UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
-----------------------------------
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _______
Commission File Number: No. 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 report) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
AVAILABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at February 11, 1998
- ----------------------------- --------------------------------
Common Stock, $0.01 Par Value 33,640,771 Shares
COMMERCIAL FEDERAL CORPORATION
------------------------------
FORM 10-Q
---------
INDEX
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________________________________________________________________
PART I - FINANCIAL INFORMATION Page Number
--------------------- -----------
Item 1. Financial Statements:
Consolidated Statement of Financial
Condition as of December 31, 1997
and June 30, 1997 3
Consolidated Statement of Operations for
the Three and Six Months Ended December
31, 1997 and 1996 4-5
Consolidated Statement of Cash Flows for
the Six Months Ended December 31, 1997
and 1996 6-7
Notes to Consolidated Financial Statements 8-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13-21
PART II. OTHER INFORMATION
-----------------
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE PAGE 24
________________________________________________________________
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
______________________________________________________________________________
(Dollars in thosuands) December 31, June 30,
ASSETS 1997 1997
______________________________________________________________________________
(Unaudited) (Audited)
Cash $ 27,591 $ 55,809
Investment securities available for sale,
at fair value 95,974 19,930
Mortgage-backed securiites available for
sale, at fair value 191,731 195,766
Loans held for sale, net 57,935 68,658
Investment securities held to maturity
(fair value of $349,758 and $377,096) 349,039 379,127
Mortgage-backed securities held to maturity
(fair value of $843,711 and $829,929) 840,214 829,997
Loans receivable, net of allowances of
$47,975 and $48,390 5,249,151 5,190,081
Federal Home Loan Bank stock 94,538 72,452
Interest receivable, net of reserves of $198
and $183 45,315 44,521
Real estate, net 17,014 19,728
Premises and equipment, net 85,369 84,116
Prepaid expenses and other assets 90,397 88,302
Goodwill and core value of deposits, net of
accumulated amortization of $23,508 and
$20,404 45,074 48,178
______________________________________________________________________________
Total Assets $7,189,342 $7,096,665
______________________________________________________________________________
LIABILITIES AND STOCKHOLDERS' EQUITY
______________________________________________________________________________
Liabilities:
Deposits $4,248,932 $4,378,919
Advances from Federal Home Loan Bank 1,716,829 1,415,506
Securities sold under agreements to
repurchase 564,294 639,294
Other borrowings 102,304 128,982
Interest payable 28,193 24,992
Other liabilities 70,369 82,866
______________________________________________________________________________
Total Liabilities 6,730,921 6,670,559
______________________________________________________________________________
Commitments and contingencies -- --
______________________________________________________________________________
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized; none issued -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 32,598,970 and 32,329,255 shares
issued and outstanding 326 216
Additional paid-in capital 147,316 147,857
Retained earnings 309,984 278,450
Unrealized holding gain (loss) on securities
available for sale, net 795 (417)
______________________________________________________________________________
Total Stockholders' Equity 458,421 426,106
______________________________________________________________________________
Total Liabilities and Stockholders' Equity $7,189,342 $7,096,665
______________________________________________________________________________
Common Stock issued and outstanding at June 30, 1997, restated
to reflect the three-for-two stock split effective December 15,
1997.
See accompanying Notes to Consolidated Financial Statements.
3
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
__________________________________________________________________________________________
(Dollars in Thousands Three Months Ended Six Months Ended
Except Per Share Data) December 31, December 31,
--------------------- --------------------
1997 1996 1997 1996
__________________________________________________________________________________________
Interest Income:
Loans receivable $107,198 $102,254 $214,181 $200,801
Mortgage-backed securities 16,601 19,212 33,393 38,427
Investment securities 9,879 6,281 18,456 11,305
__________________________________________________________________________________________
Total interest income 133,678 127,747 266,030 250,533
Interest Expense:
Deposits 53,322 56,284 107,722 111,074
Advances from Federal Home Loan Bank 26,264 16,876 49,268 36,254
Securities sold under agreements to
repurchase 8,253 10,184 17,628 16,547
Other borrowings 2,284 2,106 4,855 4,069
__________________________________________________________________________________________
Total interest expense 90,123 85,450 179,473 167,944
Net Interest Income 43,555 42,297 86,557 82,589
Provision for Loan Losses (2,000) (2,108) (4,100) (3,766)
__________________________________________________________________________________________
Net Interest Income After Provision
for Loan Losses 41,555 40,189 82,457 78,823
Other Income:
Loan servicing fees 7,793 7,444 15,565 14,771
Retail fees and charges 4,617 3,993 8,984 7,916
Real estate operations 971 918 797 1,134
Gain on sales of loans 132 22 364 127
Gain on sale of mortgage-backed
securities 1,026 100 1,026 100
Other operating income 3,048 2,265 6,969 4,297
__________________________________________________________________________________________
Total other income 17,587 14,742 33,705 28,345
Other Expense:
General and administrative expenses -
Compensation and benefits 12,192 11,498 24,343 22,079
Occupancy and equipment 4,439 3,989 8,681 7,992
Data processing 2,459 2,182 4,786 4,286
Regulatory insurance and assessments 942 2,287 1,887 5,034
Advertising 2,467 1,963 4,962 3,613
Other operating expenses 7,635 6,462 14,580 14,699
__________________________________________________________________________________________
General and administrative expenses
before Federal deposit insurance
special assessment 30,134 28,381 59,239 57,703
Federal deposit insurance special
assessment -- -- -- 27,062
__________________________________________________________________________________________
Total general and administrative
expenses 30,134 28,381 59,239 84,765
Amortization of goodwill and core
value of deposits 1,557 2,740 3,104 5,125
__________________________________________________________________________________________
Total other expense 31,691 31,121 62,343 89,890
Income Before Income Taxes and
Extraordinary Items 27,451 23,810 53,819 17,278
Provision for Income Taxes 9,691 8,320 18,951 5,838
__________________________________________________________________________________________
Income Before Extraordinary Items 17,760 15,490 34,868 11,440
Extraordinary Items - Loss on Early
Retirement of Debt, Net of Tax Benefit
of $316 -- (583) -- (583)
__________________________________________________________________________________________
Net Income $ 17,760 $14,907 $34,868 $10,857
__________________________________________________________________________________________
4
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
(UNAUDITED)
__________________________________________________________________________________________
(Dollars in Thousands Three Months Ended Six Months Ended
Except Per Share Data) December 31, December 31,
--------------------- --------------------
1997 1996 1997 1996
__________________________________________________________________________________________
Weighted average number of common shares
outstanding used in basic earnings per
share calculation 32,451,886 32,203,504 32,404,454 32,467,709
Add assumed exercise of outstanding
stock options as adjustments for
dilutive securities 546,908 493,392 565,657 466,111
----------- ----------- ---------- ----------
Weighted average number of common
shares outstanding used in diluted
earnings per share calculation 32,998,794 32,696,896 32,970,111 32,933,820
__________________________________________________________________________________________
Basic Earnings Per Share:
Income before extraordinary items $ .55 $ .48 $ 1.08 $ .35
Extraordinary items, net of tax
benefit -- (.02) -- (.02)
----------- ----------- ---------- ----------
Net income $ .55 $ .46 $ 1.08 $ .33
=========== =========== ========== ==========
Diluted Earnings Per Share:
Income before extraordinary items $ .54 $ .48 $ 1.06 $ .35
Extraordinary items, net of tax
benefit -- (.02) -- (.02)
----------- ----------- ---------- ----------
Net income $ .54 $ .46 $ 1.06 $ .33
=========== =========== ========== ==========
__________________________________________________________________________________________
Dividends declared $ .055 $ .047 $ .102 $ .092
__________________________________________________________________________________________
All per share data restated to reflect the three-for-two stock
split effective December 15, 1997.
See accompanying Notes to Consolidated Financial Statements.
