash flows provided by financing activities totaled $191.1 million and
$206.2 million, respectively, for the nine months ended March 31, 1998 and 1997.
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 a net decrease in retail deposits of $68.3 million for
the nine months ended March 31, 1998, primarily due to depositors leaving for
higher interest rates. Such net decrease is attributable to the three months
ended September 30, 1997, in which retail deposits decreased $106.6 million.
During the nine months ended March 31, 1997, the Corporation utilized securities
sold under agreements to repurchase primarily for liquidity and asset liability
management purposes and the Corporation borrowed $28.0 million to partially
finance the repurchase on August 21, 1996, of 2,812,725 shares of the
Corporation's common stock. As previously discussed, such note presently has a
principal balance of $2.0 million due September 30, 1998. In addition, the
Corporation's $40.25 million 10.25% subordinated debt and $6.9 million 10%
senior notes were paid in full in December 1996 from the proceeds of the
Corporation's $50.0 million 7.95% subordinated extendible notes due December 1,
2006.
The Corporation will continue to grow its franchise through an ongoing program
of selective acquisitions of other financial institutions, as well as through
internal growth. The Corporation has considered and will continue to consider
possible mergers with and acquisitions of other selected financial institutions.
Accordingly, during the nine months ended March 31, 1998, the Corporation
consummated the acquisitions of First National, Liberty and Mid Continent and
entered into agreements with Perpetual, AmerUs Bank and First Colorado. See
Notes B and D in the Notes to the Consolidated Financial Statements for
additional information on these pending and recently consummated 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 March 31, 1998, the Corporation had issued commitments totaling approximately
$475.0 million to fund and purchase loans as follows: $56.5 million of single-
family adjustable-rate mortgage loans, $352.3 million of single-family fixed-
rate mortgage loans, $23.4 million of consumer loan lines of credit and $42.8
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.
In addition, at March 31, 1998, the Corporation had approximately $420.8 million
in mandatory forward delivery commitments to sell residential mortgage loans.
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 4.0% of the aggregate of the
prior month's daily average savings deposits and short-term borrowings. The
Corporation's liquidity ratio was 9.05% at March 31, 1998. 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 March 31, 1998, was $8.2 million, or $.20
per diluted and basic share, compared to net income of $19.6 million, or $.50
per diluted share ($.51 per basic share) for the three months ended March 31,
1997. The decrease in net income for the three months ended March 31, 1998,
compared to the three months ended March 31, 1997, is primarily due to $18.3
million in merger expenses and other nonrecurring charges recorded in the
current quarter and to net increases of and $2.8 million in general and
administrative expenses and a reduction of $467,000 in total other income. These
decreases to net income were partially offset by increases of $5.5 million in
net interest income after provision for loan losses, a decrease of $3.7 million
in provision for income taxes and a reduction of $892,000 in amortization of
goodwill and core value of deposits.
Net income for the nine months ended March 31, 1998, was $47.5 million, or $1.19
per diluted share ($1.21 per basic share), compared to net income of $34.5
million, or $.88 per diluted share ($.89 per basic share), including an after-
tax loss on early retirement of debt totaling $583,000, or $.01 loss per diluted
share, classified as an extraordinary item, for the nine months ended March 31,
1997. The increase in net income for the nine months ended March 31, 1998,
compared to the nine months ended March 31, 1997, is primarily due to a $27.5
million nonrecurring Federal deposit insurance assessment recorded in fiscal
year 1997, net increases of $10.7 million in net interest income after provision
for loan losses and $6.2 million in total other income, a net reduction
15
<PAGE>
RESULTS OF OPERATIONS (Continued):
- ----------------------------------
of $3.5 million in amortization expense of intangible assets and the
extraordinary loss on early retirement of debt totaling $583,000 recorded in the
prior fiscal year. These increases to net income were partially offset by
$19.5 million in merger expenses and other nonrecurring charges recorded in the
current fiscal year and to net increases of $9.5 million in the provision for
income taxes and $6.6 million in general and administrative expenses.
