<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 SECURITES EXCHANGE
ACT OF 1934
For the Quarterly period ended March 31, 2000
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE
ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 1-11515
-------
COMMERCIAL FEDERAL CORPORATION
----------------------------------------------------
(Exact name of registrant as specified in its charter)
Nebraska 47-0658852
--------------------------------------- -----------------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
2120 South 72nd Street, Omaha, Nebraska 68124
--------------------------------------- -----------------------------
(Address of principal executive offices) (Zip Code)
(402) 554-9200
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Title of Each Class Outstanding at May 9, 2000
- ---------------------------------------- --------------------------
Common Stock, Par Value $.01 Per Share 56,451,904 Shares
<PAGE>
COMMERICIAL FEDERAL CORPORATION
-------------------------------
FORM 10-Q
---------
INDEX
-----
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C>
Part I. Financial Information Page Number
---------------------
Item 1. Financial Statements:
Consolidated Statement of Financial Condition as of
March 31, 2000 and June 30, 1999 3
Consolidated Statement of Operations for the Three
and Nine Months Ended March 31, 2000 and 1999 4-5
Consolidated Statement of Comprehensive Income for the
Three and Nine Months Ended March 31, 2000 and 1999 6
Consolidated Statement of Cash Flows for the
Nine Months Ended March 31, 2000 and 1999 7-8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-27
Item 3. Quantitative and Qualitative Disclosures About Market Risk 27
Part II. Other Information
-----------------
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signature Page 29
Exhibit Index 30
- ------------------------------------------------------------------------------------------------
</TABLE>
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 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Cash (including short-term investments of $1,483 and $39,585) $ 200,403 $ 353,275
Investment securities available for sale, at fair value 72,159 83,811
Mortgage-backed securities available for sale, at fair value 374,298 419,707
Loans and leases held for sale, net 107,444 104,347
Investment securities held to maturity (fair value of $892,605 and $846,805) 926,152 862,760
Mortgage-backed securities held to maturity (fair value of $876,003 and $849,488) 894,966 862,838
Loans and leases receivable, net of allowances of $78,078 and $80,344 9,768,373 9,222,046
Federal Home Loan Bank stock 231,953 194,129
Interest receivable, net of allowances of $233 and $319 76,087 77,513
Real estate, net 41,368 31,513
Premises and equipment, net 181,736 185,302
Prepaid expenses and other assets 189,545 125,544
Intangible assets, net of accumulated amortization of $62,183 and $49,260 235,163 252,677
- ---------------------------------------------------------------------------------------------------------------------
Total Assets $ 13,299,647 $ 12,775,462
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 7,443,009 $ 7,655,415
Advances from Federal Home Loan Bank 4,460,575 3,632,241
Securities sold under agreements to repurchase 25,000 128,514
Other borrowings 174,625 225,383
Interest payable 48,210 48,759
Other liabilities 166,914 118,267
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities 12,318,333 11,808,579
- ---------------------------------------------------------------------------------------------------------------------
Commitments and Contingencies -- --
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 120,000,000 shares authorized;
56,763,504 and 59,593,849 shares issued and outstanding 568 596
Additional paid-in capital 316,919 364,320
Retained earnings 679,286 611,529
Accumulated other comprehensive income (loss), net (15,459) (9,562)
- ---------------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 981,314 966,883
- ---------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 13,299,647 $ 12,775,462
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLDATED STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Three Months Ended Nine Months Ended
March 31, March 31,
--------------------------------------------------------
2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans and leases receivable $ 190,203 $ 179,283 $ 562,247 $ 520,335
Mortgage-backed securities 20,986 20,407 62,527 56,353
Investment securities 21,340 16,382 63,636 41,960
- --------------------------------------------------------------------------------------------------------------------------
Total interest income 232,529 216,072 688,410 618,648
Interest Expense:
Deposits 81,408 79,122 242,103 241,706
Advances from Federal Home Loan Bank 62,179 43,730 172,203 112,748
Securities sold under agreements to repurchase 336 2,335 3,569 10,211
Other borrowings 3,535 3,443 11,519 10,506
- --------------------------------------------------------------------------------------------------------------------------
Total interest expense 147,458 128,630 429,394 375,171
Net Interest Income 85,071 87,442 259,016 243,477
Provision for Loan and Lease Losses (3,700) (2,800) (10,460) (9,600)
- --------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan and Lease Losses 81,371 84,642 248,556 233,877
Other Income (Loss):
Loan servicing fees 6,665 5,769 18,884 17,054
Retail fees and charges 10,358 8,912 31,092 27,834
Real estate operations (151) (772) (13) (1,151)
Gain (loss) on sales of loans (239) (65) 2 3,514
Gain on sales of securities -- 948 -- 4,255
Other operating income 6,421 6,032 27,105 18,309
- --------------------------------------------------------------------------------------------------------------------------
Total other income 23,054 20,824 77,070 69,815
Other Expense:
General and administrative expenses -
Compensation and benefits 27,345 25,552 82,793 71,479
Occupancy and equipment 9,560 9,007 29,532 26,508
Data processing 4,756 2,969 13,801 8,112
Regulatory insurance and assessments 848 1,462 3,751 4,341
Advertising 3,845 3,299 11,212 10,547
Other operating expenses 13,774 10,615 42,503 28,231
Merger expenses -- 13,954 -- 29,917
Restructure costs -- -- 4,291 --
- --------------------------------------------------------------------------------------------------------------------------
Total general and administrative expenses 60,128 66,858 187,883 179,135
Amortization of intangible assets 3,656 4,376 12,923 11,844
- --------------------------------------------------------------------------------------------------------------------------
Total other expense 63,784 71,234 200,806 190,979
- --------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative Effect of Change
in Accounting Principle 40,641 34,232 124,820 112,713
Provision for Income Taxes 14,151 18,063 43,357 50,195
- --------------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Change in Accounting Principle 26,490 16,169 81,463 62,518
Cumulative Effect of Change in
Accounting Principle, Net of Tax Benefit -- -- (1,776) --
- --------------------------------------------------------------------------------------------------------------------------
Net Income $ 26,490 $ 16,169 $ 79,687 $ 62,518
- --------------------------------------------------------------------------------------------------------------------------
</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,
----------------------------- -----------------------------
2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Weighted Average Number of Common Shares
Outstanding Used in Basic Earnings Per Share Calculation 57,469,848 59,723,304 58,568,141 59,266,347
Add Assumed Exercise of Outstanding Stock Options
as Adjustments for Dilutive Securities 113,432 478,169 238,290 636,098
- -----------------------------------------------------------------------------------------------------------------------------------
Weighted Average Number of Common Shares
Outstanding Used in Diluted Earnings Per Share Calculation 57,583,280 60,201,473 58,806,431 59,902,445
- -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Common Share:
Income before cumulative effect of change in accounting principle $ .46 $ .27 $ 1.39 $ 1.05
Cumulative effect of change in accounting principle -- -- (.03) --
---------- ---------- ---------- ----------
Net income $ .46 $ .27 $ 1.36 $ 1.05
========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share:
Income before cumulative effect of change in accounting principle $ .46 $ .27 $ 1.39 $ 1.04
Cumulative effect of change in accounting principle -- -- (.03) --
---------- ---------- ---------- ----------
Net income $ .46 $ .27 $ 1.36 $ 1.04
========== ========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends Declared Per Common Share $ .07 $ .065 $ .205 $ .185
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- ------------------------
2000 1999 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Income $ 26,490 $ 16,169 $ 79,687 $ 62,518
Other Comprehensive Income (Loss):
Unrealized holding gains (losses) on securities arising during the periods 377 (3,161) (9,073) 966
Less net gain on securities included in net income -- (948) -- (4,255)
- ---------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) Before Income Taxes 377 (4,109) (9,073) (3,289)
Income Tax Provision (Benefit) 131 (1,438) (3,176) (1,151)
- ---------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive Income (Loss) 246 (2,671) (5,897) (2,138)
