Exhibit 13
Annual Report to Stockholders for the
Fiscal Year Ended June 30, 1996
Impressive Growth Continues
In October 1993, prior to the implementation of a strategic acquisitions and
expansion program, Commercial Federal's retail franchise consisted of 49 branch
offices in four states - 27 in Nebraska, 20 in Colorado (Metro Denver) and one
each in Kansas and Oklahoma. The markets served by these offices are represented
by the blue dots on the map below.
[MAP OF STATES APPEARS HERE]
. Markets served as of October 1993
. Markets added from October 1993
through October 1995
In addition to 24 full-service offices, Commercial Federal operates
71 agency offices located throughout the state of Kansas.
Since that time, Commercial Federal has completed six acquisitions--with a
seventh acquisition (Heritage Financial) expected to close during October 1996.
Through the acquisitions, the Company will have added (upon the close of the
Heritage acquisition) 56 branch offices (prior to consolidations) and
approximately $1.8 billion of deposits to its franchise. In addition, Commercial
Federal has, during this same time frame, added five de novo branches through
its expansion program.
As a result of its focus on growth, in a 36-month period, Commercial Federal
more than doubled its number of retail offices in highly-desirable markets
throughout five states, while increasing its deposit base to $4.3 billion.
Commercial Federal is a major regional financial services institution that
continues to grow in size, reach and strength. The Company's growth is expected
to continue during fiscal 1997 and beyond.
Successful By All Measures
Commercial Federal entered the 1996 fiscal year with the dual objectives of
growing its retail franchise and further enhancing shareholder value. As a
result of the continued implementation of the Company's strategic operating
plans, we are pleased to report that those objectives were successfully met.
As your Company continues to achieve new record levels of operating
performance, the efforts of each and every Commercial Federal employee continue
to be focused on making your Company one of the premier financial services
institutions in the country. Our trend of year-over-year improvement indicates
that we are well on our way toward that goal.
Throughout this annual report to shareholders you will see evidence of your
Company's many achievements and successes. As you read this report, be assured
that Commercial Federal sees the accomplishments of fiscal 1996 as a stepping
stone to even greater future success on your behalf.
The Board of Directors,
Management & Employees of Commercial Federal
[LOGO APPEARS HERE]
Creating Growth In A Fast Changing Financial World
Highlights Of The 1996 Fiscal Year
During the 1996 fiscal year, your Company:
. Attained record operating income from its core banking business;
. Achieved a 40 percent increase in the market price of the Company's common
stock, advancing from $27.25 on June 30, 1995, to $38.25 on June 30, 1996;
. Increased stockholders' equity by 22 percent and book value per common share
by 16 percent;
. Instituted the payment of regular quarterly cash dividends to shareholders;
. Increased the size of its retail franchise by 10 percent;
. Completed two strategic acquisitions and entered into a definitive acquisition
agreement scheduled to close in October 1996; and
. Established account relationships with 55,100 new households - a 26 percent
increase.
Table of Contents
Financial Highlights.......................................... 1
Letter to Shareholders........................................ 2
Board of Directors............................................ 9
Corporate Profile............................................. 10
Financial Information......................................... 11
Investor Information.......................................... 75
Executive Officers and Senior Management...................... 76
Branch Locations.............................................. 77
Financial Highlights
- --------------------------------------------------------------------------------
Amounts in thousands except per share data 1996 1995(1)
- --------------------------------------------------------------------------------
FOR THE YEAR:
Interest income........................................$ 491,092 $ 454,368
Net interest income.................................... 162,775 149,842
Provision for loan losses.............................. (6,107) (6,408)
Other income........................................... 49,646 45,066
General and administrative expenses.................... 114,517 102,554
Amortization of goodwill and core value of deposits.... 9,529 10,262
Accelerated amortization of goodwill................... -- 21,357
Income before income taxes............................. 82,268 54,327
Provision for income taxes............................. 26,962 23,146
Net income............................................. 55,306 31,181
Per common share:
Net income............................................ 3.73 2.16
Dividends declared.................................... .40 --
Weighted average shares outstanding.................... 14,847 14,414
General and administrative expenses divided by
average assets (2).................................... 1.75% 1.62%
Return on average assets (2)........................... .84% .49%
Return on average equity (2)........................... 14.74% 9.98%
- --------------------------------------------------------------------------------
AT JUNE 30:
Total assets...........................................$6,607,670 $6,569,579
Cash and investment securities......................... 288,870 335,626
Mortgage-backed securities............................. 1,180,046 1,364,907
Loans receivable, net.................................. 4,813,164 4,540,692
Deposits............................................... 4,304,576 4,011,323
Advances from Federal Home Loan Bank................... 1,350,290 1,787,352
Other borrowings....................................... 439,301 273,676
Stockholders' equity................................... 413,277 337,614
Book value per common share............................ 27.39 23.65
Tangible book value per common share................... 24.69 21.04
Nonperforming assets to total assets................... 1.01% .95%
Weighted average interest rates:
Yield on interest-earning assets...................... 7.81% 7.71%
Rate on interest-bearing liabilities.................. 5.33% 5.50%
Net interest rate spread.............................. 2.48% 2.21%
Net yield on interest-earning assets.................. 2.68% 2.42%
- --------------------------------------------------------------------------------
Regulatory capital ratios of the Bank:
Tangible capital...................................... 6.18% 5.16%
Core capital.......................................... 6.41% 5.47%
Risk-based capital:
Tier 1 capital....................................... 12.56% 12.02%
Total capital........................................ 13.62% 13.12%
- --------------------------------------------------------------------------------
(1) On October 2, 1995, the Corporation consummated its acquisition of Railroad
Financial Corporation (Railroad). This acquisition was accounted for as a
pooling of interests and, accordingly, the Corporation's historical
consolidated financial statements and consolidated financial data have
been restated to include the accounts and operating results of Railroad.
(2) General and administrative expenses divided by average assets for fiscal
year 1996 is 1.68% excluding the nonrecurring expenses totaling $3,565,000
and $901,000, respectively, associated with the Railroad merger and the 1995
proxy contest. Return on average assets and return on average stockholders'
equity for fiscal year 1996 are .90% and 15.68%, respectively, excluding the
after-tax effect of the nonrecurring expenses totaling $2,920,000 and
$585,000, respectively, associated with the Railroad merger and the 1995
proxy contest. Return on average assets and return on average stockholders'
equity for fiscal year 1995 are .83% and 16.82%, respectively, excluding the
accelerated amortization of goodwill totaling $21,357,000.
- --------------------------------------------------------------------------------
Commercial Federal Corporation Annual Report 1996 1
To Our Shareholders
By any measure, fiscal year 1996 was a successful year for your Company and
your investment. During the fiscal year, Commercial Federal continued to build
on the very beneficial growth trend previously established. As a result of
Commercial Federal's emphasis on growth, profitability and shareholder value, we
have many very positive developments to share with you in our annual report to
shareholders.
[PICTURE OF WILLIAM A. FITZGERALD & JAMES A. LAPHEN APPEARS HERE]
At the outset, it is important to note that we
are not growing the Company simply for the sake
CORE OPERATIONS of growth, rather, our designed growth plans are
($ in Millions) a means of increasing the size of our customer
base, increasing profitability and, most
[BAR GRAPH APPEARS HERE] importantly, increasing the value of your
investment in Commercial Federal. We realize
$90.9 that it is not the size of our franchise that is
$82.5 important, but the size of the returns on the
$75.9 investments we have made. As you will note in
$60.1 this report, our growth has led to excellent
$34.7 bottom-line results on your behalf.
6/92 6/93 6/94 6/95 6/96
OPERATING EARNINGS REACH RECORD LEVEL
Commercial Federal reported record operating earnings of $57.6 million, or
$3.88 per share, for the fiscal year ended June 30, 1996. This represents a 15
percent increase compared with the previous record high for operating earnings
of $50.3 million, or $3.49 per share, attained in fiscal 1995. Operating
earnings do not include the effect of nonrecurring income and expenses.
Fiscal 1996 marks the fourth consecutive year that Commercial Federal has
achieved a record high for operating earnings. Operating earnings are a key
measure of profitability in that they reflect the Company's ability to generate
income from its core operations - or basic banking business - absent the effect
of any one-time or nonrecurring items.
Reported net income for fiscal 1996 - which includes the impact of
nonrecurring income and expenses - was $55.3 million, or $3.73 per share. The
difference between reported net income and operating earnings for fiscal 1996
was the effect of the nonrecurring charges associated with the Company's
purchase of Railroad Financial Corporation - which was accounted for as a
pooling of interests - and the cost incurred by the Company as a result of the
1995 proxy contest. Together, these nonrecurring charges totaled $3.5 million
after-tax, or $.23 per share. In
2 Commercial Federal Corporation Annual Report 1996
addition, the Company realized an income tax benefit of $1.0 million, or $.07
per share, for the final disposition of leases the Company owned in a nuclear
generating facility and net after-tax gains of $164,000, or $.01 per share, from
the sale of securities classified as available for sale.
The fiscal 1996 reported net income compares with reported net income of $31.2
million, or $2.16 per share, for fiscal 1995. The fiscal 1995 net income was
negatively affected by the write-off of approximately $21.4 million, or $1.49
per share, related to goodwill acquired prior to 1994. In addition, the fiscal
1995 results reflect income benefits totaling approximately $2.3 million, or
$.16 per share, resulting from lower core value amortization and provision for
income taxes.
CORE PROFITABILITY CONTINUES TO GROW
Commercial Federal's core business is focused on acquiring consumer deposits,
making loans - primarily single-family mortgage loans and consumer loans - and
mortgage loan servicing. As such, the Company's core profitability is closely
tied to both its net interest income - the difference between what it earns on
interest-earning assets and what it pays on interest-bearing liabilities - as
well as its income derived from noninterest sources such as retail fees and loan
servicing fees. The Company's growth in both net interest income and noninterest
income was exceptionally strong in fiscal 1996 and was the primary reason for
Commercial Federal's record operating income for the year.
Net interest income, after provision for loan losses, for fiscal 1996 was
$156.7 million, an increase of more than 9 percent compared with $143.4 million
for the prior fiscal year. Commercial Federal's interest rate spread increased
by
"Commercial Federal is considerably stronger than
its peers in terms of generating noninterest revenue. During
the last 12 months, noninterest revenue sources accounted
for nearly 23 percent of total revenue while the average for
the 20 largest thrifts in the nation was just 15 percent."
--Dain Bosworth
27 basis points from June 30, 1995, to June 30, 1996 - a 12 percent year-over-
year improvement. The driving factors behind this improvement were the Company's
ability to beneficially manage its cost of funds, favorable repricing of
adjustable-rate assets and the positive impact of acquisitions.
The three primary components of noninterest income - retail fees and charges,
loan servicing fees and other operating income - total $48.6 million in fiscal
1996 compared with $41.8 million for fiscal 1995 - a 16 percent increase.
Commercial Federal's loan servicing Net Interest Income
portfolio, at June 30, 1996, reached $9.8 ($ in Millions)
billion, of which $5.9 billion were loans
serviced for others. The Company generated [BAR GRAPH APPEARS HERE]
a 13 percent increase in loan servicing $156.7
fees in fiscal 1996 compared with the $143.4
previous year. Commercial Federal is not $131.5
only one of the largest loan servicers in $121.9
the Midwest, it is also one of the most $87.4
efficient servicers in the nation with an 6/92 6/93 6/94 6/95 6/96
Commercial Federal Corporation Annual Report 1996 3
average of approximately 1,200 loans serviced per employee compared to a
national average of approximately 850 loans. The Company will continue to
explore opportunities to further expand this profitable business line.
"Over the past two years Commercial Federal has proven
itself to be an opportunistic yet disciplined acquirer. We expect
management will continue to look for fill-in opportunities
but not at the cost of diluting shareholder value."
--Joseph K. Morford, Alex Brown
The other major source of noninterest income for Commercial Federal is retail
fees and charges which grew by 34 percent in fiscal 1996 to reach $12.7 million
as compared to the previous year. Management anticipates further increases in
the amount of income derived from retail fees and charges in the future.
Commercial Federal is well known for providing high-quality customer service.
The Company's recent results prove that customer service is a very important
factor for consumers when selecting a financial institution. Customers are
willing to pay for outstanding service and Commercial Federal will continue to
provide its customers with the highest-quality service possible.
GROWTH THROUGH EXPANSION
AND ACQUISITION
Since October 1993, when Commercial
Fee Income Federal implemented its latest
($ in Millions) acquisitions program, the Company has
doubled, as of June 30, 1996, its number
[BAR GRAPH APPEARS HERE] of retail locations to 98 branches in
$40.6 five states. Commercial Federal's five
$34.3 state market of Nebraska (34 branches),
$31.4 Kansas (24), Oklahoma (19), Colorado
$26.7 (20) and Iowa (1) provides the Company
$23.4 with a meaningful presence in desirable
markets throughout the Midwest. Each
6/92 6/93 6/94 6/95 6/96 market is supported by strong economies
where unemployment rates are
significantly below national averages
and property values have remained steady
or are increasing.
During fiscal 1996, Commercial Federal completed two strategic acquisitions.
The first, Railroad Financial Corporation, brought Commercial Federal 18 full-
service offices and 71 agency offices throughout Kansas and added approximately
$421 million of deposits. In addition, Railroad Financial brought a construction
lending expertise to Commercial Federal that will provide a very beneficial
income source as this product is added throughout Commercial Federal's system.
Construction loans are shorter-term, higher-rate assets that will prove to be a
valuable addition to the Company's asset/liability mix.
Also during the fiscal year, Commercial Federal completed its acquisition of
Conservative Savings Corporation, headquartered in Omaha, Nebraska, which had
deposits of approximately $198 million. This transaction brought nine full-
service offices (seven in Nebraska and one each in Kansas and Iowa) to
Commercial Federal's growing franchise.
During the later part of fiscal 1996, Commercial Federal entered into a
definitive agreement to acquire Heritage
4 Commercial Federal Corporation Annual Report 1996
Financial, Ltd., the parent company of Hawkeye Federal Savings, headquartered in
Boone, Iowa. Once completed - the acquisition is set to close during October
1996 - this transaction will add another six offices in Iowa and approximately
$160 million of deposits.
As previously explained, it is important to note that we are not undertaking
acquisitions simply to grow in size. Each acquisition completed to date has been
accretive to earnings, significantly improved our franchise and, most
importantly, enhanced shareholder value.
In addition to its acquisition activities, Commercial Federal has been adding
de novo branches in selected markets where opportunities warrant an enhanced
market presence. During the past two years, six new branches have been
completed -four in Oklahoma and two in Nebraska - each of which has exceeded
growth expectations. The Company currently has five additional locations planned
or under consideration - two in Colorado and one each in Kansas, Oklahoma and
Iowa-which will, upon completion, further bolster the Company's competitive
position in key markets.
Management continues to initiate discussions with other financial institutions
both within the existing five-state market and contiguous markets regarding
potential future acquisition opportunities. There remain numerous potential
acquisitions in the midwestern section of the United States. Commercial Federal
will remain true to its strategy of completing only those acquisitions which
meet the Company's requirements for accretion and franchise enhancement.
SALES CULTURE TAKES HOLD
One of the benefits of acquisitions activity is that it can significantly
enhance the number of customers served by the Company and, therefore, the number
of prospects to whom new products and services can be sold. And selling is
exactly what Commercial Federal is doing.
"While we continue to expect disciplined acquisitions to be
a catalyst for future earnings growth, so will improving
core fundamentals and the Company's commitment to
increasing its consumer loan volume and strengthening its
relationship banking (cross-selling) efforts."
--Steven R. Schroll, Piper Jaffray
During the 1996 fiscal year, Commercial Federal increased the number of
households served by 26 percent as compared with the previous year. These new
households opened, on average, in excess of 1.5 relationships per household
resulting in a total of 54,871 new relationships for Commercial Federal.
The Company's sales efforts have Gross Revenues
placed a special emphasis on checking ($ in Millions)
accounts and consumer loans, two base [BAR GRAPH APPEARS HERE]
accounts from which long-term $212.4
relationships can be built. As a result $194.9
of the Company's intensified sales efforts, $173.2 $182.4
Commercial Federal increased its number of $162.5
checking accounts by more than 37 percent
year-over-year. The number of consumer loan 6/92 6/93 6/94 6/95 6/96
customers also grew dramatically,
Commercial Federal Corporation Annual Report 1996 5
increasing by 39 percent. Consumer loan outstanding balances
grew by 47 percent during fiscal 1996.
During the latter part of the year, Commercial Federal
implemented a Company-wide comprehensive sales training
program. The program, entitled Fast Forward, has, in a very
short period of time, led to a substantial increase in
"Commercial Federal's market share is significant, its asset quality is
exceptionally strong, its earnings growth driven by tight cost control and its
strategy for growth is sound."
--Caren E. Mayer, Montgomery Securities
the number of accounts sold to each household served. Our
overall cross-sell ratio for new customers has increased by
approximately 50 percent in the seven months that Fast
Forward has been in place. Commercial Federal will continue
to stress sales and cross-selling efforts throughout the
Company as a means of building profitable, long-term
relationships with its customers.
As reported to you in last year's annual
Efficiency Ratio report, Commercial Federal has made significant
investments in infrastructure designed to in-
[BAR GRAPH APPEARS HERE] crease volume capacity and turnaround times
for its mortgage loan production. Those
62.6% investments have proven successful. The
56.1% Company's fiscal 1996 mortgage loan volume
53.5% reached $1.4 billion. This represents a 77
53.3% percent increase compared with fiscal 1995
52.1% volume of $797 million - which does not
6/92 6/93 6/94 6/95 6/96 reflect the impact of the pooling of
interests accounting treatment of the
Railroad Financial acquisition. Mortgage loans can now be approved in as little
as two days and closing can be accomplished in as few as 15 days. This
competitive service advantage has increased Commercial Federal's market share in
each of the markets it serves and bodes well for future increases in mortgage
loan volume.
CHANGING FACE OF COMMERCIAL
FEDERAL
Not only is Commercial Federal a growing company, it is a dynamic and
evolving company as well. Your Board and management remain attuned to industry
changes and customer expectations while ensuring that Commercial Federal is
properly positioned to take advantage of marketplace opportunities.
To that end, Commercial Federal is undertaking steps designed to alter both
its asset and liability portfolios - over time - toward a goal of being better
able to meet the financial service needs of its customers. Changes to the asset
and liability product mixes will put a greater emphasis on shorter-term, higher-
yielding products that reprice more frequently in reaction to interest rate
movements. These changes will be undertaken so as to ensure that profitability
is continually enhanced along the way.
Commercial Federal has also been proactive in the implementation of new
consumer-oriented technologies. The Company was one of the first financial
institutions in the nation to offer home banking services by providing
Microsoft's Money, Intuit's Quicken and America
6 Commercial Federal Corporation Annual Report 1996
Online's BankNow financial software to its customer base. Our customers now have
an even wider variety of ways to conduct business with Commercial Federal,
including home banking via personal computers, extended evening and weekend
branch hours, 24-hour customer service lines and Telephone Bill Paying.
Additional information about Commercial Federal and its competitive products now
can be accessed through Commercial Federal's "web site" on the internet.
Commercial Federal's internet address is: http://www.comfedbank.com.
Commercial Federal continues to make strategic investments in infrastructure
upgrades. These investments are designed to enhance customer service, increase
employee efficiency and ultimately to reduce operating expense. Your Company
has, for several years, been one of the most efficiently operated financial
institutions in the United States. Management remains focused on ensuring that
cost control and operating efficiency continue to be high priorities throughout
the Company. We realize that each dollar of operating expense saved represents
increased value for you, our shareholders.
PENDING ISSUES COULD
FAVORABLY IMPACT COMMERCIAL FEDERAL
Commercial Federal anticipates that Congress will enact legislation, during
fiscal 1997, to merge the Savings Association Insurance Fund and the Bank
Insurance Fund. At present, we believe that such legislation will call for a
one-time assessment to Commercial Federal, but would dramatically lower
Commercial Federal's future insurance premium from the current level of $.23 per
$100 of deposits to just $.04 per $100 of deposits. On the basis of Commercial
Federal's total deposits at June 30, 1996, of $4.3 billion, this action would
result in an additional $5.3 million of annual income for your Company.
We anticipate that Congress will also
consider legislation that would create a
single charter for all financial Stockholders' Equity
institutions, effectively doing away ($ in Millions)
with the regulatory differences between [BAR GRAPH APPEARS HERE]
thrifts and commercial banks. Management
believes that, if approved, the single $413.3
charter would further enhance Commercial $337.6
Federal's ability to compete in the $304.6
marketplace and thereby provide $297.8
additional value for shareholders. $253.5
6/92 6/93 6/94 6/95 6/96
In July of 1996, the Supreme Court
upheld a lower court decision regarding
the validity of claims put forth by
thrift institutions against the United Retail Deposits
States government related to the ($ in Millions)
accounting treatment of supervisory [BAR GRAPH APPEARS HERE]
goodwill. Commercial Federal has a
supervisory goodwill lawsuit pending and
is encouraged by the Supreme Court $4,305
decision. We believe that Commercial $4,011
Federal's case will be heard by the $3,676
courts during fiscal 1997. While the $2,731
outcome of the lawsuit can not be $2,660
predicted, there exists the potential 6/92 6/93 6/94 6/95 6/96
for future benefit to shareholders.
Commercial Federal Corporation Annual Report 1996 7
FAVORABLE SUBSEQUENT
TRANSACTION
In a transaction that has significantly enhanced the value of your investment in
Commercial Federal, your Company, on August 21, 1996, announced that it had
repurchased 1,250,100 shares of Commercial Federal common stock. At
"...we believe the Company has earned a right to
independence through its proven ability to build franchise
value and to grow its earnings at a faster rate than the
rest of the industry."
-- Joseph K. Morford, Alex. Brown
the time of the transaction, this represented approximately 8.3 percent of the
Company's outstanding shares. This purchase will enhance future earnings per
share by between 5.0 and 6.0 percent per year. The purchase was consistent with
Commercial Federal's policy of completing transactions which will be accretive
to earnings and thereby enhance shareholder value. This is an investment in an
asset - Commercial Federal stock - that the Board of Directors and management of
your Company perceive to be very valuable. Given Commercial Federal's strong
financial position and its continued growth prospects, this is a very
significant and valuable transaction for shareholders.
FUTURE REMAINS BRIGHT
Commercial Federal made tremendous
strides during fiscal 1996 toward its
goal of becoming one of the top
Total Assets performing thrift institutions in the
($ in Millions) United States. We believe that we have,
[BAR GRAPH APPEARS HERE] in fact, attained that goal. Be assured,
however, that we are not content to rest
$6,608 on our past achievements. We now will
$6,570 strive to ensure that your Company
$5,982 becomes one of the premier financial
$5,262 institutions - bank or thrift - in this
$5,036 country. This is a lofty ambition, but
6/92 6/93 6/94 6/95 6/96 we can not and will not settle for a
lesser goal. Our shareholders - the true
owners of Commercial Federal - deserve
nothing less than our total commitment
and effort toward this objective.
The Board of Directors, management and employees of Commercial Federal remain
focused on the objective of further enhancing the value of your investment in
the Company. As you have noted in this report, the Company's results continue to
indicate that many successes are being attained on your behalf. And, we remain
optimistic about our future.
Commercial Federal's emphasis during fiscal 1997 will be to continue to build
upon the growth trends established during 1996. That growth will take many
forms, but each individual and department goal will be tied to the overall
objective of maximizing the value of your Commercial Federal stock.
Thank you for your confidence, encouragement and continued support.
/s/ William A. Fitzgerald
William A. Fitzgerald
Chairman of the Board and
Chief Executive Officer
/s/ James A. Laphen
James A. Laphen
President and
Chief Operating Officer
8 Commercial Federal Corporation Annual Report 1996
Board of Directors
[PICTURE WILLIAM A. FITZGERALD - Chairman of the Board and Chief Executive
APPEARS Officer of Commercial Federal Corporation and Commercial Federal Bank.
HERE] Mr. Fitzgerald joined Commercial in 1955. He was named Vice President
in 1968, Executive Vice President in 1973, President in 1974, Chief
Executive Officer in 1983 and Chairman of the Board in 1994. Mr. Fitzgerald is
active in the banking community and participates in numerous industry
organizations, including the Heartland Community Bankers Association Board and
the board of America's Community Bankers. Mr. Fitzgerald joined Commercial
Federal's Board of Directors in 1973. Committee memberships: Executive (1990-
Present); Finance (1992-Present); Executive Personnel (1985-1987); Stock Option
(1984-1985); Personnel (1982-1984).
[PICTURE TALTON (TAL) K. ANDERSON - Owner and President of three automobile
APPEARS dealerships in Omaha, Nebraska, as well as one in Lincoln, Nebraska.
HERE] Mr. Anderson is also the President of a Nebraska-based automobile
leasing company and a reinsurance company. He purchased his first
dealership in 1984. In 1988, he acquired Southroads Toyota and has been owner of
Lexus of Omaha since 1990. In 1993, he bought Lincoln Dodge of Lincoln,
Nebraska. Mr. Anderson incorporated Protection Life, a reinsurance company, in
1974. Mr. Anderson also serves on the Board of Trustees for Boys Town and is
actively involved with the University of Nebraska at Omaha Alumni Board and the
University of Nebraska College of Business Administration Advisory Board. Mr.
Anderson joined Commercial Federal's Board of Directors in November 1991.
Committee memberships: Executive (1996-Present); Audit (1992-Present);
Compensation and Stock Option (1993-Present).
[PICTURE ROBERT F. KROHN - Vice Chairman and Chief Executive Officer of PSI
APPEARS Group, Inc., a national document processing company based in Omaha,
HERE] Nebraska. Mr. Krohn served as Chairman of the Board of Directors for
Commercial Federal Corporation from 1990 through 1994. He is the
former President and Chief Executive Officer of HDR, Inc., an international
architecture, planning and engineering firm. In addition to Commercial Federal's
Board of Directors, Mr. Krohn serves on the boards of Ameritas Financial
Services, Inc., Streck Laboratories, PSI Group, Inc., and Immanuel Health Care
Systems. Mr. Krohn has served on Commercial Federal's Board of Directors since
January 1984. Committee memberships: Executive Committee (1990-Present); Audit
(1996-Present); Finance (1991-1995); Compensation and Stock Option (1995);
Executive Personnel (1986 and 1990); Stock Option (1985 and 1990-1992);
Personnel (1985).
[PICTURE CHARLES M. LILLIS - President and Chief Executive Officer of US West
APPEARS Media Group, the international cellular, directory publishing and
HERE] cable television units of US West, Inc. Mr. Lillis has been published
in leading academic journals and has been the recipient of numerous
awards and recognitions. He currently serves in advisory capacities at the
University of Colorado and the University of Oregon. He is also a director of
SuperValu, Inc. Mr. Lillis has served on Commercial Federal's Board of Directors
since June 1988. Committee memberships: Finance (1992-Present); Compensation and
Stock Option (1988-1990 and 1996-Present); Audit (1991); Executive Personnel
(1989).