5
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
______________________________________________________________________________
(Dollars in thousands) Six Months Ended
December 31,
------------------------
1997 1996
______________________________________________________________________________
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 34,868 $ 10,857
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Extraordinary items, net of tax benefit -- 583
Amortization of goodwill and core value
of deposits 3,104 5,125
Provision for loss on loans and real estate 4,198 4,141
Depreciation and amortization 4,086 3,954
Accretion of deferred discounts and fee, net 435 (2,416)
Amortization of mortgage servicing rights 4,170 3,903
Amortization of deferred compensation on
restricted stock and premiums on other
borrowings 488 546
Gain on sales of real estate, loans and
loan servicing rights, net (1,712) (1,456)
Gain on sales of mortgage-backed securities (1,026) (100)
Stock dividends from Federal Home Loan Bank (3,277) (2,367)
Proceeds from the sales of loans 250,222 345,650
Origination of loans for resale (46,815) (127,741)
Purchases of loans for resale (193,372) (228,414)
Increase in interest receivable (794) (107)
Decrease in interest payable and other
liabilities (13,314) (6,727)
Other items, net (9,469) (14,150)
--------- ---------
Total adjustments (3,076) (19,576)
--------- ---------
Net cash provided (used) by operating
activities 31,792 (8,719)
______________________________________________________________________________
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans (397,338) (367,770)
Repayment of loans, net of originations 241,663 206,678
Principal repayment of mortgage-backed
securities held to maturity 86,302 66,783
Purchase of mortgage-backed securities
available for sale (40,175) --
Proceeds from sale of mortgage-backed
securities available for sale 31,719 17,447
Principal repayments of mortgage-backed
securities available for sale 14,994 17,197
Maturities and repayments of investment
securities held to maturity 115,757 47,198
Purchases of investment securities held to
maturity (85,538) (64,906)
Purchases of investment securities available
for sale (78,674) --
Maturities and repayments of investment
securities available for sale 3,000 1,000
Purchases of mortgage loan servicing rights (4,375) (3,264)
Proceeds from sale of mortgage loan servicing
rights 412 --
Purchases of Federal Home Loan Bank stock (18,809) (1,670)
Proceeds from sale of Federal Home Loan Bank
stock -- 9,501
Proceeds from sale of real estate 11,059 8,374
Payments to acquire real estate (2,004) (555)
Acquisitions, net of cash received -- 7,339
Purchases of premises and equipment, net (5,339) (3,746)
Other items, net (2,115) (690)
--------- ---------
Net cash used by investing activities (129,461) (61,084)
______________________________________________________________________________
6
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
______________________________________________________________________________
(Dollars in thousands) Six Months Ended
December 31,
------------------------
1997 1996
______________________________________________________________________________
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in deposits $(129,987) $ (41,311)
Proceeds from Federal Home Loan Bank advances 588,000 65,000
Repayment of Federal Home Loan Bank advances (286,730) (226,385)
Proceeds from securities sold under agreements
to repurchase 100,000 375,000
Repayment of securities sold under agreements
to repurchase (175,000) (85,000)
Proceeds from issuances of other borrowings -- 94,500
Repayment of other borrowings (26,716) (67,005)
Payment of cash dividends on common stock (3,019) (2,895)
Repurchase of common stock -- (49,324)
Issuance of common stock 2,928 880
Other items, net (25) (14)
--------- ---------
Net cash provided by financing activities 69,451 63,446
______________________________________________________________________________
CASH AND CASH EQUIVALENTS:
Decrease in net cash position (28,218) (6,357)
Balance, beginning of year 55,809 35,827
--------- ---------
Balance, end of period $ 27,591 $ 29,470
========= =========
______________________________________________________________________________
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for-
Interest expense $ 176,074 $ 169,863
Income taxes, net 23,270 1,930
Non-cash investing and financing activities-
Loans exchanged for mortgage-backed securities 97,395 26,991
Loans transferred to real estate 2,861 8,674
Loans to facilitate the sale of real estate 14 107
Common stock issued in connection with stock
options exercised 2,127 --
Common stock tendered and withheld in connection
with stock options exercised (5,855) --
______________________________________________________________________________
See accompanying Notes to Consolidated Financial Statements.
7
COMMERCIAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1997
(Unaudited)
________________________________________________________________
A. BASIS OF CONSOLIDATION AND PRESENTATION:
---------------------------------------
The unaudited consolidated financial statements are prepared on
an accrual basis and include the accounts of Commercial Federal
Corporation (the Corporation) and its wholly-owned subsidiary,
Commercial Federal Bank, a Federal Savings Bank (the Bank), and
all majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
The accompanying interim consolidated financial statements have
not been audited by independent auditors. However, in the
opinion of management, all adjustments (consisting only of
normal recurring adjustments) considered necessary to fairly
present the financial statements have been included. The
consolidated financial statements should be read in conjunction
with the audited financial statements and notes thereto included
in the Corporation's June 30, 1997, Annual Report to
Stockholders. The results of operations for the three and six
month periods ended December 31, 1997, are not necessarily
indicative of the results which may be expected for the entire
fiscal year 1998. Certain amounts in the prior fiscal year
periods have been reclassified for comparative purposes.
B. THREE-FOR-TWO STOCK SPLIT:
-------------------------
On November 17, 1997, the Board of Directors of the Corporation
declared a three-for-two stock split to be effected in the form
of a 50 percent stock dividend to stockholders of record on
November 28, 1997. Par value remained at $.01 per share. The
stock dividend, distributed on December 15, 1997, totaled
10,867,968 shares of common stock and was accounted for by a
transfer of $108,680 to common stock from additional paid-in
capital. Also on December 15, 1997, fractional shares resulting
from the stock split were paid in cash totaling $24,366 based on
the closing price on the record date. All references to the
number of shares, per share amounts and stock prices for all
periods presented have been adjusted on a retroactive basis to
reflect the effect of the stock split.
C. PENDING ACQUISITIONS:
--------------------
During the six months ended December 31, 1997, the Corporation
entered into definitive agreements to acquire four financial
institutions: Liberty Financial Corporation, Mid Continent
Bancshares, Inc., First National Bank Shares, LTD and Perpetual
Midwest Financial, Inc. Subsequent to December 31, 1997, the
Corporation entered into a definitive agreement on February 11,
1998, to acquire AmerUs Bank. These five acquisitions will add
115 branches (before any consolidation) to the Corporation's
existing network and approximately $3.1 billion in total assets,
approximately $2.3 billion in deposits and approximately $1.9
billion in loans serviced for others. See Note G for additional
information regarding the consummated acquisitions of First
National Bank Shares, LTD (completed January 30, 1998) and
Liberty Financial Corporation (completed February 13, 1998), and
Note H for additional information regarding the pending AmerUs
Bank acquisition.
MID CONTINENT BANCSHARES, INC. On September 2, 1997, the
Corporation entered into a reorganization and merger agreement
with Mid Continent Bancshares, Inc. (Mid Continent), parent
company of Mid-Continent Federal Savings Bank. Under the terms
of the merger agreement, the Corporation will acquire in a tax-
free reorganization all 1,998,149 outstanding shares of Mid
Continent's common stock in exchange for the Corporation's
common stock. Based on the Corporation's closing price on
December 31, 1997, of $35.5625 per share, the transaction would
result in the exchange of approximately 2,605,386 shares of the
Corporation's common stock with an aggregate value of
approximately $92,654,000.
At December 31, 1997, Mid Continent had total assets of
approximately $407,600,000, deposits of approximately
$262,400,000 and stockholders' equity of approximately
$41,000,000. Mid Continent operates ten branches located in
Kansas. This pending acquisition is anticipated to close on or
about February 27, 1998, and is expected to be accounted for as
a pooling of interests.
8
C. PENDING ACQUISITIONS (Continued):
-------------------------------
PERPETUAL MIDWEST FINANCIAL, INC. On December 15, 1997, the
Corporation entered into a reorganization and merger agreement
with Perpetual Midwest Financial, Inc. (Perpetual), parent
company of Perpetual Savings Bank, FSB. Under the terms of the
merger agreement, the Corporation will acquire in a tax-free
reorganization all 1,891,000 outstanding shares of Perpetual's
common stock in exchange for the Corporation's common stock.
Perpetual's shareholders will receive .8636 shares of the
Corporation's common stock for each outstanding share of
Perpetual's common stock. Based on the Corporation's closing
price on December 31, 1997, of $35.5625 per share, the
transaction would result in the exchange of approximately
1,633,067 shares of the Corporation's common stock with a total
aggregate value of approximately $58,076,000.
At December 31, 1997, Perpetual had total assets of
approximately $392,100,000, deposits of approximately
$313,900,000, and stockholders' equity of approximately
$35,000,000. Perpetual operates five branches located in Iowa.
This pending acquisition, which is subject to regulatory
approvals, Perpetual shareholders' approval and other
conditions, is expected to be completed by June 30, 1998. This
acquisition is expected to be accounted for as a pooling of
interests.
