UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly period ended September 30, 1995
------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-11515
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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
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
---- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 8 , 1995
----- --------------------------------
Common Stock, $0.01 Par Value 14,299,860 Shares
The exhibit index is located on page 28.
This document is comprised of 29 pages.
COMMERCIAL FEDERAL CORPORATION
------------------------------
FORM 10-Q
---------
INDEX
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PART I. FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements:
Consolidated Statement of Financial Condition as of
September 30, 1995 and June 30, 1995 3
Consolidated Statement of Operations for the Three
Months Ended September 30, 1995 and 1994 4
Consolidated Statement of Cash Flows for the Three
Months Ended September 30, 1995 and 1994 5 - 6
Notes to Consolidated Financial Statements 7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14 - 25
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and Reports on Form 8 - K 26
SIGNATURE PAGE 27
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PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
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(Dollars in Thousands) September 30, June 30,
ASSETS 1995 1995
- -----------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
Cash (including short-term investments of $3,000 and $3,100).................. $ 33,651 $ 29,330
Mortgage-backed securities available for sale, at fair value.................. 10,029 10,322
Loans held for sale........................................................... 54,540 36,382
Investment securities held to maturity (fair value of $287,386 and $291,651).. 290,364 294,237
Mortgage-backed securities held to maturity (fair value of
$1,290,627 and $1,312,958)................................................... 1,298,079 1,321,461
Loans receivable, net of allowances of $46,313 and $46,489.................... 3,988,777 3,955,256
Federal Home Loan Bank stock.................................................. 97,110 97,110
Interest receivable, net of reserves of $101 and $197......................... 36,943 38,761
Real estate................................................................... 16,658 16,385
Premises and equipment........................................................ 62,819 62,716
Prepaid expenses and other assets............................................. 59,148 58,636
Goodwill and core value of deposits, net of accumulated
amortization of $137,767 and $135,683........................................ 31,628 33,712
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Total Assets................................................................ $5,979,746 $5,954,308
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Liabilities:
Deposits..................................................................... $3,629,072 $3,591,175
Advances from Federal Home Loan Bank......................................... 1,629,354 1,656,602
Securities sold under agreements to repurchase............................... 195,755 195,755
Other borrowings............................................................. 54,365 55,403
Interest payable............................................................. 26,197 22,703
Other liabilities............................................................ 123,348 123,169
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Total Liabilities........................................................... 5,658,091 5,644,807
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Commitments and contingencies................................................. -- --
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Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized;
none issued................................................................. -- --
Common stock, $.01 par value; 25,000,000 shares authorized;
12,912,416 and 12,909,849 shares issued and outstanding..................... 129 129
Additional paid-in capital................................................... 140,029 139,728
Unrealized holding gain on securities available for sale, net................ 73 79
Retained earnings, substantially restricted.................................. 181,424 169,565
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Total Stockholders' Equity.................................................. 321,655 309,501
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Total Liabilities and Stockholders' Equity.................................. $5,979,746 $5,954,308
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See accompanying Notes to Consolidated Financial Statements.
3
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
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(Dollars in Thousands Except Per Share Data) Three Months Ended
September 30,
---------------------------
1995 1994
- --------------------------------------------------------------------------------------------
Interest Income:
Loans receivable............................................. $ 82,579 $72,838
Mortgage-backed securities................................... 21,279 19,201
Investment securities........................................ 5,940 6,061
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Total interest income...................................... 109,798 98,100
Interest Expense:
Deposits..................................................... 47,603 38,365
Advances from Federal Home Loan Bank......................... 23,711 23,206
Securities sold under agreements to repurchase............... 3,524 1,688
Other borrowings............................................. 1,482 1,666
- --------------------------------------------------------------------------------------------
Total interest expense..................................... 76,320 64,925
Net Interest Income............................................. 33,478 33,175
Provision for Loan Losses....................................... (1,508) (1,508)
- --------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses............. 31,970 31,667
Other Income (Loss):
Loan servicing fees.......................................... 5,968 5,234
Retail fees and charges...................................... 2,635 2,160
Real estate operations....................................... 461 (588)
Gain (loss) on sales of loans................................ 101 (280)
Other operating income....................................... 1,597 1,451
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Total other income......................................... 10,762 7,977
Other Expense:
General and administrative expenses:
Compensation and benefits................................... 8,828 8,409
Occupancy and equipment..................................... 4,931 4,323
Regulatory insurance and assessments........................ 2,234 2,082
Advertising................................................. 1,341 1,063
Amortization of purchased and originated mortgage
loan servicing rights...................................... 1,959 2,007
Other operating expenses.................................... 3,254 2,383
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Total general and administrative expenses.................. 22,547 20,267
Amortization of goodwill and core value of deposits.......... 2,084 2,886
Accelerated amortization of goodwill......................... -- 10,679
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Total other expense........................................ 24,631 33,832
Income Before Provision for Income Taxes........................ 18,101 5,812
Provision for Income Taxes...................................... 6,242 5,305
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Net Income...................................................... $ 11,859 $ 507
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Earnings Per Common Share:
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Net Income................................................... $ .91 $ .04
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See accompanying Notes to Consolidated Financial Statements.