- ---------------------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 26,736 $ 13,498 $ 73,790 $ 60,380
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
6
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Nine Months Ended
March 31,
-----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2000 1999
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 79,687 $ 62,518
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization of intangible assets 12,923 11,844
Provision for losses on loans and leases and real estate 10,474 10,814
Depreciation and amortization 15,458 12,895
Amortization (accretion) of deferred discounts and fees, net (278) 2,373
Amortization of mortgage servicing rights 6,786 9,225
Amortization of deferred compensation on restricted
stock and deferred compensation plans and premiums on other borrowings 704 1,422
Termination of employee stock ownership plans -- 13,954
Gain on sales of real estate and loans, net (908) (4,444)
Gain on sales of securities -- (4,255)
Stock dividends from Federal Home Loan Bank (7,379) (7,649)
Proceeds from sales of loans 577,150 1,589,897
Origination of loans for resale (101,783) (474,423)
Purchases of loans for resale (344,593) (1,163,201)
Decrease in interest receivable 1,426 949
Increase (decrease) in interest payable and other liabilities 48,004 (51,369)
Other items, net (57,960) (2,977)
------------ ------------
Total adjustments 160,024 (54,945)
------------ ------------
Net cash provided by operating activities 239,711 7,573
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
- -------------------------------------------------------------------------------------------------------------------
Purchases of loans (1,011,910) (1,267,991)
Repayment of loans, net of originations 262,611 854,085
Principal repayments of mortgage-backed securities available for sale 35,995 56,673
Purchases of mortgage-backed securities available for sale -- (446,186)
Proceeds from sales of mortgage-backed securities available for sale -- 209,669
Principal repayments of mortgage-backed securities held to maturity 154,490 232,926
Purchases of mortgage-backed securities held to maturity (160,073) (187,454)
Maturities and repayments of investment securities available for sale 8,570 134,996
Purchases of investment securities available for sale -- (33,801)
Proceeds from sales of investment securities available for sale -- 30,152
Maturities and repayments of investment securities held to maturity 31,089 300,039
Purchases of investment securities held to maturity (99,215) (613,996)
Purchases of mortgage loan servicing rights (6,205) (17,616)
Purchases of Federal Home Loan Bank stock (33,916) (51,213)
Proceeds from sales of Federal Home Loan Bank stock 3,471 13,366
Proceeds from sales of real estate 15,160 12,850
Payments to acquire real estate (282) (611)
Acquisitions, net of cash paid -- (88,350)
Purchases of premises and equipment, net (11,892) (33,326)
Other items, net (4,318) (4,808)
------------ ------------
Net cash used by investing activities (816,425) (900,596)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in Thousands) Nine Months Ended
March 31,
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES 2000 1999
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Decrease in deposits $ (218,564) $ (144,988)
Proceeds from Federal Home Loan Bank advances 2,016,000 1,648,055
Repayments of Federal Home Loan Bank advances (1,187,350) (545,235)
Proceeds from securities sold under agreements to repurchase 6,205 25,000
Repayments of securities sold under agreements to repurchase (103,561) (200,000)
Proceeds from issuances of other borrowings 50,000 85,000
Repayments of other borrowings (78,763) (22,873)
Proceeds from loan repayments from employee stock ownership plans -- 11,058
Payments of cash dividends on common stock (11,801) (13,539)
Repurchases of common stock (50,319) --
Issuance of common stock 2,030 43,256
Other items, net (35) (1,596)
------------ ------------
Net cash provided by financing activities 423,842 884,138
- --------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
- --------------------------------------------------------------------------------------------------------------------
Decrease in net cash position (152,872) (8,885)
Balance, beginning of year 353,275 217,012
------------ ------------
Balance, end of period $ 200,403 $ 208,127
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- --------------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest expense $ 429,907 $ 375,204
Income taxes, net 2,744 38,340
Non-cash investing and financing activities:
Loans exchanged for mortgage-backed securities 39,582 18,841
Loans transferred to real estate 18,862 13,349
Loans to facilitate the sale of real estate -- 128
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
8
<PAGE>
COMMERCIAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED MARCH 31, 2000
(Unaudited)
(Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts)
- --------------------------------------------------------------------------------
A. BASIS OF CONSOLIDATION AND PRESENTATION:
----------------------------------------
The unaudited consolidated financial statements are prepared on an accrual basis
and include the accounts of Commercial Federal Corporation (the Corporation) and
its wholly-owned subsidiary, Commercial Federal Bank, a Federal Savings Bank
(the Bank), and all majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
The accompanying interim consolidated financial statements have not been audited
by independent auditors. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments and the restructure costs
recorded in the second quarter of fiscal year 2000 and the cumulative effect of
a change in accounting principle) 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, 1999, Annual Report to
Stockholders. The results of operations for the three and nine month periods
ended March 31, 2000, are not necessarily indicative of the results which may be
expected for the entire fiscal year 2000. Certain amounts in the prior fiscal
year periods have been reclassified for comparative purposes.
B. RESTRUCTURE COSTS:
------------------
Effective November 5, 1999, the Corporation announced a restructuring plan
as part of the integration process of the Corporation's most recent seven
acquisitions and new data processing system to support community-banking
operations. This restructuring is aimed at decreasing expenses, increasing
sustainable growth in revenues, and increasing productivity through the
elimination of duplicate or inefficient functions. This restructuring plan was
approved by the Corporation's Board of Directors effective December 27, 1999.
Major aspects of the plan included (i) 16 branches to be sold and five branches
to be closed, (ii) the elimination of 121 positions and the consolidation of the
correspondent loan servicing operations, (iii) the reorganization of community
banking operations as a separate division with realigned responsibilities and
(iv) changes in data processing for customer transactions.
Implementation of this plan resulted in restructuring costs totaling $4,291,000
($3,124,000 after-tax or $.05 per diluted share) recorded in the three months
ended December 31, 1999. All aspects of this plan are expected to be completed
by early Summer 2000 with the consummation of the branch sales at later dates
primarily due to the regulatory approval process.
The restructuring plan consolidated operations and organized the branches by
market size into urban, non-urban and in-store categories. This alignment by
market size allows the Bank to better meet the various customer service and
business needs within its franchise. Retail and corporate lending, as well as
certain sales development and training functions, also moved under the
responsibility of Community Banking. The branches to be sold and closed are
located in Iowa (15), Kansas (5) and Missouri (1). The branch closings were
completed in this third quarter with one branch left to be closed in May 2000.
Thirteen of the 16 branches to be sold are under contract. Anticipated sales
dates range from May 2000 through November 2000. The 13 sold branches have
deposits of approximately $61.5 million, associated loans to be sold of
approximately $14.2 million, and are expected to earn a deposit premium totaling
approximately $3.1 million. Direct and incremental costs associated with this
part of the restructure are estimated at $2,377,000.
9
<PAGE>
B. RESTRUCTURE COSTS (Continued):
------------------------------
The restructuring plan eliminated 121 positions with personnel costs consisting
of severance, benefits and related professional services totaling $1,914,000.
This plan also included the consolidation of the correspondent loan servicing
functions to Omaha, Nebraska from Wichita, Kansas and Denver, Colorado. As of
March 31, 2000, this portion of the plan was substantially completed.
The data processing component of the restructure plan calls for the processing
of customer transactions from batch processing to on-line real time item
processing. This change will eliminate duplicate handling of transactions and
will create back office efficiencies. It is management's goal to process
approximately 75% of the Bank's customer transactions on an on-line basis. No
restructure costs were recorded from this change in data processing operations.
This change is scheduled to be implemented by June 30, 2000.