[PICTURE CARL G. MAMMEL - Chairman of the Board of Mammel & Associates, a
APPEARS consulting firm providing services in executive benefits, employee
HERE] benefits planning and wealth transfer planning. Mr. Mammel is
considered one of the nation's top experts in the field of employee
benefit planning and executive benefits. He is also a managing partner and
Executive Vice President of M Financial Corporation, a network of financial
service firms throughout the United States. In addition to Commercial Federal's
Board of Directors, Mr. Mammel is a member of the boards of M Life, M Financial
Management Partnership, the Salvation Army and Childrens Hospital of Omaha. Mr.
Mammel joined Commercial Federal's Board of Directors in November 1991.
Committee memberships: Finance (1992-Present); Compensation and Stock Option
(1993-Present).
[PICTURE ROBERT S. MILLIGAN - Chairman of the Board and Chief Executive Officer
APPEARS of MI Industries, a protein processing and agri-business company
HERE] headquartered in Lincoln, Nebraska, which produces products for
pharmaceutical, biological and research markets throughout the world,
and President of Oak Grove Farms, a major producer of pork. Mr. Milligan has
held positions with the U.S. Department of Justice, the U.S. Office of Trade,
the Environmental Protection Agency and the U.S. Department of Commerce. In
addition to Commercial Federal, his board memberships include Bryan Memorial
Hospital, Nebraska Wesleyan University, Boy Scouts and the Nebraska Council of
Economic Education. Mr. Milligan joined Commercial Federal's Board of Directors
in June 1987. Committee memberships: Finance (1996-Present); Audit (1990-1995);
Executive Committee (1992-1995).
[PICTURE JAMES P. O'DONNELL - Senior Vice President and Chief Financial Officer
APPEARS of ConAgra, Inc., an Omaha, Nebraska-based international diversified
HERE] food company with annual sales of approximately $25 billion. Mr.
O'Donnell, a certified management accountant, is responsible for
ConAgra's finance, control and reporting, risk management, tax, and internal
audit functions. In addition to Commercial Federal, he is a member of several
civic boards and currently serves as Chairman of the Board of Quality Living,
Inc., an Omaha rehabilitative center. Mr. O'Donnell has served on Commercial
Federal's Board of Directors since June 1991. Committee memberships: Executive
Committee (1996-Present); Finance (1991-Present); Compensation and Stock Option
(1993-Present).
Commercial Federal Corporation Annual Report 1996 9
Corporate Profile
Commercial Federal Corporation (NYSE: CFB), headquartered in Omaha, Nebraska,
is one of the largest retail financial institutions in the Midwest and the 18th
largest thrift institution in the country with approximately $6.6 billion in
assets. Founded in 1887, Commercial Federal operates 98 retail locations serving
the states of Nebraska, Kansas, Oklahoma, Colorado, and Iowa. Commercial Federal
also has an acquisition pending which, when completed, will add six offices in
Iowa to Commercial Federal's franchise. In addition, Commercial Federal benefits
from a network of CASHBOX automated teller machines (ATMs) and belongs to
several regional, national and international electronic systems that provide
customers access to their accounts at more than 285,000 ATMs in this country and
abroad.
As a complement to its savings bank, the Company has other major subsidiary
operations: Commercial Federal Mortgage Corporation, a mortgage bank with
offices in Nebraska, Colorado, Kansas, Oklahoma, and Iowa; Commercial Federal
Investment Services, Inc., which provides a full range of brokerage and other
investment services to consumers; and Commercial Federal Insurance Corporation,
offering a variety of insurance products. Commercial Federal has 1,470
employees.
The Company's operations encompass traditional thrift products, mortgage
financing, consumer lending, insurance and stock brokerage services. These
services are united by a common theme of meeting the financial needs of
individuals and families for comprehensive, convenient and cost-effective retail
financial services.
10 Commercial Federal Corporation Annual Report 1996
FINANCIAL INFORMATION
Selected Consolidated Financial Data............... 12
Management's Discussion and Analysis............... 14
Consolidated Statement of Financial Condition...... 34
Consolidated Statement of Stockholders' Equity..... 35
Consolidated Statement of Operations............... 36
Consolidated Statement of Cash Flows............... 38
Notes to Consolidated Financial Statements......... 40
Management's Report on Internal Controls........... 73
Independent Auditors' Report....................... 74
Commercial Federal Corporation Annual Report 1996 11
SELECTED CONSOLIDATED FINANCIAL DATA
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For the Year Ended June 30,
(Dollars in Thousands Except Per Share Data) 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1)
- -----------------------------------------------------------------------------------------------------------------
Interest income.................................... $ 491,092 $ 454,368 $ 393,854 $ 404,628 $ 447,883
Interest expense................................... 328,317 304,526 256,102 276,584 352,527
-------- -------- -------- -------- --------
Net interest income................................ 162,775 149,842 137,752 128,044 95,356
Provision for loan losses.......................... (6,107) (6,408) (6,248) (6,185) (7,981)
Loan servicing fees................................ 27,891 24,731 22,227 18,776 16,029
Retail fees and charges............................ 12,747 9,547 9,155 7,874 7,419
Real estate operations............................. 172 1,490 (1,449) (5,243) (9,373)
Gain (loss) on sales of loans...................... 164 (1,695) 1,433 1,194 4,489
Gain (loss) on sales of securities, net............ 253 (41) 220 (231) 37,728
Gain on sale of loan servicing rights.............. 452 3,519 5,929 6,903 12,039
Other operating income............................. 7,967 7,515 7,178 5,169 9,486
General and administrative expenses................ 114,517 102,554 94,115 89,560 80,314
Amortization of goodwill
and core value of deposits....................... 9,529 10,262 14,131 10,544 11,389
Valuation adjustment and accelerated
amortization of goodwill......................... -- 21,357 52,703 -- --
-------- ------- ------- ------- -------
Income before income taxes,
extraordinary items and cumulative effects
of changes in accounting principles.............. 82,268 54,327 15,248 56,197 73,489
Provision for income taxes......................... 26,962 23,146 16,875 22,081 27,652
------- ------- ------- ------- -------
Income (loss) before extraordinary
items and cumulative effects of
changes in accounting principles................ 55,306 31,181 (1,627) 34,116 45,837
Extraordinary items (2)............................ -- -- -- -- (5,046)
Cumulative effects of changes in
accounting principles (3)........................ -- -- 6,597 -- --
------- ------- ------- ------- -------
Net income......................................... $ 55,306 $ 31,181 $ 4,970 $ 34,116 $ 40,791
======== ======== ======== ======== ========
Earnings per share (fully diluted):
Income (loss) before extraordinary
items and cumulative effects of
changes in accounting principles................. $ 3.72 $ 2.16 $ (.11) $ 2.42 $ 4.68
Extraordinary items (2)............................ -- -- -- -- (.52)
Cumulative effects of changes in
accounting principles (3)........................ -- -- .46 -- --
-------- -------- -------- -------- --------
Net income......................................... $ 3.72 $ 2.16 $ .35 $ 2.42 $ 4.16
======== ======== ======== ======== ========
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Other data:
Net interest rate spread......................... 2.34% 2.26% 2.43% 2.57% 2.03%
Net yield on interest-earning assets............. 2.58% 2.46% 2.59% 2.65% 2.01%
Return on average assets (4)..................... .84% .49% .09% .67% .79%
Return on average equity (4)..................... 14.74% 9.98% 1.54% 12.39% 20.12%
Dividend payout ratio (5)........................ 10.75% -- -- -- --
Total number of branches at end of period........ 98 89 73 55 54
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12 Commercial Federal Corporation Annual Report 1996
SELECTED CONSOLIDATED FINANCIAL DATA (continued)
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For the Year Ended June 30,
(Dollars in Thousands Except Per Share Data) 1996 1995 (1) 1994 (1) 1993 (1) 1992 (1)
- ----------------------------------------------------------------------------------------------------------------
Total assets.................................... $6,607,670 $6,569,579 $5,982,307 $5,262,336 $5,035,913
Investment securities (6)....................... 253,643 300,481 290,807 254,889 316,366
Mortgage-backed securities (7).................. 1,180,046 1,364,907 1,350,402 952,539 779,969
Loans receivable, net (8)....................... 4,813,164 4,540,692 3,970,626 3,655,740 3,460,294
Goodwill and core value of deposits............. 40,734 37,263 67,661 87,946 98,490
Deposits........................................ 4,304,576 4,011,323 3,675,825 2,731,127 2,660,489
Advances from Federal Home Loan Bank............ 1,350,290 1,787,352 1,625,456 1,868,779 1,465,062
Securities sold under agreements to repurchase.. 380,755 208,373 157,432 154,862 445,479
Other borrowings................................ 58,546 65,303 66,640 76,966 54,311
Stockholders' equity............................ 413,277 337,614 304,568 297,848 253,528
Book value per common share..................... 27.39 23.65 21.51 21.28 20.95
Tangible book value per common share (9)........ 24.69 21.04 16.73 15.00 12.81
Regulatory capital ratios of the Bank:
Tangible capital.............................. 6.18% 5.16% 4.69% 4.62% 2.95%
Core capital ................................. 6.41% 5.47% 5.53% 5.93% 4.63%
Risk-based capital:
Tier 1 capital................................ 12.56% 12.02% 12.18% 11.93% 8.25%
Total capital................................. 13.62% 13.12% 13.16% 12.81% 8.87%
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(1) On October 2, 1995, the Corporation consummated its acquisition of Railroad
Financial Corporation (Railroad). This acquisition was accounted for as a
pooling of interests and, accordingly, the Corporation's historical
consolidated financial statements and consolidated financial data have been
restated for all periods prior to the acquisition to include the accounts
and operating results of Railroad.
(2) Represents the loss on early extinguishment of debt, net of income tax
benefits, less the effect of the utilization of net operating losses carried
forward.
(3) Represents the cumulative effect of the change in the method of accounting
for income taxes less the cumulative effect of the change in accounting for
postretirement benefits, net of income tax benefit.
(4) Based on daily average balances during fiscal years 1996, 1995 and 1994 and
on average monthly balances for fiscal years 1993 and 1992. Return on
average assets and return on average stockholders' equity for fiscal year
1996 are .90% and 15.68%, respectively, excluding the after-tax effect of
the nonrecurring expenses totaling $2,920,000 and $585,000, respectively,
associated with the Railroad merger and the 1995 proxy contest. Return on
average assets and return on average stockholders' equity for fiscal year
1995 are .83% and 16.82%, respectively, excluding the accelerated
amortization of goodwill totaling $21,357,000. Return on average assets and
return on average stockholders' equity for fiscal year 1994 are .75% and
13.11%, respectively, excluding the after-tax effect of the intangible
assets valuation adjustment and the cumulative effects of changes in
accounting principles totaling $43,938,000 and $6,597,000, respectively.
(5) Represents dividends declared per share divided by net income per share. The
Corporation established a quarterly common stock cash dividend policy on
October 4, 1995, and declared dividends totaling $5.9 million, or $.40 per
common share, during fiscal year 1996.
(6) Includes investment securities available for sale totaling $9.9 million,
$3.0 million, $5.4 million and $1.3 million, respectively, at June 30, 1996,
1995, 1994 and 1993. No investment securities were available for sale at
June 30, 1992.
(7) Includes mortgage-backed securities available for sale totaling $263.2
million, $37.0 million, $45.0 million, $41.3 million and $20.8 million,
respectively, at June 30, 1996, 1995, 1994, 1993 and 1992.
(8) Includes loans held for sale totaling $89.4 million, $113.4 million, $187.7
million, $171.8 million and $158.4 million, respectively, at June 30, 1996,
1995, 1994, 1993 and 1992.
(9) Calculated by dividing stockholders' equity, reduced by the amount of
goodwill and core value of deposits, by the number of shares of common stock
outstanding at the respective dates.
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Commercial Federal Corporation Annual Report 1996 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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GENERAL
Commercial Federal Corporation (the Corporation) is a unitary non-
diversified savings and loan holding company whose primary asset is Commercial
Federal Bank, a Federal Savings Bank (the Bank), which is one of the largest
retail financial institutions in the Midwest and the 18th largest publicly held
thrift holding company in the United States. The Bank is a consumer-oriented
financial institution that emphasizes single-family residential real estate
lending, consumer lending, retail deposit activities, including demand deposit
accounts, and mortgage banking. At June 30, 1996, the Corporation operated 34
branch offices in Nebraska, 24 branch offices in Kansas, 20 branch offices in
greater metropolitan Denver, Colorado, 19 branch offices in Oklahoma and one
branch office in Iowa. Throughout its 109 year history, the Corporation has
emphasized customer service. To serve its customers, the Corporation conducts
loan origination activities through its 98 branch office network, loan offices
of its wholly-owned mortgage banking subsidiary and a nationwide correspondent
network consisting of approximately 375 mortgage loan originators. The
Corporation also provides insurance and securities brokerage and other retail
financial services.
Net income for fiscal year 1996 was $55.3 million, or $3.73 per share,
which compares to net income of $31.2 million and $5.0 million, respectively,
for fiscal years 1995 and 1994, or $2.16 per share and $.35 per share,
respectively.
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. Railroad's results of operations were
reported on a calendar year basis previous to its merger into the Corporation.
However, in restating prior periods, Railroad's accounts and results of
operations were conformed to the Corporation's year ended June 30, 1995.
Accordingly, in changing fiscal years, Railroad's accounts and results of
operations for the six months ended June 30, 1994, including total revenue of
$18.1 million and net income totaling $185,000, were excluded from reported
results of operations for the restated combined companies but are included in
the Corporation's Consolidated Statement of Stockholders' Equity. Fiscal year
1996 operations also include $3.6 million (pre-tax) of merger and transition
related expenses from this acquisition.
During fiscal year 1996, in addition to Railroad, the Corporation acquired
Conservative Savings Corporation (Conservative) headquartered in Omaha,
Nebraska. See "Acquisitions During Fiscal Year 1996" for additional information.
The Corporation's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family mortgage and consumer loans) and providing
customers with a full array of financial products and a high level of customer
service. As part of its long-term strategic plan, the Corporation intends to
expand its operations within its market areas either through direct marketing
efforts aimed at increasing market share, branch expansions, or opening
additional branches. The Corporation's retail strategy will continue to be
centered on attracting new customers and selling both new and existing customers
multiple products and services. Additionally, the Corporation will continue to
build and leverage an infrastructure designed to increase fee and other income.
Complementing its strategy of internal growth, 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 candidates can enhance the
Corporation's retail presence in new or existing markets and complement the
Corporation's present retail network.
ACQUISITIONS DURING FISCAL YEAR 1996
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. Cash was paid
for fractional shares. Railroad operated 18 branches and 71 agency offices
throughout the state of Kansas and at September 30, 1995, had assets of
approximately $602.9 million, deposits of approximately $421.4 million and
stockholders' equity of approximately $27.7 million. This acquisition was
accounted for as a pooling of interests.
On February 1, 1996, the Corporation consummated its acquisition of
Conservative, parent company of Conservative Savings Bank, FSB. Under the terms
of the
14 Commercial Federal Corporation Annual Report 1996
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 and each share of
Conservative's preferred stock was exchanged for $14.33 in cash and .5544 shares
of the Corporation's common stock. Cash was paid for fractional shares. Based on
the Corporation's closing stock price of $36.50 at February 1, 1996, the total
consideration for this acquisition approximated $44.1 million. Before purchase
accounting adjustments, Conservative had assets of approximately $302.9 million,
deposits of approximately $197.9 million and stockholders' equity of
approximately $35.1 million. 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 closed
in the consolidation process pursuant to this acquisition. The Conservative
acquisition was accounted for as a purchase with core value of deposits and
goodwill resulting from this transaction totaling $13.0 million.
PENDING ACQUISITION
On May 16, 1996, the Corporation entered into a Reorganization and Merger
Agreement (the Merger Agreement) by and among the Corporation, the Bank,
Heritage Financial, Ltd. (Heritage) and Hawkeye Federal Savings Bank (Hawkeye
Federal). Under the terms of the Merger Agreement, the Corporation will acquire
all 180,762 of the outstanding shares of Heritage's common stock. As defined in
the Merger Agreement, Heritage's common stock will be exchanged for cash and a
pro-rata amount of the Corporation's common stock. Based on the Corporation's
closing stock price on June 30, 1996, of $38.25, each share of Heritage common
stock would be exchanged for $18.73 in cash and 2.559 shares of the
Corporation's common stock, resulting in the exchange of approximately 462,570
shares of the Corporation's common stock with a total aggregate value
approximating $21.1 million. Cash will be paid in lieu of fractional shares.
Additional cash consideration up to approximately $1.2 million may be paid to
Heritage shareholders pending the final disposition of an impaired asset of
Hawkeye Federal. At June 30, 1996, Heritage had assets of approximately $182.1
million, deposits of approximately $157.9 million and stockholders' equity of
approximately $12.9 million. Heritage operates six branches located in Iowa.
This pending acquisition is expected to be completed in October 1996.
SUBSEQUENT EVENT-REPURCHASE OF COMMON STOCK
On August 21, 1996, the Corporation consummated the repurchase of 1,250,100
shares of its common stock, $0.01 par value, from CAI Corporation, a Dallas-
based investment company, for an aggregate purchase price of approximately $48.9
million. Such purchase price, excluding transaction costs incurred by the
Corporation for this repurchase, consisted of cash consideration of
approximately $28.2 million and surrender of a warrant (valued at approximately
$20.7 million) which would have enabled the Corporation to purchase 99 shares of
non-voting common stock of CAI Corporation. The repurchased shares represented
8.3% of the outstanding shares of the Corporation's common stock prior to the
repurchase. After repurchase, a total of 13,844,036 shares of common stock
remain issued and outstanding as of August 21, 1996. The cash portion of the
repurchase was financed in part by a loan from a financial institution secured
by 1,403,200 shares or 15.6% of the outstanding common stock of the Bank. As
consideration, the Corporation also reimbursed CAI Corporation for certain
expenses totaling $2.2 million incurred in connection with its ownership of the
1,250,100 shares, including costs and expenses incurred in connection with the
1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of
the pro rata portion of any dividend CAI Corporation otherwise would have
received for the quarter ended September 30, 1996. Concurrent with the close of
the repurchase, two directors of the Corporation, who also serve as executive
officers of CAI Corporation, resigned from the Corporation's Board of Directors.
In addition, CAI Corporation and each of its shareholders agreed to a standstill
agreement for a period of 60 months beginning August 21, 1996. CAI Corporation
and the Corporation have each agreed to waive and release all claims against the
other and the Corporation has agreed to indemnify CAI Corporation and its
directors, officers and affiliates against certain derivative claims.
Commercial Federal Corporation Annual Report 1996 15
REGULATORY ISSUES
The Corporation'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 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 premium rate for the most highly rated BIF-
insured institutions to the statutory minimum of $1,000 per semi-annual period
and reduced the rate paid by undercapitalized BIF-insured institutions to 0.27%
of insured deposits. The FDIC amendment creates a substantial disparity in the
deposit insurance premiums paid by the BIF and SAIF members and places 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. Any such proposals would require a one
time assessment of an amount sufficient to bring the SAIF to a level equal to
1.25% of insured deposits to be imposed on all SAIF-insured deposits held as of
March 31, 1995. Recently, the FDIC revised its estimate of the size of the
special assessment to 68 basis points of insured deposits to bring the SAIF
statutory level to the 1.25% of insured deposits. Any such assessment will
depend on the SAIF fund balance once BIF-SAIF legislation has been passed. It
would also depend on adjustments in the assessable base provided in legislation,
but still would be allocated among institutions on the basis of deposits at
March 31, 1995.
Assuming a .68% assessment on a $4.2 billion deposit base, the assessment
would result, on a pro forma basis as of June 30, 1996, in a one-time after-tax
charge of approximately $18.3 million to the Corporation. Such assessment would
have the effect of reducing the Bank's tangible capital to $390.4 million, or
5.92% of adjusted total assets, core capital to $406.6 million, or 6.15% of
adjusted total assets, and risk-based capital to $442.3 million, or 13.08% of
risk-weighted assets. The Bank would, on a pro forma basis as of June 30, 1996,
continue to exceed the minimum requirements to be classified as a "well-
capitalized" institution under applicable regulations. If such a special
assessment were required and the SAIF as a result was fully recapitalized, it
could have the effect of reducing the Bank's deposit insurance premiums to the
SAIF, thereby increasing net income in future periods.
Also under consideration by Congress are proposals relating to merger of
the BIF and SAIF funds and the elimination of the thrift charter. Management of
the Corporation is unable to predict accurately at this time whether any of
these proposals will be adopted in their current form or the impact of these
proposals on the Corporation.
ASSET/LIABILITY MANAGEMENT
The operations of the Corporation are subject to the risk of interest rate
fluctuations to the extent that there is a difference (i.e., a mismatch) between
the amount of the Corporation's interest-earning assets and interest-bearing
liabilities which mature or reprice in specified periods. Consequently, when
interest rates change, to the extent the Corporation's interest-earning assets
have longer maturities or effective repricing periods than its interest-bearing
liabilities, the interest income realized on the Corporation's interest-earning
assets will adjust more slowly than the interest expense on its interest-bearing
liabilities. This mismatch in the maturity and interest rate sensitivity of
assets and liabilities is commonly referred to as the "gap." A gap is considered
positive when the amount of interest rate sensitive assets maturing or repricing
during a specified period exceeds the amount of interest rate sensitive
liabilities maturing or repricing during such period, and is considered negative
when the amount of interest rate sensitive liabilities maturing or repricing
during a specified period exceeds the amount of interest rate assets maturing or
repricing during such period. Generally, during a period of rising interest
rates, a negative gap would adversely affect net interest income while a
positive gap would result in an increase in net interest income, and during a
period of declining interest rates, a negative gap would result in an increase
in net interest income while a positive gap would adversely affect net interest
income.
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
16 Commercial Federal Corporation Annual Report 1996
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 Corporation has placed a greater emphasis on shorter-
term higher yielding assets that reprice more frequently in reaction to interest
rate movements. In addition, the Corporation has continued its concentration of
adjustable-rate assets as a percentage of total assets to benefit 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 Corporation
has had 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
were used to artificially lengthen the maturity of various interest-bearing
liabilities. In accordance with these arrangements, the Corporation pays fixed
rates and receives variable rates of interest according to a specified index.
The Corporation has reduced its level of such swap agreements to a notional
principal amount of $10.0 million at June 30, 1996, from balances of $78.5
million and $109.5 million, respectively, at June 30, 1995 and 1994. The
interest rate cap agreement, which was assumed in the Railroad merger, has a
notional principal amount of $10.0 million which pays interest when the three-
month LIBOR exceeds 7.0%. For fiscal years 1996, 1995 and 1994, the Bank
recorded $2.3 million, $4.4 million and $8.5 million, respectively, in net
interest expense from these interest rate swap and cap agreements. The interest
rate cap agreement terminates March 1997 and the swap agreement matures November
1997.
The following table represents management's projected maturity and
repricing of the Bank's interest-earning assets and interest-bearing liabilities
on an unconsolidated basis at June 30, 1996. The amounts of interest-earning
assets, interest-bearing liabilities and interest rate risk management
instruments presented which mature or reprice within a particular period were
determined in accordance with the contractual terms of such assets, liabilities
and interest rate swap agreements, except (i) adjustable-rate loans are included
in the period in which they are first scheduled to adjust and not in the period
in which they mature and are also adjusted for prepayment rates ranging from
6.5% to 33.8% for single-family residential loans and mortgage-backed
securities, (ii) prepayment rates ranging from 7.8% to 29.5%, based on the
contractual interest rate, were utilized for fixed-rate, single-family
residential loans and mortgage-backed securities, (iii) prepayment rates ranging
from 1.8% to 8.5%, based on the contractual interest rate, were utilized for
commercial real estate and multi-family loans and a prepayment rate of 42.5% was
utilized for consumer loans, (iv) passbook deposits and negotiable order of
withdrawal ("NOW") accounts totaling $534.8 million, all of which have fixed-
rates, are assumed to mature according to the decay rates as defined by
regulatory guidelines, which at June 30, 1996, ranged from 14.0% to 32.0%, (v)
market bonus savings and commercial money market accounts totaling $104.7
million are assumed to reprice or mature according to the decay rates as defined
by regulatory guidelines, which at June 30, 1996, was 31.0%, and (vi) money
market rate deposits totaling $528.0 million are deemed to reprice or mature
within the one-year category, even though a certain portion of these deposits is
not likely to be interest rate sensitive. Management believes that these
assumptions approximate actual experience and considers such assumptions
reasonable; however, the interest rate sensitivity of the Bank's interest-
earning assets and interest-bearing liabilities could vary substantially if
different assumptions were used or if actual experience differs from the
assumptions used, such as actual prepayment experience varying from estimates,
early deposit withdrawals, and caps on adjustable-rate loans and mortgage-backed
securities.
Commercial Federal Corporation Annual Report 1996 17
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Within 91 Days Over 1 3 Years
(Dollars in Thousands) 90 Days to 1 Year to 3 Years and Over Total
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Interest-earning assets:
Fixed-rate
mortgage loans (1) (2)...................................... $ 199,958 $ 299,193 $ 698,584 $1,343,949 $2,541,684
Other loans (2) (3)............................................ 1,163,619 1,548,164 714,656 77,514 3,503,953
Investments (4)................................................ 107,188 21,450 102,038 103,829 334,505
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Interest-earning assets........................................ 1,470,765 1,868,807 1,515,278 1,525,292 6,380,142
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Interest-bearing liabilities:
Savings deposits............................................ 565,603 104,313 187,319 310,240 1,167,475
Other time deposits......................................... 1,017,645 1,353,786 755,610 62,063 3,189,104
Borrowings (5).............................................. 343,063 646,589 740,060 13,124 1,742,836
Impact of interest rate
swap agreements........................................... -- (10,000) 10,000 -- --
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Interest-bearing liabilities................................ 1,926,311 2,094,688 1,692,989 385,427 6,099,415
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Gap position................................................... (455,546) (225,881) (177,711) 1,139,865 280,727
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Cumulative gap................................................. $ (455,546) $ (681,427) $ (859,138) $ 280,727 $ 280,727
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Gap as a percentage of the
Bank's total assets.......................................... (6.89)% (3.42)% (2.69)% 17.25% 4.25%
Cumulative gap as a percentage
of the Bank's total assets................................... (6.89)% (10.31)% (13.00)% 4.25% 4.25%
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(1) Includes conventional single-family and multi-family mortgage loans and
mortgage-backed securities.
(2) Such amounts are, as applicable, before deductions for unamortized discounts
and premiums, loans in process, deferred loan fees and allowance for loan
losses.
(3) Includes adjustable-rate single-family mortgage loans, adjustable-rate
mortgage-backed securities and all other types of loans with either fixed or
adjustable interest rates.
(4) Included in the "Within 90 Days" column are short-term cash investments of
$2.4 million and FHLB stock of $79.1 million.
(5) Includes advances from the FHLB, securities sold under agreements to
repurchase and other borrowings.
