UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended MARCH 31, 1997
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 1-11515
-------
COMMERCIAL FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0658852
- ------------------------------- ----------------------
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
2120 SOUTH 72ND STREET, OMAHA, NEBRASKA 68124
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(402) 554-9200
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 8, 1997
- ----------------------------- --------------------------
Common Stock, $0.01 Par Value 21,531,951 Shares
1
COMMERCIAL FEDERAL CORPORATION
------------------------------
FORM 10-Q
---------
INDEX
-----
- -----------------------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION PAGE NUMBER
--------------------- -----------
Item 1. Financial Statements:
Consolidated Statement of Financial Condition as of
March 31, 1997 and June 30, 1996.......................... 3
Consolidated Statement of Operations for the Three
and Nine Months Ended March 31, 1997 and 1996............. 4-5
Consolidated Statement of Cash Flows for the Nine
Months Ended March 31, 1997 and 1996...................... 6-7
Notes to Consolidated Financial Statements................... 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 14-24
PART II. OTHER INFORMATION
-----------------
Item 5. Other Information............................................ 25
Item 6. Exhibits and Reports on Form 8-K............................. 25
SIGNATURE PAGE..................................................................... 26
- -----------------------------------------------------------------------------------------------
2
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
-----------------------------
- ------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) March 31, June 30,
ASSETS 1997 1996
- ------------------------------------------------------------------------------------------------------------
(Unaudited) (Audited)
Cash (including short-term investments of $2,300 and $2,400) $ 50,874 $ 35,827
Investment securities available for sale, at fair value 18,883 9,898
Mortgage-backed securities available for sale, at fair value 192,231 263,206
Loans held for sale 70,825 89,379
Investment securities held to maturity (fair value of $336,396 and $239,141) 340,545 243,145
Mortgage-backed securities held to maturity (fair value $851,437 and $905,034) 854,170 916,840
Loans receivable, net of allowances of $49,225 and $49,200 5,042,633 4,723,785
Federal Home Loan Bank stock 64,150 79,113
Interest receivable, net of reserves of $376 and $388 39,473 40,683
Real estate 20,054 16,669
Premises and equipment 75,834 73,555
Prepaid expenses and other assets 87,162 74,836
Goodwill and core value of deposits, net of
accumulated amortization of $81,599 and $73,742 45,001 40,734
- ------------------------------------------------------------------------------------------------------------
Total Assets $6,901,835 $6,607,670
- ------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $4,419,171 $4,304,576
Advances from Federal Home Loan Bank 1,230,505 1,350,290
Securities sold under agreements to repurchase 660,755 380,755
Other borrowings 85,802 58,546
Interest payable 25,405 24,298
Other liabilities 71,556 75,928
- ------------------------------------------------------------------------------------------------------------
Total Liabilities 6,493,194 6,194,393
- ------------------------------------------------------------------------------------------------------------
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;
21,523,481 and 22,634,551 shares issued and outstanding 215 151
Additional paid-in capital 147,388 175,548
Retained earnings 262,898 240,281
Unrealized holding loss on securities available for sale, net (1,860) (2,703)
- ------------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 408,641 413,277
- ------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $6,901,835 $6,607,670
- ------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements.