The following provides details of the restructuring related liabilities from
inception through March 31, 2000:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Personnel Bank
Expenses Operations Total
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balances, September 30, 1999 $ -- $ -- $ --
Restructuring costs 1,914 2,377 4,291
Cash payments and utilization - second quarter (570) (1,711) (2,281)
- ------------------------------------------------------------------------------------------------
Balances, December 31, 1999 1,344 666 2,010
Cash payments and utilization - third quarter (914) (72) (986)
- ------------------------------------------------------------------------------------------------
Balances, March 31, 2000 $ 430 $ 594 $ 1,024
- ------------------------------------------------------------------------------------------------
</TABLE>
C. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE:
----------------------------------------------------
Effective July 1, 1999, the Corporation adopted the provisions of Statement of
Position 98-5 "Reporting the Costs of Start-Up Activities" (SOP 98-5), which
requires that costs of start-up activities and organizational costs be expensed
as incurred. Prior to the adoption of this statement, these costs were
capitalized and amortized over periods ranging from five to 25 years. The effect
of adopting the provisions of SOP 98-5 was to record a charge of $1,776,000, net
of an income tax benefit of $978,000, or $.03 per diluted share, as a cumulative
effect of a change in accounting principle in the accompanying Consolidated
Statement of Operations for the nine months ended March 31, 2000. These costs
consist of organizational costs primarily associated with the creation of a real
estate investment trust subsidiary and start-up costs of the proof of deposit
department for processing customer transactions following the complete
conversion of the Corporation's deposit system.
10
<PAGE>
D. COMMON STOCK REPURCHASE:
-----------------------
On April 28, 1999, the Corporation's Board of Directors authorized the
repurchase of up to five percent, or approximately 3,000,000 shares, of the
Corporation's outstanding common stock. This repurchase was completed in full on
December 29, 1999. Effective December 27, 1999, the Corporation's Board of
Directors authorized a second repurchase of up to 3,000,000 shares of the
Corporation's outstanding common stock over the next 18 months. Repurchases can
be made at any time and in any amount, depending upon market conditions and
various other factors. However, the amounts to be expended for this second
repurchase will not exceed 50.0% of the Corporation's cumulative reported net
income beginning October 1, 1999. Any repurchase generally will be on the open-
market, although privately negotiated transactions are also possible. In
compliance with Nebraska law, all repurchased shares will be cancelled.
During the three months ended March 31, 2000, the Corporation purchased and
cancelled 1,407,000 shares of its common stock at a cost of $20,283,000. For the
nine months ended March 31, 2000, there were 2,921,100 shares purchased and
canceled at a cost of approximately $50,319,000. Since the first repurchase was
announced, the Corporation purchased and cancelled a total of 4,421,100 shares
through March 31, 2000, at a cost of approximately $86,537,000.
E. COMMITMENTS AND CONTINGENCIES:
-----------------------------
At March 31, 2000, the Corporation issued commitments, excluding undisbursed
portions of loans in process, of approximately $510,117,000 as follows:
$217,274,000 to originate loans, $58,186,000 to purchase loans and $234,657,000
to provide unused lines of credit for commercial and consumer use. 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, 2000, the Corporation had issued
commitments to sell residential mortgage loans totaling $177,258,000. Loans sold
subject to recourse provisions totaled approximately $13,992,000 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 that collateralize these loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse effect on the Corporation's financial position or results of operations.
On September 12, 1994, the Bank and the Corporation commenced litigation against
the United States in the United States Court of Federal Claims seeking to
recover monetary relief for the government's refusal to honor certain contracts
that it had entered into with the Bank. The suit alleges that such governmental
action constitutes a breach of contract and an unlawful taking of property by
the United States without just compensation or due process in violation of the
Constitution of the United States. The Corporation and the Bank are pursuing
alternative damage claims of up to approximately $230,000,000. The Bank also
assumed a lawsuit in the merger with a 1998 acquisition, Mid Continent
Bancshares, Inc. (Mid Continent), against the United States also relating to a
supervisory goodwill claim filed by the former Mid Continent. The litigation
status and process of these legal actions, as well as that of numerous actions
brought by others alleging similar claims with respect to supervisory goodwill
and regulatory capital credits, make the value of the claims asserted by the
Bank (including the Mid Continent claim) uncertain as to their ultimate outcome,
and contingent on a number of factors and future events which are beyond the
control of the Bank, both as to substance, timing and the dollar amount of
damages that may be awarded to the Bank and the Corporation if they finally
prevail in this litigation.
11
<PAGE>
F. REGULATORY CAPITAL:
-------------------
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 tables. Prompt corrective action provisions pursuant to 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 corrective 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, 2000, and June 30, 1999, 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>
- -------------------------------------------------------------------------------------------
As of March 31, 2000
--------------------------------------------------
Actual Capital Required Capital
------------------------ ----------------------
Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital $ 909,898 6.96% $ 196,221 1.50%
Core capital 916,399 7.00 392,637 3.00
Risk-based capital 983,523 13.46 584,372 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 916,399 7.00 654,396 5.00
Tier 1 risk-based capital 916,399 12.55 438,279 6.00
Total risk-based capital 983,523 13.46 730,465 10.00
- -------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------
As of June 30, 1999
--------------------------------------------------
Actual Capital Required Capital
------------------------ ----------------------
Amount Ratio Amount Ratio
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTS capital adequacy:
Tangible capital $ 880,400 6.97% $ 189,412 1.50%
Core capital 890,967 7.05 379,142 3.00
Risk-based capital 957,676 13.70 559,279 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 890,967 7.05 631,903 5.00
Tier 1 risk-based capital 890,967 12.74 419,459 6.00
Total risk-based capital 957,676 13.70 699,099 10.00
- -------------------------------------------------------------------------------------------
</TABLE>
As of March 31, 2000, 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.
12
<PAGE>
G. SEGMENT INFORMATION:
--------------------
The Corporation has identified two distinct lines of business operations for the
purposes of management reporting: Community Banking and Mortgage Banking. These
segments were determined based on the Corporation's financial accounting and
reporting processes with insurance and securities brokerage operations
aggregated with Community Banking. Management makes operating decisions and
assesses performance based on a continuous review of these two primary
operations.
The Community Banking segment involves a variety of traditional banking and
financial services. These services include retail banking services, consumer
checking and savings accounts, and loans for consumer, commercial real estate,
residential mortgage and business purposes. Also included in this segment is
insurance and securities brokerage services. The Community Banking services are
offered through the Bank's branch network, including traditional offices,
supermarkets and convenience stores, ATMs, 24-hour telephone centers and the
Internet. Community Banking is also responsible for the Corporation's investment
and mortgage-backed securities portfolios and the corresponding management of
deposits, advances from the Federal Home Loan Bank and certain other borrowings.
The Mortgage Banking segment involves the origination and purchase of
residential mortgage loans, the sale of such mortgage loans in the secondary
mortgage market, the servicing of mortgage loans and the purchase and
origination of rights to service mortgage loans. Mortgage Banking operations are
conducted through the Bank's branches, offices of a mortgage banking subsidiary
and a nationwide correspondent network of mortgage loan originators. The Bank
allocates expenses to the Mortgage Banking operation on terms that are not
necessarily indicative of those which would be negotiated between unrelated
parties. The Mortgage Banking segment also originates and sells loans to the
Bank. Effective July 1, 1999, substantially all loans sold to the Bank from the
Mortgage Banking operation are at net book value, resulting in no gains or
losses. Previously, these sales were primarily at par such that the Mortgage
Banking operation recorded losses equal to the origination expenses it incurred
net of fees collected. All of these losses are deferred by the Bank and
amortized over the estimated life of the loans the Bank purchased.
The Parent Company includes interest income earned on intercompany cash balances
and intercompany transactions, interest expense on Parent Company debt and
operating expenses for general corporate purposes.