4
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
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(Dollars in Thousands) Three Months Ended
September 30,
----------------------
1995 1994
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 11,859 $ 507
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
Accelerated amortization of goodwill................................ -- 10,679
Amortization of goodwill and core value of deposits................. 2,084 2,886
Provisions for loss on loans and real estate........................ 1,048 1,683
Depreciation and amortization....................................... 1,389 1,132
Accretion of deferred discounts and fees............................ (2,052) (2,122)
Amortization of purchased and originated mortgage
loan servicing rights.............................................. 1,959 2,007
Amortization of deferred compensation on restricted
stock and premiums................................................. 1,656 1,817
Gain on sale of real estate, net.................................... (158) (118)
(Gain) loss on sales of loans, net.................................. (101) 280
Proceeds from the sale of loans..................................... 91,103 139,232
Origination of loans for resale..................................... (38,367) (16,335)
Purchase of loans for resale........................................ (71,328) (152,167)
Decrease in interest receivable..................................... 1,818 1,612
Increase in interest payable........................................ 3,494 1,381
Increase (decrease) in other liabilities............................ 179 (11,691)
Other items, net.................................................... 36 (1,152)
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Total adjustments.................................................. (7,240) (20,876)
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Net cash provided (used) by operating activities.................. $ 4,619 $ (20,369)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Principal repayments of loans and mortgage-backed securities......... $ 252,773 $ 203,635
Purchases of loans................................................... (158,969) (215,748)
Origination of loans................................................. (105,571) (83,391)
Maturities and repayments of investment securities................... 30,332 706
Purchases of investment securities................................... (26,328) --
Purchases of mortgage loan servicing rights.......................... (2,230) (2,036)
Proceeds from sale of real estate.................................... 2,204 1,826
Purchases of premises and equipment, net............................. (1,492) (3,907)
Payments to acquire real estate...................................... (656) (93)
Proceeds from sale of mortgage-backed securities available for sale.. -- 20,210
Purchases of mortgage-backed securities.............................. -- (6,869)
Acquisitions, net of cash (paid) received............................ -- (6,338)
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Net cash used by investing activities............................. $ (9,937) $ (92,005)
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5
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
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(Dollars in Thousands) Three Months Ended
September 30,
------------------------
1995 1994
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits.............................. $ 37,897 $ (21,341)
Proceeds from Federal Home Loan Bank advances................ 96,000 346,220
Repayment of Federal Home Loan Bank advances................. (123,281) (105,983)
Repayment of securities sold under agreements to repurchase.. -- (95,982)
Repayment of other borrowings................................ (1,059) (1,547)
Other items, net............................................. 82 85
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Net cash provided by financing activities.................. $ 9,639 $ 121,452
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CASH AND CASH EQUIVALENTS:
Increase in net cash position................................ $ 4,321 $ 9,078
Balance, beginning of year................................... 29,330 21,208
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Balance, end of period....................................... $ 33,651 $ 30,286
========= =========
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense............................................. $ 72,872 $ 63,391
Income taxes, net............................................ 716 138
Non-cash investing and financing activities:
Loans exchanged for mortgage-backed securities............... 20,572 66,025
Loans transferred to real estate............................. 2,437 416
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See accompanying Notes to Consolidated Financial Statements.
6
COMMERCIAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1995
(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 except for the accelerated
amortization of goodwill recorded during the first three months of fiscal year
1995) 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, 1995, Annual Report to Stockholders. The results of
operations for the three month period ended September 30, 1995, are not
necessarily indicative of the results which may be expected for the entire
fiscal year 1996. Certain amounts in the prior fiscal year period have been
reclassified for comparative purposes.
B. ACCOUNTING CHANGES:
------------------
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS:
As of July 1, 1995, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 122 (SFAS No. 122) entitled "Accounting for
Mortgage Servicing Rights." SFAS No. 122 requires that a mortgage banking
enterprise recognize as a separate asset the rights to service mortgage loans
for unrelated third parties that have been acquired through either the purchase
or origination of a loan. The statement requires mortgage servicers that sell
or securitize loans and retain the servicing rights to allocate the total cost
of the loans to the servicing rights and loans based on their relative fair
values. Purchased mortgage servicing rights are mortgage servicing rights that
have been purchased from unrelated third parties. Originated mortgage servicing
rights generally represent the mortgage servicing rights acquired when an
institution originates and subsequently sells mortgage loans to unrelated third
parties but retains the servicing rights. Previous to July 1, 1995, only
purchased mortgage servicing rights were capitalized as assets. In addition,
SFAS No. 122 requires all capitalized mortgage servicing rights, both originated
and purchased, to be evaluated for impairment based on their fair values.
The Corporation capitalized $331,000 of mortgage servicing rights during the
three months ended September 30, 1995, purchased $2,230,000 of mortgage
servicing rights and amortized $1,959,000 of mortgage servicing rights during
the same period. The unamortized book value of mortgage servicing rights totaled
$36,684,000 at September 30, 1995. The fair value of capitalized mortgage
servicing rights is calculated using the present value of estimated expected
future cash flows using a discount rate commensurate with the risk involved. The
fair value of the Corporation's mortgage servicing rights totaled approximately
$66,600,000 at September 30, 1995. In using this valuation method, the
Corporation used assumptions that market participants would use in estimating
future net servicing income which included estimates of the cost of servicing
per loan, the discount rate, float value, an inflation rate, ancillary income
per loan, prepayment speeds and default rates. The Corporation conducts its
periodic impairment analyses using a discounted, disaggregated method, based
upon current coupon rates. For purposes of measuring impairment of mortgage
servicing rights, the risk characteristics used by the Corporation include the
underlying loans' interest rates, prepayment speeds and loan type. No valuation
allowance for capitalized servicing rights was necessary to be established as of
September 30, 1995.
7
B. ACCOUNTING CHANGES (Continued):
------------------------------
ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS:
As of July 1, 1995, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 121 (SFAS No. 121) entitled "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 establishes accounting standards for the recognition and
measurement of the impairment of long-lived assets, certain identifiable
intangibles and goodwill. This statement does not apply to core deposit
intangibles or mortgage and other servicing rights. The provisions of this
statement require that long-lived assets and certain identifiable intangibles to
be held and used be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. In performing the review of recoverability, the provisions of SFAS
No. 121 require the estimation of the expected future cash flows (undiscounted
and without interest charges) to result from the use of the asset and its
eventual disposition with an impairment loss recognized if the sum of such cash
flows is less than the carrying amount of the asset. Management of the
Corporation does not believe that the adoption of the provisions of this
statement will have a material effect on the Corporation's financial position or
results of operations.
8
C. REGULATORY CAPITAL:
-------------------
At September 30, 1995, the Bank's estimates of its capital amounts and the
capital levels required under Office of Thrift Supervision (OTS) capital
regulations are as follows:
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(Dollars in Thousands) Actual Requirement Excess
- ---------------------- --------- ----------- ---------
Bank's stockholder's equity..................... $ 349,356
Less unrealized holding gain on
securities available for sale, net............ (73)
Less intangible assets.......................... (29,530)
Less phase-out of investment
in non-includable subsidiaries................ (2,798)
--------- ----------- ---------
Tangible capital................................ $ 316,955 $ 89,269 $ 227,686
========= =========== =========
Tangible capital to adjusted assets (1)......... 5.33% 1.50% 3.83%
========= =========== =========
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Tangible capital................................ $ 316,955
Plus certain restricted amounts
of other intangible assets.................... 20,123
--------- ----------- ---------
Core capital (Tier 1 capital)................... $ 337,078 $ 179,143 $ 157,935
========= =========== =========
Core capital to adjusted assets (2)............. 5.64% 3.00% 2.64%
========= =========== =========
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Core capital.................................... $ 337,078
Plus general loan loss allowances............... 32,102
Less amount of land loans and
non-residential construction loans in
excess of an 80.0% loan-to-value ratio........ (523)
--------- ----------- ---------
Risk-based capital (Total capital).............. $ 368,657 $ 213,953 $ 154,704
========= =========== =========
Risk-based capital to risk weighted assets (3).. 13.78% 8.00% 5.78%
========= =========== =========
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(1) Based on adjusted total assets totaling $5,951,295,000.
