UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly period ended MARCH 31, 1996
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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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2120 SOUTH 72ND STREET, OMAHA, NEBRASKA 68124
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(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 ____
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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 May 9, 1996
- ----------------------------- --------------------------------
Common Stock, $0.01 Par Value 15,076,452 Shares
The exhibit index is located on page 29.
This document is comprised of 30 pages.
COMMERCIAL FEDERAL CORPORATION
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FORM 10-Q
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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
March 31, 1996 and June 30, 1995...................................................... 3
Consolidated Statement of Operations for the Three
and Nine Months Ended March 31, 1996 and 1995......................................... 4
Consolidated Statement of Cash Flows for the Three
and Nine Months Ended March 31, 1996 and 1995......................................... 5 - 6
Notes to Consolidated Financial Statements................................................. 7 - 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................ 14 - 26
Part II. OTHER INFORMATION
-----------------
Item 5. Other Information....................................................................... 27
Item 6. Exhibits and Reports on Form 8 - K...................................................... 27
SIGNATURE PAGE.............................................................................................. 28
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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) March 31, June 30,
ASSETS 1996 1995
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(Unaudited) (Audited)
Cash (including short-term investments of $ 2,500 and $6,345)......................... $ 50,658 $ 35,145
Investment securities available for sale, at fair value............................... 9,846 2,988
Mortgage-backed securities available for sale, at fair value.......................... 288,807 36,974
Loans held for sale................................................................... 102,938 113,385
Investment securities held to maturity (fair value of $249,092 and $294,805).......... 251,440 297,493
Mortgage-backed securities held to maturity (fair value of
$893,226 and $1,319,333)............................................................. 897,017 1,327,933
Loans receivable, net of allowances of $49,304 and $48,463............................ 4,689,980 4,427,307
Federal Home Loan Bank stock.......................................................... 82,344 103,648
Interest receivable, net of reserves of $363 and $352................................. 39,416 42,211
Real estate........................................................................... 14,985 16,786
Premises and equipment................................................................ 74,075 67,204
Prepaid expenses and other assets..................................................... 75,265 61,242
Goodwill and core value of deposits, net of accumulated
amortization of $142,923 and $136,032................................................ 40,717 37,263
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Total Assets...................................................................... $ 6,617,488 $ 6,569,579
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Liabilities:
Deposits............................................................................ $4,334,125 $ 4,011,323
Advances from Federal Home Loan Bank................................................ 1,508,089 1,787,352
Securities sold under agreements to repurchase...................................... 160,755 208,373
Other borrowings.................................................................... 59,335 65,303
Interest payable.................................................................... 26,702 24,223
Other liabilities................................................................... 128,083 135,391
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TOTAL LIABILITIES................................................................. 6,217,089 6,231,965
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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;
15,067,179 and 14,272,793 shares issued and outstanding............................ 151 143
Additional paid-in capital............................................................ 174,685 146,530
Unrealized holding gain (loss) on securities available for sale, net.................. (381) 86
Retained earnings, substantially restricted........................................... 225,944 190,855
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Total Stockholders' Equity........................................................ 400,399 337,614
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Total Liabilities and Stockholders' Equity........................................ $ 6,617,488 $ 6,569,579
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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 Nine Months Ended
March 31, March 31,
-------------------------------- ------------------------------
1996 1995 1996 1995
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Interest Income:
Loans receivable.......................................... $ 97,035 $ 86,758 $ 285,961 $ 252,396
Mortgage-backed securities................................ 19,904 21,648 63,731 62,516
Investment securities..................................... 5,960 6,470 18,284 19,126
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Total interest income................................... 122,899 114,876 367,958 334,038
Interest Expense:
Deposits.................................................. 53,209 45,032 159,958 130,159
Advances from Federal Home Loan Bank...................... 22,284 28,179 73,281 81,072
Securities sold under agreements to repurchase............ 3,207 2,217 10,361 5,009
Other borrowings.......................................... 1,638 1,777 5,073 5,469
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Total interest expense.................................. 80,338 77,205 248,673 221,709
Net Interest Income......................................... 42,561 37,671 119,285 112,329
Provision for Loan Losses................................... (1,508) (1,584) (4,599) (4,825)
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Net Interest Income After Provision for Loan Losses......... 41,053 36,087 114,686 107,504
Other Income (Loss):
Loan servicing fees....................................... 7,363 6,199 20,674 18,393
Retail fees and charges................................... 3,376 2,359 9,084 6,834
Real estate operations.................................... 222 1,430 391 1,601
Gain (loss) on sales of loans............................. (316) (118) 34 (1,288)
Gain on sales of mortgage - backed and
investment securities, net............................... 200 -- 200 --
Gain on sales of loan servicing rights.................... -- 817 452 2,682
Other operating income.................................... 1,720 2,015 5,104 5,557
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Total other income....................................... 12,745 12,702 35,939 33,779
Other Expense:
General and administrative expenses:
Compensation and benefits............................... 11,287 11,207 33,590 32,849
Occupancy and equipment................................. 5,946 5,357 17,519 15,496
Regulatory insurance and assessments.................... 2,761 2,363 7,871 6,904
Advertising............................................. 1,594 1,085 4,465 3,347
Amortization of purchased and originated mortgage
loan servicing rights.................................. 2,387 2,086 6,546 6,172
Other operating expenses................................ 4,389 3,935 14,869 11,320
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Total general and administrative expenses............... 28,364 26,033 84,860 76,088
Amortization of goodwill and core value of deposits....... 2,491 2,212 6,891 8,008
Accelerated amortization of goodwill...................... -- -- -- 21,357
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Total other expense..................................... 30,855 28,245 91,751 105,453
Income Before Provision for Income Taxes.................... 22,943 20,544 58,874 35,830
Provision for Income Taxes.................................. 6,589 5,511 19,412 17,348
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Net Income.................................................. $ 16,354 $ 15,033 $ 39,462 $ 18,482
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Per Common Share:
Net Income................................................ $ 1.09 $ 1.04 $ 2.68 $ 1.28
Dividends Declared........................................ $ .10 $ -- $ .30 $ --
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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) Nine Months Ended
March 31,
----------------------------------------
1996 1995
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................................... $ 39,462 $ 18,482
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Accelerated amortization of goodwill...................................... -- 21,357
Amortization of goodwill and core value of deposits....................... 6,891 8,008
Provisions for loss on loans and real estate.............................. 4,130 5,155
Depreciation and amortization............................................. 5,036 4,498
Accretion of deferred discounts and fees.................................. (8,919) (5,503)
Amortization of purchased and originated mortgage
loan servicing rights................................................... 6,546 6,172
Amortization of deferred compensation on restricted
stock and premiums...................................................... 6,290 4,583
Gain on sale of real estate, net.......................................... (510) (2,050)
(Gain) loss on sales of loans, net........................................ (34) 1,288
Gain on sales of mortgage-backed and
investment securities, net.............................................. (200) --
Gain on sales of loan servicing rights.................................... (452) (2,682)
Stock dividends from Federal Home Loan Bank............................... (2,912) --
Proceeds from the sale of loans........................................... 482,310 494,419
Origination of loans for resale........................................... (295,364) (200,226)