The contributions of the major business segments to the consolidated results for
the three and nine months ended March 31, 2000 and 1999 are summarized in the
following tables:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Community Mortgage Parent Eliminations/ Consolidated
Banking Banking Company Adjustments Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Three Months Ended March 31, 2000:
Net interest income (loss) $ 77,346 $ 5,145 $ (3,661) $ 6,241 $ 85,071
Provision for loan and
lease losses 3,520 180 -- -- 3,700
Non-interest income 27,138 12,625 28,992 (45,701) 23,054
Total other expense 57,962 5,789 124 (91) 63,784
Net income 31,224 8,145 26,490 (39,369) 26,490
Total revenue
250,057 17,773 28,992 (41,239) 255,583
Intersegment revenue (loss) 7,721 6,367 29,528 (43,616) --
- ----------------------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 1999:
Net interest income (loss) $ 83,116 $ 1,651 $ (3,302) $ 5,977 $ 87,442
Provision for loan and
lease losses 2,695 105 -- -- 2,800
Non-interest income 22,702 11,636 18,678 (32,192) 20,824
Total other expense 66,326 7,601 150 (2,843) 71,234
Net income 19,608 3,764 16,169 (23,372) 16,169
Total revenue 233,035 13,506 18,678 (28,323) 236,896
Intersegment revenue (loss) 9,834 (511) 18,252 (27,575) --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
G. SEGMENT INFORMATION (Continued):
--------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Community Mortgage Parent Eliminations/ Consolidated
Banking Banking Company Adjustments Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nine Months Ended March 31, 2000:
Net interest income (loss) $ 235,382 $ 16,603 $ (10,791) $ 17,822 $ 259,016
Provision for loan and
lease losses 9,555 905 -- -- 10,460
Non-interest income 85,063 36,534 87,548 (132,075) 77,070
Total other expense 180,726 19,070 1,104 (94) 200,806
Net income 91,257 22,902 79,687 (114,159) 79,687
Total revenue 744,875 53,150 87,548 (120,093) 765,480
Intersegment revenue (loss) 34,365 5,516 88,015 (127,896) --
- ----------------------------------------------------------------------------------------------------------------------------
Nine Months Ended March 31, 1999:
Net interest income (loss) $ 225,977 $ 11,098 $ (9,752) $ 16,154 $ 243,477
Provision for loan and
lease losses 9,285 315 -- -- 9,600
Non-interest income 74,837 40,437 77,806 (123,265) 69,815
Total other expense 167,899 23,862 8,413 (9,195) 190,979
Net income 79,805 18,111 62,518 (97,916) 62,518
Total revenue 672,099 51,872 77,915 (113,423) 688,463
Intersegment revenue (loss) 26,323 6,734 76,852 (109,909) --
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
H. CURRENT ACCOUNTING PRONOUNCEMENTS:
----------------------------------
Accounting for Mortgage-Backed Securities Retained After the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise: Effective July 1,
1999, the Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 134 entitled "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held for Sale by a Mortgage
Banking Enterprise, an amendment of FASB Statement No. 65" (SFAS No. 134). FASB
Statement No. 65, as amended, requires that after the securitization of a
mortgage loan held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed security as a trading security. SFAS No.
134 further amends Statement No. 65 to require that after the securitization of
mortgage loans held for sale, an entity engaged in mortgage banking activities
classify the resulting mortgage-backed securities or other retained interests
based on its ability and intent to sell or hold those investments. This
statement conforms the subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise with the
subsequent accounting for securities retained after the securitization of other
types of assets by a nonmortgage banking enterprise. Management of the
Corporation did not reclassify any mortgage-backed securities upon initial
application, therefore, the adoption of SFAS No. 134 did not have an effect on
the Corporation's financial position, liquidity or results of operations.
14
<PAGE>
H. CURRENT ACCOUNTING PRONOUNCEMENTS (Continued):
----------------------------------------------
Accounting for Derivative Instruments and Hedging Activities: In June 1998, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 133 entitled "Accounting for Derivative Instruments and
Hedging Activities" (SFAS No. 133). This statement requires the recognition of
all derivative financial instruments as either assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. The accounting for gains and losses associated with changes in the fair
value of a derivative and the effect on the consolidated financial statements
will depend on its hedge designation and whether the hedge is highly effective
in achieving offsetting changes in the fair value or cash flows of the asset or
liability hedged. Under the provisions of SFAS No. 133, the method that will be
used for assessing the effectiveness of a hedging derivative, as well as the
measurement approach for determining the ineffective aspects of the hedge, must
be established at the inception of the hedge. The methods must be consistent
with the entity's approach to managing risk.
SFAS No. 133 was effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. However, on July 7, 1999, the FASB issued Statement of
Financial Accounting Standards No. 137 entitled "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" (SFAS No. 137). This statement delays the effective date of
SFAS No. 133 for one year, or for all fiscal quarters of fiscal years beginning
after June 15, 2000, with initial application as of the beginning of any fiscal
quarter that begins after issuance. On that initial application date, hedging
relationships must be designated anew and documented pursuant to the provisions
of SFAS No. 133. Management of the Corporation has not determined the effect, if
any, that the adoption will have on the Corporation's financial position,
liquidity or results of operations. Management of the Corporation will adopt the
provisions of SFAS No. 133 as of July 1, 2000.
Business Combinations and Intangible Assets: On September 7, 1999 the FASB
issued a proposal for public comment that would, among other items, eliminate
the pooling of interests method of accounting for business combinations. A final
statement may be issued by the end of calendar year 2000. If adopted, this
statement would be effective for business combinations initiated after the
statement is published. The main provisions in the exposure draft are (i) that
the purchase method should be the only method used to account for all business
combinations, prohibiting the use of the pooling-of-interests method; (ii)
goodwill should be amortized on a straight-line basis over its useful (finite)
life, not to exceed 20 years; (iii) a review of goodwill for impairment should
be performed no later than two years after the acquisition date if certain
factors are present; and (iv) goodwill amortization and impairment charges
should be displayed on a net-of-tax basis as a separate line item within income
from continuing operations. That line item should be preceded by a subtotal such
as "income before goodwill charges" (which would follow the income tax
provision). A per share amount would be permitted to be shown on the face of the
income statement for goodwill charges and the subtotal that precedes that
amount.
15
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The statements in this management's discussion and analysis of financial
condition and results of operations that are not historical fact are
forward-looking statements that involve inherent risks and uncertainties. The
Corporation cautions readers that a number of important factors could cause
actual results to differ materially from those in the forward-looking
statements. Those factors include fluctuations in interest rates, inflation,
government regulations, the effect of pending legislation, the progress of
integrating acquisitions, economic conditions, adequacy of allowance for credit
losses, costs associated with the second quarter restructuring, technology
changes and competition in the geographic and business areas in which the
Corporation conducts its operations. These statements are based on management's
current expectations. Actual results in future periods may differ materially
from those currently expected because of various risks and uncertainties.
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. Pursuant to the
capital distribution regulations of the Office of Thrift Supervision (OTS), the
Bank is permitted to pay capital distributions during a calendar year up to
100.0% of its retained net income (net income determined in accordance with
generally accepted accounting principles less total capital distributions
declared) for the current calendar year combined with the Bank's retained net
income for the preceding two calendar years without requiring an application for
approval to be filed with the OTS. At March 31, 2000, the Bank would be
permitted to pay an aggregate amount approximating $70.8 million in dividends
under this regulation. Should the Bank's regulatory capital fall below certain
levels, applicable law would require approval by the OTS of such proposed
dividends and, in some cases, would prohibit the payment of dividends.
The Corporation manages its liquidity at both the parent company and subsidiary
levels. At March 31, 2000, the cash of Commercial Federal Corporation (the
parent company) totaled $17.7 million. Due to the parent company's limited
independent operations, management believes that its cash balance at March 31,
2000 is sufficient to meet operational needs excluding funds necessary for
interest and principal payments and the repurchase of common stock. 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 its $46.4 million of 9.375% fixed-rate junior subordinated
debentures due May 15, 2027 (the Debentures) and on its promissory notes is
dependent upon its receipt of dividends from the Bank. Accordingly, for the
three and nine months ended March 31, 2000, the parent company received cash
dividends totaling $31.154 million and $75.818 million from the Bank. The
dividends received were paid primarily to cover (i) interest payments totaling
$10.419 million on the parent company's debt, (ii) principal payments of $5.438
million on the parent company's variable rate term note, (iii) common stock cash
dividends totaling $11.62 million paid by the parent company to its shareholders
through March 31, 2000, and (iv) the financing, in part, of common stock
repurchases totaling $48.341 million for the nine months ended March 31, 2000.