Net Interest Income:
- --------------------
Net interest income was $55.8 million for the three months ended March 31, 1998,
compared to $51.0 million for the three months ended March 31, 1997, resulting
in an increase of $4.8 million, or 9.4%. Net interest income was $162.0 million
for the nine months ended March 31, 1998, compared to $148.4 million for the
nine months ended March 31, 1997, resulting in an increase of $13.6 million, or
9.1%. The interest rate spread was 2.73% at March 31, 1998, compared to 2.55% at
March 31, 1997, an increase of 18 basis points. During the three months ended
March 31, 1998 and 1997, interest rate spreads were 2.57% and 2.46%,
respectively, an increase of 11 basis points; and the yield on interest-earning
assets was 2.80% and 2.74% over the same respective periods of time. Interest
rate spreads decreased five basis points from 2.49% to 2.44% during the nine
months ended March 31, 1998, compared to March 31, 1997. Net interest income
increased for nine months ended March 31, 1998, over the nine months ended March
31, 1997, due to the net earnings balance increasing by $37.6 million over the
respective period. The average balance of interest-earning assets increased
$536.0 million and $812.8 million, respectively, for the three and nine months
ended March 31, 1998, compared to the same periods ended March 31, 1997, while
the average balance of interest-bearing liabilities increased $559.2 million and
$775.1 million over the same respective periods of time. The increases in these
average balances are due to the acquisitions of First National on January 30,
1998, 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 For the Nine
Months Ended Months Ended At
March 31, March 31, March 31,
----------------------- --------------------- -------------------
1998 1997 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans and leases 8.12% 8.10% 7.92% 8.15% 8.11% 8.16%
Mortgage-backed securities 6.54 6.48 6.22 6.55 6.80 6.69
Investments 6.43 6.74 6.39 6.84 6.74 6.66
- -------------------------------------------------------------------------------------------------------------------------
Interest-earnings assets 7.76 7.74 7.54 7.79 7.82 7.83
- -------------------------------------------------------------------------------------------------------------------------
Weighted average rate paid on:
Savings deposits 2.94 3.09 2.89 3.07 2.89 3.20
Other time deposits 5.68 5.71 5.48 5.72 5.67 5.72
Advances from FHLB 5.88 5.83 5.77 5.75 5.73 5.86
Securities sold under agreements
to repurchase 5.97 6.03 6.01 6.15 5.95 6.02
Other borrowings 8.79 8.45 9.82 10.45 8.81 8.43
- -------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 5.19 5.28 5.10 5.30 5.09 5.28
- -------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.57% 2.46% 2.44% 2.49% 2.73% 2.55%
- -------------------------------------------------------------------------------------------------------------------------
Net annualized yield on
interest-earning assets 2.80% 2.74% 2.65% 2.69% 2.89% 2.65%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<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 and nine months ended March 31, 1998. The following
table includes nonaccruing loans averaging $48.3 million and $44.7 million,
respectively, for the three and nine months ended March 31, 1998, as interest-
earning assets at a yield of zero percent:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, 1998 March 31, 1998
--------------------------------------------- -------------------------------------
Annualized Annualized
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases $ 6,168,417 $ 125,042 8.12% $ 6,290,404 $ 373,510 7.92%
Mortgage-backed securities 1,047,483 17,129 6.54 1,107,576 51,701 6.22
Investments 756,526 12,167 6.43 764,000 36,605 6.39
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets 7,972,426 154,338 7.76 8,161,980 461,816 7.54
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 1,710,111 12,380 2.94 1,664,231 36,134 2.89
Other time deposits 3,461,634 48,518 5.68 3,639,652 149,625 5.48
Advances from FHLB 1,894,761 27,468 5.88 1,852,618 80,273 5.77
Securities sold under
agreements to repurchase 499,124 7,446 5.97 548,399 25,074 6.01
Other borrowings 123,756 2,720 8.79 118,205 8,705 9.82
- ------------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 7,689,386 98,532 5.19 7,823,105 299,811 5.10
- ------------------------------------------------------------------------------------------------------------------------------------
Net earnings balance $ 283,040 $ 338,875
============ ============
Net interest income $ 55,806 $ 162,005
========== ==========
Interest rate spread 2.57% 2.44%
- ------------------------------------------------------------------------------------------------------------------------------------
Net annualized yield on
interest-earnings assets 2.80% 2.65%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
During the three and nine months ended March 31, 1998, the Corporation
experienced lower costs on interest-bearing liabilities primarily due to
decreases in the interest rates on savings deposits (15 and 18 basis points,
respectively) and other time deposits (three and 24 basis points, respectively).