Purchase of loans for resale.............................................. (214,843) (317,630)
Decrease in interest receivable........................................... 4,726 270
(Decrease) Increase in interest payable................................... 1,850 (1,398)
Decrease in other liabilities............................................. (11,420) (10,670)
Other items, net.......................................................... (5,268) (3,747)
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Total adjustments...................................................... (22,143) 1,844
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Net cash provided by operating activities............................ $ 17,319 $ 20,326
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans............................................................. $ (443,450) $ (533,790)
Repayments of loans, net of originations....................................... 326,086 124,820
Proceeds from sale of mortgage-backed securities available for sale............ 166,472 22,645
Proceeds from sale of investment securities available for sale................. 51,770 14,797
Maturities and repayments of investment securities available for sale.......... 2,077 --
Principal repayments of mortgage-backed securities............................. 144,129 103,110
Maturities and repayments of investment securities held to maturity............ 96,108 12,147
Purchases of investment securities held to maturity............................ (76,266) (10,000)
Purchases of mortgage-backed securities held to maturity....................... -- (13,411)
Proceeds from sale of Federal Home Loan Bank stock............................. 36,085 5,798
Purchases of Federal Home Bank stock........................................... (3,713) (11,589)
Purchases of mortgage loan servicing rights.................................... (10,629) (5,439)
Proceeds from sale of mortgage loan servicing rights........................... 452 2,682
Acquisitions, net of cash paid................................................. (15,234) (5,908)
Proceeds from sale of real estate.............................................. 9,852 8,536
Payments to acquire real estate................................................ (1,603) (890)
Purchases of premises and equipment, net....................................... (6,854) (8,249)
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Net cash provided (used) by investing activities..................... $ 275,282 $ (294,741)
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5
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
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(Dollars in Thousands) Nine Months Ended
March 31,
-------------------------------
1996 1995
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CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits........................................................ $ 123,304 $ 89,588
Proceeds from Federal Home Loan Bank advances.......................................... 215,000 596,042
Repayment of Federal Home Loan Bank advances........................................... (560,509) (365,110)
Proceeds from securities sold under agreements to repurchase........................... -- 120,000
Repayment of securities sold under agreements to repurchase............................ (47,618) (157,432)
Repayment of other borrowings.......................................................... (6,031) (3,808)
Payment of cash dividends on common stock.............................................. (2,863) --
Issuance of common stock............................................................... 1,560 3
Other items, net....................................................................... 69 783
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Net cash provided (used) by financing activities.................................. $ (277,088) $ 280,066
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CASH AND CASH EQUIVALENTS:
Increase in net cash position.......................................................... $ 15,513 $ 5,651
Balance, beginning of year............................................................. 35,145 27,575
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Balance, end of period................................................................. $ 50,658 $ 33,226
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense.................................................................. $ 246,678 $ 222,952
Income taxes, net................................................................. 11,946 7,939
Non-cash investing and financing activities:
Securities transferred from held to maturity to available for sale, net........... 410,930 --
Loans exchanged for mortgage-backed securities.................................... 50,315 172,499
Loans transferred to real estate.................................................. 7,107 3,408
Loans to facilitate the sale of real estate....................................... 51 569
Common stock issued in connection with the acquisition of Conservative............ 25,826 --
Reduction in core value of deposits on recognition of pre-aquisition
tax credits and net operating losses............................................ -- (6,810)
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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 NINE MONTHS ENDED MARCH 31, 1996
(Unaudited)
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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.
On October 2, 1995, the Corporation consummated its acquisition of Railroad
Financial Corporation (Railroad), parent company of Railroad Savings Bank, fsb.
This acquisition was accounted for as a pooling of interests and, accordingly,
the Corporation's historical consolidated financial statements have been
restated for all periods prior to the acquisition to include the accounts and
results of operations of Railroad. See Note E for additional information
regarding this merger.
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 restatement of
all periods prior to the merger with Railroad and the accelerated amortization
of goodwill recorded during the first six 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 and
nine month periods ended March 31, 1996, are not necessarily indicative of the
results which may be expected for the entire fiscal year 1996. Certain amounts
in the prior fiscal year periods have been reclassified for comparative
purposes.
B. ACCOUNTING CHANGES:
------------------
ACCOUNTING FOR MORTGAGE SERVICING RIGHTS:
As of July 1, 1995, the Corporation adopted, on a prospective basis, the
provisions of Statement of Financial Accounting Standards No. 122 (SFAS No. 122)
entitled "Accounting for Mortgage Servicing Rights." SFAS No. 122 provides that
an institution that acquires mortgage servicing rights through either the
purchase or origination of mortgage loans and sells or securitizes those loans
with servicing rights retained will allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. Mortgage servicing
rights will be amortized in proportion to and over the period of estimated net
servicing income and will be evaluated for impairment based on their fair
value. The impairment evaluation will stratify the mortgage servicing rights
based upon one or more of the predominant risk characteristics of the underlying
loans. The net effect of adopting the provisions of SFAS No. 122 was to increase
pre-tax earnings of approximately $905,000 and $2,838,000, respectively, for the
three and nine months ended March 31, 1996.
The unamortized book value of mortgage servicing rights totaled $43,344,000 at
March 31, 1996. The fair value of the Corporation's mortgage servicing rights
totaled approximately $73,134,000 at March 31, 1996. 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. For purposes of measuring impairment of mortgage servicing
rights, the predominant risk characteristics used by the Corporation to stratify
mortgage servicing rights 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 March 31, 1996.
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. The adoption of the
provisions of this statement did not have a material effect on the Corporation's
financial position or results of operations.
C. MORTGAGE-BACKED AND INVESTMENT SECURITIES:
-----------------------------------------
As of July 1, 1994, the Corporation adopted the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" which
required the classification of investments into three categories: held-to-
maturity, trading and available-for-sale. At December 31, 1995, pursuant to the
issuance of a special report by the Financial Accounting Standards Board
entitled "A Guide to Implementation of Statement No. 115 on Accounting for
Certain Investments in Debt and Equity Securities," and the reassessment of the
appropriateness of the classifications of all securities held, the Corporation
reclassified investment and mortgage-backed securities totaling a net of
$410,930,000 from securities held-to-maturity to securities available-for-sale.
Such reclassification consisted of substantially all existing 15- and 30-year
fixed-rate mortgage-backed securities approximating $370,400,000 held by the
Bank and approximately $49,945,000 of agency investment securities from the
held-to-maturity classification into the available-for-sale account category. In
addition, approximately $9,415,000 of adjustable-rate mortgage-backed securities
were reclassified from available-for-sale to held-to-maturity.
In addition, on February 1, 1996, as part of the acquisition of Conservative
Savings Corporation (Conservative), parent company of Conservative Savings Bank,
FSB, the Corporation acquired a portion of Conservative's mortgage-backed
securities and investment securities with net book values of $82,253,000 and
$7,840,000, respectively, which were classified as available-for-sale. See Note
D regarding this acquisition. Such securities classified as available-for-sale
included mortgage-backed securities consisting of 15-year fixed-rate FHLMC
participation certificates totaling $6,546,000, adjustable-rate CMOs totaling
$18,297,000 and adjustable-rate REMICs totaling $57,410,000; and investment
securities consisting of one corporate and one agency-backed security.
Proceeds from the sale of mortgage-backed securities available-for-sale totaled
$166,472,000 for the three months ended March 31, 1996, resulting in net pre-tax
gains of $408,000. Included in such proceeds were securities with a net book
value totaling $19,250,000 acquired in the Conservative acquisition which were
sold at their fair market values resulting in no gain or loss. Proceeds from the
sale of investment securities available-for-sale totaled $51,770,000 for the
three months ended March 31, 1996, resulting in net pre-tax losses of $208,000.