D. COMMITMENTS AND CONTINGENCIES:
-----------------------------
At December 31, 1997, the Corporation had issued commitments,
excluding undisbursed portions of loans in process, of
approximately $212,220,000 as follows: $147,533,000 to originate
loans, $44,488,000 to purchase loans and $20,199,000 to provide
consumers unused lines of credit. Loan commitments, which are
funded subject to certain limitations, extend over various
periods of time. Generally, unused loan commitments are
canceled upon expiration of the commitment term as outlined in
each individual contract. These outstanding loan commitments to
extend credit do not necessarily represent future cash
requirements since many of the commitments may expire without
being drawn upon. Loans sold subject to recourse provisions
totaled approximately $26,778,000, which represents the total
potential credit risk associated with these particular loans.
Such credit risk would, however, be offset by the value of the
single-family residential properties which collateralize these
loans.
The Corporation is subject to a number of lawsuits and claims
for various amounts which arise out of the normal course of its
business. In the opinion of management, the disposition of
claims currently pending will not have a material adverse effect
on the Corporation's financial position or results of
operations.
On September 13, 1994, the Bank commenced litigation against the
United States in the United States Court of Federal Claims
seeking to recover monetary relief for the government's refusal
to honor certain contracts between the Bank and the Federal
Savings and Loan Insurance Corporation. The suit alleges that
such governmental action constitutes breach of contract and an
unlawful taking of property by the United States without just
compensation or due process in violation of the Constitution of
the United States. The litigation status and process of the
multiple legal actions, such as that instituted by the Bank with
respect to supervisory goodwill and regulatory capital credits,
make the value of the claims asserted by the Bank uncertain as
to ultimate outcome and contingent on a number of factors and
future events which are beyond the control of the Bank, both as
to substance, timing and the dollar amount of damages which may
be awarded to the Bank if it finally prevails in this
litigation.
9
E. CURRENT ACCOUNTING PRONOUNCEMENTS:
--------------------------------
EARNINGS PER SHARE:
The Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 128, entitled "Earnings Per Share"
(SFAS No. 128) effective December 15, 1997, and accordingly,
restated all prior period earnings per share to conform with
SFAS No. 128. This statement establishes standards for
computing and presenting earnings per share and simplified the
standards for computing earnings per share previously found in
Accounting Principles Board Opinion No. 15, "Earnings Per
Share." SFAS No. 128 supersedes Accounting Principles Board
Opinion No. 15 and its interpretations and other accounting
pronouncements. The statement replaces the presentation of
primary EPS with a presentation of basic EPS. It also requires
dual presentation with equal prominence of basic and diluted EPS
for income from continuing operations and for net income on the
face of the income statement for all entities with complex
capital structures and requires a reconciliation of the
numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. Basic
EPS excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
REPORTING COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 130
entitled "Reporting Comprehensive Income" (SFAS No. 130). This
statement establishes standards for reporting and display of
comprehensive income and its components in a full set of
financial statements. Comprehensive income is the total of
reported net income and all other revenues, expenses, gains and
losses that under generally accepted accounting principles
bypass reported net income. SFAS No. 130 requires that
comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial
statements with the aggregate amount of comprehensive income
reported in that same financial statement. SFAS No. 130 permits
the statement of changes in stockholders' equity to be used to
meet this requirement. Companies are encouraged, but not
required, to display the components of other comprehensive
income below the total for net income in the statement of
operations or in a separate statement of comprehensive income.
Companies are also required to display the cumulative total of
other comprehensive income for the period as a separate
component of equity in the statement of financial position.
This statement is effective for fiscal years beginning after
December 15, 1997, or July 1, 1998, for the Corporation, with
earlier application permitted. Companies are also required to
report comparative totals for comprehensive income in interim
reports. Management of the Corporation will adopt the provisions
of this statement, which are only of a disclosure nature,
effective July 1, 1998.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION:
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 entitled "Disclosures About Segments of an
Enterprise and Related Information" (SFAS No. 131). This
statement supersedes SFAS No. 14, "Financial Reporting for
Segments of a Business Enterprise," and utilizes the "management
approach" for segment reporting. The management approach is
based on the way that the chief operating decision maker
organizes segments within a company for making operating
decisions and assessing performance. Reportable segments are
based on any manner in which management disaggregates its
company such as by products and services, geography, legal
structure and management structure. SFAS No. 131 requires
disclosures for each segment that are similar to those required
under current standards with the addition of quarterly
disclosure requirements and more specific and detailed
geographic disclosures especially by countries as opposed to
broad geographic regions. This statement also requires
descriptive information about the way the operating segments
were determined, the products/services provided by the operating
segments, the differences between the measurements used in
reporting segment information and those used in the general
purpose financial statements, and the changes in the measurement
of segment amounts from period to period.
The provisions of SFAS No. 131 are effective for fiscal years
beginning after December 15, 1997, or July 1, 1998, for the
Corporation, with earlier application permitted. SFAS No. 131
does not need to be applied to interim statements in the initial
year of application but such comparative information will be
required in interim statements for the second year. Comparative
information for earlier years must be restated in the initial
year of application. Management of the Corporation will adopt
the provisions of this statement, which are only of a disclosure
nature, effective July 1, 1998.
10
F. REGULATORY CAPITAL REQUIREMENTS:
-------------------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that,
if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The
regulations require the Bank to meet specific capital adequacy
guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's
capital classification is also subject to qualitative judgments
by the regulators about components, risk weightings and other
factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Bank to maintain minimum amounts
and ratios as set forth in the following table of tangible, core
and total risk-based capital. Prompt Corrective Action
provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific
supervisory actions as capital levels decrease. To be
considered well-capitalized under the regulatory framework for
Prompt Correction Action provisions under FDICIA, the Bank must
maintain minimum Tier I leverage, Tier I risk-based and total
risk-based capital ratios as set forth in the following table.
At December 31, 1997, and June 30, 1997, the Bank exceeded the
minimum requirements for the well-capitalized category.
The following presents the Bank's regulatory capital levels and
ratios relative to its minimum capital requirements:
____________________________________________________________________________________
(Dollars in Thousands)
As of December 31, 1997
---------------------------------
Actual Capital Required Capital
--------------- ----------------
Amount Ratio Amount Ratio
____________________________________________________________________________________
OTS capital adequacy:
Tangible capital $480,274 6.69% $107,652 1.50%
Core capital 491,026 6.83 215,627 3.00
Risk-based capital 528,547 14.40 293,688 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 491,026 6.83 359,378 5.00
Tier 1 risk-based capital 491,026 13.38 220,266 6.00
Total risk-based capital 528,547 14.40 367,110 10.00
____________________________________________________________________________________
____________________________________________________________________________________
(Dollars in Thousands)
As of June 30, 1997
---------------------------------
Actual Capital Required Capital
--------------- ----------------
Amount Ratio Amount Ratio
____________________________________________________________________________________
OTS capital adequacy:
Tangible capital $446,291 6.31% $106,079 1.50%
Core capital 458,087 6.47 212,511 3.00
Risk-based capital 494,760 13.81 286,597 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 458,087 6.47 354,185 5.00
Tier 1 risk-based capital 458,087 12.79 214,948 6.00
Total risk-based capital 494,760 13.81 358,246 10.00
____________________________________________________________________________________
As of December 31, 1997, the most recent notification from the
OTS categorized the Bank as "well-capitalized" under the
regulatory framework for Prompt Corrective Action provisions
under FDICIA. There are no conditions or events since such
notification that management believes have changed the Bank's
classification.
11
G. SUBSEQUENT EVENTS - CONSUMMATED ACQUISITIONS:
--------------------------------------------
FIRST NATIONAL BANK SHARES, LTD. On January 30, 1998, the
Corporation consummated its acquisition of First National Bank
Shares, LTD (First National), parent company of First United
National Bank and Trust Company. Under the terms of the merger
agreement, all of the outstanding shares of First National's
common stock were exchanged for 992,842 shares of the
Corporation's common stock. Based on the Corporation's closing
price on January 30, 1998, of $32.50 per share, the exchange of
the Corporation's common stock results in a total aggregate
value approximating $32,267,000.
At December 31, 1997, before purchase accounting adjustments,
First National had assets of approximately $155,200,000,
deposits of approximately $130,600,000 and stockholders' equity
of approximately $11,200,000. First National operated seven
branches located in Kansas. This acquisition will be accounted
for as a purchase with core value of deposits resulting from
this transaction to be amortized on an accelerated basis over a
period not to exceed 10 years and goodwill, if any, to be
amortized on a straight line basis over a period not to exceed
20 years.
LIBERTY FINANCIAL CORPORATION. On February 13, 1998, the
Corporation consummated its acquisition of Liberty Financial
Corporation (Liberty), a privately held commercial bank and
thrift holding company. Under the terms of the merger
agreement, the Corporation acquired in a tax-free reorganization
all 8,748,500 outstanding shares of Liberty's common stock in
exchange for .459 shares of the Corporation's common stock.