The net earnings balance (the difference between average interest-bearing
liabilities and average interest-earning assets) decreased by $23.1 million for
the three months ended March 31, 1998, compared to the three months ended March
31, 1997, and increased $37.6 million for the nine months ended March 31, 1998
compared to the same period ended March 31, 1997. Such year to date increase is
primarily due to the acquisition of First National (which was acquired through
the issuance of common stock), 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.
17
<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 Nine Months Ended
March 31, 1998 Compared March 31, 1998 Compared
to March 31, 1997 to March 31, 1997
--------------------------------- --------------------------------
(In Thousands) Increase(Decrease) Due to Increase(Decrease) Due to
- ------------------------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans and leases $ 11,378 $ (2,159) $ 9,219 $ 47,180 $(15,488) $ 31,692
Mortgage-backed securities (2,178) 185 (1,993) (6,069) (2,916) (8,985)
Investments 3,616 (428) 3,188 11,770 (1,875) 9,895
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income 12,816 (2,402) 10,414 52,881 (20,279) 32,602
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 1,998 (563) 1,435 5,730 (1,935) 3,795
Other time deposits (2,833) (261) (3,094) (503) (6,613) (7,116)
Advances from FHLB 9,283 170 9,453 23,069 247 23,316
Securities sold under agreements to repurchase (2,492) (95) (2,587) (916) (590) (1,506)
Other borrowings 318 95 413 1,061 (508) 553
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense 6,274 (654) 5,620 28,441 (9,399) 19,042
- ------------------------------------------------------------------------------------------------------------------------------------
Effect on net interest income $ 6,542 $ (1,748) $ 4,794 $ 24,440 $(10,880) $ 13,560
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net improvements due to changes in volume for the three and nine months
ended March 31, 1998, compared to March 31, 1997, reflect the net growth the
Corporation has experienced, both internally and from acquisitions. The net
decreases due to changes in rates between the three and nine-month periods ended
March 31, 1998 and 1997, primarily reflect the decrease in rates on interest-
bearing liabilities, primarily savings and other time deposits.
Provision for Loan and Lease Losses and Real Estate Operations:
- ---------------------------------------------------------------
The Corporation recorded loan and lease loss provisions totaling $2.4 million
and $10.8 million, respectively, for the three and nine months ended March 31,
1998, compared to $3.1 million and $8.0 million, respectively, for the three and
nine months ended March 31, 1997. The provision for the three months ended March
31, 1998, is lower by $728,000 compared to the three months ended March 31,
1997, primarily due to additional general reserves recorded last fiscal year to
cover consumer loan losses. The provision for the nine months ended March 31,
1998 is $2.8 million higher compared to 1997 due primarily to additional
nonrecurring loan loss reserves recorded in the quarter ended December 31, 1997
to conform reserve positions of Liberty and Mid Continent to the policies of the
Corporation. The allowance for loan and lease losses is based upon management's
continuous evaluation of the collectibility of outstanding loans and leases,
which takes into consideration such factors as changes in the composition of the
loan and lease portfolios 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 $199,000 and
$136,000, respectively, for the three months ended March 31, 1998 and 1997,
compared to net income of $559,000 and $1.0 million, respectively, for the nine
months ended March 31, 1998 and 1997. Real estate operations reflect provisions
for real estate losses, net real estate operating activity, and gains and losses
on dispositions of real estate. The net decrease in real estate operations for
the nine months ended March 31, 1998, compared to the nine months ended March
31, 1997, is primarily due to a decrease in net gains on dispositions of real
estate in the current fiscal year compared to the prior fiscal year.