The combined gains and losses are reported as a net pre-tax gain of $200,000 in
the Consolidated Statement of Operations.
8
D. ACQUISITION OF CONSERVATIVE SAVINGS CORPORATION:
------------------------------------------------
On February 1, 1996, the Corporation consummated its acquisition of Conservative
Savings Corporation (Conservative), parent company of Conservative Savings Bank,
FSB. Under the terms of the Reorganization and Merger Agreement (the Merger
Agreement), the Corporation acquired all of the outstanding shares of
Conservative's common stock (1,844,838 shares) and preferred stock (460,000
shares). Each share of Conservative's common stock was exchanged for $6.34 in
cash and .2453 shares of the Corporation's common stock. Each share of
Conservative's preferred stock was exchanged for $14.33 in cash and .5544 shares
of the Corporation's common stock. Based on the Corporation's closing stock
price of $36.50 at February 1, 1996, the total consideration for this
acquisition approximates $44,114,000.
At February 1, 1996, before purchase accounting adjustments, Conservative had
assets of approximately $302,871,000, deposits of approximately $197,940,000 and
stockholders' equity of approximately $35,124,000. The Consolidated Statement of
Operations for the period ended March 31, 1996 includes the operating results of
Conservative beginning February 1, 1996. Conservative operated nine branches
with seven located in Nebraska, one in Overland Park, Kansas and one in Harlan,
Iowa. Three of the former Conservative branches and two branches of the
Corporation will be closed in the consolidated process pursuant to this
acquisition.
The Conservative acquisition has been accounted for as purchase, with the fair
value of the assets and liabilities to be determined including an independent
core value study, branch appraisals and a valuation of the loan servicing
portfolio, with completion expected during calendar year 1996. In addition,
costs and expenses associated with this acquisition are estimated to approximate
$1,800,000. Core value of deposits resulting from this transaction will be
amortized on an accelerated basis over a period not to exceed 10 years and
goodwill will be amortized on a straight-line basis over 20 years. The effect of
this acquisition on the Corporation's consolidated financial statements as if
this acquisition had occurred at the beginning of the fiscal year would not be
material.
E. ACQUISITION OF RAILROAD FINANCIAL CORPORATION:
----------------------------------------------
On October 2, 1995, the Corporation consummated its acquisition of Railroad and,
pursuant to the terms of the merger agreement, 2,156,232 shares of Railroad's
common stock were delivered 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 was paid for fractional
shares. Railroad operated 18 branches and 71 agency offices throughout the state
of Kansas and at acquisition date, had assets of approximately $602,900,000,
deposits of approximately $421,400,000 and stockholders' equity of approximately
$27,700,000. This acquisition was accounted for as a pooling of interests and,
accordingly, the Corporation's historical consolidated financial statements have
been restated for all periods prior to the acquisition to include the accounts
and results of operations of Railroad.
The following table summarizes results of operations of the Corporation and
Railroad for the three months ended September 30, 1995, as separately reported
prior to the merger, that are included in results of operations for the nine
months ended March 31, 1996.
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(In Thousands) Corporation Railroad Combined
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Total interest income and other income......... $ 120,560 $ 13,531 $ 134,091
Total interest expense......................... 76,320 8,283 84,603
Net income (loss).............................. 11,859 (615) 11,244
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9
E. ACQUISITION OF RAILROAD FINANCIAL CORPORATION (Continued):
----------------------------------------------------------
The following table reconciles revenue and earnings previously reported by the
Corporation to give effect to the merger as currently presented in the financial
statements for the three and nine months ended March 31, 1995.
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(In Thousands) Corporation Railroad Combined
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Three months ended March 31, 1995:
Total interest income and other income...... $ 113,661 $ 13,917 $ 127,578
Total interest expense...................... 70,046 7,159 77,205
Net income.................................. 13,527 1,506 15,033
Nine months ended March 31, 1995:
Total interest income and other income...... $ 331,174 $ 36,643 $ 367,817
Total interest expense...................... 202,981 18,728 221,709
Net income.................................. 15,284 3,198 18,482
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Railroad's results of operations were reported on a calendar year basis previous
to its merger into the Corporation. However, in restating prior periods for the
most recent fiscal year, Railroad's accounts and results of operations were
conformed to the Corporation's four quarters ended June 30, 1995. Accordingly,
in changing fiscal years, Railroad's accounts and results of operations for the
six months ended June 30, 1994 totaling $185,000 were excluded from reported
results of operations for the restated combined companies, but have been
included in the Corporation's stockholder's equity.
F. COMMON STOCK DIVIDENDS:
-----------------------
On October 4, 1995, the Corporation's Board of Directors established a quarterly
dividend policy. The following schedule details the history of the Corporation's
common stock cash dividends for shareholders of record through March 31, 1996.
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Dividend Date of Record Payment Dividend Dividend
No. Declaration Date Date Per Share Paid
-------- -------------- -------------- -------------- --------- -----------
1 Oct. 04, 1995 Oct. 16, 1995 Oct. 31, 1995 $.10 $ 1,428,985
2 Dec. 20, 1995 Dec. 29, 1995 Jan. 12, 1996 .10 1,433,975
3 Feb. 14, 1996 Mar. 29, 1996 Apr. 12, 1996 .10 1,506,642
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The Corporation currently plans to continue the declaration and payment of
dividends on a quarterly basis subject to the Board of Director's continuing
evaluation of the Corporation's consolidates earnings, financial condition,
liquidity, capital and other factors, including economic conditions and any
regulatory restrictions.
10
G. DISPOSITION OF LEVERAGED LEASES:
--------------------------------
Commercial Federal Investment Corporation (CFIC), a wholly-owned subsidiary of
the Bank, purchased through a trustee in two separate transactions in 1986
portions of El Paso Electric Company's (El Paso) ownership interest in a nuclear
generating facility located in Palo Verde, Arizona. The transactions effectively
involved a sale by El Paso of a portion of the interest in the generating
facility and the leaseback of the facility to El Paso. In December 1991, CFIC's
carrying cost in the leveraged leases was reduced to zero after CFIC drew two
letters of credit which collateralized such investment; however, CFIC continued
to have a legal ownership interest and therefore recorded deferred income taxes
payable for the deferral of tax payments resulting therefrom.
Effective February 12, 1996, after a series of actions and plans of
reorganization in bankruptcy court, El Paso's Fourth Amended Plan of
Reorganization was approved, providing for the transfer of CFIC's ownership
interest in the Palo Verde facility back to El Paso. Accordingly, the
disposition of CFIC's ownership interest in this asset results in the
recognition of taxable income approximating $154,937,000 for tax purposes only
and in estimated federal and state tax liabilities totalling approximately
$54,827,000. Such tax cash payments are due in June 1996 for the federal
liability and in September and October 1996 for the state liabilities. Such
amounts were recorded as deferred income taxes payable on CFIC's statement of
financial condition. For financial reporting accounting purposes, CFIC pre-tax
income increased for the third quarter and year to date by $1,019,700 due to
an income tax benefit recognized as the financial reporting accounting impact
from this settlement.