(2) Based on adjusted total assets totaling $5,971,418,000.
(3) Based on risk-weighted assets totaling $2,674,415,000.
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9
C. REGULATORY CAPITAL (Continued):
-------------------------------
Effective July 1, 1994, the OTS amended its risk-based capital standards to
include an interest rate risk component. The amendment requires thrifts with
interest rate risk in excess of certain levels to maintain additional capital.
Under this amendment, thrifts are divided into two groups, those with "normal"
levels of interest rate risk and those with "greater than normal" levels of
interest rate risk. Thrifts with greater than normal levels are subject to a
deduction from total capital for purposes of calculating risk-based capital. In
a letter dated August 21, 1995, the OTS notified all savings associations that
it had delayed this interest rate risk capital deduction until further notice,
pending the testing of the OTS appeals process pursuant to Thrift Bulletin No.
67. Based on the Bank's interest rate risk profile and the level of interest
rates at September 30, 1995, as well as the Bank's level of risk-based capital
at September 30, 1995, management believes that the Bank does not have a greater
than normal level of interest rate risk as measured under the OTS rule and will
not be required to increase its capital as a result of the rule.
The Federal Deposit Insurance Corporation Improvement Act of 1991 established
five regulatory capital categories: well-capitalized, adequately-capitalized,
undercapitalized, significantly undercapitalized and critically
undercapitalized; and authorized banking regulatory agencies to take prompt
corrective action with respect to institutions in the three undercapitalized
categories. These corrective actions become increasingly more stringent as the
institution's regulatory capital declines. At September 30, 1995, the Bank
exceeded the minimum requirements for the well-capitalized category as shown in
the following table.
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Tier 1 Capital Tier 1 Capital Total Capital
to Adjusted to Risk - to Risk -
(Dollars in Thousands) Total Assets Weighted Assets Weighted Assets
- ---------------------------------------------------------------------------------------
Actual capital................. $ 337,078 $ 337,078 $ 368,657
Percentage of adjusted assets.. 5.64% 12.60% 13.78%
Minimum requirements to be
classified well-capitalized... 5.00% 6.00% 10.00%
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In April 1991, the OTS proposed to amend its core capital requirement to
establish a minimum 3.0% core capital ratio for savings institutions in the
strongest financial and managerial condition. For all other savings
institutions, the minimum core capital ratio would be 3.0% plus at least an
additional 1.0% to 2.0%, determined on a case-by-case basis by the OTS after
assessing both the quality of risk management systems and the level of overall
risk in each individual savings institution. The Bank does not anticipate that
it will be materially affected by this regulation if adopted in its current
form. In addition to the proposed rule, the OTS has adopted a prompt corrective
action rule under which a savings institution that has a core capital ratio of
less than 4.0% would be deemed to be "undercapitalized" and may be subject to
certain sanctions.
10
D. COMMITMENTS AND CONTINGENCIES:
------------------------------
At September 30, 1995, the Corporation had issued commitments totaling
$88,200,000 to fund and purchase loans as follows: $31,000,000 of single-family
adjustable-rate mortgage loans, $34,400,000 of single-family fixed-rate mortgage
loans, $13,700,000 of consumer loan lines of credit and $9,100,000 of commercial
real estate loans. In addition, outstanding commitments from mortgage banking
operations to purchase mortgage loan servicing rights totaled $3,700,000 at
September 30, 1995. 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
expre without being drawn. Loans sold subject to recourse provisions totaled
approximately $46,975,000 at September 30, 1995, 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.
E. SUBSEQUENT EVENT - ACQUISITION OF RAILROAD FINANCIAL CORPORATION:
-----------------------------------------------------------------
On October 2, 1995, the Corporation consummated its acquisition of Railroad
Financial Corporation (Railroad), parent company of Railroad Savings Bank, fsb.
Pursuant to the terms of the merger agreement, Railroad delivered 2,156,232
shares of common stock to the Corporation in exchange for approximately
1,377,617 shares of the Corporation's common stock (exchange ratio of .6389
based on an average closing price of $35.063). Cash will be paid in lieu of
fractional shares. Based on the Corporation's closing common stock price of
$35.625 on October 2, 1995, such transaction resulted in an aggregate value
approximating $49,100,000. Railroad operated 18 branches and 71 agency offices
throughout the state of Kansas and at September 30, 1995, had assets of
approximately $602,900,000, deposits of approximately $421,400,000 and
stockholders' equity of approximately $27,700,000. This acquisition will be
accounted for as a pooling of interests and, accordingly, the Corporation's
historical consolidated financial statements presented in future reports will be
restated to include the accounts and results of operations of Railroad.
11
E. SUBSEQUENT EVENT - ACQUISITION OF RAILROAD
------------------------------------------
FINANCIAL CORPORATION (continued):
----------------------------------
The following table summarizes results on an unaudited pro forma basis for the
three months ended September 30, 1995 and 1994, as if this acquisition,
accounted for as a pooling of interests, had occurred as of the beginning of the
respective fiscal years as follows:
- ------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) 1995 1994
- ------------------------------------------------------------------------------------
Total interest income and other income.................. $ 134,361 $ 116,844
Total interest expense.................................. 84,604 70,288
Net income(1)........................................... 11,244 1,268
Net income per common share(2).......................... $ .78 $ .09
Weighted average shares outstanding..................... 14,505,455 14,412,507
- ------------------------------------------------------------------------------------
(1) Net income and net income per common share do not include the future
expected cost savings and benefits of related synergies as a result of the
merger of the companies. Net income for the three months ended September 30,
1995, includes approximately $1,213,000 in pre-tax acquisition charges recorded
by Railroad related to the specific, identifiable costs of the merger.
(2) Net income per common share is based upon an exchange ratio of .6389 and
the issuance of 1,403,663 and 1,398,552 shares, respectively, of the
Corporation's common stock for the three months ended September 30, 1995 and
1994.