18
<PAGE>
Provision for Loan and Lease 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
$2.1 million at March 31, 1998 compared to June 30, 1997, resulting from net
increases of $5.1 million in nonperforming loans and leases and $1.1 million in
real estate partially offset by a net decrease of $4.1 million in troubled debt
restructurings. Nonperforming assets as of the dates indicated are summarized as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
March 31, June 30, March 31,
(Dollars in Thousands) 1998 1997 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Nonperforming loans and leases:
Residential real estate loans $ 38,413 $ 35,614 $ 37,316
Commercial real estate loans 4,344 1,574 2,667
Consumer loans 2,753 2,619 2,572
Leases 708 1,302 138
- ----------------------------------------------------------------------------------------------------------
Total 46,218 41,109 42,693
- ----------------------------------------------------------------------------------------------------------
Real estate:
Commercial 8,421 9,256 9,919
Residential 10,526 8,615 8,241
- ----------------------------------------------------------------------------------------------------------
Total 18,947 17,871 18,160
- ----------------------------------------------------------------------------------------------------------
Troubled debt restructurings:
Commercial 5,119 9,196 12,065
Residential 788 787 837
- ----------------------------------------------------------------------------------------------------------
Total 5,907 9,983 12,902
- ----------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 71,072 $ 68,963 $ 73,755
- ----------------------------------------------------------------------------------------------------------
Nonperforming loans and leases to total loans and leases .72% .68% .74%
Nonperforming assets to total assets .83% .85% .93%
- ----------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses:
Other loans and leases (1) $ 47,532 $ 42,953 $ 43,572
Bulk purchased loans (2) 9,075 10,809 11,288
- ----------------------------------------------------------------------------------------------------------
Total $ 56,607 $ 53,762 $ 54,860
- ----------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses to total loans and leases .89% .89% .95%
Allowance for loan and lease losses to total nonperforming assets 79.65% 77.96% 74.38%
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $89, $77 and $80 at March 31, 1998, June 30, 1997, and March 31,
1997, 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 $417.5 million, $494.6 million and $516.8 million,
respectively, at March 31, 1998, June 30, 1997, and March 31, 1997. These
allowances are available only to absorb losses associated with respective
bulk purchased loans and are not available to absorb losses from other
loans.
19
<PAGE>
Provision for Loan and Lease Losses and Real Estate Operations (Continued):
- ---------------------------------------------------------------------------
The ratio of nonperforming loans and leases to total loans and leases was .72%
at March 31, 1998, based on loan and lease balances of $6.388 billion, compared
to .68% and .74%, respectively, at June 30, 1997, and March 31, 1997, based on
respective loan and lease balances approximating $6.041 billion and $5.797
billion. The ratio of nonperforming assets to total assets was .83% at March 31,
1998, compared to .85% and .93% at June 30, 1997, and March 31, 1997,
respectively. Ratios for nonperforming loans and leases to total loans and
leases increased compared to June 30, 1997, due to increases in such
nonperforming loans and leases, primarily delinquent residential and commercial
real estate loans, and improved compared to March 31, 1997, due primarily to net
increases in total loans and leases. Ratios for nonperforming assets to total
assets improved compared to June 30, 1997 due to increases in total assets and
to March 31, 1997 due to net improvements in total nonperforming assets as well
as increases in total assets. The percentage of allowance for loan and lease
losses to total loans and leases remained unchanged compared to June 30, 1997,
and decreased compared to March 31, 1997, primarily due to net increases in
total loans. The total allowance for loan and lease losses to total
nonperforming assets increased compared to June 30, 1997 primarily due to net
increases of $2.8 million in the loss allowance and at March 31, 1997, due to
net decreases in total nonperforming assets and to net increases in the loss
allowance.