H. COMMITMENTS AND CONTINGENCIES:
------------------------------
At March 31, 1996, the Corporation had issued commitments, excluding undisbursed
portions of loans in process, totaling approximately $200,964,000 to fund and
purchase loans as follows: $30,861,000 of single-family adjustable-rate mortgage
loans, $96,857,000 of single-family fixed-rate mortgage loans, $50,000,000 of
mortgage-backed securities, $16,697,000 of consumer loan lines of credit and
$6,549,000 of commercial real estate loans. In addition, outstanding commitments
from mortgage banking operations to purchase mortgage loan servicing rights
totaled $2,032,000 at March 31, 1996. 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.
At March 31, 1996, the Corporation had $15,572,000 in outstanding commitments to
sell mortgage-backed securities. Loans sold subject to recourse provisions
totaled approximately $41,759,000, 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.
11
I. REGULATORY CAPITAL:
------------------
At March 31, 1996, the Bank's estimates of its capital amounts and the capital
levels required under Office of Thrift Supervision (OTS) capital regulations are
as follows:
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands) Actual Requirement Excess
- ---------------------- ---------- ----------- ---------
Bank's stockholder's equity.................... $ 435,560
Add unrealized holding loss on
securities available for sale, net.......... 381
Less intangible assets......................... (39,281)
Less phase-out of investment
in non-includable subsidiaries.............. (2,076)
----------- ----------- ---------
Tangible capital............................... $ 394,584 $ 99,209 $ 295,375
----------- ----------- ---------
Tangible capital to adjusted assets (1)........ 5.97% 1.50% 4.47%
----------- ----------- ---------
- ----------------------------------------------------------------------------------------------
Tangible capital............................... $ 394,584
Plus certain restricted amounts
of other intangible assets.................. 17,509
----------- ----------- ---------
Core capital (Tier 1 capital).................. $ 412,093 $ 198,943 $ 213,150
----------- ----------- ---------
Core capital to adjusted assets (2)............ 6.21% 3.0% 3.21%
---------- ----------- ---------
- ----------------------------------------------------------------------------------------------
Core capital................................... $ 412,093
Plus general loan loss allowances.............. 36,453
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)............. $ 448,023 $ 267,686 $ 180,337
----------- ----------- ---------
Risk-based capital to risk weighted assets(3).. 13.39% 8.00% 5.39%
----------- ----------- ---------
- --------------------------------------------------------------------------------
(1) Based on adjusted total assets totaling $ 6,613,912,000.
(2) Based on adjusted total assets totaling $ 6,631,421,000.
(3) Based on risk-weighted assets totaling $ 3,346,081,000.
- --------------------------------------------------------------------------------
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 March 31, 1996, as well as the Bank's level of risk-based capital at
March 31, 1996, 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.
12
I. REGULATORY CAPITAL (Continued):
-------------------------------
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 March 31, 1996, the Bank exceeded
the minimum requirements for the well-capitalized category as shown in the
following table.
- --------------------------------------------------------------------------------------------
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..................$ 412,093 $412,093 $448,023
Percentage of adjusted assets... 6.21% 12.32% 13.39%
Minimum requirements to be
classified well-capitalized.. 5.00% 6.00% 10.00%
- --------------------------------------------------------------------------------------------
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.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
On October 2, 1995, the Corporation consummated its acquisition of Railroad
Financial Corporation, parent company of Railroad Savings Bank, FSB. This
acquisition was accounted for as a pooling of interests and, accordingly, the
Corporation's historical consolidated financial statements have been restated
for all periods prior to the acquisition to include the accounts and results of
operations of Railroad.
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 March
31, 1996, the Bank qualified as a Tier 1 Association, and would be permitted to
pay an aggregate amount approximating $74.8 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 March 31, 1996, the cash of Commercial Federal Corporation (the parent
company) totaled $10.1 million of which $3.5 million is required to be retained
under the terms of the Indenture governing the $40.25 million of subordinated
notes due December 1999. Due to the parent company's limited independent
operations, management believes that the cash balance at March 31, 1996, is
currently sufficient to meet operational needs. However, the parent company's
ability to make future interest and principal payments on the subordinated
notes, and on the $6.9 million of 10.0% senior notes acquired in the Railroad
merger, is dependent upon its receipt of dividends from the Bank. Accordingly,
on December 13, 1995, a dividend totaling $3.63 million was paid by the Bank to
the parent company. This dividend from the Bank was 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. 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. 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 pay on a quarterly basis. A dividend totaling
$2.2 million was paid by the Bank to the parent company during the nine months
ended March 31, 1995. 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, (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 $17.3 million and $20.3 million, respectively, for the nine
months ended March 31, 1996 and 1995. 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 provided by investing activities for the nine months ended March
31, 1996, totaled $275.3 million and net cash flows used by investing activities
totaled $294.7 million for the nine months ended March 31, 1995. 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. The acquisition of Railroad
had no material effect on liquidity, except for the cash outlay totaling $3.5
million relating to nonrecurring merger related costs, since such transaction
was consummated in an exchange of common stock between companies. The
acquisition of Conservative, however, resulted in a cash payment totaling
approximately $18.3 million, in addition to the issuance of common stock of the
Corporation, exchanged for Conservative's common and preferred stock. See Note D
for information regarding details of the acquisition of Conservative. 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.
As discussed in Note C, management of the Corporation developed an
asset/liability management strategy to reclassify substantially all 15- and 30-
year fixed-rate mortgage-backed securities approximating $370.4 million and
agency investment securities approximating $49.9 million from held to maturity
to available for sale. The purpose of this strategy is to sell such securities
and use the proceeds to fund FHLB advances as they become due, and to have the
flexibility, should the opportunity arise, to reinvest proceeds into adjustable-
rate or shorter duration interest-earning assets. In addition, on February 1,
1996, the Corporation acquired mortgage-back and investment securities totalling
approximately $90.1 million as part of the acquisition of Conservative and
classified such securities as available for sale. During the quarter ending
March 31, 1996, approximately $218.2 million of such investment and mortgage-
backed securities were sold with the proceeds used primarily to pay maturing
FHLB advances.
Net cash flows provided by financing activities totaled $277.1 million for the
nine months ended March 31, 1996, and net cash flows provided by financing
activities for the nine months ended March 31, 1995, totaled $280.1 million.
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. The
Corporation experienced net increases of $123.3 million and $89.6 million,
respectively, in deposits for the nine months ended March 31, 1996 and 1995
excluding deposits acquired in acquisitions. Such increases in deposits are due
to a broadened retail deposit base created from acquisitions, opening new
branches and increasing marketing efforts and product promotion. In addition,
during the nine months ended March 31, 1995, the Corporation utilized securities
sold under agreements to repurchase primarily for liquidity and asset liability
management purposes.
All of the Corporation's subordinated notes are now redeemable. Accordingly,
management is considering the refinancing of its outstanding subordinated debt
totaling $47.15 million given the current interest rate environment in relation
to the interest rates such notes now bear (10.25% on $40.25 million and 10.0% on
$6.9 million).
The disposition of CFIC's ownership interest in a nuclear generating facility
located in Palo Verde, Arizona (see Note G) has resulted in the recognition of
taxable income totaling approximately $154.9 million. Accordingly, such income
for tax purposes has resulted in federal and state tax liabilities totalling
approximately $54.8 million. The cash disbursements for these tax liabilities
are due in June 1996 for the federal liability and in September and October 1996
for the state liabilities.