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The Bank's one-year cumulative gap is a negative $681.4 million, or 10.31%
of the Bank's total assets of $6.606 billion at June 30, 1996, contrasted to a
negative $161.0 million, or 2.72% of total assets at June 30, 1995. The interest
rate risk policy of the Bank authorizes a liability sensitive one-year
cumulative gap not to exceed 10.0%. Accordingly, subsequent to June 30, 1996,
adjustments have been made so that the one-year cumulative gap falls within such
policy guidelines.
RESULTS OF OPERATIONS
Net income for fiscal year 1996 was $55.3 million, or $3.73 per share.
These results compare to net income for fiscal year 1995 of $31.2 million, or
$2.16 per share, and to net income for fiscal year 1994 of $5.0 million, or $.35
per share, which includes the net cumulative effects of changes in accounting
principles for income taxes and postretirement benefits of $6.6 million, or $.46
per share.
The Corporation's emphasis on single-family residential lending and the
promotion of retail financial services, along with the Corporation's growth
through acquisitions, continues to have positive effects on the Corporation's
core operations. Core earnings for fiscal year 1996 increased 10.2% and 19.7%,
respectively, over fiscal years 1995 and 1994. Core earnings, defined as
operating income before income taxes excluding (i) gains on sales of mortgage-
backed securities and loan servicing rights and (ii) amortization expense and
valuation adjustment of intangible assets, totaled $90.9 million during fiscal
year 1996 compared to $82.5 million and
18 Commercial Federal Corporation Annual Report 1996
$75.9 million, respectively, during fiscal years 1995 and 1994. This improvement
in core earnings resulted primarily from increases in net interest income, loan
servicing fees and retail fee income.
The increase in net income for fiscal year 1996 compared to fiscal year
1995 is primarily due to the following: a $21.4 million nonrecurring charge for
accelerated amortization of goodwill recorded in fiscal year 1995 and not
incurred in the current fiscal year, an increase of $13.2 million in net
interest income after provision for loan losses, increases of $3.2 million each
in retail fees and charges and loan servicing fees, an increase of $746,000 in
other operating income and a decline of $733,000 in amortization of intangible
assets. These increases to net income were partially offset by an increase of
$12.0 million in general and administrative expenses, an increase of $3.8
million in the provision for income taxes, a decline of $1.3 million in real
estate operations and a decrease of $1.2 million in net gains on the sales of
loans and loan servicing rights.
The increase in net income for fiscal year 1995 compared to fiscal year
1994 is primarily due to the following: a change of $31.3 million in
nonrecurring charges associated with the intangible assets valuation adjustment
and the accelerated amortization of goodwill, an increase of $11.9 million in
net interest income after provision for loan losses, a decline of $3.9 million
in amortization of goodwill and core value of deposits, an improvement of $2.9
million in real estate operations, an increase of $2.5 million in loan servicing
fees, an increase of $392,000 in retail fees and charges and a net increase of
$76,000 in other operating income. These increases to net income were partially
offset by an increase of $8.4 million in total general and administrative
expenses, a net decrease of $6.6 million from the cumulative effects of changes
in accounting principles, an increase of $6.3 million in the provision for
income taxes and a net decrease of $5.5 million in net gains on the sales of
loans and loan servicing rights.
NET INTEREST INCOME AND INTEREST RATE SPREAD
Net interest income was $162.8 million for fiscal year 1996 compared to
$149.8 million for fiscal year 1995, an increase of $12.9 million, or 8.6%; and
compared to $137.8 million for fiscal year 1994. Based on the portfolios of
interest-earning assets and interest-bearing liabilities at the end of the last
three fiscal years, interest rate spreads were 2.48%, 2.21% and 2.33%,
respectively, at June 30, 1996, 1995 and 1994, an increase of 27 basis points
comparing the interest rate spread at June 30, 1996, to the interest rate spread
at June 30, 1995, and a decrease of 12 basis points comparing the spreads at
June 30, 1995, to June 30, 1994. In addition, during the fiscal years 1996, 1995
and 1994, interest rate spreads were 2.34%, 2.26% and 2.43%, respectively,
representing an increase of eight basis points comparing the interest rate
spread during fiscal year 1996 to fiscal year 1995 and a decrease of 17 basis
points comparing the spread during fiscal year 1995 to 1994. The net yield on
interest-earning assets during fiscal years 1996, 1995 and 1994 was 2.58%, 2.46%
and 2.59%, respectively, representing an increase of 12 basis points comparing
fiscal year 1996 to 1995 and a decrease of 13 basis points comparing fiscal year
1995 to 1994.
During fiscal year 1996, in accordance with the one-time reclassification
permitted under a special accounting report, and the reassessment of the
appropriateness of the classifications of all securities held, management of the
Corporation developed an asset/liability management strategy to reclassify
substantially all of its 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. In addition,
approximately $9.4 million of adjustable-rate mortgage-backed securities were
reclassified from available for sale to held to maturity. The purpose of this
strategy is to sell such securities and use the proceeds to fund Federal Home
Loan Bank of Topeka (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. During fiscal year 1996,
approximately $230.8 million of such investment and mortgage-backed securities
were sold with the proceeds used primarily to pay maturing FHLB advances.
The sale of approximately $230.8 million of the securities available for
sale and the utilization of such proceeds to repay maturing FHLB advances, the
Corporation's favorable asset liability mix (primarily increased levels of
adjustable-rate mortgage loans, consumer loans and multi-family commercial real
estate loans) and the acquisition of Conservative, have improved the interest
rate spreads and yields. Net interest income increased due primarily to average
interest-earning assets increasing $210.0 million to $6.311 billion for fiscal
year
Commercial Federal Corporation Annual Report 1996 19
1996 compared to $6.101 billion for fiscal year 1995. This increase in average
interest-earning assets is primarily due to the Conservative acquisition in
February 1996 with a higher net interest rate spread than the Corporation and to
internal growth moderately offset by the sale of the securities available for
sale previously discussed.
However, the future trend in interest rate spreads and net interest income
will be dependent upon such factors as the composition and size of the
Corporation's interest-earning assets and interest-bearing liabilities, the
interest rate risk exposure of the Corporation, and the maturity and repricing
activity of interest-sensitive assets and liabilities, as influenced by changes
in and levels of both short-term and long-term market interest rates.
Net interest income increased during fiscal year 1995 compared to fiscal
year 1994, even though the interest rate spread and the net yield on interest-
earning assets decreased 17 and 13 basis points, respectively, due to average
interest-earning assets increasing $775.5 million to $6.101 billion for fiscal
year 1995 compared to $5.326 billion for fiscal year 1994. This increase in
average interest-earning assets is primarily due to the acquisitions during
fiscal years 1995 and 1994 and to internal growth.
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 fiscal years presented.
- -------------------------------------------------------------------------------
For the Year
Ended June 30, At June 30,
---------------------- -----------------------
1996 1995 1994 1996 1995 1994
Weighted average yield on:
Loans.......................... 8.29% 8.04% 7.98% 8.19% 8.26% 7.72%
Mortgage-backed securities..... 6.45 6.02 5.68 6.73 6.38 5.73
Investments.................... 6.13 6.14 6.42 6.20 6.18 5.95
- -------------------------------------------------------------------------------
Interest-earning assets...... 7.78 7.45 7.39 7.81 7.71 7.13
- -------------------------------------------------------------------------------
Weighted average rate paid
on:
Savings deposits............... 2.79 3.24 2.16 3.04 3.08 2.74
Other time deposits............ 6.10 5.32 5.12 5.75 5.88 5.00
Advances from FHLB............. 5.79 5.71 5.73 5.66 5.89 5.37
Securities sold under
agreement
to repurchase.................. 7.14 7.59 6.15 6.51 7.08 6.08
Other borrowings............... 10.89 10.89 10.56 11.05 10.67 10.66
- -------------------------------------------------------------------------------
Interest-bearing
liabilities................. 5.44 5.19 4.96 5.33 5.50 4.80
- -------------------------------------------------------------------------------
Net interest rate spread........ 2.34% 2.26% 2.43% 2.48% 2.21% 2.33%
- -------------------------------------------------------------------------------
Net yield on
interest-earning assets........ 2.58% 2.46% 2.59% 2.68% 2.42% 2.49%
- -------------------------------------------------------------------------------
20 Commercial Federal Corporation Annual Report 1996
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 periods indicated. The table below includes
nonaccruing loans averaging $35.5 million, $30.9 million and $31.9 million,
respectively, for fiscal years 1996, 1995 and 1994 as interest-earning assets at
a yield of zero percent.
- --------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------ --------------------------- ----------------------------
Average Yield/ Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate Balance Interest Rate
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans........................ $4,643,401 $384,765 8.29% $4,277,946 $344,109 8.04% $3,843,662 $306,725 7.98%
Mortgage-backed
securities................. 1,284,448 82,830 6.45 1,402,237 84,404 6.02 1,082,507 61,491 5.68
Investments.................. 383,433 23,497 6.13 421,089 25,855 6.14 399,555 25,638 6.42
- --------------------------------------------------------------------------------------------------------------------------
Interest-earning
assets..................... 6,311,282 491,092 7.78 6,101,272 454,368 7.45 5,325,724 393,854 7.39
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits............. 1,189,619 33,177 2.79 1,037,702 33,638 3.24 809,692 17,492 2.16
Other time deposits.......... 2,966,505 180,863 6.10 2,752,501 146,525 5.32 2,441,971 125,065 5.12
Advances from FHLB........... 1,625,950 94,057 5.79 1,913,467 109,314 5.71 1,679,076 96,216 5.73
Securities sold under
agreements to
repurchase................. 189,568 13,525 7.14 103,223 7,837 7.59 155,897 9,592 6.15
Other borrowings............. 61,480 6,695 10.89 66,245 7,212 10.89 73,270 7,737 10.56
- --------------------------------------------------------------------------------------------------------------------------
Interest-bearing
liabilities................ 6,033,122 328,317 5.44 5,873,138 304,526 5.19 5,159,906 256,102 4.96
- --------------------------------------------------------------------------------------------------------------------------
Net earnings balance......... $ 278,160 $ 228,134 $ 165,818
Net interest income.......... $162,775 $149,842 $137,752
Interest rate spread......... 2.34% 2.26% 2.43%
- --------------------------------------------------------------------------------------------------------------------------
Net yield on interest -
earning assets............. 2.58% 2.46% 2.59%
- --------------------------------------------------------------------------------------------------------------------------
During fiscal year 1996, the Corporation's net earnings balance (the
difference between average interest-bearing liabilities and average interest-
earning assets) improved by $50.0 million compared to fiscal year 1995 primarily
from the acquisition of Conservative (which was partially paid for through the
issuance of common stock) and net internal growth with earnings retention. The
percentage of average interest-earning assets to average interest-bearing
liabilities was 104.6% during fiscal year 1996, compared to 103.9% during fiscal
year 1995 and to 103.2% during fiscal year 1994. During fiscal year 1995, the
Corporation experienced higher costs on interest-bearing liabilities and a lower
interest rate spread and yield compared to fiscal year 1994 primarily due to
increases in the interest rates offered on certain types of deposit products
which were raised in order to maintain savings deposits as an attractive
investment vehicle for consumers. The reduced interest rate spread and yield
also reflects the fact that the Corporation's incremental growth of interest-
earning assets during fiscal year 1995 contained comparatively narrower yields
on its interest-earning assets. The net earnings balance improved by $62.3
million for fiscal year 1995 compared to 1994 primarily from internal growth.
Commercial Federal Corporation Annual Report 1996 21
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: (i) changes in volume (change in volume multiplied by prior
year rate), and (ii) changes in rate (change in rate multiplied by prior year
volume). The net change attributable to change in both volume and rate, which
cannot be segregated, has been allocated proportionately to the change due to
volume and the change due to rate. 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.
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended June 30, Year Ended June 30,
1996 Compared to 1995 1995 Compared to 1994
------------------------------- --------------------------------------
(In Thousands) Increase (Decrease) Due to Increase (Decrease) Due to
- --------------------------------------------------------------------------------------------------------------------------
Volume Rate Total Volume Rate Total
- --------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans........................... $30,052 $10,604 $40,656 $34,914 $ 2,470 $37,384
Mortgage-backed securities...... (7,364) 5,790 (1,574) 19,064 3,849 22,913
Investments..................... (2,308) (50) (2,358) 1,349 (1,132) 217
- --------------------------------------------------------------------------------------------------------------------------
Interest income............... 20,380 16,344 36,724 55,327 5,187 60,514
- --------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits................ 4,574 (5,035) (461) 5,814 10,332 16,146
Other time deposits............. 11,969 22,369 34,338 16,383 5,077 21,460
Advances from FHLB.............. (16,616) 1,359 (15,257) 13,391 (293) 13,098
Securities sold under agreements
to repurchase................. 6,187 (499) 5,688 (3,689) 1,934 (1,755)
Other borrowings................ (519) 2 (517) (759) 234 (525)
- --------------------------------------------------------------------------------------------------------------------------
Interest expense................ 5,595 18,196 23,791 31,140 17,284 48,424
- --------------------------------------------------------------------------------------------------------------------------
Effect on net interest income..... $14,785 $(1,852) $12,933 $24,187 $(12,097) $12,090
- --------------------------------------------------------------------------------------------------------------------------
The improvements due to changes in volume between fiscal years 1996 and
1995 reflect the increases in such interest rate spreads and the growth the
Corporation has experienced, both internally and from acquisitions. The
improvements due to changes in volume between fiscal years 1996, 1995 and 1994
in part reflects the increases in the difference between average interest-
bearing liabilities and average interest-earning assets of $50.0 million and
$62.3 million, respectively. The decreases in interest rate spreads between
fiscal years 1995 and 1994 account for the decrease due to rate increases in
fiscal year 1995 over 1994.
22 Commercial Federal Corporation Annual Report 1996
NON-INTEREST INCOME AND EXPENSE
PROVISION FOR LOAN LOSSES AND REAL ESTATE OPERATIONS
The Corporation recorded loan loss provisions of $6.1 million, $6.4 million
and $6.2 million in fiscal years 1996, 1995 and 1994, respectively. The loan
loss provision decreased even though the net loan portfolio increased
approximately $272.5 million at June 30, 1996, compared to June 30, 1995,
indicating the improved credit quality of the loan portfolio and the low level
of nonperforming loans over the respective periods of time. At June 30, 1996,
the Corporation's conventional, FHA and VA loans, including loans held for sale,
totaling approximately $4.3 billion, are secured by single-family residential
properties located primarily in Nebraska (20%), Colorado (17%), Kansas (7%),
Georgia, Oklahoma and Texas (5% each), and the remaining 41% in 44 other states.
The commercial real estate loan portfolio at June 30, 1996, totaling $269.7
million is secured by properties located in Colorado (33%), Nebraska (31%),
Florida (12%) and the remaining 24% in 18 other states. The allowance for loan
losses is based upon management's continuous evaluation of the collectibility of
outstanding loans, which takes into consideration such factors as changes in the
composition of the loan portfolio and economic conditions that may affect the
borrower's ability to pay, regular examinations by the Corporation's credit
review group of specific problem loans and of the overall portfolio quality and
real estate market conditions in the Corporation's lending areas.
The Corporation recorded net income from real estate operations of $172,000
and $1.5 million in fiscal years 1996 and 1995, respectively, and a net loss of
$1.4 million in fiscal year 1994. Real estate operations reflect provisions for
real estate losses, net real estate operating activity and gains and losses on
dispositions of real estate. Fiscal year 1996 reflects a credit to the provision
for real estate operations totaling $479,000 compared to real estate loss
provisions charged to operations of $199,000 and $1.7 million, respectively, for
fiscal years 1995 and 1994. The credit to provision for real estate operations
in fiscal year 1996 was primarily due to excess reserves recaptured into income
upon settlement of a lawsuit. The decrease in real estate operations of $1.3
million for fiscal year 1996 from fiscal year 1995 is primarily due to a pre-tax
gain of $1.2 million recorded in fiscal year 1995 from the sale of an apartment
and assisted-care facility located in Dallas, Texas. The improvement in real
estate operations of $2.9 million for fiscal year 1995 over fiscal year 1994 is
primarily due to the realization of gains on sales of certain commercial
properties, lower operating expenses and lower loss provisions. 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 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.
Commercial Federal Corporation Annual Report 1996 23
Nonperforming assets are monitored on a regular basis by the Corporation's
internal credit review and asset workout groups. Nonperforming assets increased
by $3.8 million, or 6.1%, at June 30, 1996, compared to June 30, 1995, primarily
as a result of net increases of $5.6 million in nonperforming loans and $1.3
million in real estate offset by a decrease of $3.1 million in troubled debt
restructurings. Nonperforming assets at June 30 are summarized as follows:
- -------------------------------------------------------------------------------
(Dollars in Thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
Nonperforming loans (1)
Residential real estate........................ $34,660 $30,784 $27,470
Commercial real estate......................... 2,357 773 5,613
Consumer....................................... 888 701 409
- -------------------------------------------------------------------------------
Total........................................ 37,905 32,258 33,492
- -------------------------------------------------------------------------------
Real estate (2)
Commercial..................................... 8,850 8,795 16,869
Residential.................................... 4,986 3,784 4,566
- -------------------------------------------------------------------------------
Total........................................ 13,836 12,579 21,435
- -------------------------------------------------------------------------------
Troubled debt restructurings (3)
Commercial..................................... 13,894 16,566 19,455
Residential.................................... 909 1,294 1,580
- --------------------------------------------------------------------------------
Total........................................ 14,803 17,860 21,035
- -------------------------------------------------------------------------------
Total nonperforming assets....................... $66,544 $62,697 $75,962
- -------------------------------------------------------------------------------
Nonperforming loans to total loans............... .78% .70% .83%
Nonperforming assets to total assets............. 1.01% .95% 1.27%
- -------------------------------------------------------------------------------
Allowance for loan losses:
Other loans (4)................................ $36,513 $33,261 $27,530
Bulk purchased loans (5)....................... 12,765 15,280 17,321
- -------------------------------------------------------------------------------
Total........................................ $49,278 $48,541 $44,851
- -------------------------------------------------------------------------------
Allowance for loan losses to total loans......... 1.01% 1.06% 1.11%
Allowance for loan losses to total nonperforming
assets.......................................... 74.05% 77.42% 59.04%
- --------------------------------------------------------------------------------
(1) Nonperforming loans consist of nonaccruing loans (loans 90 days or more past
due) and accruing loans that are contractually past due 90 days or more. At
June 30, 1996, 1995 or 1994, there were no accruing loans contractually past
due 90 days or more.
(2) Real estate consists of commercial and residential property acquired through
foreclosure or repossession (real estate owned and real estate in judgment)
and real estate from certain subsidiary operations, and does not include
performing real estate held for investment totaling $2.8 million, $4.2
million and $2.9 million, respectively, at June 30, 1996, 1995 and 1994.
(3) A troubled debt restructuring is a loan on which the Corporation, for
reasons related to the debtor's financial difficulties, grants a concession
to the debtor, such as a reduction in the loan's interest rate, a reduction
in the face amount of the debt, or an extension of the maturity date of the
loan, that the Corporation would not otherwise consider.
(4) Includes $78,000 at June 30, 1996 and 1995, and $206,000 at June 30, 1994,
in general allowance for losses established primarily to cover risks
associated with borrowers' delinquencies and defaults on loans held for
sale.
(5) Represents the allowance for loan losses for single-family residential whole
loans purchased between January 1991 and June 30, 1992 (bulk purchased
loans), which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans to provide for the credit
risk associated with such bulk purchased loans. These bulk purchased loans
had principal balances of $574.4 million, $701.9 million and $868.0 million,
respectively, at June 30, 1996, 1995 and 1994. These allowances are
available only to absorb losses associated with respective bulk purchased
loans, and are not available to absorb losses from other loans.
- -------------------------------------------------------------------------------
24 Commercial Federal Corporation Annual Report 1996
The ratio of nonperforming loans to total loans was .78% at June 30, 1996,
based on loan balances of $4.9 billion, compared to .70% and .83%, respectively,
at June 30, 1995 and 1994, which were based on loan balances of $4.6 billion and
$4.0 billion. Management believes that these ratios reflect the quality of the
Corporation's loan portfolio, which consists primarily of loans secured by
single-family residential properties. The ratio of nonperforming assets to total
assets of 1.01%, .95% and 1.27%, respectively, at June 30, 1996, 1995 and 1994,
which management believes are favorable compared to industry standards, is an
indicator of the stabilization of nonperforming assets. The total allowance for
loan losses increased to $49.3 million at June 30, 1996, an improvement of
$737,000 and $4.4 million, respectively, compared to June 30, 1995 and 1994. The
percentage of allowance for loan losses to total loans at June 30, 1996, was
1.01%, compared to the ratios of 1.06% and 1.11%, respectively, at June 30, 1995
and 1994. The total allowance for loan losses to total nonperforming assets of
74.05% and 77.42% at June 30, 1996 and 1995, respectively, compared to 59.04% at
June 30, 1994, indicates improved coverage for potential losses. 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 of $5.6 million offset slightly by net increases of $273.2
million in total loans and $38.1 million in total assets compared to June 30,
1995. The asset quality ratios comparing June 30, 1995, to June 30, 1994,
improved due to net decreases in nonperforming loans and nonperforming assets,
primarily from the sale of properties and loan principal payments, combined with
increases in both total loans and total assets over the respective fiscal years.
Nonperforming loans at June 30, 1996, increased $5.6 million compared to
June 30, 1995, primarily due to net increases of $3.9 million, $1.6 million and
$187,000 in delinquent residential real estate loans, commercial real estate
loans and consumer loans, respectively. The increase of $3.9 million in
delinquent residential real estate loans is primarily due to residential
construction real estate loans increasing $1.9 million from a balance of
$603,000 at June 30, 1995, to $2.5 million at June 30, 1996, primarily due to
increased loan volume in residential construction lending.
The net increase of $1.3 million in real estate at June 30, 1996, compared
to June 30, 1995, is substantially attributable to a net increase of $1.2
million in residential real estate. Real estate is primarily located in Colorado
and Nebraska and at June 30, 1996, before allowance for losses, totaled $6.0
million and $5.4 million, respectively, compared to $6.8 million and $5.8
million at June 30, 1995.
Troubled debt restructurings decreased $3.1 million at June 30, 1996,
compared to June 30,1995, primarily attributable to net decreases of $2.7
million in commercial real estate loans and $385,000 in residential real estate
loans with the net decreases due primarily to loan principal repayments.
LOAN SERVICING FEES
Loan servicing fees, which also include miscellaneous loan fees for late
payments and prepayment charges, and assumption and modification fees, totaled
$27.9 million, $24.7 million and $22.2 million for fiscal years 1996, 1995 and
1994, respectively. This current year increase over previous fiscal years is
primarily due to increases in the size of the Corporation's loan servicing
portfolio. Fees from loans serviced for other institutions totaled $22.7
million, $20.9 million and $18.1 million for fiscal years 1996, 1995 and 1994,
respectively. The mortgage loan servicing portfolio totaled $5.870 billion,
$5.151 billion and $4.636 billion at June 30, 1996, 1995 and 1994, 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 Bank's loan servicing
portfolio will decrease as mortgage interest rates decline.
RETAIL FEES AND CHARGES
Retail fees and charges totaled $12.7 million, $9.5 million and $9.2
million for fiscal years 1996, 1995 and 1994, respectively. The primary source
of this fee income is customer charges for retail financial services such as
checking account fees and service charges, charges for insufficient funds or
uncollected funds, stop payment fees, overdraft protection fees and transaction
fees for personal
Commercial Federal Corporation Annual Report 1996 25
checking and automatic teller machine services. The net increase of $3.2 million
from fiscal year 1996 compared to fiscal year 1995 primarily results 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 last two fiscal years. As a result of the
Corporation's acquisition activity, combined with aggressive checking account
promotions, the Corporation's customer account deposit base has increased
significantly over the past fiscal year. Such acquisitions account for over $2.5
million of the total retail fees and charges for fiscal year 1996 compared to
$1.4 million for fiscal year 1995, an increase of approximately $1.1 million.
The increase of $392,000 from fiscal year 1994 to fiscal year 1995 is primarily
due to additional fees and charges generated from a larger customer base that
resulted primarily from the acquisition of two financial institutions in fiscal
year 1995.
GAIN (LOSS) ON SALES OF LOANS
During fiscal years 1996, 1995 and 1994, the Corporation sold loans to
third parties through its mortgage banking operations totaling $667.7 million,
$654.4 million and $1.96 billion, respectively, resulting in net pre-tax gains
of $164,000 and $1.4 million, respectively, for fiscal years 1996 and 1994, and
a net pre-tax loss of $1.7 million for fiscal year 1995. Mortgage loans are
generally sold in the secondary market with loan servicing retained and without
recourse to the Corporation. The net gain recorded in fiscal year 1996 is
attributable to the relatively stable interest rate environment and to the
adoption effective July 1, 1995, of the provisions of Statement of Financial
Accounting Standards No. 122 (SFAS No. 122) entitled "Accounting for Mortgage
Servicing Rights," which prescribes accounting methods that generally result in
comparatively higher amounts of gains realized from the sales of loans.
SFAS No. 122 requires capitalization of internally originated mortgage
servicing rights as well as purchased mortgage servicing rights. The net effect
of adopting the provisions of SFAS No. 122 was to increase fiscal year 1996 pre-
tax earnings approximately $4.0 million. At June 30, 1996, mortgage servicing
rights totaled $45.0 million. SFAS No. 122 also requires that mortgage servicing
rights be reported at the lower of cost or fair value. Mortgage servicing rights
are stratified by loan type and interest rate for purposes of impairment
measurement. Impairment losses are recognized to the extent the unamortized
mortgage servicing right for each stratum exceeds the current market value, as
reductions in the carrying value of the asset, through the use of a valuation
allowance, with a corresponding reduction to loan servicing income. No valuation
allowance for capitalized servicing rights was necessary to be established as of
June 30, 1996. The future effect of SFAS No. 122 is dependent, among other
items, upon the volume and type of loans originated, the general levels of
market interest rates and the rate of estimated loan prepayments. Accordingly,
management of the Corporation is unable to predict with any reasonable certainty
what effect this statement will have on the Corporation's future results of
operations or its financial position.
The net gains and losses recorded in fiscal years 1995 and 1994 are
primarily from mortgage banking operations of the former Railroad Savings Bank
which have been combined under the pooling of interests accounting treatment.
Such gains and losses were incurred primarily from the sales of loans which were
originated pursuant to unhedged commitments. The lower sales activity comparing
fiscal year 1995 to 1994 primarily is a result of lower loan originations due to
the relatively higher interest rate environment.
GAIN ON SALES OF LOAN SERVICING RIGHTS
Gain on the sales of loan servicing rights totaled $452,000, $3.5 million
and $5.9 million, respectively, for fiscal years 1996, 1995 and 1994. All such
sales activity of loan servicing rights was 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 $8.2 million, $7.5 million and $7.4 million
for fiscal years 1996, 1995 and 1994, respectively. The major components of
other operating income are brokerage and insurance commissions. Brokerage
commission income totaled $3.0 million, $2.6 million and $3.1 million,
respectively, for fiscal years 1996, 1995 and 1994. Management believes that
investment alternatives more attractive to consumers such as certificates of
deposit with higher interest rates have contributed to lower revenues for
brokerage commissions, primarily affecting
26 Commercial Federal Corporation Annual Report 1996
annuity commissions. Insurance commission income totaled $1.7 million, $2.4
million and $2.1 million, respectively, for fiscal years 1996, 1995 and 1994.