Nonperforming loans and leases at March 31, 1998, increased by $5.1 million
compared to June 30, 1997, primarily due to net increases totaling $2.8 million
for both delinquent residential real estate loans and delinquent commercial real
estate loans. These increases were partially offset by net decreases of $594,000
in leases. The net increase in real estate of $1.1 million at March 31, 1998,
compared to June 30, 1997, is due primarily to the net increase in residential
real estate properties and the capitalization of lot development costs totaling
$2.3 million partially offset by the net dispositions of commercial real estate.
The net decrease of $4.1 million in troubled debt restructurings at March 31,
1998, compared to June 30, 1997, is primarily attributable to the payoff of two
commercial loans totaling $3.8 million.
Loan Servicing Fees:
- --------------------
Fees from loans serviced for other institutions totaled $9.8 million and $29.5
million, respectively, for the three and nine months ended March 31, 1998
compared to $10.5 million and $30.4 million, respectively, for the three and
nine months ended March 31, 1997. The decrease comparing the respective periods
is primarily due to a net decrease in loans serviced for other institutions
comparing fiscal year 1998 periods to fiscal year 1997. At March 31, 1998 and
1997, the Corporation's mortgage servicing portfolio approximated $6.951 billion
and $7.282 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 $5.6 million and $17.1 million, respectively,
for the three and nine months ended March 31, 1998, compared to $5.4 million and
$15.7 million, respectively, for the three and nine months ended March 31, 1997.
The net increases result primarily from increases in certain checking account
fees and VISA debit check card fees attributable to a significant increase in
the number of retail checking accounts at March 31, 1998, compared to March 31,
1997.
Gain on Sales of Loans:
- -----------------------
The Corporation sold loans to third parties through its mortgage banking
operations resulting in net pre-tax gains of $292,000 and $1.1 million,
respectively, on loans sold totaling $235.7 million and $643.4 million,
respectively, for the three and nine months ended March 31, 1998, compared to
net pre-tax gains of $350,000 and $993,000, respectively, on loans sold totaling
$217.5 million and $695.5 million, respectively, for the three and nine months
ended March 31, 1997. 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.
20
<PAGE>
Gain on Sales of Mortgage-Backed Securities:
- --------------------------------------------
The Corporation sold mortgage-backed securities available for sale resulting in
net pre-tax gains of $468,000 and $1.5 million, respectively, for the three and
nine months ended March 31, 1998, on sales totaling $37.3 million and $68.0
million, compared to $100,000 for the nine months ended March 31, 1997 on sales
totaling $80.3 million.
Other Operating Income:
- -----------------------
Other operating income totaled $3.9 million and $15.3 million, respectively, for
the three and nine months ended March 31, 1998, compared to $4.3 million and
$10.5 million, respectively, for the three and nine months ended March 31, 1997.
The major components of other operating income are brokerage commissions,
credit life and disability commissions and insurance commissions which increased
slightly for the three months ended March 31, 1998, compared to March
31, 1997. However, the net decrease for the three months ended March 31,
1998, compared to 1997 is attributable to nonrecurring charges totaling
$597,000 recorded in the current fiscal quarter for certain reserves on leasing
operations acquired in the Liberty merger.
For the nine months ended March 31, 1998, brokerage commissions, credit life and
disability commissions and insurance commissions increased moderately compared
to 1997 with other increases in other operating income for the nine months ended
March 31, 1998, compared to 1997 due primarily to excess trustee funds on debt
payoff totaling $1.2 million, receipts from bankruptcy settlements totaling
$402,000, a net pre-tax gain of $380,000 on the sale of $412,000 of loan
servicing rights and other sundry items.
General and Administrative Expenses:
- ------------------------------------
General and administrative expenses totaled $56.6 million and $135.1 million,
respectively, for the three and nine months ended March 31, 1998, compared to
$35.5 million and $108.9 million, respectively, for the three and nine months
ended March 31, 1997, excluding the $27.5 million nonrecurring industry-wide
Federal deposit insurance special assessment recorded in the first quarter of
fiscal year 1997.