The Corporation has considered and will continue to consider possible mergers
with and acquisitions of other selected financial institutions. During fiscal
year 1996 to date, the Corporation consummated the acquisitions of Railroad and
Conservative; and during fiscal 1995, consummated the acquisitions of Home
Federal and Provident Federal Savings Bank (Provident) located in Lincoln,
Nebraska; See Notes D and E 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 continue to grow its five-state franchise through an
ongoing program of selective acquisitions of other financial institutions.
Acquisition candidates will be selected based on the extent to which the
candidate can enhance the Corporation's retail presence in new or underserved
markets and complement the Corporation's existing retail network.
15
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- --------------------------------------------
At March 31, 1996, the Corporation had issued commitments, excluding undisbursed
portions of loans in process, totaling approximately $201.0 million to fund and
purchase loans as follows: $30.9 million of single-family adjustable-rate
mortgage loans, $96.9 million of single-family fixed-rate mortgage loans, $50.0
million of mortgage-backed securities, $16.7 million of consumer loan lines of
credit and $6.5 million of commercial real estate loans. In addition,
outstanding commitments from mortgage banking operations to purchase mortgage
loan servicing rights totaled $2.0 million at March 31, 1996. These outstanding
loan commitments to extend credit in order to originate loans or fund consumer
loan lines of credit do not necessarily represent future cash requirements since
many of the commitments may expire without being drawn. The Corporation expects
to fund these commitments, as necessary, from the sources of funds previously
described. In addition, at March 31, 1996, the Corporation had $15.6 million in
outstanding commitments to sell mortgage-back securities.
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 7.34% at March 31, 1996. 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.
Subsequently, the FDIC reduced the assessment rate for the most highly rated
BIF-insured institutions to zero percent. 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 was scheduled to be payable during the first quarter of 1996.
However, on April 25, 1996, this measure was dropped in order to pass the 1996
budget reconciliation bill. It is anticipated that this measure will be offered
again this year but details are unclear. Assuming the aforementioned
information, the assessment would result, on a pro forma basis as of March 31,
1996, in a one-time after-tax charge of approximately $22.9 million to the
Corporation. Such assessment would have the effect of reducing the tangible
capital of the Bank to $371.7 million, or 5.64%, of adjusted total assets, core
capital to $389.2 million, or 5.89%, of adjusted total assets, and risk-based
capital to $425.1 million, or 12.70%, of risk-weighted assets. The Bank would,
on such pro forma basis as of March 31, 1996, continue to exceed the minimum
requirements to be classified as a "well-capitalized" institution under
applicable regulations. See Note I 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.
16
RECENT EVENTS (Continued):
- --------------------------
Legislation currently being considered by Congress would repeal the bad debt
reserve provisions of the Internal Revenue Code. Savings associations, like the
Bank, which have previously benefitted from certain favorable provisions
regarding their deductions from taxable income for annual additions to their
bad debt reserve would be affected. Under this legislation, such institutions
would be required to recapture into taxable income reserves in excess of 1987
levels over a six-year period beginning with the 1996 taxable year. The start of
such recapture could be delayed until the 1998 taxable year if the dollar amount
of the institution's residential loan originations in each year were not less
than the average dollar amount of residential loans originated in each of the
six most recent years disregarding the years with the highest and lowest
originations during such period. For purposes of this test, residential loan
originations would not include refinancings and home equity loans. The adoption
of the provisions of this legislation as presented in its current form will not
have a material effect on the Corporation's financial position or results of
operation.
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.
RESULTS OF OPERATIONS:
- ---------------------
Net income for the three months ended March 31, 1996, was $16.4 million, or
$1.09 per share, compared to $15.0 million of net income for the three months
ended March 31, 1995, or $1.04 per share. The increase in net income for the
three months ended March 31, 1996, compared to the three months ended March 31,
1995, is primarily due to the following: an increase of $5.0 million in net
income after provision for loan losses, an increase of $1.2 million in loan
servicing fees and an increase of $1.0 million in retail fees and charges. These
increases to net income were partially offset by an increase of $2.3 million in
general and administrative expenses, a decline of $1.2 million in real estate
operations, an increase of $1.1 million in the provision for income taxes, a
decrease of $635,000 in net gains on sales of loans, loan servicing rights and
mortgage-backed and investment securities, a decrease of $295,000 in other
operating income and an increase of $279,000 in amortization expense of
intangible assets.
Net income for the nine months ended March 31, 1996, was $39.5 million, or $2.68
per share, compared to $18.5 million of net income for the nine months ended
March 31, 1995, or $1.28 per share. The increase in net income for the nine
months ended March 31, 1996, compared to the nine months ended March 31, 1995,
is primarily due to the following: a $21.4 million non-recurring charge for
accelerated amortization of goodwill recorded in the prior period and not
incurred in the current period, an increase of $7.2 million in net interest
income after provision for loan losses, increases of $2.3 million each in retail
fees and charges and loan servicing fees and a decline of $1.1 million in
amortization expense of intangible assets. These increases to net income were
partially offset by an increase of $8.8 million in general and administrative
expenses, an increase of $2.1 million in the provision for income taxes, a
decline of $1.2 million in real estate operations, a decrease of $708,000 in net
gains on sales of loans, loan servicing rights and mortgage-backed and
investment securities and a decrease of $453,000 in other operating income.
Net Interest Income:
- --------------------
Net interest income was $42.6 million for the three months ended March 31, 1996,
compared to $37.7 million for the three months ended March 31, 1995, resulting
in an increase of $4.9 million,or 13.0%. Net interest income was $119.3 million
for the nine months ended March 31, 1996, compared to $112.3 million for the
nine months ended March 31, 1995, resulting in an increase of $7.0 million, or
6.2%. The interest rate spread was 2.52% at March 31, 1996, compared to 2.17% at
March 31, 1995, an increase of 35 basis points. During the three months ended
March 31, 1996 and 1995, interest rate spreads were 2.45% and 2.20%,
respectively, an increase of 25 basis points; and during the nine months ended
March 31, 1996 and 1995, interest rate spreads were 2.31% and 2.30%. The sale of
approximately $218.2 million of the investment and mortgage-backed securities
available-for-sale (see Note C and the "Liquidity and Capital Resources"
section) and the utilization of such proceeds to repay maturing FHLB advances,
the Corporation's favorable asset liability mix and acquisition of Conservative,
has improved the interest rate spreads and yields. 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.
17
Net Interest Income (Continued):
- --------------------------------
Net interest income increased during the three and nine months ended March 31,
1996, compared to the same periods ended March 31, 1995. Such increases are
primarily due to average interest-earning assets increasing $173.9 million to
$6.301 billion for the three months ended March 31, 1996, compared to $6.127
billion for the three months ended March 31, 1995; and increasing $260.4 million
to $6.310 billion from $6.050 billion, comparing the nine months ended March 31,
1996 to 1995. These increases in average interest-earning assets are primarily
due to the Conservative acquisition in February 1996 and the Provident
acquisition in April 1995 moderately offset by the sale of the investment and
mortgage-backed securities available for sale previously discussed.
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.
In connection with its asset/liability management program, the Bank has interest
rate swap agreements and an interest rate cap agreement with other
counterparties under terms that provide an exchange of interest payments on the
outstanding notional amount of the swap or cap agreement. 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 $30.0 million at March 31, 1996, from a balance of $78.5 million at
June 30, 1995, and $83.5 million at March 31, 1995. The interest rate cap
agreement, which was assumed in the Railroad merger, has a notional principal
amount of $10.0 million with terms requiring the Corporation to pay a 7.0% fixed
rate of interest and receiving a variable rate with a quarterly cash settlement.