The Bank will continue to pay dividends to the parent company, subject to
regulatory restrictions, to cover future principal and interest payments on the
parent company's debt and quarterly cash dividends on common stock when and as
declared by the parent company. Dividends totaling $59.109 million were paid by
the Bank to the parent company during the nine months ended March 31, 1999. 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.
On April 28, 1999, the Corporation's Board of Directors authorized the
repurchase up to five percent, or approximately 3,000,000 shares, of its
outstanding common stock. This repurchase was completed in full on December 29,
1999. Effective December 27, 1999, the Corporation's Board of Directors
authorized a second repurchase of up to 3,000,000 shares of the Corporation's
outstanding common stock over the next 18 months. The amounts to be expended for
this second repurchase will not exceed 50.0% of the Corporation's cumulative
reported net income beginning October 1, 1999. During the three and nine months
ended March 31, 2000, the Corporation purchased and cancelled 1,407,000 shares
and 2,921,100 shares, respectively, of its common stock at a cost of $20.3
million and $50.3 million, respectively. From April 1999 through March 31, 2000,
a total of 4,421,100 shares have been repurchased and cancelled at a cost of
approximately $86.5 million.
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) and (iv) cash generated from operations.
As reflected in the Consolidated Statement of Cash Flows, net cash flows
provided by operating activities totaled $239.7 million and $7.6 million,
respectively, for the nine months ended March 31, 2000 and 1999. Amounts
fluctuate from period to period primarily as a result of mortgage banking
activity relating to the purchase and origination of loans for resale and the
subsequent sale of such loans.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- --------------------------------------------
Net cash flows used by investing activities totaled $816.4 million and $900.6
million, respectively, for the nine months ended March 31, 2000 and 1999.
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.
Net cash flows provided by financing activities totaled $423.8 million and
$884.1 million, respectively, for the nine months ended March 31, 2000 and 1999.
Advances from the FHLB and retail deposits have been the primary sources to
balance the Corporation's funding needs during each of the periods presented.
The Corporation experienced net decreases in retail deposits of $218.6 million
and $145.0 million, respectively, for the nine months ended March 31, 2000 and
1999, primarily due to depositors seeking higher-yielding investment options.
During the nine months ended March 31, 2000, the Corporation continued to borrow
long-term FHLB advances that are callable at the option of the FHLB. Such
advances provide the Corporation with lower interest-bearing liabilities than
other funding alternatives and at March 31, 2000 totaled $2.5 billion. The
one-year notes for $40.0 million from the AmerUs Bank (AmerUs) acquisition on
July 31, 1998 were paid in full on July 30, 1999. The $32.5 million term note
due July 31, 2003 was refinanced on July 1, 1999. The proceeds to pay the $40.0
million AmerUs note in full and the refinancing came from a term note for $72.5
million due June 30, 2004, unsecured, with quarterly principal payments of $1.8
million and interest payable quarterly at 100 basis points below the lender's
national base rate. At March 31, 2000, this term note had a remaining principal
balance of $67.1 million. In addition, on August 30, 1999, the Corporation
borrowed $10.0 million from the same lender on a revolving line of credit. This
revolving credit note has a balance of $10.0 million as of March 31, 2000 and is
unsecured with interest terms the same as the term note. The proceeds were used
to help finance the Corporation's repurchase of its common stock. During the
three and nine months ended March 31, 2000, the Corporation repurchased shares
at a cost of $20.3 million and $50.3 million, respectively. See Note D for
additional information regarding the repurchase of common stock.
At March 31, 2000, the Corporation issued commitments totaling approximately
$510.1 million to fund and purchase loans as follows: $103.6 million of
single-family adjustable-rate mortgage loans, $57.9 million of single-family
fixed-rate mortgage loans, $113.9 million of commercial real estate,
multi-family and nonmortgage loans and $234.7 million of unused lines of credit
for commercial and consumer use. These outstanding loan commitments to extend
credit in order to originate loans or fund commercial and consumer loans lines
of credit do not necessarily represent future cash requirements since many of
the commitments may expire without being drawn. The Corporation expects to fund
these commitments, as necessary, from the sources of funds previously described.
In addition, at March 31, 2000, the Corporation had approximately $177.3 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 Bank is required by federal
regulation to maintain a minimum average daily balance of liquid assets in each
calendar quarter of not less than 4.0% of net withdrawable deposits plus
short-term borrowings or 4.0% of the average daily balance of net withdrawable
accounts plus short-term borrowings during the preceding quarter. The Bank's
liquidity ratio was 14.66% at March 31, 2000. Liquidity levels will vary
depending upon savings flows, future loan fundings, cash operating needs,
collateral requirements and general prevailing economic conditions. The Bank
does not foresee any difficulty in meeting its liquidity requirements.
17
<PAGE>
FINANCIAL LEGISLATION:
- ----------------------
On November 12, 1999, President Clinton signed into law the Gramm-Leach-Bliley
Act (GLB Act) which, effective March 11, 2000, authorized affiliations between
banking, securities and insurance firms and authorized bank holding companies
and national banks to engage in a variety of new financial activities. Among the
new activities permitted to bank holding companies are securities and insurance
brokerage, securities underwriting, insurance underwriting and merchant banking.
National bank subsidiaries are now permitted to engage in similar financial
activities but only on an agency basis unless they are one of the 50 largest
banks in the United States. National bank subsidiaries are prohibited from
insurance underwriting, real estate development and merchant banking. The
Federal Reserve Board, in consultation with the Department of Treasury, may
approve additional financial activities. The GLB Act, however, prohibits future
affiliations between existing unitary savings and loan holding companies, like
the Corporation, and firms which are engaged in commercial activities and
prohibits the formation of new unitary holding companies.
The GLB Act imposes new requirements on financial institutions with respect to
customer privacy. The GLB Act generally prohibits disclosure of customer
information to non-affiliated third parties unless the customer has been given
the opportunity to object and has not objected to such disclosure. Financial
institutions are further required to disclose their privacy policies to
customers annually. Financial institutions, however, are required to comply with
state law if it is more protective of customer privacy than the GLB Act.
The GLB Act contains significant revisions to the Federal Home Loan Bank System,
among them, making membership in the Federal Home Loan Bank voluntary for
federal savings associations. The GLB Act contains a variety of other provisions
including a prohibition against ATM surcharges unless the customer has first
been provided notice of the imposition and amount of the fee.
The Corporation is unable to predict the effect of the GLB Act on its operations
and competitive environment at this time. Although the GLB Act reduces the range
of companies with which the Corporation may affiliate, it may facilitate
affiliations with companies in the financial services industry.
RESULTS OF OPERATIONS:
- ----------------------
Net income for the three months ended March 31, 2000, was $26.5 million, or $.46
per basic and diluted share, compared to net income of $16.2 million, or $.27
per basic and diluted share for the three months ended March 31, 1999. The net
increase in net income for the quarter ended March 31, 2000, compared to the
quarter ended March 31, 1999, is primarily due to a net increase of $2.2 million
in other income and to net decreases in general and administrative expenses
totaling $6.7 million, the provision for income taxes totaling $3.9 million and
in amortization of intangible assets totaling $720,000. Partially offsetting
these increases to net income was a net decrease of $3.3 million in net interest
income after provision for loan and lease losses.
Net income for the nine months ended March 31, 2000, was $79.7 million, or $1.36
per basic and diluted share compared to net income of $62.5 million, or $1.04
per diluted share ($1.05 per basic share) for the nine months ended March 31,
1999. Such net increase comparing periods is due to net increases of $14.7
million in net interest income after provision for loan and lease losses and
$7.3 million in other income and a decrease of $6.8 million in the provision for
income taxes. Partially offsetting these increases to net income were increases
in general and administrative expenses totaling $8.7 million and $1.1 million in
amortization of intangible assets and the cumulative effect of a change in
accounting principle totaling $1.8 million.