Based on the Corporation's closing stock price on February 13,
1998, of $33.9375 per share, the transaction results in the
exchange of approximately 4,015,561 shares of the Corporation's
common stock with an aggregate value of approximately
$136,278,000.
At December 31, 1997, Liberty had assets of approximately
$670,100,000, deposits of approximately $582,000,000 and
stockholders' equity of approximately $50,300,000. Liberty
operated 38 branches in Iowa and seven in the metropolitan area
of Tucson, Arizona. This acquisition is expected to be accounted
for as a pooling of interests.
H. SUBSEQUENT EVENT - PENDING ACQUISITION:
--------------------------------------
AMERUS BANK. On February 11, 1998, the Corporation entered
into a stock purchase agreement to acquire AmerUs Bank, a
wholly-owned subsidiary of AmerUs Group Co. AmerUs Bank is a
federally chartered savings bank headquartered in Des Moines,
Iowa. Under the terms of the agreement, the Corporation will
acquire through a taxable acquisition all of the outstanding
shares of AmerUs Bank's common stock. As of February 11, 1998,
the total purchase consideration approximates $200,884,000 and
consists of (i) cash totaling approximately $95,750,000 (subject
to certain adjustments), (ii) a one-year promissory note for
$40,000,000, and (iii)either 1,915,709 shares of the
Corporation's common stock (registered or non-registered) or the
cash equivalent of such shares subject to election by the
Corporation. The cash equivalent payment in lieu of common
stock is subject to the election of the Corporation and will be
based on the average New York Stock Exchange closing price for
the five trading days ending on, and including, the third
trading day immediately preceding the closing date of the
acquisition. If the shares of the Corporation's common stock
have not been registered pursuant to an effective registration
statement as of closing, the Corporation must execute a
Registration Rights Agreement with AmerUs Group Co. on or before
closing.
At December 31, 1997, AmerUs Bank had total assets of
approximately $1.5 billion, deposits of approximately $963.4
million and stockholder's equity of approximately $101.1 million
(before a $5.0 million cash infusion by AmerUs Group Co. prior
to closing). AmerUs Bank operates 48 branches located in Iowa
(27), Missouri (8), Nebraska (6), Kansas (4), Minnesota (2) and
South Dakota (1). This pending acquisition, which is subject to
regulatory approvals and certain other conditions, is expected
to close in the third quarter of calendar year 1998. This
pending acquisition is expected to be accounted for as a
purchase with core value of deposits resulting from this
transaction to be amortized on an accelerated basis over a
period not to exceed 10 years, the non-compete covenant to be
amortized on a straight line basis over a period not to exceed
three years and goodwill to be amortized on a straight line
basis over a period not to exceed 20 years.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES:
- -------------------------------
The Corporation's principal asset is its investment in the
capital stock of the Bank, and because it does not generate any
significant revenues independent of the Bank, the Corporation's
liquidity is dependent on the extent to which it receives
dividends from the Bank. The Bank's ability to pay dividends to
the Corporation is dependent on its ability to generate earnings
and is subject to a number of regulatory restrictions and tax
considerations. Under capital distribution regulations of the
OTS, a savings institution that, immediately prior to, and on a
pro forma basis after giving effect to, a proposed dividend, has
total capital that is at least equal to the amount of its fully
phased-in capital requirements (a "Tier I Association") is
permitted to pay dividends during a calendar year in an amount
equal to the greater of (i) 75.0% of its net income for the
recent four quarters, or (ii) 100.0% of its net income to date
during the calendar year plus an amount that would reduce by
one-half the amount by which its ratio of total capital to
assets exceeded its fully phased-in risk-based capital ratio
requirement at the beginning of the calendar year. At December
31, 1997, the Bank qualified as a Tier I Association, and would
be permitted to pay an aggregate amount approximating $142.0
million in dividends under these regulations. Should the Bank's
regulatory capital fall below certain levels, applicable law
would require prior approval by the OTS of such proposed
dividends and, in some cases, would prohibit the payment of
dividends.
At December 31, 1997, the cash of Commercial Federal Corporation
(the parent company) totaled $22.1 million. On August 11, 1997,
the Corporation paid down its five-year promissory term note by
$21.0 million, and paid $1.0 million as scheduled principal
payments on September 30, 1997 and December 31, 1997, resulting
in a remaining principal balance of $3.0 million due September
30, 1998. Due to the parent company's limited independent
operations, management believes that its cash balance at
December 31, 1997, is currently sufficient to meet operational
needs. However, the parent company's ability to make future
interest and principal payments on its $50.0 million of 7.95%
fixed-rate subordinated extendible notes due December 1, 2006
(the Notes), on the $3.0 million promissory term note due
September 30, 1998, and on its $46.4 million of 9.375%
fixed-rate junior subordinated debentures due May 15, 2027 (the
Debentures), is dependent upon its receipt of dividends from the
Bank. Accordingly, for the three and six months ended December
31, 1997, dividends totaling $5.012 million and $8.587 million,
respectively, were declared by the Bank to be paid to the parent
company. These dividends from the Bank were paid to cover (i)
interest payments totaling $3.278 million on the parent
company's debt, (ii) principal payments of $2.0 million on the
parent company's promissory term note and (iii) the quarterly
common stock cash dividends totaling $3.309 million payable by
the parent company to its common stock shareholders through
December 31, 1997. The Bank will continue to pay dividends to
the parent company, pursuant to regulatory restrictions, to
cover the cash dividends on common stock that the parent company
intends to continue to pay on a quarterly basis and on future
principal and interest payments on the parent company's debt.
Dividends totaling $29.667 million were paid by the Bank to the
parent company during the six months ended December 31, 1996.
The parent company also receives cash from the exercise of stock
options and the sale of common stock under its employee benefit
plans, as well as from the Bank for income tax benefits from
operating losses of the parent company as provided in the
corporate tax sharing agreement.
The Corporation's primary sources of funds are (i) deposits,
(ii) principal repayments on loans, mortgage-backed and
investment securities, (iii) advances from the Federal Home Loan
Bank (FHLB) of Topeka, (iv) cash generated from operations and
(v) securities sold under agreements to repurchase. As
reflected in the Consolidated Statement of Cash Flows, net cash
flows provided by operating activities totaled $31.8 million for
the six months ended December 31, 1997 and net cash flows used
by operating activities totaled $8.7 million for the six months
ended December 31, 1996. Amounts fluctuate from period to
period primarily as a result of mortgage banking activity
relating to the purchase and origination of loans for resale and
the subsequent sale of such loans.
Net cash flows used by investing activities totaled $129.5
million and $61.1 million, respectively, for the six months
ended December 31, 1997 and 1996. Amounts fluctuate from period
to period primarily as a result of (i) principal repayments on
loans and mortgage-backed securities and (ii) the purchase and
origination of loans, mortgage-backed and investment
securities. The acquisitions of First National, Liberty, Mid
Continent and Perpetual (all scheduled to close during fiscal
year 1998) will have no material effect on liquidity, except for
the cash outlays relating to nonrecurring merger related costs,
since such transactions are structured to be consummated in an
exchange of common stock between the Corporation and these
respective financial institutions.
13
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- -------------------------------------------
Net cash flows provided by financing activities totaled $69.5
million and $63.4 million, respectively, for the six months
ended December 31, 1997 and 1996. Advances from the FHLB have
been the primary sources to balance the Corporation's funding
needs during each of the periods presented. The Corporation
experienced net decreases in retail deposits of $130.0 million
and $41.3 million, respectively, for the six months ended
December 31, 1997 and 1996. These decreases in deposits are
primarily due to depositors leaving for higher interest rates.
For the three months ended September 30, 1997, retail deposits
decreased $120.0 million; therefore, the Corporation does not
anticipate such outflows to continue as experienced during the
three months ended September 30, 1997. In addition, during the
six months ended December 31, 1996, the Corporation utilized
securities sold under agreements to repurchase primarily for
liquidity and asset liability management purposes. Also, during
the six months ended December 31, 1996, the Corporation borrowed
$28.0 million to partially finance the repurchase on August 21,
1996, of 2,812,725 shares of the Corporation's common stock. As
previously discussed, such note now has a principal balance of
$3.0 million due September 30, 1998. In addition, the
Corporation's $40.25 million 10.25% subordinated debt and $6.9
million 10% senior notes were paid in full in December 1996 from
the proceeds of the Corporation's $50.0 million 7.95%
subordinated extendible notes due December 1, 2006.