For the nine months ended March 31, 1996 and 1995, the Bank recorded $2.1
million and $3.4 million, respectively, in interest expense from these
interest rate swap and cap agreements. In the 12 months ending March 31, 1997,
an additional $20.0 million of these swap agreements mature. The interest rate
cap agreement terminates March 1997.
18
Net Interest Income (Continued):
- --------------------------------
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 Nine
Months Ended Months Ended At
March 31, March 31, March 31,
------------------- ------------------- -----------------
1996 1995 1996 1995 1996 1995
-------- -------- ------- -------- ------- ------
Weighted average yield on:
Loans............................................. 8.31% 8.09% 8.30% 7.97% 8.23% 8.15%
Mortgage-backed securities........................ 6.43 6.14 6.45 5.93 6.73 6.17
Investments....................................... 6.09 6.18 6.09 6.08 6.00 6.15
-------- --------- -------- -------- -------- --------
Interest-earning assets......................... 7.80 7.51 7.77 7.36 7.82 7.57
-------- --------- -------- -------- -------- --------
Weighted average rate paid on:
Savings deposits.................................. 2.89 3.48 2.73 3.23 2.85 3.22
Other time deposits............................... 5.87 5.38 6.19 5.15 5.83 5.63
Advances from FHLB................................ 5.70 5.87 5.81 5.62 5.67 5.93
Securities sold under agreements
to repurchase................................... 7.09 7.71 7.03 7.57 7.09 7.70
Other borrowings................................... 10.94 10.95 10.86 11.02 11.00 10.70
-------- --------- -------- -------- -------- --------
Interest-bearing liabilities..................... 5.35 5.31 5.46 5.06 5.30 5.40
-------- --------- -------- -------- -------- --------
Interest rate spread............................... 2.45% 2.20% 2.31% 2.30% 2.52% 2.17%
-------- --------- -------- -------- -------- -------
Net annualized yield on
interest-earning assets........................ 2.70% 2.46% 2.52% 2.48% 2.74% 2.36%
-------- -------- -------- -------- -------- --------
- --------------------------------------------------------------------------------
19
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 and nine months ended March 31, 1996. The
table below includes nonaccruing loans averaging $39.5 million and $35.0
million, respectively, for the three and nine months ended March 31, 1996, as
interest-earning assets at a yield of zero percent.
- --------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, 1996 March 31, 1996
------------------------------------ -------------------------------------------
Annualized Annualized
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ---------------------- ------------ ---------- ------ ------------- ------------- ------
Interest-earning assets:
Loans.............................. $ 4,670,477 $ 97,035 8.31% $ 4,595,584 $ 285,961 8.30%
Mortgage-backed securities......... 1,238,552 19,904 6.43 1,316,402 63,713 6.45
Investments........................ 392,452 5,960 6.09 398,290 18,284 6.09
------------ ---------- ------ ------------- ------------ -------
Interest-earning assets.......... 6,301,481 122,899 7.80 6,310,276 367,958 7.77
------------ ---------- ------ ------------- ------------ -------
Interest-bearing liabilities:
Savings deposits................... 1,132,941 8,153 2.89 1,208,744 24,863 2.73
Other time deposits................ 3,078,532 45,056 5.87 2,895,791 135,095 6.19
Advances from FHLB................. 1,568,878 22,284 5.70 1,674,949 73,281 5.81
Securities sold under
agreements to repurchase....... 178,832 3,207 7.09 192,816 10,361 7.03
Other borrowings..................... 59,902 1,638 10.94 62,270 5,073 10,86
------------ ---------- ------ ------------- ------------ -------
Interest-bearing
liabilities...................... 6,019,085 80,338 5.35 6,034,570 248,673 5.46
------------ ---------- ------ ------------- ------------ -------
Net earnings balance................. $ 282,396 $ 275,706
------------ -------------
Net interest income.................. $ 42,561 $ 119,285
---------- ------------
Interest rate spread................. 2.45% 2.31%
------ -------
Net annualized yield on
interest-earning assets.......... 2.70% 2.52%
------- -------
- --------------------------------------------------------------------------------------------------------------------------------
During the three and nine months ended March 31, 1996, the Corporation
experienced higher costs on interest-bearing liabilities 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 the last 12 months in order to maintain such
deposits as an attractive investment vehicle for consumers. Such higher costs on
interest-bearing liabilities have been offset by the 29 and 41 basis point
increases in interest-earning assets for the three and nine months ended March
31, 1996, respectively, resulting in increased interest rate spreads of 25 basis
points and one basis point, respectively, comparing current fiscal year periods
to prior fiscal year periods. The net earnings balance (the difference between
average interest-bearing liabilities and average interest-earning assets)
improved by $47.6 million and $55.6 million, respectively, for the three and
nine months ended March 31, 1996, compared to the three and nine months ended
March 31, 1995, primarily from the acquisition of Conservative and net internal
growth.
20
Net Interest Income (Continued):
- --------------------------------
The following table presents the dollar amount of changes in interest income and
expense for each major component of interest-earning assets and interest-bearing
liabilities, respectively, and the amount of change in each attributable to:
(1) changes in volume (change in volume multiplied by prior year rate), and (2)
changes in rate (change in rate multiplied by prior year volume). The net
change attributable to change in both volume and rate, which cannot be
segregated, has been allocated proportionately to the change due to volume and
the change due to rate. This table demonstrates the effect of the increased
volume of interest-earning assets and interest-bearing liabilities, the
increasing interest rates and the effect on the interest rate spreads previously
discussed.
- ------------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, 1996 Compared March 31, 1996 Compared
to March 31, 1995 to March 31, 1995
--------------------------------------- --------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
--------------------------------------- --------------------------------------
(In Thousands) Volume Rate Net Volume Rate Net
- -------------- ---------- ---------- ----------- ----------- ---------- -----------
Interest Income:
Loans.........................................$ 7,809 $ 2,468 $ 10,277 $ 22,754 $ 10,811 $ 33,565
Mortgage-backed securities.................... (2,736) 992 (1,744) (4,110) 5,307 1,197
Investments................................... (426) (84) (510) (892) 50 (842)
---------- ---------- ----------- ----------- ---------- -----------
Interest income............................ 4,647 3,376 8,023 17,752 16,168 33,920
---------- ---------- ----------- ----------- ---------- -----------
Interest expense:
Savings deposits.............................. 721 (1,560) (839) 3,739 (4,217) (478)
Other time deposits........................... 5,322 3,694 9,016 7,570 22,707 30,277
Advances from FHLB............................ (5,113) (782) (5,895) (10,422) 2,631 (7,791)
Securities sold under agreements
to repurchase.............................. 1,175 (185) 990 5,717 (365) 5,352
Other borrowings.............................. (137) (2) (139) (321) (75) (396)
---------- ---------- ----------- ----------- ---------- -----------
Interest expense.............................. 1,968 1,165 3,133 6,283 20,681 26,964
---------- ---------- ----------- ----------- ---------- -----------
Net effect on net interest income.............$ 2,679 $ 2,211 $ 4,890 $ 11,469 $ (4,513) $ 6,956
---------- ---------- ----------- ----------- ---------- -----------
- -----------------------------------------------------------------------------------------------------------------------------------
The improvements due to changes in volume and rate between the three and nine
months ended March 31, 1996 compared to 1995, reflect the increases in interest
rate spreads for the comparable periods. The improvements due to changes in
volume in part reflects the increases in the differences between average
interest-bearing liabilities and average interest-earning assets of $47.6
million and $55.6 million, respectively, between the three and nine months ended
March 31, 1996 compared to 1995. The percentage of average interest-earning
assets to average interest-bearing liabilities was 104.6% for the nine months
ended March 31, 1996, compared to 103.8% for the nine months ended March 31,
1995, with such improvement primarily due to the Conservative acquisition and
net internal growth.