18
<PAGE>
RESULTS OF OPERATIONS (Continued):
- ----------------------------------
Net Interest Income:
- --------------------
Net interest income was $85.1 million for the three months ended March 31, 2000,
compared to $87.4 million for the three months ended March 31, 1999, resulting
in a decrease of approximately $2.3 million, or 2.7%. The interest rate spread
was 2.60% at March 31, 2000 compared to 2.88% at March 31, 1999, a decrease of
28 basis points. During the three months ended March 31, 2000 and 1999, interest
rate spreads were 2.66% and 2.84%, respectively, a decrease of 18 basis points;
and the yield on interest-earning assets was 2.75% and 3.01%, down six basis
points over the same respective periods of time. Net interest income decreased
for the three months ended March 31, 2000 compared to 1999 due to five interest
rate increases by the Federal Reserve over the past year resulting in the rate
on interest-bearing liabilities increasing 23 basis points over the same
respective time periods. Net interest income also decreased due to the
Corporation's net earnings balance (the difference between interest-earning
assets over interest-bearing liabilities) decreasing $50.9 million from $329.1
million for the quarter ended March 31, 1999 to $278.2 million for the March 31,
2000 quarter.
Net interest income was $259.0 million for the nine months ended March 31, 2000,
compared to $243.5 million for the nine months ended March 31, 1999, resulting
in an increase of approximately $15.5 million, or 6.4%. The interest rate spread
was 2.77% during the nine months ended March 31, 2000, compared to 2.83% for
1999, a decrease of six basis points, while the net yield on interest-earning
assets decreased 17 basis points to 2.82% from 2.99% during the nine months
ended March 31, 2000 and 1999, respectively. The average balance of interest-
earning assets increased $1.383 billion for the nine months ended March 31, 2000
compared to the same period ended March 31, 1999, while the average balance of
interest-bearing liabilities increased $1.513 billion. The increases in these
average balances are due to the acquisitions of AmerUs on July 31, 1998 and
Midland First Financial Corporation (Midland) on March 1, 1999 both of which
were accounted for as purchases with their account balances reflected as of the
respective acquisition dates. Net interest income increased for the nine months
ended March 31, 2000 compared to 1999 due to the volume increases in these
average balances partially offset by the decrease in interest rate spreads. The
future trend in interest rate spreads and net interest income will be dependent
upon such factors as the composition and balances 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,
------------------------ ------------------------ ------------------------
2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted average yield on:
Loans and leases 7.73% 7.75% 7.72% 7.90% 7.81% 7.74%
Mortgage-backed securities 6.44 6.14 6.39 6.20 6.50 6.21
Investments 6.87 6.52 6.84 6.49 6.69 6.52
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets 7.51 7.46 7.49 7.59 7.56 7.44
- ------------------------------------------------------------------------------------------------------------------------------
Weighted average rate paid on:
Savings deposits 3.17 2.74 3.04 2.79 3.27 2.75
Other time deposits 5.30 5.32 5.22 5.46 5.39 5.29
Advances from FHLB 5.48 5.06 5.29 5.34 5.64 4.98
Securities sold under agreements
to repurchase 4.92 5.81 5.58 5.87 5.02 5.83
Other borrowings 7.98 7.85 7.73 8.16 8.47 8.00
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 4.85 4.62 4.72 4.76 4.96 4.56
- ------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.66% 2.84% 2.77% 2.83% 2.60% 2.88%
- ------------------------------------------------------------------------------------------------------------------------------
Net annualized yield on
interest-earning assets 2.75% 3.01% 2.82% 2.99% 2.73% 2.99%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19
<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, 2000. The
following table includes nonaccruing loans averaging $68.1 million and $72.3
million, respectively, for the three and nine months ended March 31, 2000, as
interest-earning assets at a yield of zero percent:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, 2000 March 31, 2000
------------------------------------------- ------------------------------------------
Annualized Annualized
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans and leases $ 9,843,301 $ 190,203 7.73% $ 9,698,469 $ 562,247 7.72%
Mortgage-backed securities 1,303,458 20,986 6.44 1,304,715 62,527 6.39
Investments 1,242,211 21,340 6.87 1,240,692 63,636 6.84
- ------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets 12,388,970 232,529 7.51 12,243,876 688,410 7.49
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 3,139,596 24,851 3.17 3,124,660 71,487 3.04
Other time deposits 4,280,363 56,557 5.30 4,335,336 170,616 5.22
Advances from FHLB 4,486,627 62,179 5.48 4,259,028 172,203 5.29
Securities sold under
agreements to repurchase 27,046 336 4.92 83,763 3,569 5.58
Other borrowings 177,098 3,535 7.98 198,682 11,519 7.73
- ------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 12,110,730 147,458 4.85 12,001,469 429,394 4.72
- ------------------------------------------------------------------------------------------------------------------------------
Net earnings balance $ 278,240 $ 242,407
=========== ===========
Net interest income $ 85,071 $ 259,016
=========== ===========
Interest rate spread 2.66% 2.77%
- ------------------------------------------------------------------------------------------------------------------------------
Net annualized yield on 2.75% 2.82%
interest-earnings assets
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The net earnings balance decreased by $50.9 million and $129.6 million for the
three and nine months ended March 31, 2000, compared to the three and nine
months ended March 31, 1999. Such decreases are primarily due to the acquisition
of Midland that was financed entirely by available cash totaling $83.0 million
and the repurchases of the Corporation's common stock totaling $86.5 million.
20
<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, 2000 Compared March 31, 2000 Compared
to March 31, 1999 to March 31, 1999
------------------------------------ ---------------------------------------
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 $ 9,892 $ 1,028 $ 10,920 $ 50,958 $ (9,046) $ 41,912
Mortgage-backed securities (414) 993 579 4,410 1,764 6,174
Investments 4,044 914 4,958 19,299 2,377 21,676
- ------------------------------------------------------------------------------------------------------------------------------------
Interest income 13,522 2,935 16,457 74,667 (4,905) 69,762
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 2,437 2,730 5,167 8,202 4,235 12,437
Other time deposits (2,728) (153) (2,881) (4,758) (7,282) (12,040)
Advances from FHLB 14,170 4,279 18,449 60,415 (960) 59,455
Securities sold under agreements to repurchase (1,687) (312) (1,999) (6,155) (487) (6,642)
Other borrowings 32 60 92 1,582 (569) 1,013
- ------------------------------------------------------------------------------------------------------------------------------------
Interest expense 12,224 6,604 18,828 59,286 (5,063) 54,223
- ------------------------------------------------------------------------------------------------------------------------------------
Effect on net interest income $ 1,298 $ (3,669) $ (2,371) $ 15,381 $ 158 $ 15,539
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE>
Provision for Loan and Lease Losses and Real Estate Operations:
- ---------------------------------------------------------------
The Corporation recorded loan and lease loss provisions totaling $3.7 million
and $10.5 million, respectively, for the three and nine months ended March 31,
2000, compared to $2.8 million and $9.6 million, respectively, for the three and
nine months ended March 31, 1999. Net loans and leases charged-off totaled $5.0
million and $11.6 million for the three and nine months ended March 31, 2000,
compared to $2.8 million and $8.2 million for the respective periods ended March
31, 1999. The net charge-offs are higher for the current third quarter due to a
charge-off totaling $1.3 million relating to a 70-unit apartment complex in
Wichita, Kansas assumed with the acquisition of Mid Continent. The provision for
the nine months ended March 31, 1999 includes a $1.0 million loss reserve
recorded to conform the reserve position of First Colorado Bancorp, Inc. (a
pooled acquisition) 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 leases and of the overall portfolio quality and real estate market
conditions in the Corporation's lending areas. The allowance for credit losses
totaled $78.1 million at March 31, 2000, or 122.4% of total nonperforming loan
and leases, compared to $80.4 million, or 114.9% at June 30, 1999.
The Corporation recorded net losses from real estate operations totaling
$151,000 and $13,000 for the three and nine months ended March 31, 2000 compared
to net losses of $772,000 and $1.2 million, respectively, for the three and nine
months ended March 31, 1999. 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 decreases in real estate operations for the
three and nine months ended March 31, 2000 compared to 1999 is due primarily to
net decreases in operating expenses and net decreases in provisions for real
estate losses.