Fiscal year 1996 results are lower than 1995, and management of the Corporation
will continue to emphasize insurance and securities brokerage services; however,
such commissions are affected to a significant degree by the current interest
rate environment in relation to rates on other competing products. Fiscal year
1996 results also include credit life and disability commission income totaling
$1.6 million compared to $1.2 million and $629,000 in fiscal years 1995 and
1994, respectively. Other miscellaneous sundry income totaled approximately $1.9
million, $1.3 million and $1.6 million, respectively, for fiscal years 1996,
1995 and 1994. The increase of $600,000 comparing fiscal year 1996 to 1995 is
primarily attributable to the recognition of $344,000 in fiscal year 1996 on the
disposition of a leasing transaction and $253,000 recorded as net gains on the
sales of securities compared to a loss of $41,000 for fiscal year 1995.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses totaled $114.5 million, $102.6 million
and $94.1 million for fiscal years 1996, 1995 and 1994, respectively. The
efficiency ratio, defined as general and administrative expenses divided by the
sum of (i) net interest income before provision for loan losses, (ii) loan
servicing fees, (iii) retail fees and charges and (iv) other operating income,
has remained favorable even though operating expenses have increased, primarily
from acquisitions in each of the last three fiscal years, by approximately $12.0
million during fiscal year 1996 compared to 1995 and approximately $8.4 million
during fiscal year 1995 compared to 1994. The Corporation's efficiency ratio for
fiscal year 1996 is 54.2% compared to 53.5% and 53.3% for fiscal years 1995 and
1994, respectively. The increase in the efficiency ratio for fiscal year 1996
compared to fiscal year 1995 is due to increases in general and administrative
expenses primarily from the acquisitions during the last two fiscal years and
nonrecurring expenses totaling $4.5 million associated with the Railroad merger
and the 1995 proxy contest. Excluding the effects of such nonrecurring expenses
the Corporation's efficiency ratio for fiscal year 1996 is 52.1%.
The increase of approximately $12.0 million in general and administrative
expenses in fiscal year 1996 compared to fiscal year 1995 was due to increases
in compensation and benefits of $1.7 million, occupancy and equipment of $2.6
million, regulatory insurance and assessments of $1.3 million, advertising of
$1.9 million, amortization of mortgage servicing rights of $688,000 and $3.8
million in other operating expenses. The net increase of approximately $12.0
million, or 11.7%, comparing fiscal year 1996 to fiscal year 1995 is in part
attributable to nonrecurring expenses associated with the Railroad merger and
the 1995 proxy contest, expenses associated with loan production, additional
branches and increased marketing costs for deposits and other product and image
promotions. During fiscal year 1996 total nonrecurring costs and expenses
totaled $4.5 million consisting of (i) $3.6 million related to the Railroad
merger for accounting, legal, investment banking, severance benefits,
advertising and miscellaneous transition and conversion expenses and (ii)
$901,000 related to the 1995 proxy contest for consulting services, legal fees,
solicitation fees and printing and mailing costs. Other increases in general and
administrative expenses for fiscal year 1996 are attributable to loan production
costs, primarily compensation and benefits, which exceeded fiscal year 1995
expenses by approximately $3.5 million. Advertising expenditures, up $1.9
million, fluctuate based upon desired levels of product promotion and were
higher compared to fiscal year 1995 due to increased campaigns for checking
accounts and related products, certificates of deposit, consumer and mortgage
lending and image promotion. Amortization of mortgage servicing rights increased
by $688,000 over fiscal year 1995 primarily due to an increase of $14.1 million
in capitalized mortgage servicing rights. In addition, loans serviced for other
institutions increased $718.7 million over fiscal year 1995 resulting in
increased staffing levels and related expenses. Other net increases in general
and administrative expenses directly resulting from the Corporation's recent
acquisitions, excluding Railroad, totaled approximately $400,000 over fiscal
year 1995. Such increases in general and administrative expenses result from
increased personnel wages and benefits, costs of operating additional branches
and higher regulatory insurance assets from deposits acquired. Other expenses
were also incurred on an indirect basis attributable to such acquisitions.
The Corporation paid FDIC insurance premiums and OTS assessments totaling
$10.6 million, $9.3 million and $8.2 million for fiscal years 1996, 1995 and
1994, respectively. The higher levels of such costs recorded during the
respective fiscal years are due to the Corporation's increased deposit base
resulting from acquisitions and internal growth.
Commercial Federal Corporation Annual Report 1996 27
The increase of $8.4 million in general and administrative expenses in
fiscal year 1995 compared to fiscal year 1994 was due to increases in
compensation and benefits of $6.3 million, occupancy and equipment of $1.8
million, regulatory insurance and assessments of $1.1 million, advertising of
$640,000 and amortization of mortgage servicing rights of $652,000, partially
offset by a decrease of $2.1 million in other operating expenses. Increases in
general and administrative expenses directly resulting from the acquisitions in
fiscal years 1995 and 1994 totaled $4.4 million comparing fiscal year 1995 ($7.5
million) to fiscal year 1994 ($3.1 million). 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 increases in general and administrative
expenses in fiscal year 1995 compared to fiscal year 1994 are attributable to
loan production costs, primarily compensation and benefits, which were deferred
in fiscal year 1994 when loan production volume was significantly higher than in
fiscal year 1995. Such increase in loan production costs expensed in fiscal year
1995 over 1994 totaled $3.7 million. Deferred compensation related to restricted
stock totaled $1.2 million and $395,000, respectively, in fiscal years 1995 and
1994, an increase of $778,000 due to additional awards granted. Additionally,
amortization of mortgage servicing rights increased $652,000 in fiscal year 1995
over 1994 primarily from the increase of $10.4 million in servicing rights
acquired through purchases.
GOODWILL AND CORE VALUE OF DEPOSITS
Total amortization expense for goodwill and core value of deposits for
fiscal years 1996, 1995 and 1994 was $9.5 million, $10.3 million and $14.1
million, respectively. Amortization of goodwill and core value of deposits for
fiscal year 1996 was lower than fiscal year 1995 primarily due to a reduction in
amortization expense on core value of deposits which is amortized on an
accelerated basis partially offset by the $725,000 increase in intangible
amortization from the Conservative acquisition as of February 1, 1996.
Amortization of goodwill and core value of deposits for fiscal year 1995 was
lower than fiscal year 1994 primarily due to a $6.2 million decrease in goodwill
amortization comparing the respective fiscal years since the amortization of
goodwill was accelerated and completely amortized to expense over the first six
months of fiscal year 1995. In addition, the amortization expense on core value
of deposits from acquisitions before fiscal year 1994 decreased in the last six
months of fiscal year 1995 due to an adjustment totaling $6.8 million that was
recorded effective January 1, 1995, as a result of the Corporation's recognition
of pre-acquisition tax credits and net operating losses. Such decreases in
amortization expenses comparing fiscal year 1995 to 1994 were partially offset
by the net increase of $2.4 million in amortization of core value of deposits
and goodwill resulting from the acquisitions in fiscal years 1994 and 1995. No
impairment adjustment has been made to the intangible assets resulting from the
Corporation's acquisitions during fiscal years 1996, 1995 or 1994.
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
28 Commercial Federal Corporation Annual Report 1996
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. Such fair value estimate
resulted in the Corporation recognizing an impairment of recorded intangible
assets at June 30, 1994, of $52.7 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
was completely amortized to expense over the first six months of fiscal year
1995.
PROVISION FOR INCOME TAXES
For fiscal years 1996, 1995 and 1994 the provision for income taxes was
$27.0 million, $23.1 million and $16.9 million, respectively. The effective tax
rates for fiscal years 1996, 1995 and 1994 were 32.8%, 42.6% and 110.7%,
respectively. The provision for income taxes for fiscal year 1996 was reduced by
approximately $1.0 million for an income tax benefit recognized for financial
reporting purposes from a leveraged lease settlement. The provision for income
taxes for fiscal year 1995 was reduced by $2.3 million due to the recognition of
pre-acquisition tax credits and net operating losses that the Corporation was
entitled to from a thrift acquired in 1987 and two leasing companies acquired in
1984 and 1986. For the three fiscal years ended June 30, 1996, the effective tax
rates vary from the applicable statutory rates primarily due to the
nondeductibility of amortization of goodwill and core value of deposits in
relation to the level of taxable income for the respective fiscal years. The
effective tax rate also varied from the statutory rate of 35.0% for fiscal year
1996 due to the nondeductibility of certain Railroad merger and acquisition
costs offset slightly by the aforementioned income tax benefit recognized from
the leveraged lease settlement.
In addition, the effective tax rate varied from the statutory rate for
fiscal years 1995 and 1994 due to the recognition of the pre-acquisition tax
credits and net operating losses of $2.3 million in fiscal year 1995 and, in
fiscal year 1994, to the intangible assets valuation adjustment of $52.7
million. The effective tax rate for fiscal year 1994 includes a change in the
federal tax law enacted in August 1993 that increased the federal corporate
marginal tax rate from 34.0% to 35.0%. The effect of this tax rate change on the
net deferred income tax liability resulted in the recording of additional income
tax expense of $1.2 million in the first quarter of fiscal year 1994.
In August 1996, changes in the federal tax law (i) repealed both the
percentage of taxable income and experience methods effective July 1, 1996,
allowing a bad debt deduction for specific charge-offs only, and (ii) require
recapture into taxable income over a six year period of tax bad debt reserves
which exceed the base year amount, adjusted for any loan portfolio shrinkage.
These changes will result in the recognition of additional deferred tax
liabilities of approximately $103,000 in the first quarter of fiscal year 1997.
The remaining unrecognized deferred tax liability could be recognized in the
future, in whole or in part, if (i) there is a change in federal tax law, (ii)
the Bank fails to meet certain definitional tests and other conditions in the
federal tax law, (iii) certain distributions are made with respect to the stock
of the Bank or (iv) the bad debt reserves are used for any purpose other than
absorbing bad debt losses.
CUMULATIVE EFFECTS OF CHANGES IN ACCOUNTING PRINCIPLES
Included in fiscal year 1994 results of operations was the adoption of the
provisions of two accounting statements resulting in the Corporation recording a
net $6.6 million in net income, or $.46 per share, from the cumulative effects
of these changes in accounting principles.
The adoption of the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," resulted in recording $6.9
million in net income, or $.48 per share, while the adoption of the provisions
of Statement of Financial Accounting Standards No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," resulted in recording a charge
to income of $519,000 (net of a tax benefit of $183,000), or $.02 loss per share
after tax.
Commercial Federal Corporation Annual Report 1996 29
RATIOS
The table below sets forth certain performance ratios of the Corporation
for the periods indicated.
- -------------------------------------------------------------------------------
Year Ended June 30,
- -------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Return on average assets:net income
divided by average total assets (1)
(2).................................. .84% .49% .09%
Return on average equity:net income
divided by average equity (1) (2).... 14.74 9.98 1.54
Equity-to-assets ratio:average
stockholders' equity to average total
assets (1)........................... 5.72 4.95 5.74
General and administrative expenses
divided by average assets (1)(2)..... 1.75 1.62 1.67
- --------------------------------------------------------------------------------
(1) Based on daily average balances during fiscal years 1996, 1995 and 1994.
(2) General and administrative expenses divided by average assets for fiscal
year 1996 is 1.68% excluding the nonrecurring expenses totaling $3,565,000
and $901,000, respectively, associated with the Railroad merger and the 1995
proxy contest. Return on average assets and return on average stockholders'
equity for fiscal year 1996 are .90% and 15.68%, respectively, excluding the
after-tax effect of the nonrecurring expenses totaling $2,920,000 and
$585,000, respectively, associated with the Railroad merger and the 1995
proxy contest. Return on average assets and return on average stockholders'
equity for fiscal year 1995 are .83% and 16.82%, respectively, excluding the
accelerated amortization of goodwill totaling $21,357,000.
- --------------------------------------------------------------------------------
The increase in the operating ratio for general and administrative expenses
for fiscal year 1996 compared to fiscal year 1995 is attributable to an increase
of approximately $12.0 million in such expenses primarily due to the
nonrecurring expenses totaling $4.5 million associated with the Railroad merger
and the 1995 proxy contest as well as increases in general and administrative
expenses attributable to the Conservative acquisition. The decrease in the
operating ratio for general and administrative expenses for fiscal year 1995
compared to fiscal year 1994 is due to an increase of approximately $685.0
million in the Corporation's average total assets from fiscal year 1994
partially offset by an increase of $8.4 million in such expenses over the same
time span.
IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS
During fiscal year 1996, the Corporation adopted the provisions of two
accounting pronouncements: Statement No. 121 entitled "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
and Statement No. 122 entitled "Accounting for Mortgage Servicing Rights." See
Note 1 to the Consolidated Financial Statements for a discussion of the
implementation of the provisions of these new accounting pronouncements and
their effect, if any, on the Corporation's financial position and results of
operations.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation's principal asset is its investment in the capital stock of
the Bank, and because it does not generate any significant revenues independent
of the Bank, the Corporation's liquidity is dependent on the extent to which it
receives dividends from the Bank. The Bank's ability to pay dividends to the
Corporation is dependent on its ability to generate earnings and is subject to a
number of regulatory restrictions and tax considerations. Under capital
distribution regulations of the OTS, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed dividend,
has total capital that is at least equal to the amount of its fully phased-in
capital requirements (a "Tier 1 Association") is permitted to pay dividends
during a calendar year in an amount equal to the greater of (i) 75.0% of its net
income for the recent four quarters, or (ii) 100.0% of its net income to date
during the calendar year plus an amount that would reduce by one-half the amount
by which its ratio of total capital to assets exceeded its fully phased-in risk-
based capital ratio requirement at the beginning of the calendar year. At June
30, 1996, the Bank qualified as a Tier 1 Association, and would be permitted to
pay an aggregate amount approximating $92.9 million in dividends under these
regulations. Should the Bank's regulatory capital fall below certain levels,
applicable law would require
30 Commercial Federal Corporation Annual Report 1996
approval by the OTS of such proposed dividends and, in some cases, would
prohibit the payment of dividends.
At June 30, 1996, the cash of Commercial Federal Corporation (the parent
company) totaled $12.6 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 June 30, 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,
during fiscal years 1996 and 1995, the parent company received dividends
totaling $9.3 million and $5.7 million, respectively, from the Bank. These
dividends from the Bank were made primarily to cover (i) the interest payments
on the parent company's subordinated debt and senior notes which amount totaled
$4.9 million in the aggregate and (ii) the common stock cash dividends of $4.4
million paid by the parent company to its shareholders through June 30, 1996. On
October 4, 1995, the Board of Directors of the Corporation established a policy
of paying a regular quarterly cash dividend on its common stock. Prior to such
date, the Corporation had never paid dividends. Accordingly, cash dividends
totaling $5.9 million, or $.40 per common share, were declared during fiscal
year 1996 with $4.4 million paid through June 30, 1996. The payment of dividends
on the common stock is subject to the discretion of the Board of Directors of
the Corporation and depends on a variety of factors, including operating results
and financial condition, liquidity, regulatory capital limitations and other
factors. The Bank will continue to pay dividends to the parent company, pursuant
to regulatory restrictions, to cover cash dividends on common stock that the
parent company intends to pay on a quarterly basis. The parent company also
receives cash from the exercise of stock options and the sale of stock under its
employee benefit plans which totaled $2.3 million and $1.3 million,
respectively, during fiscal years 1996 and 1995.
Subsequent to June 30, 1996, the Corporation repurchased on August 21,
1996, 1,250,100 shares of its common stock. Total cash consideration for this
transaction, including certain expenses and costs associated with the seller's
ownership of such stock, approximated $51.2 million. The sources of cash to
consummate this stock repurchase consisted of (i) a short-term note totaling
$28.0 million, (ii) a dividend from the Bank totaling $18.0 million and (iii)
cash totaling $5.2 million paid directly by the parent company.
The Corporation's primary sources of funds are (i) deposits,
(ii) principal repayments on loans, mortgage-backed and investment securities,
(iii) advances from the FHLB of Topeka, (iv) cash generated from operations and
(v) securities sold under agreements to repurchase. As reflected in the
Consolidated Statement of Cash Flows, net cash flows used by operating
activities for fiscal year 1996 totaled $6.3 million, and net cash flows
provided by operating activities for fiscal years 1995 and 1994 totaled $18.9
million and $31.2 million, respectively. 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. The
origination of loans for resale totaling $365.5 million for fiscal year 1996 is
comparable to the $332.8 million for fiscal year 1995 but considerably lower
than the $996.5 million for fiscal year 1994 primarily due to the lower volume
of loan refinancing activity attributable to the increase in interest rates over
the past two fiscal years.
Net cash flows provided by investing activities totaled $253.0 million and
$90.7 million for fiscal years 1996 and 1994, respectively, and net cash flows
used by investing activities totaled $264.1 million for fiscal year 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 $3.6
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. During
fiscal year 1995 the Corporation acquired the assets and liabilities of two
financial institutions for which it paid cash totaling $16.5 million and
received cash totaling $91.8 million primarily from the acquisition of the
deposits and branches of a Kansas institution. In addition, the large amount of
cash flows provided by investing activities during fiscal year
Commercial Federal Corporation Annual Report 1996 31
1994 is primarily from the acquisition of deposits of two institutions for which
the Corporation received cash totaling $784.5 million. The proposed acquisition
of Heritage will result in cash paid totaling approximately $3.4 million for
Heritage's common stock as well as the exchange of approximately 462,570 shares
of the Corporation's common stock.
At December 31, 1995, in accordance with the one-time reclassification
permitted under the special report 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, management of the Corporation developed an
asset/liability management strategy to reclassify substantially all of its 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. In addition, approximately $9.4 million of
adjustable-rate mortgage-backed securities were reclassified from available for
sale to held to maturity. 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-backed and investment
securities totaling approximately $90.1 million as part of the acquisition of
Conservative and classified such securities as available for sale. During fiscal
year 1996, approximately $230.8 million of such investment and mortgage-backed
securities were sold with the proceeds used primarily to pay maturing FHLB
advances.
Net cash flows used by financing activities totaled $246.1 million and
$129.6 million, respectively, for fiscal years 1996 and 1994 and net cash
provided by financing activities totaled $252.8 million for fiscal year 1995.
Advances from the FHLB and retail deposits have been the primary sources to
balance the Corporation's funding needs during each of the fiscal years
presented. The Corporation experienced net increases of $93.8 million, $103.9
million and $121.1 million, respectively, in deposits for the fiscal years ended
June 30, 1996, 1995, and 1994, 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 fiscal years 1996 and 1995 the Corporation
utilized securities sold under agreements to repurchase primarily for liquidity
and asset liability management purposes.
As a result of the final disposition of a subsidiary's interest in a
nuclear generating facility located in Palo Verde, Arizona in February 1996, the
Corporation recognized taxable income totaling approximately $154.9 million.
Accordingly, such income for tax purposes has resulted in federal and state tax
liabilities totaling approximately $51.8 million. These tax payments were paid
in June 1996 for the federal tax liability and will be paid in September and
October 1996 for the state tax liabilities. While these payments affect the
Corporation's cash flow position, they did not and will not have a material
adverse impact on the Corporation's financial condition or results of
operations.
Among the proposals being considered by the FDIC and Congress to eliminate
the deposit insurance premium disparity between BIF-insured and SAIF-insured
institutions is a reduction in premium rates charged to SAIF-insured
institutions as was done for BIF-insured institutions. It is expected that such
a reduction would be accompanied by a one-time assessment of SAIF-insured
institutions up to .68% of insured deposits to increase the SAIF reserve level
to 1.25% of SAIF-insured deposits, which is the same level attained by the BIF
prior to the reduction of BIF premium rates. If a special assessment as
described above were to be required, it would result, on a pro forma basis as
of June 30, 1996, in a one-time after-tax charge to the Corporation of
approximately $18.3 million. If such a special assessment were required and the
SAIF as a result was fully recapitalized, it could have the effect of reducing
the Corporation's deposit insurance premiums to the SAIF, thereby increasing
net income in future periods.
The Corporation has considered and will continue to consider possible
mergers with and acquisitions of other selected financial institutions. During
fiscal year 1996 the Corporation consummated the acquisitions of Railroad and
Conservative, and entered into a merger agreement with Heritage. See Notes 2, 3
and 27 to the Consolidated Financial Statements for additional information on
these completed and pending acquisitions. Such acquisitions present the
Corporation with the opportunity to further expand its retail network in its
existing markets; and to increase its earnings potential by increasing its
mortgage and consumer loan volumes funded by deposits which generally bear lower
rates of interest than alternative sources of funds.
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 existing
markets and complement the Corporation's present retail network.
At June 30, 1996, the Corporation had issued commitments of $173.6 million
to fund and purchase loans as follows: $55.2 million of single-family adjustabl
rate mortgage loans, $94.8 million of single-family fixed-rate mortgage loans,
$6.0 million of commercial real estate loans and $17.6 million of consumer loan
lines of
32 Commercial Federal Corporation Annual Report 1996
credit. In addition, at June 30, 1996, outstanding commitments from mortgage
banking operations to purchase mortgage loan servicing rights totaled $9,000.
These outstanding loan commitments to extend credit in order to originate loans
or fund consumer loan lines of credit do not necessarily represent future cash
requirements since many of the commitments may expire without being drawn. The
Corporation expects to fund these commitments, as necessary, from the sources of
funds previously described.
The maintenance of an appropriate level of liquid resources to meet not
only regulatory requirements but also to provide funding necessary to meet the
Corporation's current business activities and obligations is an integral element
in the management of the Corporation's assets. The Corporation is required by
federal regulation to maintain a minimum average daily balance of cash and
certain qualifying liquid investments equal to 5.0% of the aggregate of the
prior month's daily average savings deposits and short-term borrowings. The
Corporation's liquidity ratio was 7.07% at June 30, 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.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and related consolidated financial
information have been prepared in accordance with generally accepted accounting
principles, which require the measurement of financial position and operating
results in terms of historical dollars without considering changes in the
relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant effect on a financial institution's performance than the effects of
general levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services.
STOCK PRICES AND DIVIDENDS
The Corporation's common stock is traded on the New York Stock Exchange
under the symbol "CFB." Prior to August 2, 1995, the Corporation's common stock
was traded on the Nasdaq Stock Market and quoted on the Nasdaq National Market
under the symbol "CFCN." The following table sets forth the high and low closing
sales prices for the periods indicated for the common stock of the Corporation.
-----------------------------------------------------------------------------------------------------------------------------------
1996 1995
----------------------------------------------- --------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
Common stock prices:
High.................... $38 7/8 $38 7/8 $37 3/4 $37 $31 1/4 $24 7/8 $24 13/16 $27 7/8
Low..................... 36 7/8 35 32 3/8 27 1/8 24 5/8 20 3/8 18 7/8 23 3/4
Dividends declared...... $.10 $.10 $.20 -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
As of June 30, 1996, there were 15,089,701 shares of common stock issued
and outstanding which were held by more than 2,215 shareholders of record and
395,520 shares subject to outstanding options. On August 21, 1996, after the
repurchase of 1,250,100 shares of common stock from CAI Corporation, a total of
13,844,036 shares remain outstanding. The number of shareholders of record does
not reflect the persons or entities who hold their stock in nominee or "street"
name.
On October 4, 1995, the Board of Directors of the Corporation established
a policy of paying a regular quarterly cash dividend on its common stock.
Accordingly, cash dividends totaling $5.9 million, or $.40 per common share,
were declared during fiscal year 1996. See "Liquidity and Capital Resources" and
Note 19 to the Consolidated Financial Statements regarding the payment of future
dividends and any possible restrictions thereon.