21
Provision for Loan Losses and Real Estate Operations:
- -----------------------------------------------------
The Corporation recorded loan loss provisions totaling $1.5 million and $4.6
million, respectively, for the three and nine months ended March 31, 1996
compared to $1.6 million and $4.8 million, respectively, for the three and nine
months ended March 31, 1995. The loan loss provisions decreased slightly over
the respective periods even though the net loan portfolio increased
approximately $449.3 million at March 31, 1996, compared to March 31, 1995,
indicating management's assessment of 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 from real estate operations of $222,000 and
$391,000, respectively, for the three and nine months ended March 31, 1996,
compared to net income of $1.4 million and $1.6 million, respectively, for the
three and nine months ended March 31, 1995. Real estate operations reflect
provisions for real estate losses, net real estate operating activity, and gains
and losses on dispositions of real estate. The decline in real estate operations
for the three and nine months ended March 31, 1996, compared to the three and
nine months ended March 31, 1995, is primarily due to a pre-tax gain recorded in
the third quarter ended March 31, 1995 totaling $1.2 million from the sale of an
apartment and assisted-care facility located in Dallas, Texas. Such property and
resulting gain for the prior fiscal year are from the former Railroad Savings
Bank which have been included in the Corporation's results of operations under
the pooling of interests accounting treatment. Management believes that the
positive results from 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.
22
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, after restating the June 30, 1995 balances to reflect the merger with
Railroad, increased $4.6 million at March 31, 1996, compared to June 30, 1995,
resulting from net increases of $7.7 million in nonperforming loans, partially
offset by net decreases of $2.1 million in troubled debt restructurings and
$974,000 in real estate. Nonperforming assets as of the dates indicated are
summarized below:
- --------------------------------------------------------------------------------
March 31, June 30,
(Dollars in Thousands) 1996 1995
- --------------------------------------------------------------------------------
Nonperforming loans:
Residential real estate......................... $ 36,021 $ 30,784
Commercial real estate.......................... 3,116 773
Consumer........................................ 789 701
--------- ---------
Total......................................... 39,926 32,258
--------- ---------
Real estate:
Commercial...................................... 9,029 8,795
Residential..................................... 3,033 4,241
--------- ---------
Total......................................... 12,062 13,036
--------- ---------
Troubled debt restructurings:
Commercial...................................... 14,112 15,708
Residential..................................... 1,151 1,695
--------- ---------
Total......................................... 15,263 17,403
--------- ---------
Total nonperforming assets........................ $ 67,251 $ 62,697
--------- ---------
Nonperforming loans to total loans................ .82% .70%
Nonperforming assets to total assets.............. 1.02% .95%
Allowance for loan losses:
Other loans (1)................................. $ 36,352 $ 33,261
Bulk purchased loans (2)........................ 13,361 15,280
--------- ---------
Total......................................... $ 49,713 $ 48,541
--------- ---------
Allowance for loan losses to total loans.......... 1.03% 1.06%
Allowance for loan losses to total
nonperforming assets.............................. 73.92% 77.42%
- --------------------------------------------------------------------------------
(1) Includes $409,000 and $78,000, respectively, at March 31, 1996 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 $604.6 million and $701.9 million,
respectively, at March 31, 1996 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.
23
Provision for Loan Losses and Real Estate Operations (Continued):
- -----------------------------------------------------------------
The ratio of nonperforming loans to total loans was .82% at March 31, 1996,
based on loan balances of $4.843 billion, compared to .70% at June 30, 1995,
based on loan balances approximating $4.589 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 was 1.02% at March 31, 1996, compared to
.95% at June 30, 1995, which management believes is favorable compared to
industry standards and is an indicator of the stabilization of nonperforming
assets. Ratios for both nonperforming loans to total loans and nonperforming
assets to total assets increased compared to June 30, 1995 primarily due to a
net increase in nonperforming loans totaling $7.7 million offset slightly by net
increases of $253.3 million in total loans and $47.9 million in total assets
compared to June 30, 1995. The percentages for allowance for loan losses to
total loans and to total nonperforming assets remained relatively unchanged
comparing March 31, 1996 to June 30, 1995.
Nonperforming loans at March 31, 1996, increased by $7.7 million compared to
June 30, 1995, primarily due to net increases in delinquent residential real
estate loans totaling $3.2 million, delinquent commercial real estate loans
totaling $2.3 million and delinquent residential construction loans totaling
$2.0 million. The net decrease of $974,000 in real estate at March 31, 1996,
compared to June 30, 1995, is primarily due to a net decrease of $1.2 million in
residential real estate. The net decrease of $2.1 million in troubled debt
restructurings at March 31, 1996, 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 due to its delinquency status.
Loan Servicing Fees:
- --------------------
Fees from loans serviced for other institutions totaled $7.4 million and $20.7
million, respectively, for the three and nine months ended March 31, 1996,
compared to $6.2 million and $18.4 million, respectively, for the three and nine
months ended March 31, 1995. These increases comparing the respective periods
are primarily due to increases in the size of the Corporation's loan servicing
portfolio. At March 31, 1996 and 1995, the Corporation's mortgage servicing
portfolio approximated $5.773 billion and $4.867 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 $3.4 million and $9.1 million, respectively, for
the three and nine months ended March 31, 1996, compared to $2.4 million and
$6.8 million, respectively, for the three and nine months ended March 31, 1995.
These net increases in retail fees and charges primarily result from increases
in certain checking account fees and related ancillary fees for overdraft and
insufficient funds charges from the Corporation's expanding retail customer
deposit base over the same respective periods.
Gain (Loss) on Sales of Loans:
- ------------------------------
The Corporation sold loans to third parties through its mortgage banking
operations resulting in net pre-tax losses of $136,000 for the three months
ended March 31, 1996 and in net pre-tax gains of $34,000 for the nine months
ended March 31, 1996. Such sales during the three and nine months ended
March 31, 1995, resulted in net pre-tax losses of $118,000 and $1.3 million,
respectively. The net gain recorded in the current fiscal year is attributable
to the relatively stable interest rate environment currently in place the last
nine months and to the adoption of the provisions of SFAS No. 122 effective July
1, 1995 which prescribes accounting methods that generally result in
comparatively higher amounts of gains realized from the sales of loans. The net
losses recorded in the prior fiscal year periods are primarily from mortgage
banking operations of the former Railroad Savings Bank which have been combined
under the pooling of interests accounting treatment. Such losses were incurred
primarily from the sales of loans which were originated pursuant to unhedged
commitments.
24
Gain on Sales of Mortgage-Backed and Investment Securities:
- -----------------------------------------------------------
The net gain on sales of mortgage-backed and investment securities available
for sale totaled $200,000 for the three and nine months ended March 31, 1996.
Mortgage-backed and investment securities available for sale totaling
approximately $218.2 million were sold during the third quarter ended March 31,
1996, resulting in net pre-tax gains of $408,000 on the mortgage-backed
securities and net pre-tax losses of $208,000 on the investment securities. See
Note C and the "Liquidity and Capital Resources" section for further information
on these sales.