The net increase of $21.1 million for the three months ended March 31, 1998,
compared to the three months ended March 31, 1997, was primarily due to merger
expenses totaling $11.5 million recorded in the current fiscal year quarter and
to net increases in data processing of $4.3 million, operating expenses of $2.8
million, compensation and benefits of $1.5 million, advertising of $512,000 and
occupancy and equipment of $588,000.
Such net increase comparing quarters is primarily due to the current merger
expenses totaling $11.5 million (recorded to cover severance and termination
costs of $5.2 million, transaction costs such as investment banking, accounting
and legal costs of $4.7 million and other miscellaneous transition and
conversion expenses of $1.5 million associated with the Liberty and Mid
Continent acquisitions), increased data processing costs totaling 4.3 million
due to the impairment in the value of certain computer systems and software
pursuant to the conversion of systems integrated necessitated by Year 2000
compliance, and to the nonrecurring charges totaling $2.5 million to conform
accounting practices of certain operations of Liberty and Mid Continent to the
Corporation.
The net increase of $26.1 million comparing the nine months ended March 31,
1998, to the nine months ended March 31, 1997, was primarily due to merger
expenses totaling $12.7 million recorded fiscal year to date, and to net
increases of $4.8 million in data processing, $4.1 million in compensation and
benefits, $4.3 million in other operating expenses, $1.8 million in advertising
and $1.6 million in occupancy and equipment. These increases were partially
offset by a net decrease of $3.1 in regulatory insurance and assessments.
The net increase for the nine months ended March 31, 1998, compared to the nine
months ended March 31, 1997, is primarily attributed to merger expenses totaling
$12.7 (recorded to cover severance and termination costs of $5.2 million,
transaction costs of $5.9 million and other miscellaneous transition and
conversion expenses of $1.5 million associated with Liberty and Mid Continent
acquisitions), nonrecurring charges totaling $2.5 million to conform accounting
practices of certain operations of Liberty and Mid Continent to the Corporation,
increased marketing costs for checking accounts and related products and
consumer loans totaling $1.8 million, increased occupancy and equipment
expenses, net increases in general and administrative expenses from
acquisitions, increased data processing costs of which $4.3 million is due to
the impairment in the value of computer systems and software necessitated by
Year 2000 compliance as discussed above and other net increases in employee
benefits and other operating expenses primarily due to branch expansion and
acquisitions over the prior fiscal year period. Partially offsetting these
increases were decreases in regulatory insurance and assessments totaling $3.1
million and nonrecurring expenses totaling $2.3 million recorded in the prior
fiscal year related to the repurchase of 2,812,725 shares of the Corporation's
common stock. The decrease in regulatory insurance and assessments of $3.1
million for the nine months ended March 31, 1998, compared to the respective
prior year period 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 was .23%
of insured deposits which was reduced to .18% of insured deposits for the
quarter ended December 31, 1996, and to .064% of insured deposits effective
January 1, 1997, and thereafter.
21
<PAGE>
Amortization of Goodwill and Core Value of Deposits:
- ----------------------------------------------------
Amortization of goodwill and core value of deposits totaled $2.0 million and
$5.3 million, respectively, for the three and nine months ended March 31, 1998,
compared to $2.9 million and $8.9 million, respectively, for the three and nine
months ended March 31, 1997. The net decreases for the respective periods are
due primarily to the reduction in amortization expense of core value of deposits
since amounts from certain acquisitions were fully amortized as of April 30,
1997.
Provision for Income Taxes:
- ---------------------------
For the three and nine months ended March 31, 1998, the provision for income
taxes totaled $6.5 million and $28.3 million, respectively, compared to $10.2
million and $18.8 million, respectively, for the three and nine months ended
March 31, 1997. The effective income tax rates for the three and nine months
ended March 31, 1998, were 44.1% and 37.3%, respectively, compared to 34.2% and
34.9%, respectively, for the three and nine months ended March 31, 1997. The
effective tax rates for all periods vary from the applicable statutory rates
primarily due to the nondeductibility of amortization of goodwill and core value
of deposits, and, for the fiscal year 1998 periods, certain merger expenses and
nonrecurring charges, in relation to the level of taxable income for the
respective periods.