The Corporation will continue to grow its franchise through an
ongoing program of selective acquisitions of other financial
institutions, as well as through internal growth. The
Corporation has considered and will continue to consider
possible mergers with and acquisitions of other selected
financial institutions. Accordingly, during the six months
ended December 31, 1997, the Corporation entered into merger
agreements with Liberty, Mid Continent, First National and
Perpetual. See Notes B and G in the Notes to the Consolidated
Financial Statements for additional information on these pending
and recently consummated acquisitions. In addition, subsequent
to December 31, 1997, the Corporation on February 11, 1998,
entered into a stock purchase agreement to acquire AmerUs Bank
(see Note H). Such acquisitions present the Corporation with
the opportunity to further expand its retail network in its
existing markets; and to increase its earnings potential by
increasing its mortgage and consumer loan volumes funded by
deposits which generally bear lower rates of interest than
alternative sources of funds. Acquisition candidates are
selected based on the extent to which the candidate can enhance
the Corporation's retail presence in new or existing markets and
complement the Corporation's present retail network.
At December 31, 1997, the Corporation had issued commitments
totaling approximately $212.2 million to fund and purchase loans
as follows: $30.1 million of single-family adjustable-rate
mortgage loans, $123.9 million of single-family fixed-rate
mortgage loans, $20.2 million of consumer loan lines of credit
and $38.0 million of commercial real estate loans. These
outstanding loan commitments to extend credit in order to
originate loans or fund consumer loan lines of credit do not
necessarily represent future cash requirements since many of the
commitments may expire without being drawn. The Corporation
expects to fund these commitments, as necessary, from the
sources of funds previously described.
The maintenance of an appropriate level of liquid resources to
meet not only regulatory requirements but also to provide
funding necessary to meet the Corporation's current business
activities and obligations is an integral element in the
management of the Corporation's assets. The Corporation is
required by federal regulation to maintain a minimum average
daily balance of cash and certain qualifying liquid investments
equal to 5.0% of the aggregate of the prior month's daily
average savings deposits and short-term borrowings. The
Corporation's liquidity ratio was 5.64% at December 31, 1997.
Liquidity levels will vary depending upon savings flows, future
loan fundings, cash operating needs, collateral requirements and
general prevailing economic conditions. The Corporation does
not foresee any difficulty in meeting its liquidity
requirements.
RESULTS OF OPERATIONS:
- ---------------------
Net income for the three months ended December 31, 1997, was
$17.8 million, or $.54 per diluted share ($.55 per basic share),
compared to net income of $14.9 million, or $.46 per diluted and
basic share (including an after-tax loss on early retirement of
debt totaling $583,000, or $.02 loss per diluted share,
classified as an extraordinary item) for the three months ended
December 31, 1996. The increase in net income for the three
months ended December 31, 1997, compared to the three months
ended December 31, 1996, is primarily due to net increases of
$2.8 million in total other income and $1.4 million in net
interest income after provision for loan losses, a reduction of
$1.2 million in amortization expense of intangible assets and
the extraordinary loss on early retirement of debt totaling
$583,000 recorded in the prior fiscal year quarter. These
increases to net income were partially offset by increases of
$1.7 million in general and administrative expenses and $1.4
million in provision for income taxes.
Net income for the six months ended December 31, 1997, was $34.9
million, or $1.06 per diluted share ($1.08 per basic share),
compared to net income of $10.9 million, or $.33 per diluted and
basic share ( including an after-tax loss on early retirement of
debt totaling $583,000, or $.02 loss per diluted share,
classified as an extraordinary item) for the six months ended
December 31, 1996. The increase in net income for the six
months ended December 31, 1997, compared to the six months ended
December 31, 1996, is primarily due to a $27.1 million
nonrecurring Federal deposit insurance assessment recorded in
fiscal year 1997, net increases of $5.4 million in total other
income and $3.6 million in net interest income after provision
for loan losses, a net reduction of $2.0 million in amortization
expense of intangible assets and the extraordinary loss on early
retirement of debt totaling $583,000 recorded in the prior
fiscal year. These increases to income were partially offset by
net increases of $13.1 million in the provision for income taxes
and $1.5 million in general and administrative expenses.
14
Net Interest Income:
- -------------------
Net interest income was $43.6 million for the three months ended
December 31, 1997, compared to $42.3 million for the three
months ended December 31, 1996, resulting in an increase of $1.3
million, or 3.0%. Net interest income was $86.6 million for the
six months ended December 31, 1997, compared to $82.6 million
for the six months ended December 31, 1996, resulting in an
increase of $4.0 million, or 4.8%. The interest rate spread was
2.41% at December 31, 1997, compared to 2.44% at December 31,
1996, a decrease of three basis points. During the three months
ended December 31, 1997 and 1996, interest rate spreads were
2.36% and 2.45%, respectively, a decrease of nine basis points;
and the yield on interest-earning assets was 2.52% and 2.57%
over the same respective periods of time. Interest rate spreads
also decreased seven basis points from 2.43% to 2.36% during the
six months ended December 31, 1997, compared to December 31,
1996. The interest rate spreads were lower for the current
fiscal year periods compared to the prior fiscal year periods
primarily due to increases of four and five basis points,
respectively, in rates on total interest-bearing liabilities,
primarily advances from the FHLB and savings deposits. Net
interest income increased for the three and six months ended
December 31, 1997, over the three and six months ended December
31, 1996, due to the net earnings balance increasing by $51.1
million and $43.2 million over the respective periods. The
average balance of interest-earning assets increased $343.9
million and $415.7 million, respectively, for the three and six
months ended December 31, 1997, compared to the same periods
ended December 31, 1996, while the average balance of interest-
bearing liabilities increased $292.8 million and $372.4 million
over the same respective periods of time. The increases in
these average balances are due to the acquisitions of Heritage
Financial, Ltd. (Heritage) on October 1, 1996, and Investors
Federal Savings (Investors) on May 1, 1997, and to internal
growth. The future trend in interest rate spreads and net
interest income will be dependent upon such factors as the
composition and size of the Corporation's interest-earning
assets and interest-bearing liabilities, the interest rate risk
exposure of the Corporation, and the maturity and repricing
activity of interest-sensitive assets and liabilities, as
influenced by changes in and levels of both short-term and long-
term market interest rates.
The following table presents certain information concerning
yields earned on interest-earning assets and rates paid on
interest-bearing liabilities during and at the end of each of
the periods presented:
________________________________________________________________________________________________________
For the Three For the Six
Months Ended Months Ended At
December 31, December 31, December 31,
---------------- ------------------ ----------------
1997 1996 1997 1996 1997 1996
________________________________________________________________________________________________________
Weighted average yield on:
Loans 8.04% 8.16% 8.07% 8.15% 8.05% 8.12%
Mortgage-backed securities 6.47 6.55 6.46 6.57 6.81 6.70
Investments 6.98 6.41 6.88 6.26 6.95 6.21
________________________________________________________________________________________________________
Interest-earning assets 7.72 7.77 7.74 7.76 7.78 7.77
________________________________________________________________________________________________________
Weighted average rate paid on:
Savings deposits 3.17 3.06 3.18 3.09 3.30 3.09
Other time deposits 5.73 5.73 5.75 5.74 5.66 5.74
Advances from FHLB 5.95 5.67 5.96 5.69 6.00 5.75
Securities sold under agreements to
repurchase 6.01 6.10 6.02 6.22 5.99 6.04
Other borrowings 8.81 9.74 8.80 10.17 8.84 8.27
________________________________________________________________________________________________________
Interest-bearing liabilities 5.36 5.32 5.38 5.33 5.37 5.33
________________________________________________________________________________________________________
Interest rate spread 2.36% 2.45% 2.36% 2.43% 2.41% 2.44%
________________________________________________________________________________________________________
Net annualized yield on
interest-earning assets 2.52% 2.57% 2.52% 2.56% 2.60% 2.60%
________________________________________________________________________________________________________
15
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 six months ended December 31, 1997. The following table
includes nonaccruing loans averaging $40.1 million and $39.0
million, respectively, for the three and six months ended
December 31, 1997, as interest-earning assets at a yield of zero
percent:
________________________________________________________________________________________________________________
Three Months Ended Six Months Ended
December 31, 1997 December 31, 1997
------------------------------ ------------------------------
Annualized Annualized
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
________________________________________________________________________________________________________________
Interest-earning assets:
Loans $5,327,939 $107,198 8.04% $5,300,813 $214,181 8.07%
Mortgage-backed securities 1,027,102 16,601 6.47 1,033,988 33,393 6.46
Investments 566,396 9,879 6.98 536,684 18,456 6.88
________________________________________________________________________________________________________________
Interest-earning assets 6,921,437 133,678 7.72 6,871,485 266,030 7.74
________________________________________________________________________________________________________________
Interest-bearing liabilities:
Savings deposits 1,275,683 10,193 3.17 1,272,410 20,381 3.18
Other time deposits 2,988,870 43,129 5.73 3,015,965 87,341 5.75
Advances from FHLB 1,752,685 26,264 5.95 1,641,145 49,268 5.96
Securities sold under agreements
to repurchase 537,229 8,253 6.01 572,500 17,628 6.02
Other borrowings 103,758 2,284 8.81 110,316 4,855 8.80
________________________________________________________________________________________________________________
Interest-bearing liabilities 6,658,225 90,123 5.36 6,612,336 179,473 5.38
________________________________________________________________________________________________________________
Net earnings balance $ 263,212 $ 259,149
========== ==========
Net interest income $ 43,555 $ 86,557
======== ========
Interest rate spread 2.36% 2.36%
________________________________________________________________________________________________________________
Net annualized yield on
interest-earning assets 2.52% 2.52%
________________________________________________________________________________________________________________
During the three and six months ended December 31, 1997, the
Corporation experienced higher costs on interest-bearing
liabilities primarily due to increases in the interest rates on
FHLB advances (28 and 27 basis points, respectively,) and
savings deposits (11 and nine basis points, respectively). The
net earnings balance (the difference between average interest-
bearing liabilities and average interest-earning assets)
increased by $51.1 million and $43.2 million, respectively, for
the three and six months ended December 31, 1997, compared to
the three and six months ended December 31, 1996, primarily due
to the acquisition of Heritage (which was acquired, in part,
through the issuance of common stock), the acquisition of
Investors and net internal growth with earnings retention.