12
F. SUBSEQUENT EVENT - PROPOSED ACQUISITION:
----------------------------------------
On August 15, 1995, the Corporation entered into a Reorganization and Merger
Agreement (the Merger Agreement) by and among the Corporation, the Bank,
Conservative Savings Corporation (Conservative) and Conservative Savings Bank,
FSB. Under the terms of the Merger Agreement, the Corporation will acquire all
of the outstanding shares of Conservative's common stock (1,846,005 shares) and
preferred stock (460,000 shares). As defined in the Merger Agreement,
Conservative's common and preferred stock will be exchanged for cash and the
Corporation's common stock based on the average closing price of the
Corporation's common stock for a specified period prior to closing. Based on the
Corporation's closing stock price of $35.75 at September 30, 1995, the
transaction has a per share value of $15.37 for the common stock and $34.73 for
the preferred stock with an aggregate value of approximately $44,343,000 for all
outstanding common and preferred stock.
The Corporation also announced that it has entered into a stock option agreement
with Conservative under which the Corporation has been granted an option to
purchase 19.9% of Conservative's outstanding shares of common stock under
certain circumstances provided in the agreement in the event the transaction is
terminated.
At September 30, 1995, Conservative had assets of approximately $384,100,000,
deposits of approximately $194,200,000 and stockholders' equity of approximately
$34,700,000. Conservative operates nine branches with seven located in
Nebraska, one in Overland Park, Kansas and one in Harlan, Iowa. This proposed
acquisition, which is subject to regulatory approvals and the approval of
Conservative's shareholders, is expected to be completed by March 31, 1996, but
no later than June 30, 1996, unless extended by mutual agreement of both
parties. This acquisition will be accounted for as a purchase with core value
of deposits resulting from this transaction amortized on an accelerated basis
over a period not to exceed 10 years and goodwill, if any, amortized on a
straight-line basis over a period not to exceed 20 years.
G. SUBSEQUENT EVENT - COMMON STOCK DIVIDEND:
-----------------------------------------
On October 4, 1995, the Corporation's Board of Directors established a quarterly
dividend policy and, on the same day, declared a cash dividend of $.10 per share
on the Corporation's common stock. Accordingly, a cash dividend totaling
$1,429,000 was paid on October 31, 1995, to stockholders of record on October
16, 1995.
13
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 1 Association") is permitted to pay dividends
during a calendar year in an amount equal to the greater of (i) 75.0% of its net
income for the recent four quarters, or (ii) 100.0% of its net income to date
during the calendar year plus an amount that would reduce by one-half the amount
by which its ratio of total capital to assets exceeded its fully phased-in risk-
based capital ratio requirement at the beginning of the calendar year. At
September 30, 1995, the Bank qualified as a Tier 1 Association, and would be
permitted to pay an aggregate amount approximating $93.8 million in dividends
under these regulations. Should the Bank's regulatory capital fall below
certain levels, applicable law would require prior approval by the OTS of such
proposed dividends and, in some cases, would prohibit the payment of dividends.
At September 30, 1995, the cash of Commercial Federal Corporation (the parent
company) totaled $12.0 million of which $3.5 million is required to be retained
under the terms of the Indenture governing the subordinated notes due December
1999. Due to the parent company's limited independent operations, management
believes that the cash balance at September 30, 1995, is currently sufficient to
meet operational needs. However, the parent company's ability to make future
interest and principal payments on the subordinated notes is dependent upon its
receipt of dividends from the Bank. Accordingly, on October 25, 1995, a
dividend totaling $3.63 million was declared by the Bank to be paid on or after
December 1, 1995, to the parent company. This dividend from the Bank will be
paid primarily to cover (i) the semi-annual interest payments on the parent
company's subordinated debt and (ii) the initial common stock cash dividend of
$1.43 million paid on October 31, 1995, to the parent company's stockholders of
record on October 16, 1995. See Note G for additional information regarding
this common stock dividend. Future payment of dividends by the parent company
will depend on the parent company's consolidated earnings, financial condition,
liquidity, capital and other factors, including economic conditions and any
regulatory restrictions. No dividends were paid by the Bank to the parent
company during the three months ended September 30, 1995 or 1994. The parent
company also receives cash from the exercise of stock options and the sale of
stock under its employee benefit plans.
The Bank'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 and (iv) cash generated from operations.
As reflected in the Consolidated Statement of Cash Flows, net cash flows
provided by operating activities totaled $4.6 million for the three months ended
September 30, 1995, and net cash flows used by operating activities totaled
$20.4 million for the three months ended September 30, 1994. 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.
14
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- --------------------------------------------
Net cash flows used by investing activities for the three months ended September
30, 1995 and 1994, totaled $9.9 million and $92.0 million, respectively.
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 and mortgage-backed securities. During the first quarter
of fiscal year 1995 the Corporation acquired the assets and liabilities of Home
Federal Savings and Loan (Home Federal), located in Ada, Oklahoma, for which it
paid cash totaling $9.0 million. The acquisition of Railroad will have no
material effect on liquidity since such transaction has been consummated in an
exchange of common stock between companies. The proposed acquisition of
Conservative, however, is expected to result in a cash payment totaling
approximately $19.0 million, and the issuance of common stock of the
Corporation, for Conservative's common stock, preferred stock and common stock
options.
Net cash flows provided by financing activities for the three months ended
September 30, 1995 and 1994, totaled $9.6 million and $121.5 million,
respectively. Advances from the FHLB and retail deposits have been the primary
sources to balance the Bank's funding needs during each of the periods
presented. In addition, during the three months ended September 30, 1994, the
Corporation utilized securities sold under agreements to repurchase primarily
for liquidity and asset liability management purposes. The Corporation
experienced a net increase of $37.9 million in deposits for the three months
ended September 30, 1995, compared to a net decrease of $21.3 million for the
three months ended September 30, 1994, attributable to a broadened retail
deposit base created from acquisitions, opening new branches and to increased
marketing efforts and product promotion.
The Corporation has considered and will continue to consider possible mergers
with and acquisitions of other selected financial institutions. During fiscal
year 1995, the Corporation consummated the acquisitions of Home Federal and
Provident Federal Savings Bank (Provident) located in Lincoln, Nebraska; and
during fiscal year 1996 to date, consummated the acquisition of Railroad and
entered into a merger agreement with Conservative. See Notes E and F for
additional information on the acquisitions of Railroad and Conservative. Such
acquisitions present the Corporation with the opportunity to further expand its
retail network in the Oklahoma, Kansas, Nebraska and Iowa 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.
The Corporation will seek to continue its growth through expansion of the
Corporation's operations in its market areas and may seek to enter markets in
other adjoining states. The Corporation will also seek to expand its operations
both through competition for market share within its market areas and through
mergers with and acquisitions of other selected financial institutions.
Management of the Corporation believes that its emphasis on operating acquired
entities as consumer-oriented financial institutions is attractive to potential
acquisition candidates and is advantageous in competing with larger banks for
acquisitions of selected financial institutions.