Extraordinary Items - Loss on Early Retirement of Debt:
- -------------------------------------------------------
In December 1996, the Corporation recognized extraordinary losses of $583,000
(net of income tax benefits totaling $316,000), or $.01 loss per share,
primarily as a result of the early retirement of its $40.25 million 10.25%
subordinated debt due December 15, 1999, and its $6.9 million 10.0% senior notes
due January 31, 1999. The extraordinary losses consisted primarily of the write-
off of the related premiums and costs associated with the issuance and
redemption of such debt which was retired on December 27, 1996, with the
proceeds from the $50.0 million subordinated extendible notes offering completed
December 2, 1996.
Other Matters - Year 2000 Compliance:
- -------------------------------------
As the year 2000 approaches, an important business issue has emerged regarding
how existing application software programs and operating systems can accommodate
this date value. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in earlier years) are
expected to read entries for the year 2000 as the year 1900 and compute payment,
interest or delinquency based on the wrong date or are expected to be unable to
compute payment, interest or delinquency. Rapid and accurate data processing is
essential to the operations of the Corporation.
All of the material computer programs of the Corporation that could be affected
by this problem are provided by major third party vendors. Currently, the
Corporation is in the process of replacing/upgrading all computer systems and
programs, as well as most equipment, in order to provide cost-effective and
efficient delivery of services to its customers, information to management, and
to provide additional capacity for processing information and transactions due
to acquisitions. As such, during the three months ended March 31, 1998, the
Corporation recorded a nonrecurring charge of $4.3 million which is the
impairment in value of certain computer systems and software pursuant to systems
conversions necessitated by Year 2000. The adjusted carrying amount of these
computer systems and software will be depreciated until their disposal at the
date of conversion. The third party vendors of the Corporation have advised the
Corporation that all such computer systems and programs will be year 2000
compliant. However, if the third party vendors are unable to resolve year 2000
issues in time, the Corporation would likely experience significant data
processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operations of the Corporation.
22
<PAGE>
PART II. OTHER INFORMATION
---------------------------
Item 5. Other Information
-----------------
A Special Meeting of Stockholders will be called on July 3, 1998, for
shareholders of record at May 14, 1998. The purpose of the meeting is to
consider and act upon:
(1) a proposal to approve the First Colorado merger and to approve an
amendment to the Corporation's Articles of Incorporation to increase the
number of shares authorized from 50,000,000 to 70,000,000 with such
additional shares primarily to be issued in this merger;
(2) an amendment to the Corporation's Articles of Incorporation to further
increase the number of authorized shares from 70,000,000 to 120,000,000
shares (in the event the First Colorado merger is not approved, this
amendment would increase the authorized shares from 50,000,000 to
100,000,000 shares) which will allow the Corporation to meet its future
needs and provide greater flexibility in responding to advantageous
business opportunities including possible future acquisition
opportunities;
(3) an amendment to the Corporation's 1996 Stock Option and Incentive Plan to
increase the number of shares available for grant to 3,934,250 for
issuance thereunder; and
(4) such other business as may properly come before such special meeting.
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:
The Corporation filed a Current Report on Form 8-K dated February
11, 1998, reporting that the Corporation had entered into a Stock
Purchase Agreement dated February 11, 1998, to acquire AmerUs Bank,
a wholly-owned subsidiary of AmerUs Group Company, headquartered in
Des Moines, Iowa. See Note D for additional information concerning
this pending acquisition.
The Corporation filed a Current Report on Form 8-K dated March 9,
1998, reporting that the Corporation had entered into a
Reorganization and Merger Agreement dated March 9, 1998, with First
Colorado Bancorp, Inc., parent company of First Federal Bank of
Colorado, headquartered in Lakewood, Colorado. See Note D for
additional information concerning this pending merger.