Although the Corporation believes that the present level of the allowance for
loan and lease losses is adequate to reflect the risks inherent in its
portfolios, there can be no assurance that the Corporation will not experience
increases in its nonperforming assets, that it will not increase the level of
its allowance in the future or that significant provisions for losses will not
be required based on factors such as deterioration in market conditions, changes
in borrowers' financial conditions, delinquencies and defaults.
22
<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 problem asset groups. Nonperforming assets as of the
dates indicated are summarized as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
March 31, June 30,
2000 1999
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonperforming loans and leases:
Residential real estate loans $ 49,419 $ 49,061
Commercial real estate loans 1,867 12,220
Consumer loans 7,529 4,859
Leases and other loans 5,014 3,875
- -------------------------------------------------------------------------------------------------------------------------------
Total 63,829 70,015
- -------------------------------------------------------------------------------------------------------------------------------
Real estate:
Commercial 16,982 8,880
Residential 15,618 14,384
- -------------------------------------------------------------------------------------------------------------------------------
Total 32,600 23,264
- -------------------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings:
Commercial 5,349 9,534
Residential 174 195
- -------------------------------------------------------------------------------------------------------------------------------
Total 5,523 9,729
- -------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $101,952 $103,008
- -------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans and leases to total loans and leases .63% .73%
Nonperforming assets to total assets .77% .81%
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses (1) $ 78,128 $ 80,419
- -------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses to total loans and leases .77% .84%
Allowance for loan and lease losses to total nonperforming assets 76.63% 78.07%
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes $50,000 and $75,000 at March 31, 2000 and June 30, 1999,
respectively, in general allowance for losses established primarily to
cover risks associated with borrowers' delinquencies and defaults on loans
held for sale.
23
<PAGE>
Provision for Loan and Lease Losses and Real Estate Operations (Continued):
- ---------------------------------------------------------------------------
Nonperforming assets decreased $1.1 million at March 31, 2000, compared to June
30, 1999, resulting from net decreases of $6.2 million in nonperforming loans
and leases and $4.2 million in troubled debt restructurings partially offset by
a net increase of $9.3 million in real estate. Nonperforming loans and leases at
March 31, 2000, decreased by $6.2 million compared to June 30, 1999, primarily
due to a net decrease of $10.4 million in delinquent commercial loans partially
offset by net increases of $3.8 million in delinquent consumer loans and leases
and other loans. The net increase in real estate of $9.3 million at March 31,
2000, compared to June 30, 1999, is due primarily to the transfer of delinquent
commercial loans totaling $10.9 million to nonperforming commercial real estate.
The net decrease of $4.2 million in troubled debt restructurings at March 31,
2000, compared to June 30, 1999, is due primarily to the reclassification of a
commercial troubled debt restructuring to nonperforming loan status.
The ratio of nonperforming loans and leases to total loans and leases decreased
compared to June 30, 1999, due to the net increase in loans and leases at March
31, 2000, compared to June 30, 1999. The ratio of nonperforming assets to total
assets decreased compared to June 30, 1999 due to the net decrease in total
nonperforming assets and the net increase in total assets. The percentage of
allowance for loan and lease losses to total loans and leases decreased compared
to June 30, 1999, due primarily to the net decrease in the allowance for loan
and lease losses over the same periods of time. The allowance for loan and lease
losses to total nonperforming assets decreased at March 31, 2000 compared to
June 30, 1999 due primarily to the net decrease in the allowance for loan and
lease losses.
Loan Servicing Fees:
- --------------------
Fees from loans serviced for other institutions totaled $6.7 million and $18.9
million for the three and nine months ended March 31, 2000 compared to $5.8
million and $17.1 million, respectively, for the three and nine months ended
March 31, 1999. The amount of net revenue generated from loan servicing fees is
primarily due to the average size of the Corporation's portfolio of mortgage
loans serviced for other institutions and the level of rates for service fees
collected partially offset by the amortization expense of mortgage servicing
rights. The loan servicing fees category also includes fees collected for late
loan payments. The net increase in comparing both the three and nine month
periods to the last fiscal year periods is primarily due to a decrease in the
amortization expense of mortgage servicing rights. The amount of amortization
expense of mortgage servicing rights is determined, in part, by principal pay-
downs of the mortgage loans in the servicing portfolio that are influenced by
changes in interest rates.
Effective July 1, 1999, the amortization expense of mortgage servicing rights
was reclassified from general and administrative expenses to a reduction of loan
servicing fees. Such reclassification was primarily for presentation purposes to
be more in line with other financial institutions. For the three and nine months
ended March 31, 2000, gross loan servicing fees totaled $8.4 million and $25.8
million, respectively, compared to $8.6 million and $25.9 million, respectively,
for the three and nine months ended March 31, 1999. At March 31, 2000 and 1999,
the Corporation's mortgage servicing portfolio approximated $7.325 billion and
$7.451 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 $10.4 million and $31.1 million, respectively,
for the three and nine months ended March 31, 2000 compared to $8.9 million and
$27.8 million, respectively, for the three and nine months ended March 31, 1999.
Increases in certain checking account fees and related ancillary fees for
overdraft and insufficient funds charges, VISA debit card fees and a reduction
in the amount of waiver of retail fees are all attributable for the increases
over the respective periods for fiscal year 1999.
24
<PAGE>
Gain (Loss) on Sales of Loans:
- ------------------------------
The Corporation sold loans to third parties through its mortgage banking
operations resulting in net pre-tax losses of $239,000 and $65,000,
respectively, for the three months ended March 31, 2000 and 1999, and in net
pre-tax gains of $2,000 and $3.5 million, respectively, for the nine months
ended March 31, 2000. Loans sold totaled $235.6 million and $575.0 million,
respectively, for the three months ended March 31, 2000 and 1999 and $577.2
million and $1.586 billion, respectively, for the nine months ended March 31,
2000 and 1999. Mortgage loans are generally sold in the secondary market with
loan servicing retained and without recourse to the Corporation.
Gain on Sales of Securities:
- ----------------------------
During the three and nine months ended March 31, 2000, there were no sales of
securities available for sale. The Corporation sold securities available for
sale resulting in net pre-tax gains of $948,000 and $4.3 million, respectively,
for the three and nine months ended March 31, 1999, on sales of mortgage-backed
securities totaling $9.4 million and $235.6 million, respectively, acquired in
the AmerUs acquisition.
Other Operating Income:
- -----------------------
Other operating income totaled $6.4 million and $27.1 million, respectively, for
the three and nine months ended March 31, 2000, compared to $6.0 million and
$18.3 million, respectively, for the three and nine months ended March 31, 1999.
The major components of other operating income are brokerage commissions, credit
life and disability commissions, insurance commissions and leasing operations.
The net increases for the three and nine months ended March 31, 2000 compared to
the prior year periods are primarily attributable to the gain totaling $8.5
million on the sale of the Corporation's headquarters building on December 1,
1999 and to increases in credit life and disability and insurance commissions
partially offset by the prior year nonrecurring gain of $1.1 million on the sale
of a branch closed pursuant to the First Colorado Bancorp, Inc. merger.
General and Administrative Expenses:
- ------------------------------------
General and administrative expenses totaled $60.1 million and $187.9 million,
respectively, for the three and nine months ended March 31, 2000, compared to
$66.9 million and $179.1 million, respectively, for the three and nine months
ended March 31, 1999.
The net decrease for the three months ended March 31, 2000 compared to March 31,
1999 is due to a $14.0 million charge recorded in the third quarter of fiscal
year 1999 relating to the termination of three employee stock ownership plans
acquired in mergers. Such amount represents the market value of unallocated
shares distributed to plan participants upon the termination of these employee
stock ownership plans. Regulatory insurance and assessments also decreased
$614,000 from the three months ended March 31, 1999 due to rate reductions in
the Financing Corporation (FICO) assessments of SAIF-insured deposits. These
decreases were partially offset by net increases in the other categories of
general and administrative expenses due, in part, to the Midland acquisition on
March 1, 1999, which was accounted for under the purchase method of accounting
and to data processing charges from increased utilization of computer systems.