16
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:
________________________________________________________________________________________________________________
Three Months Ended Six Months Ended
December 31, 1997 Compared December 31, 1997 Compared
to December 31, 1996 to December 31, 1996
------------------------------ ------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------ ------------------------------
(In Thousands) Volume Rate Net Volume Rate Net
________________________________________________________________________________________________________________
Interest Income:
Loans $ 6,545 $(1,601) $ 4,944 $15,731 $(2,351) $13,380
Mortgage-backed securities (2,365) (246) (2,611) (4,414) (620) (5,034)
Investments 3,017 581 3,598 5,969 1,182 7,151
________________________________________________________________________________________________________________
Interest income 7,197 (1,266) 5,931 17,286 (1,789) 15,497
________________________________________________________________________________________________________________
Interest expense:
Savings deposits 762 326 1,088 1,853 510 2,363
Other time deposits (3,987) (63) (4,050) (5,868) 153 (5,715)
Advances from FHLB 8,522 866 9,388 11,227 1,787 13,014
Securities sold under agreements
to repurchase (1,781) (150) (1,931) 1,616 (535) 1,081
Other borrowings 394 (216) 178 1,387 (601) 786
________________________________________________________________________________________________________________
Interest expense 3,910 763 4,673 10,215 1,314 11,529
________________________________________________________________________________________________________________
Effect on net interest income $ 3,287 $(2,029) $ 1,258 $ 7,071 $(3,103) $ 3,968
________________________________________________________________________________________________________________
The net improvements due to changes in volume for the three and
six months ended December 31, 1997, compared to December 31,
1996, reflect the net growth the Corporation has experienced,
both internally and from acquisitions. The net decreases due to
changes in rates between the three and six-month periods ended
December 31, 1997 and 1996, primarily reflect the increase in
rates on interest-bearing liabilities, primarily FHLB advances.
Provision for Loan Losses and Real Estate Operations:
- ----------------------------------------------------
The Corporation recorded loan loss provisions totaling $2.0
million and $4.1 million, respectively, for the three and six
months ended December 31, 1997, compared to $2.1 million and
$3.8 million, respectively, for the three and six months ended
December 31, 1996. The loan loss provision for the six months
ended December 31, 1997, is $334,000 higher compared to 1996 due
primarily to a larger amount of general reserves recorded in the
current fiscal year to cover possible consumer loan losses. The
allowance for loan losses is based upon management's continuous
evaluation of the collectibility of outstanding loans, which
takes into consideration such factors as changes in the
composition of the loan portfolio and economic conditions that
may affect the borrower's ability to pay, regular examinations
by the Corporation's credit review group of specific problem
loans and of the overall portfolio quality and real estate
market conditions in the Corporation's lending areas.
The Corporation recorded net income from real estate operations
of $971,000 and $797,000, respectively, for the three and six
months ended December 31, 1997, compared to net income of
$918,000 and $1.1 million, respectively, for the three and six
months ended December 31, 1996. Real estate operations reflect
provisions for real estate losses, net real estate operating
activity, and gains and losses on dispositions of real estate.
The net decrease in real estate operations for the six months
ended December 31, 1997, compared to the six months ended
December 31, 1996, is primarily due to a decrease in net gains
on dispositions of real estate in the current fiscal year
compared to the prior fiscal year.
17
Provision for Loan Losses and Real Estate Operations(Continued):
- ---------------------------------------------------------------
Nonperforming assets are monitored on a regular basis by the
Corporation's internal credit review and asset workout groups.
Nonperforming assets decreased $3.4 million at December 31,
1997, compared to June 30, 1997, resulting from net decreases of
$4.9 million and $3.1 million, respectively, in troubled debt
restructurings and real estate partially offset by a net
increase of $4.6 million in nonperforming loans. Nonperforming
assets as of the dates indicated are summarized as follows:
____________________________________________________________________________________
December 31, June 30, December 31,
(Dollars in Thousands) 1997 1997 1996
____________________________________________________________________________________
Nonperforming loans:
Residential real estate $38,806 $34,348 $38,644
Commercial real estate 394 424 684
Consumer 2,216 2,042 2,085
____________________________________________________________________________________
Total 41,416 36,814 41,413
____________________________________________________________________________________
Real estate:
Commercial 6,480 8,417 8,818
Residential 7,420 8,599 7,771
____________________________________________________________________________________
Total 13,900 17,016 16,589
____________________________________________________________________________________
Troubled debt restructurings:
Commercial 3,947 8,857 11,288
Residential 801 787 825
____________________________________________________________________________________
Total 4,748 9,644 12,113
____________________________________________________________________________________
Total nonperforming assets $60,064 $63,474 $70,115
____________________________________________________________________________________
Nonperforming loans to total loans .76% .68% .80%
Nonperforming assets to total assets .84% .89% 1.02%
____________________________________________________________________________________
Allowance for loan losses:
Other loans (1) $38,429 $37,658 $38,591
Bulk purchased loans (2) 9,631 10,809 11,733
____________________________________________________________________________________
Total $48,060 $48,467 $50,324
____________________________________________________________________________________
Allowance for loan losses to total
loans .89% .90% .97%
Allowance for loan losses to total
nonperforming assets 80.01% 76.36% 71.77%
____________________________________________________________________________________
<FN>
(1) Includes $85,000, $77,000 and $92,000 at December 31, 1997,
June 30, 1997, and December 31, 1996, respectively, in
general allowance for losses established primarily to cover
risks associated with borrowers' delinquencies and defaults
on loans held for sale.
(2) Represents the allowance for loan losses for single-family
residential whole loans purchased between January 1991 and
June 30, 1992 (bulk purchased loans), which had been
allocated from the amount of net discounts associated with
the Corporation's purchase of these loans to provide for
the credit risk associated with such bulk purchased loans.
These bulk purchased loans had principal balances of $443.6
million, $494.6 million and $538.2 million, respectively,
at December 31, 1997, June 30, 1997, and December 31, 1996.
These allowances are available only to absorb losses
associated with respective bulk purchased loans and are not
available to absorb losses from other loans.
</FN>
18
Provision for Loan Losses and Real Estate Operations(Continued):
- ---------------------------------------------------------------
The ratio of nonperforming loans to total loans was .76% at
December 31, 1997, based on loan balances of $5.417 billion,
compared to .68% and .80%, respectively, at June 30, 1997, and
December 31, 1996, based on respective loan balances
approximating $5.377 billion and $5.189 billion. The ratio of
nonperforming assets to total assets was .84% at December 31,
1997, compared to .89% and 1.02% at June 30, 1997, and December
31, 1996, respectively. Ratios for nonperforming loans to total
loans increased compared to June 30, 1997, due to increases in
such nonperforming loans, primarily delinquent residential
loans, and improved compared to December 31, 1996, due primarily
to net increases in total loans. Ratios for nonperforming
assets to total assets improved compared to June 30, 1997 and
December 31, 1996, due to net improvements in total
nonperforming assets as well as increases in total assets. The
percentage of allowance for loan losses to total loans remained
relatively unchanged compared to June 30, 1997, and decreased
compared to December 31, 1996, primarily due to net increases in
total loans and to decreases in the allowance for loan losses
from loan repayments for bulk purchased loans. The total
allowance for loan losses to total nonperforming assets
increased compared to June 30, 1997 and December 31, 1996,
primarily due to net decreases in total nonperforming assets.