23
<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: May 15, 1998 /s/ James A. Laphen
------------ ---------------------------------------
James A. Laphen, President, Chief
Operating Officer and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
Date: May 15, 1998 /s/ Gary L. Matter
------------ ---------------------------------------
Gary L. Matter, Senior Vice President,
Controller and Secretary
(Principal Accounting Officer)
24
<PAGE>
EXHIBIT INDEX
-------------
Page Number
Exhibit 11. Computation of Earnings Per Share 26
Exhibit 27. Financial Data Schedules (EDGAR only) --
25
<PAGE>
COMMERCIAL FEDERAL CORPORATION Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
COMPUTATION OF INCOME PER BASIC AND DILUTED SHARES:
- ---------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
-------------------------------- --------------------------------
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before extraordinary items $ 8,194,249 $ 19,604,744 $ 47,536,921 $ 35,095,819
Extraordinary items, net of tax benefit -- -- -- (583,312)
------------- ------------- ------------- -------------
Net income $ 8,194,249 $ 19,604,744 $ 47,536,921 $ 34,512,507
============= ============= ============= =============
- ---------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE:
- ------------------------
Weighted average number of common shares
outstanding used in basic earnings per
share calculation 39,978,614 38,667,348 39,227,633 38,827,114
============= ============= ============= =============
Income before extraordinary items $ .20 $ .51 $ 1.21 $ .90
Extraordinary items, net of tax benefit -- -- -- (.01)
------------- ------------- ------------- -------------
Net income $ .20 $ .51 $ 1.21 $ .89
============= ============= ============= =============
- ---------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS PER SHARE:
- --------------------------
Weighted average number of common shares
outstanding used in basic earnings
per share calculation 39,978,614 38,667,348 39,227,633 38,827,114
Add assumed exercise of outstanding stock
options as adjustments for dilutive
securities 424,003 624,902 600,800 590,472
------------- ------------- ------------- -------------
Weighted average number of common shares
outstanding used in diluted earnings per
share calculation 40,402,617 39,292,250 39,828,433 39,417,586
============= ============= ============= =============
Income before extraordinary items $ .20 $ .50 $ 1.19 $ .89
Extraordinary items, net of tax benefit -- -- -- (.01)
------------- ------------- ------------- -------------
Net income $ .20 $ .50 $ 1.19 $ .88
============= ============= ============= =============
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
INTERIM STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED MARCH 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1
<CASH> 89,747
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 2,182
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 383,470
<INVESTMENTS-CARRYING> 1,250,064
<INVESTMENTS-MARKET> 1,258,185
<LOANS> 6,330,909
<ALLOWANCE> 56,607
<TOTAL-ASSETS> 8,528,709
<DEPOSITS> 5,222,085
<SHORT-TERM> 1,196,728
<LIABILITIES-OTHER> 119,290
<LONG-TERM> 1,400,865
0
0
<COMMON> 403
<OTHER-SE> 589,338
<TOTAL-LIABILITIES-AND-EQUITY> 8,528,709
<INTEREST-LOAN> 373,510
<INTEREST-INVEST> 88,306
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 461,816
<INTEREST-DEPOSIT> 185,759
<INTEREST-EXPENSE> 299,811
<INTEREST-INCOME-NET> 162,005
<LOAN-LOSSES> 10,845
<SECURITIES-GAINS> 1,494
<EXPENSE-OTHER> 140,374
<INCOME-PRETAX> 75,824
<INCOME-PRE-EXTRAORDINARY> 47,537
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,537
<EPS-PRIMARY> 1.21
<EPS-DILUTED> 1.19
<YIELD-ACTUAL> 2.63
<LOANS-NON> 46,218
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,907
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 53,762
<CHARGE-OFFS> 9,685
<RECOVERIES> 2,031
<ALLOWANCE-CLOSE> 56,607
<ALLOWANCE-DOMESTIC> 9,075
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 47,532
</TABLE>