At September 30, 1995, the Corporation had issued commitments totaling $88.2
million to fund and purchase loans as follows: $31.0 million of single-family
adjustable-rate mortgage loans, $34.4 million of single-family fixed-rate
mortgage loans, $13.7 million of consumer loan lines of credit and $9.1 million
of commercial real estate loans. In addition, outstanding commitments from
mortgage banking operations to purchase mortgage loan servicing rights totaled
$3.7 million at September 30, 1995. 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.
15
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- --------------------------------------------
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 8.03% at September 30, 1995. 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.
RECENT EVENTS:
- --------------
The Bank's savings deposits are insured by the Savings Association Insurance
Fund (SAIF), which is administered by the Federal Deposit Insurance Corporation
(FDIC). The assessment rate currently ranges from 0.23% of deposits for well-
capitalized institutions to 0.31% of deposits for undercapitalized institutions.
The FDIC also administers the Bank Insurance Fund (BIF), which has the same
designated reserve ratios as the SAIF. On August 8, 1995, the FDIC adopted an
amendment to the BIF risk-based assessment schedule which lowered the deposit
insurance assessment rate for most commercial banks and other depository
institutions with deposits insured by the BIF to a range of from 0.31% of
insured deposits for undercapitalized BIF-insured institutions to 0.04% of
deposits for well-capitalized institutions, which constitute over 90% of BIF-
insured institutions. The FDIC amendment became effective September 30, 1995.
The amendment creates a substantial disparity in the deposit insurance premiums
paid by BIF and SAIF members and could place SAIF-insured savings institutions
at a significant competitive disadvantage to BIF-insured institutions.
A number of proposals have been considered to recapitalize the SAIF in order to
eliminate the premium disparity. The Senate and the House of Representatives
have both, as part of a budget reconciliation package to balance the federal
budget, approved legislation requiring a one time assessment of .85% of insured
deposits to be imposed on all SAIF-insured deposits held as of March 31, 1995.
This assessment would be payable during the first quarter of 1996. The
assessment would result, on a pro forma basis as of September 30, 1995, in a
one-time after-tax charge of approximately $19.5 million to the Corporation.
Such assessment would have the effect of reducing the tangible capital of the
Bank to $297.5 million, or 5.02%, of adjusted total assets, core capital to
$317.6 million, or 5.34%, of adjusted total assets, and risk-based capital to
$349.2 million, or 13.06%, of risk-weighted assets. Including the insured
deposits of Railroad as if the Corporation and Railroad had merged as of
September 30, 1995, the assessment would have resulted, in a one-time after-tax
charge of approximately $21.8 million and reduced the pro forma combined
tangible, core and risk-based capital to $328.3 million (5.03%), $348.4 million
(5.32%) and $381.9 million (12.71%), respectively. The Bank would, on such pro
forma basis as of September 30, 1995, continue to exceed the minimum
requirements to be classified as a "well-capitalized" institution. See Note C
for information on the Bank's regulatory capital and the minimum requirements to
be classified well-capitalized. If such a special assessment were required and
the SAIF as a result was fully recapitalized, it could have the effect of
reducing the Bank's deposit insurance premiums to the SAIF, thereby increasing
net income in future periods.
Also under consideration by Congress are proposals relating to merger of the BIF
and SAIF funds, the elimination of the thrift charter and the federal tax
implications of conversion to a national bank. Management of the Corporation is
unable to accurately predict at this time whether any of these proposals will be
adopted in their current form or the impact of these proposals on the
Corporation.
16
RESULTS OF OPERATIONS:
- ----------------------
Net income for the three months ended September 30, 1995, was $11.9 million, or
$.91 per share, compared to $507,000 of net income for the three months ended
September 30, 1994, or $.04 per share. The increase in net income for the three
months ended September 30, 1995, compared to the three months ended September
30, 1994, is primarily due to the following: a $10.7 million non-recurring
charge for accelerated amortization of goodwill recorded in the prior quarter
and not incurred in the current quarter, an improvement of $1.0 million in real
estate operations, a decline of $802,000 in amortization expense of intangible
assets, an increase of $734,000 in loan servicing fees, an increase of $475,000
in retail fees and charges, an improvement of $381,000 in gain on sales of
loans, an increase of $303,000 in net interest income and an increase of
$146,000 in other operating income. These increases to net income were partially
offset by an increase of $2.28 million in general and administrative expenses
and an increase of $937,000 in the provision for income taxes.
Net Interest Income:
- --------------------
Net interest income was $33.5 million for the three months ended September 30,
1995, compared to $33.2 million for the three months ended September 30, 1994,
resulting in an increase of $303,000, or .9%. The interest rate spread was 2.20%
at September 30, 1995, compared to 2.29% at September 30, 1994, a decrease of
nine basis points. During the three months ended September 30, 1995 and 1994,
interest rate spreads were 2.15% and 2.31%, respectively, a decrease of 16 basis
points. The current interest rate environment has put pressure on the
Corporation's interest rate spreads and yields and the resulting net interest
income. 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.
Net interest income increased during the three months ended September 30, 1995,
compared to September 30, 1994, even though the interest rate spread and the net
yield on interest-earning assets decreased 16 and 10 basis points, respectively,
due to average interest-earning assets increasing $271.9 million to $5.721
billion for the three months ended September 30, 1995, compared to $5.449
billion for the three months ended September 30, 1994. This increase in average
interest-earning assets is primarily due to the acquisitions during fiscal year
1995 and to internal growth.
The Corporation has historically invested in interest-earning assets that have a
longer duration than its interest-bearing liabilities. The shorter duration of
the interest-sensitive liabilities indicates that the Corporation is exposed to
interest rate risk. In a rising rate environment, in addition to reducing the
market value of long-term interest-earning assets, liabilities will reprice
faster than assets, therefore decreasing net interest income.
To mitigate this risk, the Bank has utilized certain financial instruments to
hedge the interest rate exposure on certain interest-sensitive liabilities.
However, it has been the general policy of the Bank to move toward a natural,
rather than a synthetic, management of its interest rate risk. The Bank has
allowed these financial instruments to expire upon maturity while extending the
maturities and locking in fixed interest rates on certain borrowings, primarily
advances from the FHLB. Such strategy has helped to reduce the Bank's one-year
cumulative gap mismatch. In addition, the Bank's continued concentration of
adjustable-rate assets as a percentage of total assets benefits the one-year
cumulative gap as such adjustable-rate assets reprice and are more responsive to
the sensitivity of more frequently repricing interest-bearing liabilities.