Nonperforming loans at December 31, 1997, increased by $4.6
million compared to June 30, 1997, primarily due to net
increases totaling $4.6 million and $174,000, respectively, in
delinquent residential real estate and consumer loans. These
increases were offset by net decreases of $177,000 in
delinquent construction real estate and commercial real estate
loans. The net decrease in real estate of $3.1 million at
December 31, 1997, compared to June 30, 1997, is due primarily
to the disposition of certain residential and commercial real
estate totaling $7.5 million and $4.0 million, respectively,
offset primarily by the addition of residential real estate
properties totaling $5.7 million and the capitalization of lot
development costs totaling $1.9 million. The net decrease of
$4.9 million in troubled debt restructurings at December 31,
1997, compared to June 30, 1997, is primarily attributable to
the payoff of two commercial loans totaling $3.8 million and
transfers to nonperforming loans totaling $1.4 million.
Loan Servicing Fees:
- -------------------
Fees from loans serviced for other institutions totaled $7.8
million and $15.6 million, respectively, for the three and six
months ended December 31, 1997 compared to $7.4 million and
$14.8 million, respectively for the three and six months ended
December 31, 1996. The increase comparing the respective
periods is primarily due to net increases in miscellaneous loan
fees for late payments, prepayment charges and modification
fees. Fees from loans serviced for other institutions were
basically unchanged comparing fiscal year 1998 periods to fiscal
year 1997. At December 31, 1997 and 1996, the Corporation's
mortgage servicing portfolio approximated $5.799 billion and
$5.894 billion, respectively.
The value of the Corporation's loan servicing portfolio
increases as mortgage interest rates rise and loan prepayments
decrease. It is expected that income generated from the
Corporation's loan servicing portfolio will increase in such an
environment. However, this positive effect on the Corporation's
income is offset, in part, by a decrease in additional servicing
fee income attributable to new loan originations, which
historically decrease in periods of higher, or increasing,
mortgage interest rates, and by an increase in expenses from
loan production costs since a portion of such costs cannot be
deferred due to lower loan originations. Conversely, the value
of the Corporation's loan servicing portfolio will decrease as
mortgage interest rates decline.
Retail Fees and Charges:
- -----------------------
Retail fees and charges totaled $4.6 million and $9.0 million,
respectively, for the three and six months ended December 31,
1997, compared to $4.0 million and $7.9 million, respectively,
for the three and six months ended December 31, 1996. The net
increases of $600,000 and $1.1 million, respectively, result
primarily from increases in certain checking account fees and
VISA debit check card fees attributable to a significant
increase in the number of retail checking accounts at December
31, 1997, compared to December 31, 1996.
Gain on Sales of Loans:
- ----------------------
The Corporation sold loans to third parties through its mortgage
banking operations resulting in net pre-tax gains of $132,000
and $364,000, respectively, on loans sold totaling $116.5
million and $249.9 million, respectively, for the three and six
months ended December 31, 1997, compared to net pre-tax gains of
$22,000 and $127,000, respectively, on loans sold totaling
$160.5 million and $345.5 million, respectively, for the three
and six months ended December 31, 1996. Mortgage loans are
generally sold in the secondary market with loan servicing
retained and without recourse to the Corporation. The net gains
are attributable to the relatively stable interest rate
environments over the respective periods.
19
Gain on Sale of Mortgage-Backed Securities:
- ------------------------------------------
The Corporation sold mortgage-backed securities available for
sale resulting in net pre-tax gains of $1.0 million for the
three and six months ended December 31, 1997, compared to
$100,000 for the three and six months ended December 31, 1996,
on sales totaling $30.7 million and $17.3 million, respectively.
Other Operating Income:
- ----------------------
Other operating income totaled $3.0 million and $7.0 million,
respectively, for the three and six months ended December 31,
1997, compared to $2.3 million and $4.3 million, respectively,
for the three and six months ended December 31, 1996. The major
components of other operating income are from brokerage
commissions, credit life and disability commissions and
insurance commissions which increased a net of $81,000 for the
three months ended December 31, 1997, compared to December 31,
1996. Also contributing to the increase for the three months
ended December 31, 1997, compared to 1996 are excess trustee
funds on debt payoff totaling $735,000.
For the six months ended December 31, 1997, brokerage
commissions and credit life and disability commissions increased
$513,000 and $239,000, respectively, compared to 1996 with
insurance commissions lower by $162,000 for the current fiscal
year. In addition, other increases in other operating income
for the six months ended December 31, 1997, compared to 1996 are
receipts from bankruptcy settlements totaling $402,000, excess
trustee funds on debt payoff totaling $1.2 million and a net
pre-tax gain of $380,000 on the sale of $412,000 of loan
servicing rights.
General and Administrative Expenses:
- -----------------------------------
General and administrative expenses totaled $30.1 million and
$59.2 million, respectively, for the three and six months ended
December 31, 1997, compared to $28.4 million and $57.7 million,
respectively, for the three and six months ended December 31,
1996, excluding the $27.1 million nonrecurring industry-wide
Federal deposit insurance special assessment recorded in the
first quarter of fiscal year 1997. The net increase of $1.7
million for the three months ended December 31, 1997, compared
to the three months ended December 31, 1996, was primarily due
to net increases in other operating expenses of $1.2 million,
compensation and benefits of $694,000, advertising of $504,000,
occupancy and equipment of $450,000 and data processing of
$277,000. These increases were partially offset by a net
decrease of $1.3 million in regulatory insurance and
assessments.
The net increase of $1.5 million comparing the six months ended
December 31, 1997, to the six months ended December 31, 1996,
was primarily due to net increases of $2.3 million in
compensation and benefits, $1.3 million in advertising, $689,000
in occupancy and equipment and $500,000 in data processing,
partially offset by net decreases of $3.1 million in regulatory
insurance and assessments and $119,000 in other operating
expenses.
The net increase of $1.7 million for the three months ended
December 31, 1997, compared to the three months ended December
31, 1996, is, in part, due to net increases in other operating
expenses of $1.2 million resulting primarily from net increases
of $518,000 and $230,000, respectively, in amortization expense
of mortgage servicing rights and in processing charges,
increased marketing costs for checking accounts and related
products and consumer loans, increased data processing costs and
other net increases in employee benefits, rent and occupancy and
other operating expenses primarily due to branch expansion and
acquisitions over the prior fiscal year period and other
expenses incurred on an indirect basis attributable to such
branch expansion and acquisitions. Partially offsetting this net
increase is a decrease in regulatory insurance and assessments
of $1.3 million. This decrease in regulatory insurance and
assessments of $1.3 million and $3.1 million, respectively, for
the three and six months ended December 31, 1997, compared to
the respective prior year periods is substantially due to the
revised rate structure on insured deposits adopted by the
Federal Deposit Insurance Corporation after the recapitalization
of the Savings Association Insurance Fund. The Corporation's
annual deposit insurance rate in effect prior to this
recapitalization was .23% of insured deposits which was reduced
to .18% of insured deposits for the quarter ended December 31,
1996, and to .064% of insured deposits effective January 1,
1997, and thereafter.
The net $1.5 million increase in general and administrative
expenses, excluding the deposit insurance special assessment,
for the six months ended December 31, 1997, compared to the six
months ended December 31, 1996, is primarily attributed to
increased marketing costs for checking accounts and related
products and consumer loans totaling $1.3 million, increased
occupancy and equipment expenses, net increases in general and
administrative expenses from acquisitions, increased data
processing costs, higher loan production costs and other net
increases in employee benefits and other operating expenses
primarily due to branch expansion and acquisitions over the
prior fiscal year period. Partially offsetting these increases
were decreases in regulatory insurance and assessments totaling
$3.1 million, previously discussed, and nonrecurring expenses
totaling $2.3 million recorded in the prior fiscal year related
to the repurchase of 2,812,725 shares of the Corporation's
common stock.