Gain on Sales of Loan Servicing Rights:
- ---------------------------------------
Gain on the sales of loan servicing rights totaled $452,000 for the nine months
ended March 31, 1996 compared to gains of $817,000 and $2.7 million,
respectively, for the three and nine months ended March 31, 1995. There were no
sales of loan servicing rights in the last six months ended March 31, 1996, with
all such sales activity from the mortgage banking operations of the former
Railroad Savings Bank which have been combined under the pooling of interests
accounting treatment.
Other Operating Income:
- -----------------------
Other operating income totaled $1.7 million and $5.1 million, respectively, for
the three and nine months ended March 31, 1996, compared to $2.0 million and
$5.6 million, respectively, for the three and nine months ended March 31, 1995.
The decrease of $295,000 comparing the current quarter results to the prior year
quarter is primarily due to decreases in insurance commission income of
$268,000. The decrease of $453,000 comparing the nine months ended March 31,
1996 to 1995 is primarily due to a net decrease of $731,000 in insurance
commission income partially offset by a net increase of $203,000 in brokerage
commission income. Investment alternatives more attractive to consumers such as
certificates of deposit with higher rates of interest contributed to
lower revenues for insurance commissions, primarily affecting annuity
commissions.
General and Administrative Expenses:
- ------------------------------------
General and administrative expenses totaled $28.4 million and $84.9 million,
respectively, for the three and nine months ended March 31, 1996, compared to
$26.0 million and $76.1 million, respectively, for the three and nine months
ended March 31, 1995. The increase of over $2.3 million for the three months
ended March 31, 1996, compared to the three months ended March 31, 1995, was
primarily due to net increases in occupancy and equipment of $589,000,
advertising of $509,000, other operating expenses of $454,000, regulatory
insurance and assessments of $398,000, amortization of purchased and originated
mortgage loan servicing rights of $301,000 and 80,000 in compensation and
benefits.
The increase of $8.8 million for the nine months ended March 31, 1996, compared
to the nine months ended March 31, 1995, was primarily due to net increases in
other operating expenses of $3.6 million, occupancy and equipment of $2.0
million, advertising of $1.1 million, regulatory insurance and assessments of
$967,000, compensation and benefits of $741,000 and $374,000 in amortization of
purchased and originated mortgage loan servicing rights.
The net increases of $2.3 million and $8.8 million, respectively, for the three
and nine months ended March 31, 1996, compared to the respective prior year
periods are in part attributable to growth from acquisitions, additional
branches and increased marketing costs for deposits and other product
promotions, nonrecurring expenses associated with the Railroad merger and the
1995 proxy contest. During the nine months ended March 31, 1996 nonrecurring
costs and expenses related to the Railroad merger (accounting, legal, investment
banking, severance benefits, advertising and miscellaneous transition and
conversion expenses) totaled $3.5 million. Costs attributable to the 1995 proxy
contest were primarily incurred in the second quarter of fiscal year 1996,
consisting of consulting services, legal fees, solicitation fees and printing
and mailing costs, and totaled $901,000. In addition, net increases in general
and administrative expenses directly resulting from the Corporation's recent
acquisitions (excluding Railroad) totaled $589,000 and $859,000, respectively,
comparing the three and nine months ended March 31, 1996, to the respective
prior year periods. 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.
25
Amortization of Goodwill and Core Value of Deposits:
- ----------------------------------------------------
Amortization of goodwill and core value of deposits totaled $2.5 million and
$6.9 million, respectively, for the three and nine months ended March 31, 1996,
compared to $2.2 million and $8.0 million, respectively, for the three and nine
months ended March 31, 1995. The net increase of $279,000 for the three months
ended March 31, 1996 is primarily due to the amortization of core value of
deposits/goodwill totaling $290,000 resulting from the estimated purchase
accounting for fair values of the assets and liabilities from the Conservative
acquisition (see Note D). The net decrease of $1.1 million for the nine months
ended March 31, 1996 is primarily attributable to a reduction in amortization
expense on core value of deposits from acquisitions before fiscal year 1994.
Such a reduction was a result of the Corporation's recognition of pre-
acquisition tax credits and net operating losses resulting in an adjustment
totaling $6.8 million that reduced core value of deposits effective January 1,
1995.
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 and nine months ended March 31, 1996, the provision for income
taxes totaled $6.6 million and $19.4 million, respectively, compared to $5.5
million and $17.3 million, respectively, for the three and nine months ended
March 31, 1995. The effective income tax rates for the three and nine months
ended March 31, 1996 were 28.7% and 33.0%, respectively, compared to 26.8% and
48.4%, respectively, for the three and nine months ended March 31, 1995. An
income tax benefit approximating $1.0 million recognized in the third quarter
ended March 31, 1996 as the financial accounting effect from the El Paso
settlement reduced the third quarter 1996 tax provision accordingly. The
provision for income taxes was reduced by $1.5 million for the three months
ended March 31, 1995, due to the recognition of pre-acquisition tax credits
and net operating losses.
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 nine
months ended March 31, 1995, the Corporation recorded and separately reported
accelerated amortization of goodwill totaling $21.4 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 nine month period of fiscal year 1995 is higher
compared to the nine months ended March 31, 1996. See "Accelerated Amortization
of Goodwill" for additional information on the amortization of this goodwill.
The effective tax rates for all periods vary from the federal statutory rate
primarily due to the nondeductibility of amortization of goodwill and core value
of deposits, and certain Railroad merger and acquisition costs, in relation to
the level of taxable income for the respective periods, offset slightly for the
three and nine months ended March 31, 1996 by the aforementioned income tax
benefit recognized from the El Paso settlement and for the three and nine months
ended March 31, 1995, due to the recognition of the pre-acquisition tax credits
and net operating losses.
26
PART II. OTHER INFORMATION
---------------------------
Item 5. Other Information
-----------------
During April 1996 the credit rating on the Corporation's subordinated
debt was upgraded by Standard & Poors to "BB-" from "B+" and by
Thomson Bank Watch to "BBB-" from "BB+". Reviews by both agencies of
the Corporation's financial position cited improved financial
performance and earnings, low credit risk for thrift and mortgage
banking strategies, growing sources of non-interest revenue, good
asset quality supported by adequate reserves and improved capital
assets as reasons for such upgrades.
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 March 19,
1996, reporting the restatement of the Corporation's consolidated
financial statements for all periods prior to the acquisitiion
(acquisition date October 2, 1995) of Railroad Financial Corporation
(Railroad) to include the accounts and operating results of Railroad.
As such, the Corporation has restated its audited consolidated
statements of financial condition as of June 30, 1995 and 1994, and
the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended
June 30, 1995; and has included such restated financial statements in
the Form 8-K.
27
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL FEDERAL CORPORATION
------------------------------
(Registrant)
Date: May 14, 1996 /s/ James A. Laphen
------------ ----------------------------------------
James A. Laphen, President, Chief
Operating Officer and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
Date: May 14, 1996 /s/ Gary L. Matter
------------ ----------------------------------------
Gary L. Matter, Senior Vice President,
Controller and Secretary
(Principal Accounting Officer)
28
EXHIBIT INDEX
-------------
Page No.
--------
[S] [C] [C]
Exhibit 11. Computation of Earnings Per Share 30
29