17
Net Interest Income (Continued):
- --------------------------------
In connection with its asset/liability management program, the Bank has interest
rate swap agreements with other counterparties under terms that provide an
exchange of interest payments on the outstanding notional amount of the swap.
Such agreements have been used to artificially lengthen the maturity of various
interest-bearing liabilities. In accordance with these arrangements, the Bank
pays fixed rates and receives variable rates of interest according to a
specified index. The Bank has reduced its level of such swap agreements to a
notional principal amount of $70.0 million at September 30, 1995, from a balance
of $78.5 million at June 30, 1995, and $93.5 million at September 30, 1994. For
the three months ended September 30, 1995 and 1994, the Bank recorded $927,000
and $1.4 million, respectively, in interest expense from its interest rate swap
agreements. In the 12 months ending September 30, 1996, an additional $60.0
million of these swap agreements mature.
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
Months Ended At
September 30, September 30,
------------------ ---------------
1995 1994 1995 1994
------ ----- ------ ------
Weighted average yield on:
Loans........................................... 8.25% 7.89% 8.25% 7.88%
Mortgage-backed securities...................... 6.42 5.68 6.57 5.86
Investments..................................... 6.08 6.12 6.23 5.98
----- ----- ----- -----
Interest-earning assets........................ 7.67 7.20 7.73 7.24
----- ----- ----- -----
Weighted average rate paid on:
Savings deposits................................ 3.15 2.93 3.10 3.02
Other time deposits............................. 6.01 5.05 6.04 5.09
Advances from FHLB.............................. 5.84 5.47 5.73 5.52
Securities sold under agreements to repurchase.. 7.04 7.10 7.04 8.38
Other borrowings................................ 10.77 11.24 10.86 10.81
----- ----- ----- -----
Interest-bearing liabilities................... 5.52 4.89 5.53 4.95
----- ----- ----- -----
Interest rate spread............................. 2.15% 2.31% 2.20% 2.29%
===== ===== ===== =====
Net annualized yield on
interest-earning assets......................... 2.34% 2.44% 2.42% 2.44%
===== ===== ===== =====
- -----------------------------------------------------------------------------------------
18
Net Interest Income (Continued):
- --------------------------------
The following table presents average interest-earning assets and average
interest-bearing liabilities, interest income and interest expense and average
yields and rates during the three months ended September 30, 1995. The table
below includes nonaccruing loans averaging $29.0 million for the three months
ended September 30, 1995, as interest-earning assets at a yield of zero percent.
- --------------------------------------------------------------------------------
Three Months Ended
September 30, 1995
--------------------------------------
Annualized
Average Yield/
(Dollars in Thousands) Balance Interest Rate
-------------------- ----------- ---------- -----------
Interest-earning assets:
Loans............................ $ 4,005,821 $ 82,579 8.25%
Mortgage-backed securities....... 1,326,859 21,279 6.42
Investments...................... 387,935 5,940 6.08
----------- ---------- --------
Interest-earning assets...... 5,720,615 109,798 7.67
----------- ---------- --------
Interest-bearing liabilities:
Savings deposits................. 992,641 7,868 3.15
Other time deposits.............. 2,624,165 39,735 6.01
Advances from FHLB............... 1,609,598 23,711 5.84
Securities sold under
agreements to repurchase........ 195,755 3,524 7.04
Other borrowings................. 55,063 1,482 10.77
----------- ---------- --------
Interest-bearing
liabilities.................... 5,477,222 76,320 5.52
----------- ---------- --------
Net earnings balance.............. $ 243,393
===========
Net interest income............... $ 33,478
==========
Interest rate spread.............. 2.15%
========
Net annualized yield on
interest-earning assets...... 2.34%
========
- --------------------------------------------------------------------------------
During the three months ended September 30, 1995, the Corporation experienced
higher costs on interest-bearing liabilities and a lower interest rate spread
and yield compared to the three months ended September 30, 1994, primarily due
to increases in the interest rates offered on certain types of deposit products.
The Corporation, and most of its competitors in its deposit markets, raised
interest rates on deposits during fiscal year 1995 in order to maintain savings
deposits as an attractive investment vehicle for consumers. The net earnings
balance (the difference between average interest-bearing liabilities and average
interest-earning assets) improved by $58.9 million for the three months ended
September 30, 1995, compared to the three months ended September 30, 1994,
primarily from internal growth.
19
Net Interest Income (Continued):
- --------------------------------
The following table 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:
(1) changes in volume (change in volume multiplied by prior year rate), and (2)
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. This table demonstrates the effect of the increased
volume of interest-earning assets and interest-bearing liabilities, the
increasing interest rates and the decline in interest rate spreads previously
discussed.
- ------------------------------------------------------------------------------------------------
Three Months Ended
September 30, 1995 Compared
to September 30, 1994
------------------------------------------
Increase (Decrease) Due to
------------------------------------------
(In Thousands) Volume Rate Net
- -------------- -------- -------- --------
Interest Income:
Loans........................................... $ 6,144 $ 3,597 $ 9,741
Mortgage-backed securities...................... (375) 2,453 2,078
Investments..................................... (80) (41) (121)
-------- -------- --------
Interest income............................... 5,689 6,009 11,698
-------- -------- --------
Interest expense:
Savings deposits................................ 41 543 584
Other time deposits............................. 2,439 6,215 8,654
Advances from FHLB.............................. (1,033) 1,538 505
Securities sold under agreements to repurchase.. 1,850 (14) 1,836
Other borrowings................................ (116) (68) (184)
-------- -------- --------
Interest expense.............................. 3,181 8,214 11,395
-------- -------- --------
Net effect on net interest income................. $ 2,508 $ (2,205) $ 303
======== ======== ========
- ------------------------------------------------------------------------------------------------
The decrease due to changes in rates between the three months ended September
30, 1995 and 1994, reflects the decrease in interest rate spreads. The
improvement due to changes in volume in part reflects the increases in the
difference between average interest-bearing liabilities and average interest-
earning assets of $58.9 million between the three months ended September 30,
1995 and 1994. The percentage of average interest-earning assets to average
interest-bearing liabilities was 104.4% for the three months ended September 30,
1995, compared to 103.5% for the three months ended September 30, 1994, with
such improvement primarily due to internal growth.