20
Amortization of Goodwill and Core Value of Deposits:
- ---------------------------------------------------
Amortization of goodwill and core value of deposits totaled $1.6
million and $3.1 million, respectively, for the three and six
months ended December 31, 1997, compared to $2.7 million and
$5.1 million, respectively, for the three and six months ended
December 31, 1996. The net decreases of $1.2 million and $2.0
million, respectively, for the three and six months ended
December 31, 1997, compared to last fiscal year periods are due
primarily to the reduction in amortization expense of core value
of deposits since amounts from certain acquisitions became fully
amortized as of April 30, 1997.
Provision for Income Taxes:
- --------------------------
For the three and six months ended December 31, 1997, the
provision for income taxes totaled $9.7 million and $19.0
million, respectively, compared to $8.3 million and $5.8
million, respectively, for the three and six months ended
December 31, 1996. The effective income tax rate for the three
and six months ended December 31, 1997, were 35.3% and 35.2%,
respectively, compared to 34.9% and 33.8%, respectively, for the
three and six months ended December 31, 1996. The effective tax
rates for all periods vary from the applicable statutory rates
primarily due to the nondeductibility of amortization of
goodwill and core value of deposits, and certain merger and
acquisition costs, in relation to the level of taxable income
for the respective periods.
Extraordinary Items - Loss on Early Retirement of Debt:
- ------------------------------------------------------
In December 1996, the Corporation recognized extraordinary
losses of $583,000 (net of income tax benefits totaling
$316,000), or $.02 loss per share, primarily as a result of the
early retirement of its $40.25 million 10.25% subordinated debt
due December 15, 1999, and its $6.9 million 10.0% senior notes
due January 31, 1999. The extraordinary losses consisted
primarily of the write-off of the related premiums and costs
associated with the issuance and redemption of such debt which
was retired on December 27, 1996, with the proceeds from the
$50.0 million subordinated extendible notes offering completed
December 2, 1996.
Other Matters - Year 2000 Compliance:
- -----------------------------------
As the year 2000 approaches, an important business issue has
emerged regarding how existing application software programs and
operating systems can accommodate this date value. Many
computer programs that can only distinguish the final two digits
of the year entered (a common programming practice in earlier
years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based
on the wrong date or are expected to be unable to compute
payment, interest or delinquency. Rapid and accurate data
processing is essential to the operations of the Corporation.
All of the material computer programs of the Corporation that
could be affected by this problem are provided by major third
party vendors. Currently, the Corporation is in the process of
replacing/upgrading all computer systems and programs, as well
as most equipment, in order to provide cost-effective and
efficient delivery of services to its customers, information to
management, and to provide additional capacity for processing
information and transactions due to acquisitions. The third
party vendors of the Corporation have advised the Corporation
that all such computer systems and programs will be year 2000
compliant. However, if the third party vendors are unable to
resolve year 2000 issues in time, the Corporation would likely
experience significant data processing delays, mistakes or
failures. These delays, mistakes or failures could have a
significant adverse impact on the financial condition and
results of operations of the Corporation.
21
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a). The Corporation held its Annual Meeting of
Stockholders on November 18, 1997 in Omaha, Nebraska.
The inspector of election issued his certified final
report on December 5, 1997 for the proposals voted
upon at such Annual Meeting.
(b). Not applicable.
(c). The following proposals were voted upon at the Annual
Meeting: (i) the election of one individual as a
director for a two-year term and the election of three
individuals as directors for a three-year term, (ii)
the approval of an amendment to the Corporation's
Articles of Incorporation to increase the number of
authorized shares of common stock from 25,000,000
shares to 50,000,000 shares, and (iii) the approval of
an amendment to the Corporation's Articles of
Incorporation to establish a variable range for the
number of members from nine to 12 members. The
results of voting, NOT ADJUSTED FOR THE THREE-FOR-TWO
STOCK SPLIT EFFECTIVE DECEMBER 15, 1997, were as
follows:
Proposal 1 -- Election of Directors:
- -----------------------------------
Nominee Votes for (1) Votes Withheld
- ------- ------------ --------------
For term to expire in 1999:
Michael P. Glinsky 19,179,765 168,597
For terms to expire in 2000:
Talton K. Anderson 19,258,356 90,657
Carl G. Mammel 19,259,701 88,985
James P. O'Donnell 19,259,475 88,935
_______________________________________________________________
(1) Stockholders are entitled to cumulate their votes in
the election of directors. Unless otherwise indicated by
the stockholder, a vote for the Board of Directors'
nominees gives the proxies named discretionary authority to
cumulate all votes to which the stockholder was entitled
and to allocate such votes in favor of one or more of the
Board's nominees as the proxies determined. The votes
reported herein reflect the allocation of votes so as to
maximize the number of nominees elected to serve as
directors.
Proposal 2 -- Approval to Increase Authorized Shares:
- ----------------------------------------------------
Votes For Votes Against Abstentions or Broker Nonvotes
- --------- ------------- ------------------------------
18,751,212 516,617 80,789
________________________________________________________________
Proposal 3 -- Approval for Variable Range of Membership of Board
of Directors:
- ----------------------------------------------------------------
Votes For Votes Against Abstentions or Broker Nonvotes
- --------- ------------- ------------------------------
16,342,310 239,357 2,766,949
________________________________________________________________
(d). Not applicable.
Amended and restated Articles of Incorporation were filed
as an exhibit to the Current Report on Form 8-K dated December
8, 1997, hereby incorporated by reference.
22
PART II. OTHER INFORMATION
--------------------------
Item 5. Other Information
-----------------
Effective February 11, 1998, the Corporation entered
into a definitive agreement to acquire AmerUs Bank, a
wholly owned subsidiary of AmerUs Group Co. A Current
Report on Form 8-K was filed on February 13, 1998 by
the Corporation announcing such agreement. See Note
H for additional information concerning this proposed
acquisition.
The Corporation announced on February 17, 1998, upon
completion of its acquisition of Liberty (see Note G)
on February 13, 1998, that its Board of Directors
appointed William A. Krause as a new Director. Mr.
Krause, former director and chairman of Liberty, will
serve a term to expire at the Corporation's annual
meeting of stockholders in November 1998.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). Exhibits:
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedules (EDGAR)
(b). Reports on Form 8-K:
The Corporation filed a Current Report on Form 8-K
dated November 18, 1997, announcing that stockholders
had approved proposals for amendments to the
Corporation's Articles of Incorporation to increase
the number of authorized shares of common stock from
25,000,000 to 50,000,000 shares and to establish a
variable range for the number of members on the Board
of Directors from nine to 12 members. In addition,
the Corporation announced the authorization by its
Board of Directors of a three-for-two stock split to
be effected in the form of a 50 percent stock
dividend. The Corporation also reported on this Form
8-K the declaration of a quarterly cash dividend of
$.055 per common share representing a 17.9% increase
from last quarter after adjusting for the stock split.
The stock dividend, payable to shareholders of record
as of November 28, 1997, was paid on December 15,
1997. The cash dividend, payable to shareholders of
record as of December 31, 1997, was paid on January
14, 1998. See Note B for additional information
regarding the stock split.
The Corporation filed a Current Report on Form 8-K
dated December 8, 1997, announcing the results of
voting at the Commercial Federal Corporation Annual
Meeting. The Corporation also reported on this Form
8-K that pursuant to the stockholders' approval of
Proposals 2 and 3, Article IV of the Corporation's
Articles of Incorporation was amended to increase the
number of authorized shares of common stock from
25,000,000 shares to 50,000,000 shares, and Article
VII of the Corporation's Articles of Incorporation was
amended to establish a variable range for the number
of members on the Board of Directors from no less than
nine to no more than 12 members.
The Corporation filed a Current Report on Form 8-K
dated December 15, 1997, reporting that the
Corporation had entered into a Reorganization and
Merger Agreement dated December 15, 1997, with
Perpetual Midwest Financial Inc., parent company of
Perpetual Savings Bank, FSB, headquartered in Cedar
Rapids, Iowa. See Note B for additional information
concerning this proposed merger.
23
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: February 17, 1998 /s/ James A. Laphen
--------------------------------
James A. Laphen, President, Chief
Operating Officer and Chief
Financial Officer (Duly
Authorized and Principal
Financial Officer)
Date: February 17, 1998 /s/ Gary L. Matter
---------------------------------
Gary L. Matter, Senior Vice
President, Controller and
Secretary
(Principal Accounting Officer)
24
EXHIBIT INDEX
-------------
Page Number
________________________________________________________________
Exhibit 11. Computation of Earnings Per Share 26
Exhibit 27. Financial Data Schedule (EDGAR only) --
25