For the nine months ended March 31, 2000, general and administrative expenses
include restructure costs totaling $4.3 million recorded in this current fiscal
year second quarter. The restructuring costs of $4.3 million reflect the
expenses and charges pursuant to the sale and closing of 21 branches ($2.4
million) and the elimination of 121 positions ($1.9 million). General and
administrative expenses are expected to decrease as a result of the
implementation of this restructuring plan. Management expects such positive
effects beginning in the third quarter and increasing through the fourth quarter
of fiscal year 2000 with full realization of approximately $12.0 million
anticipated for fiscal year 2001. See Note B "Restructure Costs" to the Notes to
Consolidated Financial Statements for additional information. For the nine
months ended March 31, 1999, general and administrative expenses include merger
expenses totaling $30.1 million associated with the First Colorado Bancorp, Inc.
acquisition and the termination of the three employee stock ownership plans.
The Midland acquisition, which was accounted for under the purchase method of
accounting, contributed to the net increases in additional general and
administrative expenses for the nine months ended March 31, 2000. The AmerUs
acquisition, also accounted for as a purchase, contributed to a lesser extent to
the net increases for the nine months ended March 31, 2000. These acquisitions
result in increased personnel wages and benefits and costs of operating
additional branches, as well as other expenses incurred on an indirect basis
attributable to these acquisitions. General and administrative expenses also
increased for the nine months ended March 31, 2000 compared to 1999 due to
higher costs associated with the new data processing computer systems, higher
item processing costs from the customer deposit delivery system implemented in
the second quarter of last fiscal year and to decreases in deferred costs
associated with loan originations due to lower loan origination volumes.
25
<PAGE>
Amortization of Intangible Assets:
- ----------------------------------
Amortization of intangible assets totaled $3.7 million and $12.9 million,
respectively, for the three and nine months ended March 31, 2000, compared to
$4.4 million and $11.8 million, respectively, for the three and nine months
ended March 31, 1999. In the quarter ended March 31, 2000, purchase accounting
adjustments and the core value study relating to the Midland acquisition were
finalized. The net increase for the nine months ended March 31, 2000 compared to
March 31, 1999 is primarily due to the Midland acquisition consummated March 1,
1999.
Provision for Income Taxes:
- ---------------------------
For the three and nine months ended March 31, 2000, the provision for income
taxes totaled $14.2 million and $43.4 million, respectively, compared to $18.1
million and $50.2 million, respectively, for the three and nine months ended
March 31, 1999. The effective income tax rates for the three and nine months
ended March 31, 2000 were 34.8% and 34.7%, respectively, compared to 52.8% and
44.5%, respectively, for the three and nine months ended March 31, 1999. The
effective tax rates for all periods vary from the statutory rate primarily due
to the nondeductibility of amortization of intangible assets in relation to the
level of taxable income for the respective periods, increases in tax-exempt
securities and, for the nine months ended March 31, 1999, to the
nondeductibility of certain merger-related expenses and other nonrecurring
charges.
Cumulative Effect of Change in Accounting Principle:
- ----------------------------------------------------
Effective July 1, 1999, the Corporation adopted the provisions of Statement of
Position 98-5 "Reporting the Costs of Start-Up Activities" (SOP 98-5), which
requires that costs of start-up activities and organizational costs be expensed
as incurred. Prior to the adoption of this statement, these costs were
capitalized and amortized over periods ranging from five to 25 years. The effect
of adopting the provisions of SOP 98-5 was to record a charge of $1.776 million,
net of an income tax benefit of $978,000, or $.03 per diluted share, as a
cumulative effect of a change in accounting principle in the accompanying
consolidated statement of operations. These costs consist of organizational
costs primarily associated with the creation of a real estate investment trust
subsidiary and start-up costs of the proof of deposit department for processing
customer transactions following the complete conversion of the Corporation's
deposit system.
26
<PAGE>
Year 2000:
- ----------
The year 2000 posed important business issues regarding how existing application
software programs and operating systems, both internal and external, could
accommodate this date value. The Corporation did not experience any data
processing delays, mistakes or failures as a result of Year 2000 issues.
All of the significant computer programs of the Corporation that could have been
affected by this problem were provided by major third party vendors. The
Corporation completed the process of replacing/upgrading its 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. The total cost of the Year 2000 project is estimated to
approximate $14.0 million funded through cash flows from operations. Most of the
total project cost was capitalized since it involved the purchase of computer
systems, programs and equipment. During the three and nine months ended March
31, 2000, approximately $92,000 and $712,000, respectively, was expensed that
related to systems conversion costs, internal staff costs as well as consulting
and other Year 2000 expenses. For fiscal year 1999, approximately $4.4 million
was expensed relating to such items. In addition, during fiscal year 1998 the
Corporation expensed $4.3 million due to accelerated amortization of certain
computer systems and software necessitated by Year 2000 compliance and the
related planned systems conversions. The adjusted carrying amount of these
computer systems and software was depreciated until their disposal at the date
of conversion.
Item 3. QUANTITATIVE AND QUALITATIVE
------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
Information as of March 31, 2000 concerning the Corporation's exposure to market
risk, which has remained relatively unchanged from June 30, 1999, is
incorporated by reference from the text under the caption "Market Risk" in the
Form 10-K for the Corporation's fiscal year ended June 30, 1999.
27
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 5. Other Information
-----------------
On April 20, 2000, the Corporation announced that James A. Laphen,
President and Chief Operating Officer, will retire effective December
31, 2000.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). Exhibits:
Exhibit 27. Financial Data Schedules
(b). Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended
March 31, 2000.
28
<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 12, 2000 /s/ William A. Fitzgerald
------------ ----------------------------------------
William A. Fitzgerald, Chairman of the Board
and Chief Executive Officer (Duly Authorized
Officer)
Date: May 12, 2000 /s/ Gary L. Matter
------------ ----------------------------------------
Gary L. Matter, Senior Vice President,
Controller and Secretary
(Principal Accounting Officer)
29
<PAGE>
EXHIBIT INDEX
-------------
Exhibit 27. Financial Data Schedules
30
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UAUDITED
INTERIM FINANCIAL STATEMENTS AS OF AND FOR THE NINE MONTHS ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> MAR-31-2000
<EXCHANGE-RATE> 1
<CASH> 198,920
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,483
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 446,457
<INVESTMENTS-CARRYING> 1,821,118
<INVESTMENTS-MARKET> 1,768,608
<LOANS> 9,875,817
<ALLOWANCE> 78,128
<TOTAL-ASSETS> 13,299,647
<DEPOSITS> 7,443,009
<SHORT-TERM> 704,845
<LIABILITIES-OTHER> 215,124
<LONG-TERM> 3,995,355
0
0
<COMMON> 568
<OTHER-SE> 980,746
<TOTAL-LIABILITIES-AND-EQUITY> 13,299,647
<INTEREST-LOAN> 562,247
<INTEREST-INVEST> 126,163
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 688,410
<INTEREST-DEPOSIT> 242,103
<INTEREST-EXPENSE> 429,394
<INTEREST-INCOME-NET> 259,016
<LOAN-LOSSES> 10,460
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 200,806
<INCOME-PRETAX> 124,820
<INCOME-PRE-EXTRAORDINARY> 81,463
<EXTRAORDINARY> 0
<CHANGES> (1,776)
<NET-INCOME> 79,687
<EPS-BASIC> 1.36
<EPS-DILUTED> 1.36
<YIELD-ACTUAL> 2.75
<LOANS-NON> 63,829
<LOANS-PAST> 0
<LOANS-TROUBLED> 5,523
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 80,419
<CHARGE-OFFS> 15,912
<RECOVERIES> 4,328
<ALLOWANCE-CLOSE> 78,128
<ALLOWANCE-DOMESTIC> 5,337
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 72,791
</TABLE>