Commercial Federal Corporation Annual Report 1996 33
Commercial Federal Corporation Consolidated Statement of Financial Condition
- --------------------------------------------------------------------------------
(Dollars in Thousands) June 30,
ASSETS 1996 1995
- --------------------------------------------------------------------------------
Cash (including short-term investments of
$2,400 and $6,345) .......................... $ 35,827 $ 35,145
Investment securities available for sale,
at fair value ............................... 9,898 2,988
Mortgage-backed securities available for sale,
at fair value ............................... 263,206 36,974
Loans held for sale .......................... 89,379 113,385
Investment securities held to maturity (fair
value of $239,141 and $294,805) ............. 243,145 297,493
Mortgage-backed securities held to maturity
(fair value of $905,034 and $1,319,333) ..... 916,840 1,327,933
Loans receivable, net of allowances of
$49,200 and $48,463 ......................... 4,723,785 4,427,307
Federal Home Loan Bank stock ................. 79,113 103,648
Interest receivable, net of reserves of
$388 and $352 ............................... 40,683 42,211
Real estate .................................. 16,669 16,786
Premises and equipment ....................... 73,555 67,204
Prepaid expenses and other assets ............ 74,836 61,242
Goodwill and core value of deposits, net of
accumulated amortization of $73,742 and
$64,213 ..................................... 40,734 37,263
- --------------------------------------------------------------------------------
Total Assets ............................. $6,607,670 $6,569,579
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities:
Deposits ................................... $ 4,304,576 $4,011,323
Advances from Federal Home Loan Bank ....... 1,350,290 1,787,352
Securities sold under agreements to
repurchase ................................ 380,755 208,373
Other borrowings ........................... 58,546 65,303
Interest payable ........................... 24,298 24,223
Other liabilities .......................... 75,928 135,391
- --------------------------------------------------------------------------------
Total Liabilities ........................ 6,194,393 6,231,965
- --------------------------------------------------------------------------------
Commitments and contingencies ................ -- --
- --------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; 10,000,000
shares authorized; none issued .............. -- --
Common stock, $.01 par value; 25,000,000
shares authorized; 15,089,701 and
14,272,793 shares issued and outstanding .... 151 143
Additional paid-in capital ................... 175,548 146,530
Retained earnings ............................ 240,281 190,855
Unrealized holding gain (loss) on
securities available for sale, net .......... (2,703) 86
- --------------------------------------------------------------------------------
Total Stockholders' Equity ............... 413,277 337,614
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 6,607,670 $6,569,579
- --------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
34 Commercial Federal Corporation Annual Report 1996
Commercial Federal Corporation Consolidated Statement of Stockholders' Equity
- --------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Unrealized
Holding Gain
(Loss) on
Additional Securities
Common Paid-in Retained Available
Stock Capital Earnings for Sale, Net Total
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1993......... $140 $143,189 $154,519 $ -- $297,848
Issuance of 90,836 shares
under certain compensation
and employee plans .......... 1 1,021 -- -- 1,022
Issuance of 16,247 shares of
common stock upon acquisition
of business ................. 1 169 -- -- 170
Restricted stock and deferred
compensation plans, net ..... -- 395 -- -- 395
Purchase and retirement of
2,844 shares of treasury
stock ....................... -- (35) -- -- (35)
Unrealized holding gain on
securities available for
sale, net .................... -- -- -- 198 198
Net income .................... -- -- 4,970 -- 4,970
Railroad Financial Corporation
activity for six months ended
June 30, 1994:
Issuance of 32,473 shares
under certain compensation
and employee plans ......... -- 146 -- -- 146
Purchase and retirement of
39,953 shares of treasury
stock ...................... -- (590) -- -- (590)
Unrealized holding loss on
securities available for
sale, net .................. -- -- -- (728) (728)
Net income .................... -- -- 185 -- 185
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 ....... 142 144,295 159,674 (530) 303,581
Issuance of 111,994 shares
under certain compensation
and employee plans ........... 1 1,333 -- -- 1,334
Restricted stock and deferred
compensation plans, net ...... -- 1,173 -- -- 1,173
Purchase and retirement of
17,759 shares of treasury
stock ........................ -- (271) -- -- (271)
Unrealized holding gain on
securities available for
sale, net .................... -- -- -- 616 616
Net income .................... -- -- 31,181 -- 31,181
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1995 ......... 143 146,530 190,855 86 337,614
Issuance of 113,456 shares
under certain compensation
and employee plans ........... 1 2,290 -- -- 2,291
Issuance of 707,562 shares of
common stock upon acquisition
of business .................. 7 25,819 -- -- 25,826
Restricted stock and deferred
compensation plans, net ...... -- 909 -- -- 909
Unrealized holding loss on
securities available for
sale, net .................... -- -- -- (2,789) (2,789)
Cash dividends declared ($.40
per share) ................... -- -- (5,880) -- (5,880)
Net income .................... -- -- 55,306 -- 55,306
- --------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1996 $151 $175,548 $240,281 $(2,703) $413,277
- --------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
Commercial Federal Corporation Annual Report 1996 35
Commercial Federal Corporation Consolidated Statement of Operations
- ----------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------------
Interest Income:
Loans receivable ................................ $384,765 $344,109 $306,725
Mortgage-backed securities ...................... 82,830 84,404 61,491
Investment securities ........................... 23,497 25,855 25,638
- ----------------------------------------------------------------------------------------------
Total interest income ........................ 491,092 454,368 393,854
Interest Expense:
Deposits ........................................ 214,040 180,163 142,557
Advances from Federal Home Loan Bank ............ 94,057 109,314 96,216
Securities sold under agreements to repurchase .. 13,525 7,837 9,592
Other borrowings ................................ 6,695 7,212 7,737
- ----------------------------------------------------------------------------------------------
Total interest expense ....................... 328,317 304,526 256,102
Net Interest Income .............................. 162,775 149,842 137,752
Provision for Loan Losses ........................ (6,107) (6,408) (6,248)
- ----------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan
Losses .......................................... 156,668 143,434 131,504
Other Income (Loss):
Loan servicing fees ............................. 27,891 24,731 22,227
Retail fees and charges ......................... 12,747 9,547 9,155
Real estate operations .......................... 172 1,490 (1,449)
Gain (loss) on sales of loans ................... 164 (1,695) 1,433
Gain on sales of loan servicing rights .......... 452 3,519 5,929
Other operating income .......................... 8,220 7,474 7,398
- ----------------------------------------------------------------------------------------------
Total other income ........................... 49,646 45,066 44,693
Other Expense:
General and administrative expenses-
Compensation and benefits ...................... 45,413 43,737 37,407
Occupancy and equipment ........................ 23,572 20,925 19,147
Regulatory insurance and assessments ........... 10,642 9,317 8,217
Advertising .................................... 6,451 4,594 3,954
Other operating expenses ....................... 28,439 23,981 25,390
- ----------------------------------------------------------------------------------------------
Total general and administrative expenses .... 114,517 102,554 94,115
Amortization of goodwill and core value of
deposits ....................................... 9,529 10,262 14,131
Valuation adjustment and accelerated
amortization of goodwill ....................... -- 21,357 52,703
- ----------------------------------------------------------------------------------------------
Total other expense .......................... 124,046 134,173 160,949
- ----------------------------------------------------------------------------------------------
Income Before Income Taxes and Cumulative Effects
of Changes in Accounting Principles ............. 82,268 54,327 15,248
Provision for Income Taxes ....................... 26,962 23,146 16,875
- ----------------------------------------------------------------------------------------------
Income (Loss) Before Cumulative Effects of
Changes in Accounting Principles ................ 55,306 31,181 (1,627)
Cumulative Effects of Changes in Accounting
Principles, net ................................. -- -- 6,597
- ----------------------------------------------------------------------------------------------
Net Income ....................................... $ 55,306 $ 31,181 $ 4,970
- ----------------------------------------------------------------------------------------------
36 Commercial Federal Corporation Annual Report 1996
Commercial Federal Corporation Consolidated Statement of Operations (continued)
- --------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Year Ended June 30,
1996 1995 1994
- --------------------------------------------------------------------------------------------
Earnings Per Common Share:
- --------------------------------------------------------------------------------------------
Income (loss) before cumulative
effects of changes in accounting principles .............. $3.73 $2.16 $(.11)
Cumulative effects of changes in accounting principles .... -- -- .46
- --------------------------------------------------------------------------------------------
Net income ................................................ $3.73 $2.16 $ .35
- --------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
Commercial Federal Corporation Annual Report 1996 37
Commercial Federal Corporation Consolidated Statement of Cash Flows
- ----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................. $ 55,306 $ 31,181 $ 4,970
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization of goodwill and core value of deposits ................. 9,529 10,262 14,131
Accelerated amortization of goodwill and valuation adjustment ....... -- 21,357 52,703
Cumulative effects of changes in accounting principles .............. -- -- (6,414)
Provisions for loss on loans and real estate ........................ 5,628 6,607 7,912
Depreciation and amortization ....................................... 6,855 5,613 4,768
Accretion of deferred discounts and fees, net ....................... (4,296) (2,476) (9,983)
Amortization of mortgage servicing rights ........................... 9,011 8,323 7,671
Amortization of deferred compensation on restricted stock
and premiums on other borrowings .................................. 1,365 1,340 948
Deferred tax provision .............................................. (52,591) 14,374 5,078
Gain on sales of real estate, loans and loan servicing rights, net .. (1,574) (4,022) (9,593)
Stock dividends from Federal Home Loan Bank ......................... (4,216) -- --
Proceeds from the sale of loans ..................................... 667,847 652,744 1,959,827
Origination of loans for resale ..................................... (365,484) (332,831) (996,518)
Purchase of loans for resale ........................................ (317,567) (378,886) (977,624)
Increase (decrease) in interest receivable .......................... 3,459 (3,781) (452)
Decrease in interest payable and other liabilities .................. (14,016) (9,452) (9,446)
Other items, net .................................................... (5,532) (1,493) (16,747)
--------- -------- ---------
Total adjustments ................................................. (61,582) (12,321) 26,261
--------- -------- ---------
Net cash (used) provided by operating activities ................ (6,276) 18,860 31,231
- ----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans ..................................................... (576,377) (688,313) (1,117,176)
Repayment of loans, net of originations ................................ 411,420 176,911 375,259
Proceeds from sale of mortgage-backed securities available for sale .... 179,041 40,774 20,821
Principal repayments of mortgage-backed securities available for sale... 20,315 -- --
Principal repayments of mortgage-backed securities held to maturity .... 176,225 137,060 263,599
Purchases of mortgage-backed securities held to maturity ............... (50,197) (11,504) (214,811)
Maturities and repayments of investment securities held to maturity .... 104,458 24,172 119,185
Purchases of investment securities held to maturity .................... (76,266) (25,000) (153,650)
Proceeds from sale of investment securities available for sale ......... 51,770 14,797 --
Maturities and repayments of investment securities available for sale... 2,077 800 460
Purchase of investment securities available for sale ................... -- -- (1,551)
Acquisitions, net of cash (paid) received .............................. (15,234) 75,414 785,140
Purchases of mortgage loan servicing rights ............................ (14,034) (9,386) (7,774)
Proceeds from sale of loan servicing rights ............................ 452 3,519 5,981
Proceeds from sale of Federal Home Loan Bank stock ..................... 41,085 13,548 8,408
Purchases of Federal Home Loan Bank stock .............................. (4,178) (16,236) (8,078)
Proceeds from sale of real estate ...................................... 12,080 12,009 21,568
Payments to acquire real estate ........................................ (1,817) (1,444) (2,773)
Purchases of premises and equipment, net ............................... (8,211) (11,241) (4,403)
Other items, net ....................................................... 413 -- 504
-------- --------- ---------
Net cash provided (used) by investing activities ................ 253,022 (264,120) 90,709
- ----------------------------------------------------------------------------------------------------------------
38 Commercial Federal Corporation Annual Report 1996
Commercial Federal Corporation Consolidated Statement of Cash Flows (continued)
- -----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Year Ended June 30,
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits .................................................. $ 93,755 $ 103,936 $ 121,062
Proceeds from Federal Home Loan Bank advances ......................... 1,169,500 617,602 885,290
Repayment of Federal Home Loan Bank advances .......................... (1,672,784) (506,392) (1,128,966)
Proceeds from securities sold under agreements to repurchase .......... 230,000 195,755 2,570
Repayment of securities sold under agreements to repurchase ........... (57,618) (157,432) --
Proceeds from issuance of other borrowings ............................ -- 4,000 --
Repayment of other borrowings ......................................... (6,836) (5,702) (10,579)
Payment of cash dividends on common stock ............................. (4,370) -- --
Issuance of common stock .............................................. 2,291 1,334 1,022
Other items, net ...................................................... (2) (271) (35)
---------- ---------- ------------
Net cash (used) provided by financing activities ............... (246,064) 252,830 (129,636)
- ------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position .............................. 682 7,570 (7,696)
Balance, beginning of year ............................................ 35,145 27,575 35,271
---------- ---------- ------------
Balance, end of year .................................................. $ 35,827 $ 35,145 $ 27,575
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest expense .................................................. $ 328,861 $ 306,634 $ 259,705
Income taxes, net ................................................. 73,741 4,179 13,193
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 .................... 63,445 189,031 605,490
Loans transferred to real estate .................................. 9,908 7,853 9,345
Loans to facilitate the sale of real estate ....................... 51 583 12,847
Common stock issued in connection with the acquisition of
business ......................................................... 25,826 -- --
Reduction in core value of deposits on recognition of
pre-acquisition tax credits and net operating losses ............ -- (6,810) --
Increase to assets and liabilities from prior business
combinations ..................................................... -- -- 15,195
- -----------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
Commercial Federal Corporation Annual Report 1996 39
Commercial Federal Corporation Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts)
Note 1. Summary Of Significant Accounting Policies:
BASIS OF CONSOLIDATION - The 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. Certain amounts for
years prior to fiscal year 1996 have been reclassified for comparative purposes.
NATURE OF BUSINESS - The Corporation is a unitary non-diversified savings and
loan holding company whose primary asset is the Bank which is a consumer-
oriented financial institution that emphasizes single-family residential real
estate lending, consumer lending, retail deposit activities, mortgage banking
and other retail financial services. The Bank conducts loan origination
activities through its branch office network, loan offices of its wholly-owned
mortgage banking subsidiary and a nationwide correspondent network.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period.
POOLING OF INTERESTS - 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.
CASH AND CASH EQUIVALENTS - For the purpose of reporting cash flows, cash and
cash equivalents include cash, restricted cash and federal funds sold.
Generally, federal funds are purchased and sold for a one-day period.
SECURITIES - Securities must be classified in one of three categories and
accounted for as follows: (i) debt securities that the Corporation has the
positive intent and ability to hold to maturity are classified as "held-to-
maturity securities" and reported at amortized cost; (ii) debt and equity
securities that are bought and held principally for the purpose of selling them
in the near term are classified as "trading securities" and reported at fair
value, with unrealized gains and losses included in earnings; and (iii) debt and
equity securities not classified as either held-to-maturity securities or
trading securities are classified as "available-for-sale securities" and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity. The Corporation
did not hold any trading securities at June 30, 1996 or 1995.
Premiums and discounts are amortized over the contractual lives of the
related securities on the level yield method. Unrealized losses on securities,
if any, reflecting a decline in the fair value of such securities to be other
than temporary, are charged against income. Realized gains or losses on
securities available for sale are based on the specific identification method
and are included in results of operations on the trade date.
LOANS - Loans receivable are recorded at the contractual amounts owed by
borrowers less unamortized discounts, net of premiums, undisbursed funds on
loans in process, deferred loan fees and allowance for loan losses. Interest on
loans is accrued to income as earned, except that interest is not accrued on
first mortgage loans contractually delinquent three months or more. Any related
discounts or premiums on loans purchased are amortized into interest income
using the level yield method over the contractual lives of the loans, adjusted
for actual prepayments. Loan origination fees, commitment fees and direct loan
origination costs are deferred and recognized over the estimated average life of
the loan as a yield adjustment. Loans held for sale are carried at the lower of
aggregate cost or market value as determined by outstanding commitments from
investors or current investor yield requirements calculated on an aggregate loan
basis. Valuation adjustments, if necessary, to reflect the lower of aggregate
cost or market value, are recorded in current operations.
40 Commercial Federal Corporation Annual Report 1996
REAL ESTATE - Real estate includes real estate acquired through foreclosure,
real estate in judgment and real estate held for investment, which includes
equity in unconsolidated joint ventures and investment in real estate
partnerships.
Real estate acquired through foreclosure and in judgment are initially
recorded at the lower of cost or fair value minus estimated costs to sell at the
date of foreclosure establishing a new cost basis. After foreclosure, valuation
allowances for estimated losses on real estate are provided when the carrying
value exceeds the fair value minus estimated costs to sell the property.
Real estate held for investment is stated at the lower of cost or net
realizable value. Cost includes acquisition costs plus construction costs of
improvements, holding costs and costs of amenities incurred to date. Joint
venture and partnership investments are carried on the equity method of
accounting and, where applicable, are stated at net realizable value. The
Corporation's ability to recover the carrying value of real estate held for
investment (including capitalized interest) is based upon future sales of land
or projects. The ability to affect such sales is subject to market conditions
and other factors which may be beyond the Corporation's control.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is increased by
charges to income and decreased by charge-offs, net of recoveries. Management's
periodic evaluation of the adequacy of the allowance is based on the
Corporation's past loan loss experience, known and inherent risks in the
portfolio, the estimated value of any underlying collateral and current economic
conditions. Impaired loans except large groups of smaller balance homogeneous
loans (such as residential real estate and consumer loans) that are collectively
evaluated for impairment and loans that are measured at fair value or the lower
of cost or market value, are measured based on the present value of expected
future cash flows discounted at the loan's effective interest rate, or as a
practical expedient, at the observable market price of the loan or the fair
value of the underlying collateral.
ALLOWANCE FOR LOSSES ON BULK PURCHASED LOANS - The Corporation previously
purchased single-family residential whole loan packages (bulk purchased loans)
at net discounts. Portions of such discounts are allocated to allowance for
losses (credit allowances) relating to the credit risk associated with each
mortgage loan package purchased. These credit allowances are available to absorb
possible losses on these bulk purchased loans only or are credited to interest
income as actual prepayments of individual loans occur. Collectibility is
evaluated throughout the life of the acquired loans and if the estimate of total
probable collections is increased or decreased, the amount of the allowance on
bulk purchased loans (and the corresponding discount to be amortized) is
adjusted accordingly.
MORTGAGE SERVICING RIGHTS - Mortgage servicing rights represent the cost of
acquiring the right to service mortgage loans. Such costs are initially
capitalized and subsequently amortized in proportion to, and over the period of,
estimated net loan servicing income.
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 requires that
a mortgage banking enterprise recognize as a separate asset the rights to
service mortgage loans for unrelated third parties that have been acquired
though either the purchase or origination of a loan. Previous to July 1, 1995,
only purchased mortgage servicing rights were capitalized as assets. 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. Additionally,
SFAS No. 122 requires that mortgage servicing rights be reported at the lower of
cost or fair value. The value of mortgage servicing rights is determined based
on the present value of estimated expected future
Commercial Federal Corporation Annual Report 1996 41
cash flows, using assumptions as to current market discount rates, prepayment
speeds and servicing costs per loan. Mortgage servicing rights are stratified by
loan type and interest rate for purposes of impairment measurement. Loan types
include government, conventional, private, and adjustable-rate mortgage loans.
Impairment losses are recognized to the extent the unamortized mortgage
servicing right for each stratum exceeds the current market value, as reductions
in the carrying value of the asset, through the use of a valuation allowance,
with a corresponding reduction to loan servicing income. No valuation allowance
for capitalized servicing rights was necessary to be established as of June 30,
1996. The net effect of adopting the provisions of SFAS No. 122 was to increase
fiscal year 1996 pre-tax earnings approximately $3,995,000 (after-tax
approximately $2,547,000 or $.17 per common share).
PREMISES AND EQUIPMENT - Land is carried at cost. Buildings, building
improvements, leasehold improvements and furniture, fixtures and equipment are
stated at cost less accumulated depreciation and amortization. Depreciation is
calculated on a straight-line basis over the estimated useful lives of the
related assets. Estimated lives are 10 to 50 years for buildings and three to 15
years for furniture, fixtures and equipment. Leasehold improvements are
generally amortized on the straight-line method over the terms of the respective
leases. Maintenance and repairs are charged to expense as incurred.
INTANGIBLE ASSETS ACQUIRED IN BUSINESS COMBINATIONS - 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.
This accounting change was considered to be a change in accounting principle
inseparable from a change in estimate. Independent valuations of the fair value
of the intangibles were completed for fiscal years 1995 and 1994.
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" as of July 1,
1995. 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 be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. In such cases, the
expected future cash flows (undiscounted and without interest charges) resulting
from the use of the asset are estimated and an impairment loss recognized if the
sum of such cash flows is less than the carrying amount of the asset. Should
such an assessment indicate that the value of a long-lived asset or goodwill may
be impaired, an impairment loss is recognized for the difference between the
carrying value of the asset and its estimated fair value. The adoption of the
provisions of this statement had no effect on the Corporation's financial
position or results of operations.
Core value of deposits resulting from acquisitions in fiscal years 1994 and
later is amortized on an accelerated basis over a period not to exceed 10 years
and goodwill is amortized on a straight-line basis over a period not to exceed
20 years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The Corporation enters into
sales of securities under agreements to repurchase with primary dealers only,
which provide for the repurchase of the same security. Securities sold under
agreements to purchase identical securities are collateralized by assets which
are held in safekeeping in the name of the Corporation by the dealers who
arranged the transaction. Securities sold under agreements to repurchase are
treated as financings and the obligations to repurchase such securities are
reflected as a liability. The securities underlying the agreements remain in the
asset accounts of the Corporation.
HEDGING - The Bank 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 Bank is
exposed to interest rate risk. In a rising rate environment, liabilities will
reprice faster than assets, thereby reducing the market value of long-term
interest-earning assets and net interest income.
To mitigate this risk, interest rate swaps and interest rate caps have been
utilized to hedge the interest rate exposure on certain interest-sensitive
liabilities. It has been the general policy of the Bank to move toward a
natural,
42 Commercial Federal Corporation Annual Report 1996
rather than a synthetic, management of its interest rate risk. Therefore, the
Bank has allowed such hedging instruments to expire upon maturity while
extending the maturities and locking in fixed interest rates on certain
borrowings, primarily advances from the Federal Home Loan Bank, which has helped
to reduce the Bank's one-year cumulative gap mismatch. The Bank reports interest
rate swaps using settlement accounting whereby the net amount on interest rate
swaps is recognized as an adjustment to interest expense.
INCOME TAXES - The Corporation files consolidated federal income tax returns.
The Corporation and its subsidiaries have entered into a tax-sharing agreement
that provides for the allocation and payment of federal and state income taxes.
The provision for income taxes of each corporation is computed on a separate
company basis, subject to certain adjustments.
Effective July 1, 1993, the Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income
Taxes." Railroad's adoption of the provisions of this statement was changed from
the year ended December 31, 1992, to the year ended December 31, 1993, to
conform to the Corporation's adoption, and therefore is included in the
cumulative effect of changes in accounting principles for the fiscal year ended
June 30, 1994. This statement supersedes both Accounting Principles Board
Opinion No. 11 (APB Opinion No. 11) and the guidance of APB Opinion No. 23 on
the tax treatment of savings and loan bad debt reserves. SFAS No. 109 calculates
income taxes on the liability method, under which the net deferred tax asset or
liability is determined based on the tax effects of the differences between the
book and tax bases of the various assets and liabilities of the Corporation and
gives current recognition to changes in tax rates and laws. The effect of
applying the provisions of SFAS No. 109 was a one-time adjustment that increased
net income for fiscal year 1994 by $6,933,000 ($.48 per share) recorded as a
cumulative effect of a change in accounting principle resulting from increasing
the net deferred tax liability by $8,262,000 offset by additional deferred taxes
totaling $15,195,000 recorded to adjust the assets and liabilities for prior
business combinations from net-of-tax to pre-tax amounts. The principal
temporary difference creating this increase to net income is the Bank's reserve
for losses on loans and real estate. In addition, valuation allowances were
established against certain deferred tax assets recorded for state income tax
purposes.
EARNINGS PER SHARE - Earnings per common share are calculated on the basis of
the weighted average common shares outstanding and those outstanding options and
warrants that are dilutive.
NOTE 2: 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). Railroad operated 18
branches and 71 agency offices throughout the state of Kansas and at September
30, 1995, had assets of approximately $602,900,000, deposits of approximately
$421,400,000 and stockholders' equity of approximately $27,700,000. This
acquisition 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.
Commercial Federal Corporation Annual Report 1996 43
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 fiscal year
1996.
- ----------------------------------------------------------------------------------------------------------------------------------
Corporation Railroad Combined
- ----------------------------------------------------------------------------------------------------------------------------------
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
- ----------------------------------------------------------------------------------------------------------------------------------
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 fiscal years 1995 and 1994.
- ----------------------------------------------------------------------------------------------------------------------------------
Corporation Railroad Combined
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal year 1995:
Total interest income and other income ............................................ $449,526 $49,908 $499,434
Total interest expense ............................................................ 277,806 26,720 304,526
Net income ........................................................................ 27,535 3,646 31,181
Fiscal year 1994:
Total interest income and other income ............................................ $397,814 $40,733 $438,547
Total interest expense ............................................................ 239,950 16,152 256,102
Net income ........................................................................ 158 4,812 4,970
- ----------------------------------------------------------------------------------------------------------------------------------
Railroad's results of operations were reported on a calendar year basis
previous to its merger into the Corporation. However, in restating prior
periods, Railroad's accounts and results of operations were conformed to the
Corporation's year ended June 30, 1995. Accordingly, in changing fiscal years,
Railroad's accounts and results of operations for the six months ended June 30,
1994, including total revenue of $18,129,000 and net income totaling $185,000
were excluded from reported results of operations for the restated combined
companies but are included in the Corporation's Consolidated Statement of
Stockholders' Equity.
NOTE 3. PURCHASE ACQUISITION:
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 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 fiscal year 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 closed
in the consolidation process pursuant to this acquisition.
This acquisition has been accounted for as a purchase. Core value of deposits
resulting from this transaction totaled $6,842,000 and is amortized on an
accelerated basis over 10 years; and goodwill totaling $6,158,000 recorded from
this transaction is 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 is not
material.
44 Commercial Federal Corporation Annual Report 1996
NOTE 4. INVESTMENT SECURITIES:
Investment securities are summarized as follows:
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1996 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury and other Government agency obligations................. $ 6,876 $ 97 $ (63) $ 6,910
Other debt securities................................................. 2,966 22 -- 2,988
- ----------------------------------------------------------------------------------------------------------------------------
$ 9,842 $ 119 $ (63) $ 9,898
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................................ 5.50%
- ----------------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury and other Government agency obligations................. $ 213,800 $ 78 $(3,642) $210,236
States and political subdivisions..................................... 18,642 -- (440) 18,202
Other debt securities................................................. 10,703 -- -- 10,703
- ----------------------------------------------------------------------------------------------------------------------------
$243,145 78 $(4,082) $239,141
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................................ 6.06%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------------------------
Available for sale:
U.S. Treasury and other Government agency obligations................. $ 3,001 $ -- $ (13) $ 2,988
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................................ 6.64%
- ----------------------------------------------------------------------------------------------------------------------------
Held to maturity:
U.S. Treasury and other Government agency obligations................. $296,443 $1,078 $(3,743) $293,778
Other debt securities................................................. 1,050 -- (23) 1,027
- ----------------------------------------------------------------------------------------------------------------------------
$297,493 $1,078 $(3,766) $294,805
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average interest rate........................................ 6.26%
- ----------------------------------------------------------------------------------------------------------------------------
At June 30, 1996 and 1995, investment securities totaling $494,000 and
$659,000, respectively, were pledged to secure public funds.
As of June 30, 1996, the Corporation recorded an unrealized gain on
securities available for sale as an increase to stockholders' equity totaling
$56,000, net of deferred income taxes of $20,000.
Commercial Federal Corporation Annual Report 1996 45
The amortized cost and fair value of investment securities by contractual
maturity at June 30, 1996, are shown below. Expected maturities may differ from
contractual maturities because certain borrowers have the right to call or
prepay obligations with or without call or prepayment penalties.
- -----------------------------------------------------------------------------------------------------------
Available for Sale Held to Maturity
----------------------------- ------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -----------------------------------------------------------------------------------------------------------
Due in one year or less................... $ -- $ -- $ 46,173 $ 46,170
Due after one year through five years..... 9,842 9,898 167,890 164,327
Due after five years through ten years.... -- -- 14,135 13,845
Due after ten years....................... -- -- 14,947 14,799
- -----------------------------------------------------------------------------------------------------------
$9,842 $9,898 $243,145 $239,141
- -----------------------------------------------------------------------------------------------------------
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, management of the Corporation reclassified agency-backed
investment securities totaling $49,945,000 from securities held to maturity to
securities available for sale.
Proceeds from the sale of investment securities available for sale totaled
$51,770,000 and $14,797,000, respectively, for the fiscal years ended June 30,
1996 and 1995, resulting in net pre-tax losses of $208,000 for fiscal year 1996,
which are included in other operating income, and in no gain or loss for fiscal
year 1995. During fiscal year 1994 there were no sales of investment securities.