20
Provision for Loan Losses and Real Estate Operations:
- -----------------------------------------------------
The Corporation recorded loan loss provisions of $1.5 million for both three
month periods ended September 30, 1995 and 1994. The loan loss provisions
remained stable even though the net loan portfolio increased approximately
$308.9 million at September 30, 1995, compared to September 30, 1994, indicating
the credit quality of the loan portfolio and the low level of nonperforming
loans over the respective periods of time. 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 current 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 on real estate operations of $461,000 for
the three months ended September 30, 1995, compared to net losses of $588,000
for the three months ended September 30, 1994. Real estate operations reflect
provisions for real estate losses, net real estate operating activity, and gains
and losses on dispositions of real estate. The improvements in real estate
operations of $1.0 million for the three months ended September 30, 1995,
compared to the three months ended September 30, 1994, are primarily due to
lower loss provisions, lower operating expenses and litigation recoveries.
Management believes that such improvements in real estate operations are
indicative of the improvements made in the reduction of the Corporation's real
estate portfolio and to the improvement in the real estate markets in general.
Although management of the Corporation believes that present levels of
allowances for loan losses are 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 allowances in the future or that significant provisions for losses will not
be required based on factors such as deterioration in market conditions, changes
in borrowers' financial conditions, delinquencies and defaults. In addition,
regulatory agencies review the adequacy of allowances for losses on loans on a
regular basis as an integral part of their examination process. Such agencies
may require additions to the allowances based on their judgments of information
available to them at the time of their examinations.
21
Provision for Loan Losses and Real Estate Operations (Continued):
- -----------------------------------------------------------------
Nonperforming assets are monitored closely on a regular basis by the
Corporation's internal credit review and asset workout groups. Nonperforming
assets increased by $631,000, or 1.1%, at September 30, 1995, compared to June
30, 1995, primarily as a result of net increases of $1.5 million in real estate
and $1.3 million in nonperforming loans partially offset by a net decrease of
$2.2 million in troubled debt restructurings. Nonperforming assets as of the
dates indicated are summarized below:
- ----------------------------------------------------------------------------------
September 30, June 30,
(Dollars in Thousands) 1995 1994
- ----------------------------------------------------------------------------------
Nonperforming loans:
Residential real estate.......................... $ 29,272 $ 28,002
Commercial real estate........................... 868 773
Consumer......................................... 383 442
----------- ----------
Total........................................... 30,523 29,217
----------- ----------
Real estate:
Commercial....................................... 9,772 8,795
Residential...................................... 3,882 3,383
----------- ----------
Total........................................... 13,654 12,178
----------- ----------
Troubled debt restructurings:
Commercial....................................... 13,519 15,708
Residential...................................... 1,332 1,294
----------- ----------
Total........................................... 14,851 17,002
----------- ----------
Total nonperforming assets........................ $ 59,028 $ 58,397
=========== ==========
Nonperforming loans to total loans................ .75% .72%
Nonperforming assets to total assets.............. .99% .98%
Allowance for loan losses:
Other loans (1).................................. $ 31,836 $ 31,287
Bulk purchased loans (2)......................... 14,555 15,280
----------- ----------
Total........................................... $ 46,391 $ 46,567
=========== ==========
Allowance for loan losses to total loans.......... 1.13% 1.15%
Allowance for loan losses to total
nonperforming assets............................. 78.59% 79.74%
- ----------------------------------------------------------------------------------
(1) Includes $78,000 at both September 30, 1995, and June 30, 1995, 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 Bank'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 $667.8 million and $701.9 million,
respectively, at September 30, 1995, and June 30, 1995. These allowances
are available only to absorb losses associated with respective bulk
purchased loans, and are not available to absorb losses from other loans.
22
Provision for Loan Losses and Real Estate Operations (Continued):
- -----------------------------------------------------------------
The ratio of nonperforming loans to total loans was .75% at September 30, 1995,
based on loan balances of $4.0 billion, compared to .72% at June 30, 1995, also
based on loan balances approximating $4.0 billion. Management believes that
these ratios reflect the quality of the Bank's loan portfolio, which consists
primarily of loans secured by single-family residential properties. The ratio of
nonperforming assets to total assets of .99% at September 30, 1995, which
management believes is favorable compared to industry standards, is one of
several indicators of the continued improvement made in stabilizing
nonperforming assets. The total allowance for loan losses decreased to $46.4
million at September 30, 1995, compared to $46.6 million at June 30, 1995.
Accordingly, the percentages for allowance for loan losses to total loans and to
total nonperforming assets decreased slightly at September 30, 1995, compared to
June 30, 1995.
Nonperforming loans at September 30, 1995, increased by $1.3 million compared to
June 30, 1995, primarily due to a net increase in delinquent residential real
estate loans. The net increase of $1.5 million in real estate at September 30,
1995, compared to June 30, 1995, is substantially attributable to the addition
of residential and commercial real estate totaling $2.0 million and $1.1
million, respectively, partially offset by the sale of certain residential and
commercial real estate properties totaling $1.3 million and $203,000,
respectively. The net decrease of $2.2 million in troubled debt restructurings
at September 30, 1995, compared to June 30, 1995, is primarily attributable to
the loan principal repayment of one commercial loan totaling $1.6 million and
the transfer of another commercial loan totaling $527,000 to the nonperforming
loans category.
Loan Servicing Fees:
- --------------------
Fees from loans serviced for other institutions totaled $6.0 million for the
three months ended September 30, 1995, compared to $5.2 million for the three
months ended September 30, 1994. This increase of $734,000 comparing the
respective periods is primarily due to increases in the size of the
Corporation's loan servicing portfolio. At September 30, 1995 and 1994, the
Corporation's mortgage servicing portfolio approximated $4.616 billion and
$4.176 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 $2.6 million for the three months ended
September 30, 1995, compared to $2.2 million for the three months ended
September 30, 1994. The net increase of $475,000 in retail fees and charges
primarily results from increases in certain checking account fees and from the
Corporation's expanding retail customer deposit base over the same respective
period.
Gain (Loss) on Sales of Loans:
- ------------------------------
During the three months ended September 30, 1995, the Bank sold to third parties
through its mortgage banking operations loans totaling $91.0 million which
resulted in net pre-tax gains of $101,000. This activity compares to sales of
$139.5 million during the three months ended September 30, 1994, which resulted
in net pre-tax losses of $280,000. The gains recorded in the current fiscal
year period are attributable to the relatively stable interest rate environment
currently in place during the first quarter and to the recent adoption of the
provisions of SFAS No. 122 which prescribes accounting methods that generally
result in comparatively higher amounts of gains realized from the sales of
loans.
23
Other Operating Income:
- -----------------------
Other operating income totaled $1.6 million for the three months ended September
30, 1995, compared to $1.5 million for the three months ended September 30,
1994. The increase of $146,000 comparing the current quarter results to the
prior quarter is primarily due to increases in brokerage insurance commission
income of $178,000.
General and Administrative Expenses:
- ------------------------------------
General and administrative expenses totaled $22.5 million for the three months
ended September 30, 1995, compared to $20.3 million for the three months ended
September 30, 1994. The increase of $2.28 million for the three months ended
September 30, 1995, compared to the three months ended September 30, 1994, was
primarily due to net increases in other operating expenses of $871,000,
occupancy and equipment of $608,000, compensation and benefits of $419,000,
advertising of $278,000 and regulatory insurance and assessments of $152,000
partially offset by a decrease of $48,000 in amortization of purchased and
originated mortgage loan servicing rights.
The increase of $2.28 million for the three months ended September 30, 1995,
compared to the respective prior year period is primarily attributable to the
Corporation's recent acquisitions. Net increases in general and administrative
expenses directly resulting from the acquisitions totaled $734,000 comparing the
three months ended September 30, 1995, to the respective prior year period.
Such increases in general and administrative expenses result from increased
personnel wages and benefits, costs of operating additional branches and higher
regulatory insurance costs from the deposits acquired. Other expenses were also
incurred on an indirect basis attributable to such acquisitions. Other
increases comparing the three months ended September 30, 1995, to the three
months ended September 30, 1994, are partly due to additional expenses
associated with the addition of three new branches over the same periods of
time.
Amortization of Goodwill and Core Value of Deposits:
- ----------------------------------------------------
Amortization of goodwill and core value of deposits totaled $2.1 million for the
three months ended September 30, 1995, compared to $2.9 million for the three
months ended September 30, 1994. The net decrease of $802,000 is primarily
attributable to a reduction in amortization expense on core value of deposits
from acquisitions before fiscal year 1994. Such a reduction is due to an
adjustment totaling $6.8 million which reduced core value of deposits recorded
January 1, 1995, as a result of the Corporation's recognition of pre-acquisition
tax credits and net operating losses.
24
Accelerated Amortization of Goodwill:
- -------------------------------------
Effective June 30, 1994, the Corporation changed its method of valuation of
intangible assets incorporating a fair value concept using a lower of cost or
market methodology. An appraisal performed by an independent third party of the
existing intangible assets relating to acquisitions during 1986 through 1988 of
five troubled savings institutions located in Colorado, Kansas and Oklahoma
resulted in a fair value estimate of $41.0 million. This appraisal of $41.0
million as of June 30, 1994, was classified by management as core value of
deposits totaling $19.6 million and goodwill totaling $21.4 million. The $21.4
million of goodwill has been completely amortized to expense in fiscal year 1995
($10.7 million amortized in each of the two quarters ended December 31, 1994);
and for reporting purposes separately disclosed in the Consolidated Statement of
Operations.
Provision for Income Taxes:
- ---------------------------
For the three months ended September 30, 1995, the provision for income taxes
totaled $6.2 million compared to $5.3 million for the respective three months
ended September 30, 1994. The effective income tax rate for the three months
ended September 30, 1995, was 34.5% compared to 91.3% for the comparable period
ended September 30, 1994.
The provision for income taxes is computed on an interim basis based on an
estimated effective tax rate expected to be applicable for the entire fiscal
year. In arriving at such an effective tax rate, no effect is included for the
income tax related to unusual items which are separately reported. For the
three months ended September 30, 1994, the Corporation recorded and separately
reported accelerated amortization of goodwill totaling $10.7 million. The effect
of the accelerated amortization of this nondeductible goodwill has been excluded
from the determination of the annualized effective tax rate. As a result, the
effective tax rate for the three months ended September 30, 1994, is higher
compared to the three months ended September 30, 1995. See "Accelerated
Amortization of Goodwill" for additional information on the amortization of this
goodwill.
The effective tax rates for both periods vary from the federal statutory rate
primarily due to the nondeductibility of amortization of goodwill and core value
of deposits in relation to the level of taxable income for the respective
periods.
25
PART II. OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). Exhibits:
Exhibit 11. Computation of Earnings Per Share
(b). Reports on Form 8-K
The Corporation filed a Current Report on Form 8-K dated August 8, 1995,
reporting that on August 2, 1995, its common stock began trading on the New
York Stock Exchange.
The Corporation filed a Current Report on Form 8-K on August 18, 1995, reporting
the Corporation entering into, on August 15, 1995, a Reorganization and Merger
Agreement (the Agreement) by and among the Corporation, the Bank, Conservative
Savings Corporation (Conservative) and Conservative Savings Bank, FSB. Under
the terms of the Agreement, the Corporation will acquire all of the outstanding
shares of Conservative's common and preferred stock in exchange for cash and a
pro-rata number of shares of common stock of the Corporation. See Note F for
additional information concerning this proposed merger.
26
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL FEDERAL CORPORATION
------------------------------
(Registrant)
Date: November 13, 1995 /s/ James A. Laphen
------------------ ----------------------------------
James A. Laphen, President, Chief
Operating Officer and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
Date: November 13, 1995 /s/ Gary L. Matter
------------------ ----------------------------------
Gary L. Matter, Senior Vice President,
Controller and Secretary
(Principal Accounting Officer)
27
EXHIBIT INDEX
-------------
Page No.
--------
Exhibit 11. Computation of Earnings Per Share 29
28
COMMERCIAL FEDERAL CORPORATION EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(UNAUDITED)
-----------
COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARES:
- --------------------------------------------------------------------------------
Three Months Ended
September 30,
--------------------------
1995 1994
- --------------------------------------------------------------------------------
Net income.......................................... $11,859,347 $ 506,663
=========== ============
- --------------------------------------------------------------------------------
PRIMARY:
- --------
Weighted average common shares outstanding.......... 12,911,130 12,790,301
Add shares applicable to stock options
using average market price........................ 190,662 223,614
----------- -----------
Total average common and common equivalent
shares outstanding................................ 13,101,792 13,013,915
=========== ===========
Net income per common and common equivalent share... $ .91 $ .04
=========== ===========
- --------------------------------------------------------------------------------
FULLY DILUTED (1):
- ------------------
Weighted average common shares outstanding.......... 12,911,130 12,790,301
Add shares applicable to stock options
using the period-end market price
if higher than average market price
and other dilutive factors........................ 198,955 223,614
----------- -----------
Total average common and common equivalent
shares outstanding assuming full dilution......... 13,110,085 13,013,915
=========== ===========
Net income per common share assuming full dilution.. $ .90 $ .04
=========== ===========
- --------------------------------------------------------------------------------
(1) This calculation is submitted in accordance with Regulation S-K Item
601(b)(11) although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
- --------------------------------------------------------------------------------
29