NOTE 5. MORTGAGE-BACKED SECURITIES:
Mortgage-backed securities are summarized as follows:
- -------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1996 Cost Gains Losses Value
- -------------------------------------------------------------------------------------------------------
Available for sale:
Federal Home Loan Mortgage Corporation....... $ 17,134 $ 66 $ (376) $ 16,824
Government National Mortgage Association..... 119,424 264 (3,099) 116,589
Federal National Mortgage Association........ 73,456 508 (64) 73,900
Collateralized Mortgage Obligations.......... 57,649 169 (1,925) 55,893
- -------------------------------------------------------------------------------------------------------
$ 267,663 $ 1,007 $ (5,464) $ 263,206
- -------------------------------------------------------------------------------------------------------
Weighted average interest rate............... 7.25%
- -------------------------------------------------------------------------------------------------------
Held to maturity:
Federal Home Loan Mortgage Corporation....... $ 221,190 $ 1,478 $ (4,517) $ 218,151
Government National Mortgage Association..... 511,834 965 (7,310) 505,489
Federal National Mortgage Association........ 108,473 1,323 (1,949) 107,847
Collateralized Mortgage Obligations.......... 50,715 21 (1,553) 49,183
Privately Issued Mortgage Pool Securities.... 24,628 -- (264) 24,364
- -------------------------------------------------------------------------------------------------------
$ 916,840 $ 3,787 $ (15,593) $ 905,034
- -------------------------------------------------------------------------------------------------------
Weighted average interest rate............... 6.58%
- -------------------------------------------------------------------------------------------------------
46 Commercial Federal Corporation Annual Report 1996
- --------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30, 1995 Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------
Available for sale:
Federal Home Loan Mortgage Corporation....... $ 21,454 $ 144 $ (89) $ 21,509
Government National Mortgage Association..... 8,982 196 (27) 9,151
Federal National Mortgage Association........ 370 4 -- 374
Collateralized Mortgage Obligations.......... 6,022 5 (87) 5,940
- --------------------------------------------------------------------------------------------------------
$ 36,828 $ 349 $ (203) $ 36,974
- --------------------------------------------------------------------------------------------------------
Weighted average interest rate............... 7.01%
- --------------------------------------------------------------------------------------------------------
Held to maturity:
Federal Home Loan Mortgage Corporation....... $ 190,136 $ 1,457 $ (2,495) $ 189,098
Government National Mortgage Association..... 778,855 2,045 (10,971) 769,929
Federal National Mortgage Association........ 269,314 3,721 (2,633) 270,402
Collateralized Mortgage Obligations.......... 58,114 29 (1,352) 56,791
Privately Issued Mortgage Pool Securities.... 31,514 1,781 (182) 33,113
- --------------------------------------------------------------------------------------------------------
$1,327,933 $ 9,033 $ (17,633) $1,319,333
- --------------------------------------------------------------------------------------------------------
Weighted average interest rate............... 6.36%
- --------------------------------------------------------------------------------------------------------
Mortgage-backed securities held to maturity at June 30 are classified by type of
interest payment and contractual maturity term as follows:
- ---------------------------------------------------------------------------------------------------------------------
1996 1995
-------------------------------------- -----------------------------------
Amortized Fair Weighted Amortized Fair Weighted
Cost Value Rate Cost Value Rate
- ---------------------------------------------------------------------------------------------------------------------
Adjustable rate........................ $707,359 $700,300 6.49% $ 780,311 $ 774,262 6.08%
Fixed-rate, 5-year term................ 63,663 62,654 6.32 16,274 16,028 6.03
Fixed-rate, 7-year term................ 43,746 42,067 5.99 50,399 49,575 6.29
Fixed-rate, 15-year term............... 12,815 12,264 6.35 308,335 305,954 6.76
Fixed-rate, 30-year term............... 38,542 38,566 10.29 114,501 116,724 7.49
- ---------------------------------------------------------------------------------------------------------------------
866,125 855,851 6.62 1,269,820 1,262,543 6.38
Collateralized mortgage obligations.... 50,715 49,183 5.91 58,113 56,790 5.96
- ---------------------------------------------------------------------------------------------------------------------
$916,840 $905,034 6.58% $1,327,933 $1,319,333 6.36%
- ---------------------------------------------------------------------------------------------------------------------
As of June 30, 1996, the Corporation recorded an unrealized loss on
securities available for sale as a decrease to stockholders' equity totaling
$4,276,000, net of a deferred income tax benefit of approximately $1,537,000;
and as of June 30, 1995, recorded an unrealized gain on securities available for
sale as an increase to stockholders' equity totaling $134,000, net of deferred
income taxes of approximately $48,000.
At December 31, 1995, pursuant to the issuance of the aforementioned special
report 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, management of
the Corporation reclassified mortgage-backed securities totaling $370,400,000
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 held by the Corporation. In addition,
approximately $9,415,000 of adjustable-rate mortgage-backed securities were
reclassified from available for sale to held to maturity.
Commercial Federal Corporation Annual Report 1996 47
Proceeds from the sale of mortgage-backed securities available for sale
totaled $179,041,000, $40,774,000 and $20,821,000, respectively, for the fiscal
years ended June 30, 1996, 1995, and 1994 resulting in net pre-tax gains of
$461,000 and $220,000 for fiscal years 1996 and 1994, respectively, and a pre-
tax loss of $41,000 for fiscal year 1995, all of which are included in other
operating income.
At June 30, 1996 and 1995, the Corporation pledged mortgage-backed securities
totaling $458,666,000 and $317,701,000, respectively, as collateral for
collateralized mortgage obligations, public funds, securities sold under
agreements to repurchase, interest rate swap agreements and other borrowings.
NOTE 6. LOANS HELD FOR SALE:
Loans held for sale from mortgage banking operations at June 30, 1996 and
1995, totaled $89,379,000 and $113,385,000, respectively, with weighted average
rates of 7.82% and 8.02%, respectively. Loans held for sale are secured by
single-family residential properties consisting of fixed and adjustable rate
mortgage loans totaling $89,294,000 and $85,000, respectively, at June 30, 1996,
and $83,598,000 and $29,787,000, respectively, at June 30, 1995.
NOTE 7. LOANS RECEIVABLE:
Loans receivable at June 30 are summarized as follows:
- ---------------------------------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------------------------------
Conventional mortgage loans............................... $3,757,513 $3,583,517
FHA and VA loans.......................................... 291,755 340,864
Commercial real estate loans.............................. 261,046 210,676
Consumer and other loans.................................. 355,777 242,697
Construction loans........................................ 199,088 186,679
- ----------------------------------------------------------------------------------------
4,865,179 4,564,433
Less:
Unamortized premiums (discounts), net..................... 2,794 (5,957)
Loans-in-process.......................................... (91,262) (80,211)
Deferred loan fees, net................................... (3,726) (2,495)
Allowance for loan losses................................. (49,200) (48,463)
- ----------------------------------------------------------------------------------------
$4,723,785 $4,427,307
- ----------------------------------------------------------------------------------------
Weighted average interest rate............................ 8.20% 8.26%
- ----------------------------------------------------------------------------------------
At June 30, 1996, conventional, FHA and VA loans, including loans held for
sale, totaling $4,327,018,000 are secured by single-family residential
properties located as follows: 20% in Nebraska, 17% in Colorado, 7% in Kansas,
5% each in Georgia, Oklahoma and Texas, and the remaining 41% in 44 other
states. At June 30, 1995, conventional, FHA and VA loans, including loans held
for sale, totaling $4,215,956,000 were secured by single-family residential
properties located as follows: 19% each in Nebraska and Colorado, 7% in Kansas,
5% each in Texas, Georgia and Oklahoma, and the remaining 40% in 44 other
states. The commercial real estate portfolio at June 30, 1996, is secured by
properties located as follows: 33% in Colorado, 31% in Nebraska, 12% in Florida
and the remaining 24% in 18 other states. The commercial real estate portfolio
at June 30, 1995, was secured by properties located as follows: 44% in Colorado,
14% in Nebraska, 12% in Kansas, 8% in Florida and the remaining 22% in 16 other
states.
Nonperforming loans at June 30, 1996 and 1995, aggregated $37,905,000 and
$32,258,000, respectively. Of the nonperforming loans at June 30, 1996,
approximately 12% are secured by properties located in California, 9% each in
Georgia and Texas, 7% in Colorado, 6% in
48 Commercial Federal Corporation Annual Report 1996
Nebraska, 5% each in Kansas and Missouri, 4% each in Maryland and Oklahoma and
the remaining 39% located in 35 other states. Of the nonperforming loans at June
30, 1995, approximately 12% were secured by properties located in California,
11% in Texas, 9% in Colorado, 8% in Georgia, 6% each in Nebraska and Missouri,
and the remaining 48% located in 44 other states.
Also included in loans receivable at June 30, 1996 and 1995, are loans with
carrying values of $14,803,000 and $17,860,000, respectively, the terms of which
have been modified in troubled debt restructurings. During the fiscal years
ended June 30, 1996 and 1995, the Corporation recognized interest income on
these loans aggregating $1,276,000 and $1,677,000, respectively, whereas under
their original terms the Corporation would have recognized interest income of
$1,515,000 and $1,900,000, respectively. At June 30, 1996, the Corporation had
no material commitments to lend additional funds to borrowers whose loans were
subject to troubled debt restructuring.
At June 30, 1996 and 1995, the Corporation had pledged substantially all
single-family residential loans as collateral for Federal Home Loan Bank
advances and other borrowings. In addition, at June 30, 1996, the Corporation
had also pledged a portion of commercial real estate loans for Federal Home Loan
Bank advances.
NOTE 8. REAL ESTATE:
Real estate at June 30 is summarized as follows:
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Real estate owned and in judgment,
net of allowance for losses of $3,353 and $4,583.... $ 8,008 $ 7,260
Real estate held for investment, which includes
equity in unconsolidated joint ventures and
investments in real estate partnerships, net of
allowance for losses of $1,090 and $1,391........... 8,661 9,526
- --------------------------------------------------------------------------------
$16,669 $16,786
- --------------------------------------------------------------------------------
Commercial and residential real estate comprise approximately 70% and 30%,
respectively, of the total amount of real estate at June 30, 1996, and
approximately 77% and 23%, respectively, of the total amount of real estate at
June 30, 1995. Real estate located by states at June 30, 1996, is as follows:
42% in Nebraska, 31% in Colorado, 8% in Texas, and the remaining 19% in 23 other
states. Real estate located by states at June 30, 1995, was as follows: 48% in
Nebraska, 33% in Colorado, 5% in Texas, and the remaining 14% in 18 other
states.
Commercial Federal Corporation Annual Report 1996 49
NOTE 9. ALLOWANCES FOR LOSSES ON LOANS AND REAL ESTATE:
An analysis of the allowances for losses on loans and real estate is summarized as follows:
- -----------------------------------------------------------------------------------------------
Loans Real Estate Total
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1993 ...................................... $46,908 $ 5,738 $52,646
- -----------------------------------------------------------------------------------------------
Provision charged to operations ............................. 6,248 1,664 7,912
Charges ..................................................... (4,098) (1,367) (5,465)
Recoveries .................................................. 743 337 1,080
Estimated allowance for purchased loans ..................... 39 -- 39
Change in estimate of allowance for purchased loans ......... (4,357) -- (4,357)
Charge-offs to allowance for purchased loans ................ (632) -- (632)
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1994 (1) .................................. 44,851 6,372 51,223
- -----------------------------------------------------------------------------------------------
Provision charged to operations ............................. 6,408 199 6,607
Charges ..................................................... (3,771) (683) (4,454)
Recoveries .................................................. 1,334 152 1,486
Allowances from acquisitions ................................ 1,818 -- 1,818
Railroad activity for the six months ended June 30, 1994, net (58) (66) (124)
Change in estimate of allowance for purchased loans ......... (1,705) -- (1,705)
Charge-offs to allowance for purchased loans ................ (336) -- (336)
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1995 (1) .................................. 48,541 5,974 54,515
- -----------------------------------------------------------------------------------------------
Provision charged (credited) to operations .................. 6,107 (479) 5,628
Charges ..................................................... (5,533) (1,211) (6,744)
Recoveries .................................................. 734 159 893
Allowances from acquisitions ................................ 1,944 -- 1,944
Change in estimate of allowance for purchased loans ......... (2,273) -- (2,273)
Charge-offs to allowance for purchased loans ................ (242) -- (242)
- -----------------------------------------------------------------------------------------------
Balance, June 30, 1996 (1) .................................. $49,278 $ 4,443 $53,721
- -----------------------------------------------------------------------------------------------
(1) Includes $78,000 at June 30, 1996 and 1995, and $206,000 at June 30, 1994,
in general allowance for losses established primarily to cover risks associated
with borrowers' delinquencies and defaults on loans held for sale.
- --------------------------------------------------------------------------------
Bulk loan purchases acquired at a discount are allocated an estimated
allowance for bulk purchased loans that will be available for potential losses
in the future on a particular loan package with any excess over the allowance
recorded as a discount. At June 30, 1996, 1995 and 1994, $12,765,000,
$15,280,000 and $17,321,000, respectively, are included in the allowance for
losses on loans presented above.
NOTE 10. LOAN SERVICING:
The Corporation's mortgage banking subsidiary services real estate loans for
investors which are not included in the accompanying consolidated financial
statements. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding advance payments by borrowers for
taxes and insurance, making inspections as required of the mortgage premises,
collecting amounts due from delinquent mortgagors, supervising foreclosures in
the event of unremedied defaults and generally administering the loans for the
investors to whom they have been sold. The amount of loans serviced for other
institutions at June 30, 1996, 1995 and 1994, was $5,869,800,000, $5,151,100,000
and $4,635,945,000, respectively.
The mortgage servicing portfolio is covered by servicing agreements pursuant
to the mortgage-backed securities programs of the Government National Mortgage
Association (GNMA), the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC). Under these agreements, the
50 Commercial Federal Corporation Annual Report 1996
Corporation may be required to advance funds temporarily to make scheduled
payments of principal, interest, taxes or insurance if the borrower fails to
make such payments. Although the Corporation cannot charge any interest on such
advance funds, the Corporation typically recovers the advances within a
reasonable number of days upon receipt of the borrower's payment, or in the
absence of such payment, advances are recovered through FHA insurance or VA
guarantees or FNMA or FHLMC reimbursement provisions in connection with loan
foreclosures. The amount of funds advanced by the Corporation pursuant to
servicing agreements is not material.
Custodial escrow balances maintained in connection with loan servicing
totaled approximately $101,671,000 and $110,714,000, at June 30, 1996 and 1995,
respectively.
Mortgage servicing rights are included in the Consolidated Statement of
Financial Condition under the caption "Prepaid expenses and other assets." The
activity of mortgage servicing rights at June 30 is summarized as follows:
- -------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------
Beginning balance....................................... $36,236 $34,128 $34,025
Purchases of mortgage servicing rights.................. 14,034 9,386 7,774
Mortgage servicing rights from purchase acquisitions.... 38 1,045 --
Mortgage servicing rights
capitalized through loan originations.................. 3,673 -- --
Amortization expense.................................... (9,011) (8,323) (7,671)
- -------------------------------------------------------------------------------------------
Ending balance.......................................... $44,970 $36,236 $34,128
- -------------------------------------------------------------------------------------------
At June 30, 1996, the fair value of the Corporation's mortgage servicing
rights totaled approximately $77,500,000 and no valuation allowance was
necessary to be established. Outstanding commitments to purchase mortgage loan
servicing rights totaled $9,000 and $521,000, respectively, at June 30, 1996 and
1995. There was no commitment to sell any bulk packages of mortgage servicing
rights at June 30, 1996.
NOTE 11. PREMISES AND EQUIPMENT:
Premises and equipment at June 30 are summarized as follows:
- -------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------
Land.............................................................. $ 11,998 $ 10,681
Buildings and improvements........................................ 58,307 54,177
Leasehold improvements............................................ 2,875 2,640
Furniture, fixtures and equipment................................. 62,596 56,336
- -------------------------------------------------------------------------------------------
135,776 123,834
Less accumulated depreciation and amortization.................... 62,221 56,630
- -------------------------------------------------------------------------------------------
$ 73,555 $ 67,204
- -------------------------------------------------------------------------------------------
Depreciation and amortization of premises and equipment, included in
occupancy and equipment expenses, totaled $6,855,000, $5,613,000 and $4,768,000
for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
The Bank has operating lease commitments on certain premises and equipment.
Rent expense totaled $2,834,000, $2,939,000 and $2,690,000 for the fiscal years
ended June 30, 1996, 1995 and 1994, respectively. Annual minimum operating lease
commitments as of June 30, 1996, are as follows: 1997 - $1,628,000; 1998 -
$1,084,000; 1999 - $892,000; 2000 - $597,000; 2001 - $389,000; 2002 and
thereafter - $4,643,000.
Commercial Federal Corporation Annual Report 1996 51
NOTE 12. GOODWILL AND CORE VALUE OF DEPOSITS:
An analysis of goodwill and core value of deposits is summarized as follows:
- -------------------------------------------------------------------------------------------
Core Value
Goodwill of Deposits Total
- -------------------------------------------------------------------------------------------
Balance, June 30, 1993 .................................. $ 57,725 $ 30,221 $ 87,946
Additions relating to acquisitions ...................... 359 28,674 29,033
Adoption of SFAS No. 109 for prior business combinations. -- 15,692 15,692
Valuation adjustment .................................... (29,267) (20,763) (50,030)
Amortization expense .................................... (6,241) (7,890) (14,131)
Sale of an investment in a subsidiary ................... (849) -- (849)
- -------------------------------------------------------------------------------------------
Balance, June 30, 1994 .................................. 21,727 45,934 67,661
- -------------------------------------------------------------------------------------------
Additions relating to acquisitions, net ................. 1,510 6,521 8,031
Accelerated amortization expense ........................ (21,357) -- (21,357)
Write-off due to recognition of pre-acquisition
tax credits and net operating losses ................... -- (6,810) (6,810)
Amortization expense .................................... (48) (10,214) (10,262)
- -------------------------------------------------------------------------------------------
Balance, June 30, 1995 .................................. 1,832 35,431 37,263
- -------------------------------------------------------------------------------------------
Additions relating to acquisitions ...................... 6,158 6,842 13,000
Amortization expense .................................... (218) (9,311) (9,529)
- -------------------------------------------------------------------------------------------
Balance, June 30, 1996 .................................. $ 7,772 $ 32,962 $ 40,734
- -------------------------------------------------------------------------------------------
An appraisal performed in fiscal year 1994 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 $41,000,000, and therefore, recognition of
an impairment of recorded intangible assets of $52,703,000 at June 30, 1994. The
appraisal of $41,000,000 was classified as core value of deposits totaling
$19,643,000 and goodwill totaling $21,357,000. The effect of this accounting
change was a charge to fiscal year 1994 results of operations totaling
$52,703,000, with an income tax benefit of $8,765,000, resulting in a loss of
$43,938,000. Effective July 1, 1994, the remaining $19,643,000 of identifiable
intangible assets classified as core value of deposits is being amortized on a
straight-line basis over the remaining respective lives, of which all were
original 10 year terms, with the primary amount to be fully amortized as of
April 30, 1997. Goodwill of $21,357,000 was amortized over the first six months
of fiscal year 1995. No impairment adjustment has been made to the intangible
assets resulting from the Corporation's acquisitions during fiscal years 1996,
1995 or 1994.
52 Commercial Federal Corporation Annual Report 1996
NOTE 13. DEPOSITS:
Deposits at June 30 are summarized as follows:
- ------------------------------------------------------------------------------------------------------------
1996 1995
------------------------ --------------------------
Description and interest rates Amount % Amount %
- ------------------------------------------------------------------------------------------------------------
Passbook accounts (average of 4.24% and 4.38%) ...... $ 623,505 14.5% $ 549,857 13.7%
NOW accounts (average of .63% and .93%) ............. 332,233 7.7 296,552 7.4
Market rate savings (average of 3.34% and 3.36%) .... 159,672 3.7 190,994 4.8
- ------------------------------------------------------------------------------------------------------------
Total savings (no stated maturities) ................ 1,115,410 25.9 1,037,403 25.9
- ------------------------------------------------------------------------------------------------------------
Certificates of deposit:
Less than 3.00% .................................... 8,848 .2 11,846 .3
3.00% - 3.99% ..................................... 19,978 .5 67,404 1.7
4.00% - 4.99% ..................................... 285,083 6.6 518,061 12.9
5.00% - 5.99% ..................................... 1,948,836 45.3 1,017,841 25.4
6.00% - 6.99% ..................................... 606,704 14.1 1,026,035 25.5
7.00% - 7.99% ..................................... 300,040 7.0 290,950 7.2
8.00% - 8.99% ..................................... 15,090 .3 34,798 .9
9.00% and over .................................... 4,587 .1 6,985 .2
- ------------------------------------------------------------------------------------------------------------
Total certificates of deposit (fixed maturities;
average of 6.10% and 5.33%) ........................ 3,189,166 74.1 2,973,920 74.1
- ------------------------------------------------------------------------------------------------------------
$4,304,576 100.0% $4,011,323 100.0%
- ------------------------------------------------------------------------------------------------------------
Interest expense on deposit accounts for the years ended June 30 is summarized as follows:
- ------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
Passbook accounts ........................................... $ 24,702 $ 23,696 $ 8,729
NOW accounts ................................................ 2,766 2,586 2,882
Market rate savings ......................................... 5,709 7,356 5,881
Certificates of deposit ..................................... 180,863 146,525 125,065
- ------------------------------------------------------------------------------------------------------------
$214,040 $180,163 $142,557
- ------------------------------------------------------------------------------------------------------------
Certificates of deposit in amounts of $100,000 or more totaled $278,839,000
and $203,077,000, respectively, at June 30, 1996 and 1995. There were no
brokered certificates of deposit at June 30, 1996 or 1995.
Commercial Federal Corporation Annual Report 1996 53
At June 30, 1996, scheduled maturities of certificates of deposit are as follows:
- -------------------------------------------------------------------------------------------------------------------------
Year Ending June 30,
------------------------------------------------------------------------------------
Rate 1997 1998 1999 2000 2001 Thereafter Total
- -------------------------------------------------------------------------------------------------------------------------
Less than 3.00% .................... $ 6,806 $ 102 $ 82 $ 45 $ 3 $ 1,810 $ 8,848
3.00% - 3.99% ..................... 16,184 2,998 627 148 -- 21 19,978
4.00% - 4.99% ..................... 253,113 28,892 2,321 75 3 679 285,083
5.00% - 5.99% ..................... 1,444,851 344,870 129,100 14,745 10,000 5,270 1,948,836
6.00% - 6.99% ..................... 444,704 113,751 28,486 12,631 3,022 4,110 606,704
7.00% - 7.99% ..................... 201,526 74,116 14,471 8,971 587 369 300,040
8.00% - 8.99% ..................... 4,216 8,421 1,519 767 162 5 15,090
9.00% and over .................... 103 4,320 130 19 -- 15 4,587
- -------------------------------------------------------------------------------------------------------------------------
$2,371,503 $577,470 $176,736 $37,401 $13,777 $12,279 $3,189,166
- -------------------------------------------------------------------------------------------------------------------------
At June 30, 1996 and 1995, deposits of certain state and municipal agencies
and other various non-retail entities were collateralized by mortgage-backed
securities with carrying values of $7,765,000 and $44,132,000, respectively, and
investment securities with carrying values of $494,000 and $659,000,
respectively.
In accordance with regulatory requirements, at June 30, 1996 and 1995, the
Corporation maintained $13,633,000 and $11,197,000, respectively, in cash on
hand and deposits at the Federal Reserve Bank in noninterest earning reserves
against certain transaction checking accounts and nonpersonal certificates of
deposit.
NOTE 14. ADVANCES FROM THE FEDERAL HOME LOAN BANK:
The Corporation was indebted to the Federal Home Loan Bank of Topeka on notes
maturing as follows:
- ----------------------------------------------------------------------------------------------------------
1996 1995
----------------------------------------- ------------------------
Weighted Weighted
Interest Average Average
Scheduled Maturities Due: Rate Range Rate Amount Rate Amount
- ----------------------------------------------------------------------------------------------------------
Within 1 year...................... 4.61% - 9.43% 5.59% $ 825,691 6.15% $ 766,214
Over 1 year to 2 years............. 5.06 - 7.90 5.74 502,844 5.67 721,633
Over 2 years to 3 years............ 5.31 - 6.21 5.54 10,705 5.74 252,797
Over 3 years to 4 years............ 6.78 6.78 10,000 5.70 35,608
Over 4 years to 5 years............ -- -- -- -- 6.79 10,350
Over 5 years....................... 6.55 - 7.19 6.76 1,050 6.55 750
- ----------------------------------------------------------------------------------------------------------
4.61% - 9.43% 5.66% $1,350,290 5.89% $1,787,352
- ----------------------------------------------------------------------------------------------------------
At June 30, 1996 and 1995, the Corporation had pledged a portion of its real
estate loans and mortgage-backed securities as well as Federal Home Loan Bank
stock as collateral for outstanding advances. At June 30, 1996 and 1995, there
were no commitments for advances from the Federal Home Loan Bank.
54 Commercial Federal Corporation Annual Report 1996
NOTE 15. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE:
At June 30, 1996 and 1995, securities sold under agreements to repurchase
identical securities totaled $380,755,000 and $208,373,000, respectively, with
weighted average interest rates of 6.51% and 7.08%, respectively. There were no
securities sold under agreements to repurchase substantially identical
securities at June 30, 1996 or 1995. An analysis of securities sold under
agreements to repurchase identical securities for the years ended June 30 is
summarized as follows:
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Maximum month-end balance............................. $380,755 $208,373
- -------------------------------------------------------------------------------
Average balance....................................... $187,563 $103,223
- -------------------------------------------------------------------------------
Weighted average interest rate during the period...... 7.14% 7.59%
Weighted average interest rate at end of period....... 6.51% 7.08%
- -------------------------------------------------------------------------------
At June 30, 1996, securities sold under agreements to repurchase had
maturities ranging from September 1996 to January 1998 with a weighted average
maturity at June 30, 1996, of 372 days. At June 30, 1996 and 1995, mortgage-
backed securities with carrying values totaling $410,527,000 and $247,413,000,
respectively, and market values totaling $405,521,000 and $244,772,000,
respectively, were pledged as collateral for securities sold under agreements to
repurchase.
It is the Corporation's policy to enter into repurchase agreements only with
major brokerage firms that are primary dealers in government securities. At June
30, 1996, no repurchase agreements were at risk in excess of 10.0% of
stockholders' equity.
NOTE 16. OTHER BORROWINGS:
Other borrowings at June 30 consist of the following:
- -----------------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------------
Subordinated notes, interest 10.25%, due December 15, 1999.... $40,250 $40,250
Collateralized mortgage obligations........................... 8,867 12,454
Senior notes, interest 10.00%, due January 31, 1999........... 6,900 6,900
Other borrowings.............................................. 2,529 5,699
- -----------------------------------------------------------------------------------
$58,546 $65,303
- -----------------------------------------------------------------------------------
The subordinated notes pay interest semi-annually on June 15 and December
15. The subordinated notes have been redeemable since December 15, 1995, at the
election of the Corporation, in whole or in part, at par plus accrued interest
to the date of redemption. The subordinated notes have no sinking fund, are
unsecured general obligations of the Corporation, and are subordinated to all
existing and future senior indebtedness of the Corporation. The Note Indenture,
among other provisions, restricts the ability of the Corporation and its
subsidiaries, under certain circumstances, to incur additional indebtedness and
restricts the Corporation's ability to pay cash dividends or to make other
capital distributions. The Corporation is also required to maintain not less
than $3,500,000 in cash and cash equivalents under the terms of the Note
Indenture.
At June 30, 1996, the remaining two notes issued in conjunction with
collateralized mortgage obligations bear interest at 7.89% and 8.42% and are due
in varying amounts contractually through September 1, 2015. The notes are
secured by FNMA mortgage-backed securities
Commercial Federal Corporation Annual Report 1996 55
with a book value of approximately $14,540,000. As the principal balance on the
collateral on these notes repay, the notes are correspondingly repaid.
The senior notes pay interest monthly and have been redeemable since
February 1, 1995, at the election of the Corporation, in whole or in part, at
par plus accrued interest to the date of redemption. The senior notes have no
sinking fund, are unsecured general obligations of the Corporation, and are
senior to all existing and future indebtedness of the Corporation other than
debt obligations secured by certain liens. Senior noteholders do not have
priority over depositors and other creditors of the Bank. The Note Indenture,
among other provisions, restricts the ability of the Corporation and its
subsidiaries, under certain circumstances, to incur additional indebtedness and
restricts the Corporation's ability to pay cash dividends or to make other
capital distributions.
Other borrowings are collateralized by unencumbered first mortgage loans
with unpaid principal balances of approximately $5,714,000 at June 30, 1996.
Principal maturities of other borrowings as of June 30, 1996, for the next
five fiscal years are as follows: 1997 - $3,326,000; 1998 - $2,899,000; 1999 -
$9,495,000; 2000 - $41,004,000; 2001 - $240,000 and thereafter - $1,582,000.
NOTE 17. INTEREST RATE HEDGING:
The following summarizes the Corporation's interest rate hedging agreements at June 30:
- ----------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Interest rate swap agreements:
Notional principal amount, fixed rate agreements.................... $ 10,000 $ 78,500 $109,500
Weighted average fixed rate paid ................................... 11.10% 10.40% 9.62%
Weighted average variable rate received ............................ 5.97% 5.63% 3.55%
Net interest expense ............................................... $ 2,280 $ 4,345 $ 8,485
Range of remaining terms ........................................... 17 mos. 3-29 mos. 1-41 mos.
- ----------------------------------------------------------------------------------------------------------------
Net interest expense, as disclosed in the above table, also represents gross
interest expense since no interest income on these interest rate swap agreements
has been received during the three fiscal years presented. The Corporation is
not involved in any derivative activities nor has the Corporation terminated any
contracts during the fiscal years ended June 30, 1996, 1995 and 1994. The
interest rate swap agreements were collateralized at June 30, 1996 and 1995, by
mortgage-backed securities with carrying values of $15,721,000 and $18,817,000,
respectively. The swap agreement totaling $10,000,000 will mature November 1997.
Entering into interest rate swap agreements involves the credit risk of dealing
with intermediary and primary counterparties and their ability to meet the terms
of the respective contracts. The Corporation is exposed to credit loss in the
event of nonperformance by the counterparties to the interest rate swaps if the
Corporation is in a net interest receivable position at the time of potential
default by the counterparties. However, at June 30, 1996, the Corporation was in
a net interest payable position. The Corporation does not anticipate
nonperformance by the counterparties.
At June 30, 1996 and 1995, the Corporation also had one outstanding interest
rate cap agreement totaling $10,000,000 which pays interest when the three-month
LIBOR exceeds 7.00% and a termination date of March 9, 1997. The Corporation
will receive interest based on a floating rate with interest payments settled
quarterly. Through June 30, 1996 and 1995, the Corporation was not owed any
interest from its counterparts for such quarterly interest settlement. The
premium paid on March 9, 1995 (the effective date of this agreement) totaled
$115,000 with $58,000 and $19,000, respectively, amortized to interest expense
for the fiscal years ended June 30, 1996 and 1995. The unamortized premium
totaled $38,000 at June 30, 1996. This interest rate cap agreement is unsecured.
56 Commercial Federal Corporation Annual Report 1996
NOTE 18. INCOME TAXES:
The following is a comparative analysis of the provision for federal and state taxes on income:
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Current:
Federal ............................................................................ $75,927 $ 7,816 $10,980
State .............................................................................. 3,626 956 817
- --------------------------------------------------------------------------------------------------------------------------------
79,553 8,772 11,797
- --------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal ............................................................................ (45,316) 14,123 4,992
State .............................................................................. (7,275) 251 86
- --------------------------------------------------------------------------------------------------------------------------------
(52,591) 14,374 5,078
- --------------------------------------------------------------------------------------------------------------------------------
Total provision for income taxes ..................................................... $26,962 $23,146 $16,875
- --------------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of the statutory federal income tax rate to the consolidated effective tax rate:
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended June 30,
------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
Statutory federal income tax rate .................................................... 35.0% 35.0% 35.0%
Amortization of discounts, premiums and
intangible assets from acquisitions ................................................ 0.1 13.8 81.4
Income tax credits ................................................................... (0.7) (3.1) (3.3)
Bad debt deduction ................................................................... (0.2) (2.9) (13.3)
State income taxes, net of federal income tax benefit................................. (2.0) 1.6 4.1
Effect of change in enacted tax rate ................................................. -- -- 7.8
Other items, net ..................................................................... 0.6 (1.8) (1.0)
- --------------------------------------------------------------------------------------------------------------------------------
Effective tax rate ................................................................... 32.8% 42.6% 110.7%
- --------------------------------------------------------------------------------------------------------------------------------
Commercial Federal Corporation Annual Report 1996 57
The tax effect of temporary differences that gave rise to significant portions of deferred tax assets
and liabilities at June 30 are as follows:
- ---------------------------------------------------------------------------------------------------------------------
1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Finance lease contracts treated as operating leases
for income tax purposes ............................................................... $ -- $55,847
Federal Home Loan Bank stock ............................................................ 9,666 10,779
Differences between book and tax basis of premises and equipment ........................ 6,761 6,444
Core value of acquired deposits ......................................................... 4,595 3,931
Basis differences arising from acquisitions ............................................. 4,134 1,937
Other items ............................................................................. 5,681 3,479
- ---------------------------------------------------------------------------------------------------------------------
30,837 82,417
- ---------------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for losses on loans and real estate not currently deductible .................. 14,565 14,277
Tax credit carryforwards ................................................................ 136 4,035
Collateralized mortgage obligations ..................................................... 3,046 3,402
State operating loss carryforwards ...................................................... 2,167 2,724
Basis differences between tax and financial reporting
arising from acquisitions ............................................................. 4,620 2,585
Accretion of discount on purchased loans ................................................ 2,301 2,371
Employee benefits ....................................................................... 2,095 1,977
Other items ............................................................................. 2,430 2,022
- ---------------------------------------------------------------------------------------------------------------------
31,360 33,393
Valuation allowance ....................................................................... 2,279 2,659
- ---------------------------------------------------------------------------------------------------------------------
29,081 30,734
- ---------------------------------------------------------------------------------------------------------------------
Net deferred tax liability ................................................................ $ 1,756 $51,683
- ---------------------------------------------------------------------------------------------------------------------
The valuation allowance of $2,279,000 at June 30, 1996, decreased from
$2,659,000 at June 30, 1995, primarily due to a decrease in state net operating
losses available for income tax purposes.
Savings institutions that meet certain definitional tests and other
conditions prescribed by the Internal Revenue Code are allowed to deduct, within
limitations, a bad debt deduction computed as a percentage of taxable income
before such deduction. The deduction percentage is 8.0% for fiscal years ended
June 30, 1996, 1995 and 1994. Alternatively, a qualified savings institution may
compute its bad debt deduction based upon actual loan loss experience (i.e.,
experience method). The bad debt deduction for fiscal years 1996 and 1995 was
computed under the percentage of taxable income method since it yielded a
greater deduction than did the experience method. In fiscal year 1994 the Bank
computed its bad debt deduction utilizing the experience method. In accordance
with provisions of SFAS No. 109, a deferred tax liability has not been
recognized for the bad debt reserves of the Bank created in the tax years which
began prior to December 31, 1987 (the base year). At June 30, 1996, the amount
of these reserves totaled approximately $87,512,000 with an unrecognized
deferred tax liability associated with such reserves totaling approximately
$31,288,000.
In August 1996, changes in the federal tax law (i) repealed both the
percentage of taxable income and experience methods effective July 1, 1996,
allowing a bad debt deduction for specific charge-offs only, and (ii) require
recapture into taxable income over a six year period of tax bad debt reserves
which exceed the base year amount, adjusted for any loan portfolio shrinkage.
These changes will result in the recognition of additional deferred tax
liabilities of approximately $103,000 in the first quarter of fiscal year 1997.
The remaining unrecognized
58 Commercial Federal Corporation Annual Report 1996
deferred tax liability could be recognized in the future, in whole or in part,
if (i) there is a change in federal tax law, (ii) the Bank fails to meet certain
definitional tests and other conditions in the federal tax law, (iii) certain
distributions are made with respect to the stock of the Bank or (iv) the bad
debt reserves are used for any purpose other than absorbing bad debt losses.
NOTE 19. STOCKHOLDERS' EQUITY AND REGULATORY RESTRICTIONS:
On December 19, 1988, the Board of Directors of the Corporation adopted a
Shareholder Rights Plan and declared a dividend of stock purchase rights
consisting of one primary right and one secondary right for each outstanding
share of common stock on December 30, 1988, and with respect to each share of
common stock issued by the Corporation at any time after such date and prior to
the earlier of the occurrence of certain events or expiration of such rights.
These rights are attached to and trade only together with the common stock
shares. The provisions of the Shareholder Rights Plan are designed to protect
the interests of the stockholders of record in the event of an unsolicited or
hostile attempt to acquire the Corporation at a price or on terms that are not
fair to all shareholders. Unless rights are exercised, holders have no rights as
a stockholder of the Corporation (other than rights resulting from such holder's
ownership of common shares), including, without limitation, the right to vote or
to receive dividends. With certain exceptions, the rights expire December 31,
1998, unless earlier redeemed by the Corporation. At June 30, 1996, no such
rights were exercised.
The Corporation is authorized to issue 10,000,000 shares of preferred stock
having a par value of $.01 per share. None of the shares of the authorized
preferred stock has been issued. The Board of Directors is authorized to
establish and state voting powers, designation preferences, and other special
rights of such shares and the qualifications, limitations and restrictions
thereof. The preferred stock may rank prior to the common stock as to dividend
rights, liquidation preferences, or both, and may have full or limited voting
rights. Under the Office of Thrift Supervision's (OTS) capital distribution
regulations, 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 June 30, 1996, the Bank
qualified as a Tier 1 Association, and would be permitted to pay an aggregate
amount approximating $92,947,000 in dividends under these regulations. Should
the Bank's regulatory capital fall below certain levels, applicable law and
certain other federal regulations would require prior approval of such proposed
dividends and, in some cases, would prohibit the payment of dividends.
On October 4, 1995, the Board of Directors established a quarterly dividend
policy and, on the same day, declared a cash dividend of $.10 per share on the
Corporation's common stock. Accordingly, cash dividends totaling $5,880,000
($.40 per share) were declared during fiscal year 1996 with $4,370,000 paid
through June 30, 1996. The Corporation had not paid cash dividends to its common
stock shareholders before October 4, 1995.
Commercial Federal Corporation Annual Report 1996 59
NOTE 20. REGULATORY CAPITAL REQUIREMENTS:
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following tables of tangible, core and total risk-based capital. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under the
regulatory framework for Prompt Corrective Action provisions under FDICIA, the
Bank must maintain minimum Tier 1 leverage, Tier 1 risk-based and total risk-
based capital ratios as set forth in the following tables. At June 30, 1996 and
1995, the Bank exceeded the minimum requirements for the well-capitalized
category.
The following presents the Bank's regulatory capital levels and ratios
relative to its minimum capital requirements.
- -----------------------------------------------------------------------------------------------------------------------
As of June 30, 1996
------------------------------------------------------
Actual Capital Required Capital
------------------------- ---------------------------
Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------
OTS Capital Adequacy:
Tangible capital ............................................. $408,708 6.18% $ 99,137 1.50%
Core capital (Tier 1 capital) ................................ 424,909 6.41 198,760 3.00
Risk-based capital (Total capital)............................ 460,674 13.62 270,629 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital .................................... 424,909 6.41 331,266 5.00
Tier 1 risk-based capital .................................. 424,909 12.56 202,971 6.00
Total risk-based capital ................................... 460,674 13.62 338,286 10.00
- -----------------------------------------------------------------------------------------------------------------------
As of June 30, 1995
------------------------------------------------------
Actual Capital Required Capital
------------------------- ---------------------------
Amount Ratio (1) Amount (1) Ratio (1)
- -----------------------------------------------------------------------------------------------------------------------
OTS Capital Adequacy:
Tangible capital ............................................. $337,451 5.16% $ 98,017 1.50%
Core capital (Tier 1 capital) ................................ 358,881 5.47 196,677 3.00
Risk-based capital (Total capital)............................ 391,656 13.12 238,844 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital ...................................... 358,881 5.47 327,796 5.00
Tier 1 risk-based capital .................................... 358,881 12.02 179,133 6.00
Total risk-based capital ..................................... 391,656 13.12 298,555 10.00
- -----------------------------------------------------------------------------------------------------------------------
60 Commercial Federal Corporation Annual Report 1996
As of June 30, 1996, the most recent notification from the OTS categorized
the Bank as "well-capitalized" under the regulatory framework for Prompt
Corrective Action provisions under FDICIA. There are no conditions or events
since such notification that management believes have changed the Bank's
classification.
NOTE 21. COMMITMENTS AND CONTINGENCIES:
The Corporation is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit,
standby letters of credit, financial guarantees on certain loans sold with
recourse and on other contingent obligations. These instruments involve elements
of credit and interest rate risk in excess of the amount recognized in the
Consolidated Statement of Financial Condition. The contractual amounts of these
instruments represent the maximum credit risk to the Corporation. The
Corporation uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
At June 30, 1996, the Corporation had issued commitments, excluding
undisbursed portions of loans in process, of approximately $173,551,000 as
follows: $94,679,000 to originate loans, $61,264,000 to purchase loans and
$17,608,000 to provide consumers unused lines of credit. At June 30, 1995, the
Corporation had issued commitments, excluding undisbursed portions of loans in
process, of approximately $150,651,000 as follows: $76,675,000 to originate
loans, $33,723,000 to purchase loans, $15,000,000 to purchase investment
securities, $8,761,000 to purchase mortgage-backed securities and $16,492,000 to
provide consumers unused lines of credit. In addition, at June 30, 1996 and
1995, outstanding commitments from mortgage banking operations to purchase
mortgage loan servicing rights totaled $9,000 and $521,000, respectively.
Loan commitments, which are funded subject to certain limitations, extend
over various periods of time. Generally, unused loan commitments are canceled
upon expiration of the commitment term as outlined in each individual contract.
These outstanding loan commitments to extend credit do not necessarily represent
future cash requirements since many of the commitments may expire without being
drawn upon. The Corporation evaluates each customer's credit worthiness on a
separate basis and requires collateral based on this evaluation. Collateral
consists mainly of residential family units and personal property.
At June 30, 1996 and 1995, the Corporation had approximately $126,377,000
and $82,376,000, respectively, in mandatory forward delivery commitments to sell
residential mortgage loans. At June 30, 1996 and 1995, loans sold subject to
recourse provisions totaled approximately $39,340,000 and $49,678,000,
respectively, 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.
NOTE 22. EMPLOYEE BENEFIT AND INCENTIVE PLANS AND OTHER POSTRETIREMENT BENEFITS:
RETIREMENT SAVINGS PLAN - The Corporation maintains a contributory deferred
savings 401(k) plan covering substantially all employees. The Corporation's
matching contributions are equal to 100.0% of the first 8.0% of participant
contributions (up to 3.0% of participant contributions for the plan sponsored by
Railroad). Participants vest immediately in their own contributions and over a
five-year period for Corporation contributions (over
Commercial Federal Corporation Annual Report 1996 61
a three-year period for company contributions for the plan sponsored by
Railroad). Contribution expense was $1,653,000, $1,684,000 and $1,434,000 for
the years ended June 30, 1996, 1995 and 1994, respectively.
STOCK OPTION AND INCENTIVE PLAN - The Corporation's 1984 Stock Option and
Incentive Plan, as amended (the Plan), permits the granting of stock options,
restricted stock awards and stock appreciation rights. Stock options are
generally 100% exercisable on the date of grant over a period not to exceed 10
years from the date of grant with the option price equal to market value on the
date of grant. However, non-incentive stock options granted to executives on
June 13, 1996, vest one-third on the date of grant (and one-third as of both
June 13, 1997 and 1998) for 35,000 options and vest 60.0% on the date of grant
(and 20.0% as of both June 13, 1997 and 1998) for 45,450 options. Recipients of
restricted stock have the usual rights of a shareholder, including the rights to
receive dividends and to vote the shares; however, the common stock will not be
vested until certain restrictions are satisfied. The term of the Plan extends to
July 31, 2002. Railroad had three stock option and incentive plans for certain
employees and its directors (collectively referred to as "Railroad's Plans")
under which such options generally became exercisable when granted and exercised
within a 10-year period after the date of grant. On October 2, 1995, Railroad's
Plans were terminated with any outstanding options converted into Commercial
Federal Corporation options pursuant to the merger agreement.
The following table presents the activity of the stock options for the fiscal years ended June 30, 1996, 1995 and 1994:
- --------------------------------------------------------------------------------------------------------------------------
Stock Option Option Price Aggregate
Shares Per Share Amount
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1993 ............................................ 432,284 $ 2.50 -- $19.13 $ 2,539
Granted ........................................................... 3,738 13.57 -- 19.69 64
Exercised ......................................................... (64,291) 2.50 -- 15.26 (342)
Canceled .......................................................... (302) 9.31 (3)
Railroad activity for the six months ended June 30, 1994:
Granted ........................................................... 60,951 14.09 -- 15.07 864
Exercised ......................................................... (32,473) 3.80 -- 13.57 (146)
Canceled .......................................................... -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1994 ............................................ 399,907 2.50 -- 19.69 2,976
Granted ........................................................... 62,612 14.48 -- 27.31 1,696
Exercised ......................................................... (87,740) 2.50 -- 19.69 (505)
Canceled .......................................................... (4,783) 5.67 -- 17.48 (65)
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1995 ............................................ 369,996 2.50 -- 27.31 4,102
Granted ........................................................... 123,093 38.75 4,770
Exercised ......................................................... (95,979) 2.50 -- 27.31 (1,191)
Canceled .......................................................... (1,590) 14.09 -- 27.31 (40)
- --------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 ............................................ 395,520 $ 2.50 -- $38.75 $ 7,641
- --------------------------------------------------------------------------------------------------------------------------
Shares available for future grants at June 30, 1996 ................. 198,127
- --------------------------------------------------------------------------------------------------------------------------
On June 30, 1996 and 1995, stock options for 123,093 shares and 61,462
shares, respectively, of the Corporation's common stock were granted to
executives and managers of the Corporation in accordance with a management
incentive plan pursuant to the attainment of certain operating goals of the
Corporation for the respective fiscal years.
Management incentive plans were initially adopted in fiscal year 1993 with
restricted stock to be granted for awards earned each fiscal year. Accordingly,
on June 30, 1996, 1995 and 1994 (the grant dates), the Corporation issued 1,116
shares, 28,417 shares and 59,660 shares, respectively, of restricted stock with
an aggregate market value of $45,000, $776,000 and $1,525,000, respectively.
62 Commercial Federal Corporation Annual Report 1996
The awards of restricted stock vest 20.0% on each anniversary of the grant date,
provided that the employee has completed the specified service requirement, or
earlier if the employee dies or is permanently and totally disabled or upon a
change in control. Total deferred compensation on the unvested restricted stock
totaled $1,068,000, $1,951,000 and $2,480,000, at June 30, 1996, 1995 and 1994,
respectively, and is recorded as a reduction of stockholders' equity.
The value of the restricted shares will be amortized to compensation expense
over the five-year vesting period. Compensation expense applicable to the
restricted stock totaled $909,000, $1,173,000 and $395,000 for fiscal years
1996, 1995 and 1994 respectively.
POSTRETIREMENT BENEFITS - Effective July 1, 1993, the Corporation adopted
Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The provisions of
this statement changed the method of accounting for postretirement benefits
other than pensions from a cash to an accrual basis. Under SFAS No. 106, the
determination of the accrual liability requires a calculation of the accumulated
postretirement benefit obligation (APBO). The APBO represents the actuarial
present value of postretirement benefits other than pensions to be paid out in
the future (such as health care benefits to be paid to retirees) that have been
earned as of the end of the year. The Corporation elected to recognize the
cumulative effect of the initial APBO immediately resulting in an increase in
accrued postretirement health care costs of $519,000 and a decrease in net
income of $336,000 ($.02 per share), net of an income tax benefit of $183,000
which was recorded as a cumulative effect of a change in accounting principle as
of July 1, 1993.
The Corporation's postretirement benefit plan is unfunded. The following table reconciles the status of the
plan with the amounts recognized in the Consolidated Statement of Financial Condition at June 30:
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees ...................................................................................... $ 487 $ 260 $177
Fully eligible active plan participants ....................................................... 120 118 51
Other active plan participants ................................................................ 766 581 369
- ------------------------------------------------------------------------------------------------------------------------------
1,373 959 597
Unrecognized net loss ........................................................................... (783) (426) (42)
- ------------------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost included in other liabilities ............................... $ 590 $ 533 $555
- ------------------------------------------------------------------------------------------------------------------------------
The following sets forth the components of the net periodic postretirement benefit cost for the
fiscal years ended June 30:
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
Service cost - benefits earned during the fiscal year ........................................... $ 74 $ 61 $ 56
Interest cost on accumulated postretirement benefit obligation .................................. 69 43 39
Amortization of net loss ........................................................................ 29 -- --
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit expense ................................................... $ 172 $ 104 $ 95
- ------------------------------------------------------------------------------------------------------------------------------
Postretirement benefit claims paid for the year,
net of retiree contributions of $85, $72, and $57 ............................................. $ 115 $ 126 $ 59
- ------------------------------------------------------------------------------------------------------------------------------
The weighted average discount rate used to determine the APBO was 7.5% for
fiscal years ended June 30, 1996, 1995 and 1994. The assumed health care cost
trend rate used in measuring the APBO as of July 1, 1995, was 8.0% decreasing
gradually until it reaches 5.0% in 2008, when it remains constant. A one-
percentage-point increase in the assumed health care cost trend rate for each
year would increase the APBO as of June 30, 1996, by $134,000 and the aggregate
of the service and interest cost components of the net periodic postretirement
cost for fiscal year 1996 by $28,000.
Commercial Federal Corporation Annual Report 1996 63
The Corporation also maintains an unfunded postretirement survivor income
plan for certain key executives that provides benefits to beneficiaries based
upon the death of such executives and their employment status at the time of
death (i.e., normal retirement, termination or death prior to retirement). The
Corporation began to recognize these postretirement benefits in fiscal year
1996. At June 30, 1996, the accrued postretirement benefit cost included in
other liabilities and the net postretirement benefit cost charged to operations
totaled $33,000. The weighted average discount rate used to determine the APBO
was 7.5% and the assumed rate of increase for compensation was 3.0% annually.
NOTE 23. FINANCIAL INFORMATION (PARENT COMPANY ONLY):
CONDENSED STATEMENT OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
June 30,
ASSETS 1996 1995
- --------------------------------------------------------------------------------
Cash ............................................... $ 12,562 $ 10,546
Other assets ....................................... 2,387 3,996
Equity in Commercial Federal Bank .................. 447,817 374,021
- --------------------------------------------------------------------------------
Total Assets ....................................... $462,766 $388,563
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Liabilities:
Other liabilities ................................ $ 2,339 $ 799
Note payable ..................................... -- 3,000
Senior notes ..................................... 6,900 6,900
Subordinated notes ............................... 40,250 40,250
- --------------------------------------------------------------------------------
Total liabilities .................................. 49,489 50,949
Total stockholders' equity ......................... 413,277 337,614
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity ......... $462,766 $388,563
- --------------------------------------------------------------------------------
CONDENSED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------------
Year Ended June 30,
1996 1995 1994
- --------------------------------------------------------------------------------------
Dividend income from the Bank ...................... $ 9,290 $ 5,660 $ 5,740
Interest income .................................... 691 600 426
Interest expense ................................... (5,384) (5,310) (5,186)
Operating expenses ................................. (1,742) (576) (1,200)
- --------------------------------------------------------------------------------------
Income (loss) before income taxes, cumulative
effect of change in accounting principles and
equity in undistributed earnings of subsidiaries .. 2,855 374 (220)
Income tax benefit ................................. (2,117) (1,882) (2,212)
- --------------------------------------------------------------------------------------
Income before cumulative effect of change in
accounting principles and equity in undistributed
earnings of subsidiaries ........................... 4,972 2,256 1,992
Cumulative effect of change in accounting principles -- -- (198)
- --------------------------------------------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries ...................................... 4,972 2,256 1,794
Equity in undistributed earnings of subsidiaries ... 50,334 28,925 3,176
- --------------------------------------------------------------------------------------
Net income ......................................... $ 55,306 $ 31,181 $ 4,970
- --------------------------------------------------------------------------------------
64 Commercial Federal Corporation Annual Report 1996
CONDENSED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------
Year Ended June 30,
1996 1995 1994
- --------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ......................................... $ 55,306 $ 31,181 $ 4,970
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Cumulative effect of change in accounting
principles ................................... -- -- 198
Equity in earnings of subsidiaries ............. (50,334) (28,925) (3,176)
Other items, net ............................... 2,321 1,100 93
-------- -------- -------
Total adjustments ............................ (48,013) (27,825) (2,885)
-------- -------- -------
Net cash provided by operating activities .. 7,293 3,356 2,085
- --------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of stock of and cash distributions into
the Bank .......................................... -- (3,850) (5,098)
Other items, net ................................... -- (245) (244)
-------- -------- -------
Net cash used by investing activities ...... -- (4,095) (5,342)
- --------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the exercise of stock options and
other employee plans .............................. 2,093 1,334 1,022
Payment of cash dividends on common stock .......... (4,370) -- --
Proceeds from issuance of notes payable ............ -- 4,000 --
Payment of notes payable ........................... (3,000) (1,000) --
Purchase of treasury stock ......................... -- (271) (35)
-------- -------- -------
Net cash (used) provided by financing
activities ............................... (5,277) 4,063 987
- --------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position ........... 2,016 3,324 (2,270)
Balance, beginning of year ......................... 10,546 7,222 9,492
-------- -------- -------
Balance, end of year ............................... $ 12,562 $ 10,546 $ 7,222
- --------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense ................................. $ 4,913 $ 4,816 $ 4,816
Income tax payments (refunds), net ............... 72,972 (3,670) (1,100)
Non-cash investing activities:
Increase to assets and liabilities for prior
business combinations ............................ -- -- 368
- --------------------------------------------------------------------------------------
Commercial Federal Corporation Annual Report 1996 65
NOTE 24. SEGMENT INFORMATION:
The Corporation and its subsidiaries operate primarily in the savings and loan
and mortgage banking industries. Savings and loan operations (financial
institution) involve a variety of traditional banking and financial services.
Mortgage banking operations (mortgage banking) involve the origination and
purchase of mortgage loans, sale of mortgage loans in the secondary mortgage
market, servicing of mortgage loans and the purchase and origination of rights
to service mortgage loans.
Segment information at and for the fiscal years ended June 30 is summarized as
follows:
- ------------------------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------
Interest income:
Financial institution ............................. $ 483,888 $ 446,747 $ 381,316
Mortgage banking .................................. 7,204 7,621 12,538
--------- --------- ---------
Total .......................................... 491,092 454,368 393,854
--------- --------- ---------
Intersegment interest income:
Financial institution ............................. (10,115) (6,601) (5,087)
Mortgage banking .................................. 10,201 6,417 5,345
--------- --------- ---------
86 (184) 258
Intersegment elimination .......................... (86) 184 (258)
--------- --------- ---------
Total .......................................... -- -- --
--------- --------- ---------
Total interest income:
Financial institution ............................. 473,773 440,146 376,229
Mortgage banking .................................. 17,405 14,038 17,883
Intersegment elimination .......................... (86) 184 (258)
--------- --------- ---------
Total .......................................... $ 491,092 $ 454,368 $ 393,854
- ------------------------------------------------------------------------------------------------
Other income:
Financial institution - loan servicing fees........ $ 429 $ 146 $ 78
Financial institution - other income .............. 21,918 20,317 21,853
Mortgage banking - loan servicing fees ............ 27,462 24,585 22,149
Mortgage banking - other income (loss) ............ (163) 18 613
--------- --------- ---------
Total .......................................... 49,646 45,066 44,693
--------- --------- ---------
Intersegment other income:
Financial institution - loan servicing fees........ -- -- --
Financial institution - other income .............. -- -- --
Mortgage banking - loan servicing fees ............ 14,516 12,218 11,428
Mortgage banking - other income ................... -- -- --
--------- --------- ---------
14,516 12,218 11,428
Intersegment elimination .......................... (14,516) (12,218) (11,428)
--------- --------- ---------
Total .......................................... -- -- --
--------- --------- ---------
Total other income:
Financial institution - loan servicing fees........ 429 146 78
Financial institution - other income ...... 21,918 20,317 21,853
Mortgage banking - loan servicing fees .... 41,978 36,803 33,577
Mortgage banking - other income (loss) .... (163) 18 613
Intersegment elimination .................. (14,516) (12,218) (11,428)
--------- --------- ---------
Total ..................................... $ 49,646 $ 45,066 $ 44,693
- ------------------------------------------------------------------------------------------------
66 Commercial Federal Corporation Annual Report 1996
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
Operating profit (1):
Financial institution .............. $63,385 $45,664 $ 6,618
Mortgage banking ................... 26,009 14,518 14,960
------- ------- -------
89,394 60,182 21,578
Less:
General corporate expenses ......... 1,742 545 1,144
Corporate interest expense ......... 5,384 5,310 5,186
------- ------- -------
Total ............................ $82,268 $54,327 $15,248
- --------------------------------------------------------------------------------
(1) Operating profit is income before income taxes, extraordinary items and
cumulative effects of changes in accounting principles. Operating profit for
banking operations includes the effect of the intangible assets valuation
adjustment totaling $52.7 million for fiscal year 1994.
- --------------------------------------------------------------------------------
Identifiable assets:
Financial institution ............ $ 6,591,381 $ 6,478,017 $ 5,831,476
Mortgage banking ................. 171,399 171,415 221,037
Eliminations ..................... (155,110) (79,853) (70,206)
----------- ----------- -----------
Total .......................... $ 6,607,670 $ 6,569,579 $ 5,982,307
- --------------------------------------------------------------------------------
Additions to premises and equipment:
Financial institution ............ $ 6,587 $ 5,863 $ 3,823
Mortgage banking ................. 1,624 5,378 580
----------- ----------- -----------
Total .......................... $ 8,211 $ 11,241 $ 4,403
- --------------------------------------------------------------------------------
Depreciation and amortization:
Financial institution ............ $ 5,404 $ 4,568 $ 4,159
Mortgage banking ................. 1,451 1,045 609
----------- ----------- -----------
Total .......................... $ 6,855 $ 5,613 $ 4,768
- --------------------------------------------------------------------------------
Beginning in fiscal year 1994, the mortgage banking operations expanded
its loan program whereby certain costs normally paid by the borrower were paid
by the mortgage banking operations in return for a higher interest rate charged
on the loan to the borrower. The mortgage banking operations sold loans to the
Bank at par and incurred losses equal to expenses paid for borrowers net of fees
collected. Such losses approximating $986,000, $1,236,000 and $5,900,000 were
incurred during fiscal years 1996, 1995 and 1994, respectively. In addition, for
fiscal years 1995 and 1994, Railroad mortgage loans were not assessed charges
for servicing its loans from its mortgage banking operation and, therefore, no
loan servicing fees on such loans are included in the section captioned
intersegment other income.
Commercial Federal Corporation Annual Report 1996 67
NOTE 25. QUARTERLY FINANCIAL DATA (UNAUDITED):
The following summarizes the unaudited quarterly results of operations for the last three fiscal years ended June 30:
- -------------------------------------------------------------------------------------------------------------
Quarter Ended
June 30 March 31 December 31 September 30
- -------------------------------------------------------------------------------------------------------------
FISCAL 1996:
Total interest income .................................. $ 123,134 $ 122,899 $ 122,357 $ 122,702
Net interest income .................................... 43,490 42,561 38,625 38,099
Provision for loan losses .............................. (1,508) (1,508) (1,508) (1,583)
Gain on sales of securities, loans
and loan servicing rights ............................ 183 64 318 304
Net income ............................................. 15,844 16,354 11,864 11,244
Earnings per share ..................................... 1.04 1.09 .82 .77
Dividends declared per share ........................... .10 .10 .20 --
- -------------------------------------------------------------------------------------------------------------
FISCAL 1995:
Total interest income .................................. $ 120,330 $ 114,876 $ 111,913 $ 107,249
Net interest income .................................... 37,513 37,671 37,697 36,961
Provision for loan losses .............................. (1,583) (1,584) (1,658) (1,583)
Gain on sales of securities, loans
and loan servicing rights ............................ 426 699 481 177
Accelerated amortization of goodwill ................... -- -- 10,678 10,679
Net income ............................................. 12,699 15,033 2,181 1,268
Earnings per share ..................................... .88 1.04 .15 .09
- -------------------------------------------------------------------------------------------------------------
FISCAL 1994:
Total interest income .................................. $ 100,708 $ 98,370 $ 98,185 $ 96,591
Net interest income .................................... 35,354 35,335 33,457 33,606
Provision for loan losses .............................. (1,508) (1,544) (1,613) (1,583)
Gain on sales of securities, loans
and loan servicing rights ............................ 2,231 1,885 1,817 1,649
Intangible assets valuation adjustment ................. (52,703) -- -- --
Income (loss) before cumulative effects of changes
in accounting principles ............................. (31,919) 10,627 10,318 9,347
Cumulative effects of changes in accounting principles . -- -- -- 6,597
Net income (loss) ...................................... (31,919) 10,627 10,318 15,944
Earnings (loss) per share (fully diluted):
Income (loss) before cumulative effects of changes
in accounting principles ........................... (2.22) .74 .72 .65
Cumulative effects of changes in accounting principles -- -- -- .46
Net income (loss) .................................... (2.22) .74 .72 1.11
- -------------------------------------------------------------------------------------------------------------
68 Commercial Federal Corporation Annual Report 1996
NOTE 26. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" (SFAS No. 107), requires that the
Corporation disclose estimated fair value amounts of its financial instruments.
It is management's belief that the fair values presented below are reasonable
based on the valuation techniques and data available to the Corporation as of
June 30, 1996 and 1995, as more fully described in the following table. It
should be noted that the operations of the Corporation are managed from a going
concern basis and not a liquidation basis. As a result, the ultimate value
realized for the financial instruments presented could be substantially
different when actually recognized over time through the normal course of
operations. Additionally, a substantial portion of the Corporation's inherent
value is the Bank's capitalization and franchise value. Neither of these
components have been given consideration in the presentation of fair values
which follow.
The following presents the carrying value and fair value of the specified
assets and liabilities held by the Corporation at June 30, 1996 and 1995. This
information is presented solely for compliance with SFAS No. 107 and is subject
to change over time based on a variety of factors.
- --------------------------------------------------------------------------------------------------------------
1996 1995
------------------------ -------------------------
Carrying Fair Carrying Fair
Value Value Value Value
- --------------------------------------------------------------------------------------------------------------
SELECTED ASSETS
- --------------------------------------------------------------------------------------------------------------
Cash (including short-term investments)........... $ 35,827 $ 35,827 $ 35,145 $ 35,145
Investment securities............................. 253,043 249,039 300,481 297,793
Mortgage-backed securities........................ 1,180,046 1,168,240 1,364,907 1,356,307
Loans receivable, net............................. 4,813,164 4,833,778 4,540,692 4,574,506
Federal Home Loan Bank stock...................... 79,113 79,113 103,648 103,648
- --------------------------------------------------------------------------------------------------------------
SELECTED LIABILITIES
- --------------------------------------------------------------------------------------------------------------
Deposits
Passbook accounts............................... 623,505 623,505 549,857 549,857
Market rate savings accounts.................... 159,672 159,672 190,994 190,994
NOW checking accounts........................... 332,233 332,233 296,552 296,552
Certificates of deposit......................... 3,189,166 3,182,810 2,973,920 2,979,513
---------- ---------- ---------- ----------
Total deposits................................ 4,304,576 4,298,220 4,011,323 4,016,916
Advances from Federal Home Loan Bank.............. 1,350,290 1,344,122 1,787,352 1,774,577
Securities sold under agreements to repurchase.... 380,755 379,585 208,373 209,390
Other borrowings.................................. 58,546 59,886 65,303 67,212
- --------------------------------------------------------------------------------------------------------------
OFF-BALANCE SHEET INSTRUMENTS
- --------------------------------------------------------------------------------------------------------------
Interest rate swap and cap agreements............. -- (1,646) -- (2,409)
Commitments....................................... -- -- -- --
- --------------------------------------------------------------------------------------------------------------
The following sets forth the methods and assumptions used in determining
the fair value estimates for the Corporation's financial instruments at June 30,
1996 and 1995.
Cash and short-term investments:
The book value of cash and short-term investments is assumed to approximate
the fair value of such assets.
Investment securities:
Quoted market prices or dealer quotes were used to determine the fair value
of investment securities.
Mortgage-backed securities:
For mortgage-backed securities available for sale and held to maturity the
Corporation has utilized quotes for similar or identical securities in an
actively traded market,
Commercial Federal Corporation Annual Report 1996 69
where such a market exists, or has obtained quotes from independent security
brokers to determine the fair value of such assets.
Loans receivable:
The fair value of loans receivable was estimated by discounting the future
cash flows using the current market rates at which similar loans would be made
to borrowers with similar credit ratings and for similar remaining maturities.
When using the discounting method to determine fair value, loans were gathered
by homogeneous groups with similar terms and conditions and discounted at a
target rate at which similar loans would be made to borrowers as of June 30,
1996 and 1995, respectively. The fair value of loans held for sale is determined
by outstanding commitments from investors or current investor yield requirements
calculated on an aggregate loan basis. In addition, when computing the estimated
fair value for all loans, allowances for loan losses have been subtracted from
the calculated fair value for consideration of credit issues.
Federal Home Loan Bank stock:
The fair value of such stock approximates book value since the Corporation
is able to redeem this stock with the Federal Home Loan Bank at par value.
Deposits:
The fair value of savings deposits were determined as follows: (i) for
passbook accounts, market rate savings accounts and NOW checking accounts, since
such deposits are immediately withdrawable, fair value is determined to
approximate the carrying value (the amount payable on demand); (ii) for
certificates of deposit, the fair value has been estimated by discounting
expected future cash flows by derived current market rates as of June 30, 1996
and 1995, offered on certificates of deposit with similar maturities. In
accordance with provisions of SFAS No. 107, no value has been assigned to the
Corporation's long-term relationships with its deposit customers (core value of
deposits intangible) since such intangible is not a financial instrument as
defined under SFAS No. 107.
Advances from Federal Home Loan Bank:
The fair value of such advances was estimated by discounting the expected
future cash flows using current interest rates as of June 30, 1996 and 1995, for
advances with similar terms and remaining maturities.
Securities sold under agreements to repurchase:
The fair value of securities sold under agreements to repurchase was
estimated by discounting the expected future cash flows using derived interest
rates approximating market as of June 30, 1996 and 1995, over the contractual
maturity of such borrowings.
Other borrowings:
Subordinated notes and senior notes with carrying values of $40,250,000
and$6,900,000, respectively, are included in other borrowings with the fair
value of such notes based on dealer quoted market prices as of June 30, 1996 and
1995. The fair value of other borrowings, excluding the subordinated and senior
notes, was estimated by discounting the expected future cash flows using derived
interest rates approximating market as of June 30, 1996 and 1995, over the
contractual maturity of such other borrowings.
Commitments:
The commitments to originate and purchase loans have terms that are
consistent with current market terms. Since all outstanding commitments are
short-term or adjustable rate, the fair value of the commitments is not
significant.
Interest rate swap agreements:
The fair value of interest rate swap agreements is the estimated amount
that would be paid to terminate the swap agreements at June 30, 1996 and 1995,
respectively, taking into consideration current interest rates as of June 30,
1996 and 1995.
Limitations:
It must be noted that fair value estimates are made at a specific point in
time, based on relevant market information about the financial instrument.
Additionally, fair value estimates are based on existing on-and off-balance
sheet financial instruments without attempting to estimate the value of
anticipated future business, customer relationships and the value of assets and
liabilities that are not considered financial instruments. These estimates do
not reflect any premium or discount that could result from offering the
Corporation's entire holdings of a particular financial instrument for sale at
one time. Furthermore, since no market exists for certain of the Corporation's
financial instruments, fair value estimates may be based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various
70 Commercial Federal Corporation Annual Report 1996
financial instruments, and other factors. These estimates are subjective in
nature and involve uncertainties and matters of significant judgment and
therefore cannot be determined with a high level of precision. Changes in
assumptions as well as tax considerations could significantly affect the
estimates. Accordingly, based on the limitations described above, the aggregate
fair value estimates as of June 30, 1996 and 1995, are not intended to represent
the underlying value of the Corporation, on either a going concern or a
liquidation basis.
NOTE 27. PENDING ACQUISITION:
On May 16, 1996, the Corporation entered into a Reorganization and Merger
Agreement (the Merger Agreement) by and among the Corporation, the Bank,
Heritage Financial, Ltd. (Heritage) and Hawkeye Federal Savings Bank (Hawkeye
Federal). Under the terms of the Merger Agreement, the Corporation will acquire
all 180,762 of the outstanding shares of Heritage's common stock. As defined in
the Merger Agreement, Heritage's common stock will be exchanged for cash and the
Corporation's common stock based on the average closing price of such stock for
the twenty-fifth through the sixth trading days preceding the effective date of
the proposed merger. Based on the Corporation's closing stock price on June 30,
1996, of $38.25, each share of Heritage common stock would be exchanged for
$18.73 in cash and 2.559 shares of the Corporation's common stock, resulting in
the exchange of approximately 462,570 shares of the Corporation's common stock
with a total aggregate value approximating $21,079,000. Cash will be paid in
lieu of fractional shares. Additional cash consideration up to approximately
$1.2 million may be paid to Heritage shareholders pending the final disposition
of an impaired asset of Hawkeye Federal.
At June 30, 1996, Heritage had assets of approximately $182,099,000,
deposits of approximately $157,898,000 and stockholders' equity of approximately
$12,945,000. Heritage operates six branches located in Iowa. This pending
acquisition, which is subject to the approval of Heritage's shareholders, is
expected to be completed by October 31, 1996. This acquisition will be accounted
for as a purchase with core value of deposits resulting from this transaction to
be amortized on an accelerated basis over a period not to exceed 10 years and
goodwill, if any, to be amortized on a straight line basis over a period not to
exceed 20 years.
NOTE 28. CURRENT ACCOUNTING PRONOUNCEMENTS:
Accounting for Stock-Based Compensation:
In October 1995, Statement of Financial Accounting Standards No. 123
entitled "Accounting for Stock-Based Compensation" (SFAS No. 123) was issued.
SFAS No. 123 applies to all transactions in which an entity acquires goods or
services by issuing equity instruments or by incurring liabilities where the
payment amounts are based upon the entity's common stock price, except for
employee stock ownership plans. SFAS No. 123 establishes a fair value based
method of accounting for stock-based compensation arrangements with employees,
rather than the intrinsic value based method that is contained in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
No. 25). This statement encourages all entities to adopt its method of
accounting for all employee stock compensation plans. However, SFAS No. 123 does
not require an entity to adopt the new fair value based method for purposes of
preparing its basic financial statements. Entities electing to retain the
accounting treatment under APB No. 25 must make pro forma footnote disclosures
of net income and earnings per share as if the fair value based method of
accounting defined in this statement has been applied. The disclosure
requirements of SFAS No. 123 are effective for fiscal years beginning after
December 15, 1995, or effective as of July 1, 1996, for the Corporation.
Management of the Corporation intends to continue to use the APB No. 25 method
of accounting for stock-based compensation and include pro forma disclosures
when presenting complete financial statement footnotes in the future.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities:
In June 1996, Statement of Financial Accounting Standards No. 125, entitled
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" (SFAS No. 125) was issued. This statement, among other things,
applies a "financial-components approach" that focuses on control, whereby an
entity recognizes the financial and servicing assets it controls and the
liabilities it has incurred, derecognizes assets when control has been
surrendered, and derecognizes liabilities when extinguished. SFAS No. 125
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of
Commercial Federal Corporation Annual Report 1996 71
financial assets and extinguishment of liabilities occurring after December 31,
1996, and is to be applied prospectively. Earlier or retroactive application is
not permitted. Management of the Corporation does not believe that the adoption
of SFAS No. 125 will have a material effect on the Corporation's financial
position, liquidity or results of operations.
NOTE 29. SUBSEQUENT EVENT - REPURCHASE OF COMMON STOCK:
On August 21, 1996, the Corporation consummated the repurchase of 1,250,100
shares of its common stock, $0.01 par value, from CAI Corporation, a Dallas-
based investment company, for an aggregate purchase price of approximately
$48,910,000. Such purchase price, excluding transaction costs incurred by the
Corporation for this repurchase, consisted of cash consideration of
approximately $28,227,000 and surrender of a warrant (valued at approximately
$20,683,000) which would have enabled the Corporation to purchase 99 shares of
non-voting common stock of CAI Corporation. The repurchased shares represented
8.3% of the outstanding shares of the Corporation's common stock prior to the
repurchase. After repurchase, a total of 13,844,036 shares of common stock
remain issued and outstanding as of August 21, 1996. The cash portion of the
repurchase was financed in part by a loan from a financial institution secured
by 1,403,200 shares or 15.6% of the outstanding common stock of the Bank. As
consideration, the Corporation also reimbursed CAI Corporation for certain
expenses totaling $2,200,000 incurred in connection with its ownership of the
1,250,100 shares, including costs and expenses incurred in connection with the
1995 proxy contest, and paid CAI Corporation cash totaling $62,500 in lieu of
the pro rata portion of any dividend CAI Corporation otherwise would have
received for the quarter ended September 30, 1996.
Concurrent with the close of the repurchase, two directors of the
Corporation, who also serve as executive officers of CAI Corporation, resigned
from the Corporation's Board of Directors. In addition, CAI Corporation and each
of its shareholders agreed to a standstill agreement for a period of 60 months
beginning August 21, 1996. CAI Corporation and the Corporation have each agreed
to waive and release all claims against the other and the Corporation has agreed
to indemnify CAI Corporation and its directors, officers and affiliates against
certain derivative claims.
72 Commercial Federal Corporation Annual Report 1996
MANAGEMENT'S REPORT ON INTERNAL CONTROLS
Management of Commercial Federal Corporation (the Corporation) is
responsible for the preparation, integrity, and fair presentation of its
published consolidated financial statements and all other information presented
in this Annual Report. The consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and, as such,
include amounts based on informed judgments and estimates made by Management.
Management is responsible for establishing and maintaining an effective
internal control structure over financial reporting in conformity with both
generally accepted accounting principles and the Office of Thrift Supervision
instructions for Thrift Financial Reports. The internal control structure
contains monitoring mechanisms and actions are taken to correct any deficiencies
identified.
There are inherent limitations in the effectiveness of any structure of
internal control, including the possibility of human error and the circumvention
or overriding of controls. Accordingly, even an effective internal control
structure can provide only reasonable assurance with respect to financial
statements preparation. Further, because of changes in conditions, the
effectiveness of an internal control structure may vary over time.
Management assessed the Corporation's internal control structure over
financial reporting presented in conformity with both generally accepted
accounting principles and Thrift Financial Report instructions as of June 30,
1996. This assessment was based on the criteria for effective internal control
described in "Internal Control-Integrated Framework" issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based upon this assessment,
Management believes that the Corporation maintained an effective internal
control structure over financial reporting as of June 30, 1996.
/s/ Willam A. Fitzgerald /s/ James A. Laphen
William A. Fitzgerald James A. Laphen
Chairman of the Board and President, Chief Operating Officer
Chief Executive Officer and Chief Financial Officer
Commercial Federal Corporation Annual Report 1996 73
Independent Auditors' Report
To the Board of Directors and Shareholders
Commercial Federal Corporation
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of Commercial
Federal Corporation and subsidiaries (the "Corporation") as of June 30, 1996 and
1995, and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of Commercial Federal Corporation and Railroad
Financial Corporation, which has been accounted for as a pooling of interests as
described in Note 2 to the consolidated financial statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Commercial Federal
Corporation and subsidiaries as of June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, the Corporation
changed its method of accounting for mortgage servicing rights to conform with
Statement of Financial Accounting Standards No. 122 in fiscal year 1996. As
discussed in Notes 1 and 22 to the consolidated financial statements, in fiscal
year 1994 the Corporation changed its method of accounting for income taxes to
conform with Statement of Financial Accounting Standards No. 109, its method of
accounting for postretirement benefits to conform with Statement of Financial
Accounting Standards No. 106 and its method of accounting for intangible assets.
/s/ Deloitte & Touche LLP
August 23, 1996
Omaha, Nebraska
74 Commercial Federal Corporation Annual Report 1996
INVESTOR INFORMATION
CORPORATE HEADQUARTERS
Commercial Federal Corporation
Commercial Federal Tower
2120 S. 72nd Street
Omaha, NE 68124
GENERAL COUNSEL
Fitzgerald, Schorr, Barmettler, Brennan
1000 Woodmen Tower
Omaha, NE 68102
WASHINGTON COUNSEL
Housley Kantarian & Bronstein, P.C.
1220 19th Street, N.W.
Suite 700
Washington, D.C. 20036
INDEPENDENT AUDITORS
Deloitte & Touche LLP
2000 First National Center
Omaha, NE 68102
SHAREHOLDER SERVICES AND
INVESTOR RELATIONS
Shareholders desiring to change the address or
ownership of stock, report lost certificates or to
consolidate accounts should contact:
Shareholder Communications Team
Harris Trust and Savings Bank
P.O. Box A3504
Chicago, IL 60690-9502
Telephone (312) 360-5100
Analysts, investors and others seeking a copy of the Form 10-K without charge or
other financial information should contact:
Investor Relations Department
Attn: Stan Blakey
Commercial Federal Corporation
2120 S. 72nd Street
Omaha, NE 68124
Telephone (402) 390-6553
ANNUAL MEETING OF SHAREHOLDERS
The annual meeting of shareholders will convene at 10:00 a.m. on Tuesday,
November 19, 1996. The meeting will be held at the Holiday Inn Central
Convention Centre, 3321 South 72nd Street, Omaha, Nebraska, in the "Holiday C"
Meeting Room. Further information with regard to this meeting can be found in
the proxy statement.
STOCK LISTING
Commercial Federal Corporation's common stock is traded on the New York
Stock Exchange (NYSE) using the common stock symbol "CFB." The Wall Street
Journal publishes daily trading information for the stock under the abbreviation
"Comrcl Fed" in the NYSE listings.
Commercial Federal Corporation Annual Report 1996 75
EXECUTIVE OFFICERS OF THE CORPORATION
WILLIAM A. FITZGERALD
Chairman of the Board and
Chief Executive Officer
JAMES A. LAPHEN
President and
Chief Operating Officer
GARY L. MATTER
Senior Vice President,
Controller and Secretary
JOY J. NARZISI
Senior Vice President and
Treasurer
SENIOR MANAGEMENT OF THE BANK AND SUBSIDIARIES
MARGARET E. ASH MELISSA M. BEUMLER
Senior Vice President First Vice President
Retail Operations Marketing
GARY L. BAUGH MICHAEL C. BRUGGEMAN
Senior Vice President First Vice President
State Director - Kansas Human Resources
ROGER L. LEWIS RONALD P. CHEFFER
Senior Vice President First Vice President
Marketing Credit Administration
JON W. STEPHENSON JOHN J. GRIFFITH
Senior Vice President First Vice President
State Director - Oklahoma Specialized Lending
TERRY A. TAGGART DAVID E. GUNTER, JR.
Senior Vice President First Vice President of the Bank and
State Director - Colorado President of Commercial Federal Service Corp.
GARY D. WHITE KEVIN C. PARKS
Senior Vice President First Vice President
State Director - Nebraska/Iowa Internal Audit
RONALD A. AALSETH THOMAS N. PERKINS
First Vice President of the Bank First Vice President
and President of Commercial Federal Acquisitions and Expansion
Investment Services, Inc. and Commercial
Federal Insurance Corp. DENNIS R. ZIMMERMAN
First Vice President
R. HAL BAILEY Information Systems
First Vice President
Construction Lending
76 Commercial Federal Corporation Annual Report 1996
BRANCH LOCATIONS
NEBRASKA (34) KANSAS (24) OKLAHOMA (19)
Omaha (17) Kansas City (3) Oklahoma City (5)
Lincoln (7) Wichita (3) Ada (2)
Beatrice Arkansas City Ponca City (2)
Bellevue Colby Tulsa (2)
Columbus Derby Ardmore
Fremont Fredonia Bartlesville
Grand Island Garden City Bixby
Kearney Greensburg Cushing
LaVista/Papillion Hutchinson Edmond
Norfolk Iola Enid
North Platte Larned Norman
South Sioux City Lawrence Seminole
Lyndon
COLORADO (20) McPherson IOWA (1) *
Denver (6) Newton Harlan
Arapahoe County (2) Oberlin
Lakewood (2) Osage City
Arvada Ottawa
Aurora Wamego
Broomfield Wellington
Englewood
Greeley
Jefferson County
Longmont
Loveland
Northglenn
Wheat Ridge
* Commercial Federal expects to close its previously announced acquisition of
six full-service retail offices from Heritage Financial in October 1996. These
offices are located in Boone, Carrol, Lake City, Madrid, Manning, and Ogden, all
in the state of Iowa.
Commercial Federal Corporation Annual Report 1996 77