3
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Interest Income:
Loans receivable $102,101 $ 97,035 $302,902 $285,961
Mortgage-backed securities 17,668 19,904 56,095 63,713
Investment securities 5,667 5,960 16,972 18,284
- -----------------------------------------------------------------------------------------------------------------
Total interest income 125,436 122,899 375,969 367,958
Interest Expense:
Deposits 54,636 53,209 165,710 159,958
Advances from Federal Home Loan Bank 16,332 22,284 52,586 73,281
Securities sold under agreements to repurchase 10,033 3,207 26,580 10,361
Other borrowings. 1,813 1,638 5,882 5,073
- -----------------------------------------------------------------------------------------------------------------
Total interest expense 82,814 80,338 250,758 248,673
Net Interest Income 42,622 42,561 125,211 119,285
Provision for Loan Losses (2,355) (1,508) (6,121) (4,599)
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income After Provisions for Loan Losses 40,267 41,053 119,090 114,686
Other Income (Loss):
Loan servicing fees 7,873 7,363 22,644 20,674
Retail fees and charges 3,990 3,376 11,906 9,084
Real estate operations (156) 222 978 391
Gain (loss) on sales of loans 92 (136) 219 34
Other operating income 2,944 1,920 7,341 5,756
- -----------------------------------------------------------------------------------------------------------------
Total other income 14,743 12,745 43,088 35,939
Other Expense:
General and administrative expenses:
Compensation and benefits 11,412 11,287 33,491 33,590
Occupancy and equipment 6,420 5,946 18,698 17,519
Regulatory insurance and assessments 943 2,761 5,977 7,871
Advertising 2,033 1,594 5,646 4,465
Other operating expenses 6,601 6,776 21,300 21,415
- -----------------------------------------------------------------------------------------------------------------
General and administrative expenses before
Federal deposit insurance special assessment 27,409 28,364 85,112 84,860
Federal deposit insurance special assessment -- -- 27,062 --
- -----------------------------------------------------------------------------------------------------------------
Total general administrative expenses 27,409 28,364 112,174 84,860
Amortization of goodwill and core value of deposits 2,732 2,491 7,857 6,891
- -----------------------------------------------------------------------------------------------------------------
Total other expense 30,141 30,855 120,031 91,751
Income Before Income Taxes and Extraordinary Items 24,869 22,943 42,147 58,874
Provision for Income Taxes 8,692 6,589 14,530 19,412
- -----------------------------------------------------------------------------------------------------------------
Income Before Extraordinary Items 16,177 16,354 27,617 39,462
Extraordinary Items - Loss on Early Retirement
of Debt, Net of Tax Benefit of $316 -- -- (583) --
- -----------------------------------------------------------------------------------------------------------------
Net Income $ 16,177 $ 16,354 $ 27,034 $ 39,462
- -----------------------------------------------------------------------------------------------------------------
4
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
(Dollars in Thousands Except Per Share Data) Three Months Ended Nine Months Ended
March 31, March 31,
------------------ ------------------
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Per Common Share (1):
Income Before Extraordinary Items $ .74 $ .73 $ 1.26 $ 1.79
Extraordinary Items, Net of Tax Benefit -- -- (.03) --
------- ------ ------- ------
Net Income $ .74 $ .73 $ 1.23 $ 1.79
======= ====== ======= ======
Dividends Declared $ .07 $ .067 $ .207 $ .20
======= ====== ======= ======
--------------------------------------------------------------------------------------------------------------
(1) All per share data restated to reflect the three-for-two stock split
effective January 14, 1997.
See accompanying Notes to Consolidated Financial Statements.
5
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------------------------
(Dollars in Thousands) Nine Months Ended
March 31,
---------------------
1997 1996
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 27,034 $ 39,462
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Extraordinary items, net of tax benefit 583 --
Amortization of goodwill and core value of deposits 7,857 6,891
Provision for loss on loans and real estate 6,493 4,130
Depreciation and amortization 5,879 5,036
Accretion of deferred discounts and fees, net (2,073) (3,679)
Amortization of mortgage servicing rights 5,771 6,546
Amortization of deferred compensation on restricted
stock and premiums on other borrowings 735 1,050
Gains on sales of real estate, loans and loan servicing rights, net (1,749) (996)
Stock dividends from Federal Home Loan Bank (3,417) (2,912)
Proceeds from the sale of loans 501,433 482,310
Origination of loans for resale (163,877) (295,364)
Purchase of loans for resale (320,164) (214,843)
Decrease in interest receivable 2,586 4,726
Decrease in interest payable and other liabilities (5,688) (9,570)
Other items, net (19,088) (5,468)
--------- ---------
Total adjustments 15,281 (22,143)
--------- ---------
Net cash provided by operating activities 42,315 17,319
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans (556,930) (443,450)
Repayment of loans, net of originations 312,364 326,086
Principal repayments of mortgage-backed securities held to maturity 100,032 133,150
Principal repayments of mortgage-backed securities available for sale 24,459 10,979
Proceeds from sale of mortgage-backed securities available for sale 72,665 166,472
Maturities and repayments of investment securities held to maturity 88,657 96,108
Purchases of investment securities held to maturity (176,197) (76,266)
Proceeds from sale of investment securities available for sale -- 51,770
Maturities and repayments of investment securities available for sale 1,500 2,077
Purchases of mortgage loan servicing rights (6,873) (10,629)
Proceeds from sale of Federal Home Loan Bank stock 21,502 36,085
Purchases of Federal Home Loan Bank stock (1,670) (3,713)
Acquisitions, net of cash received 7,339 (15,234)
Proceeds from sale of real estate 11,774 9,852
Payments to acquire real estate (867) (1,603)
Purchases of premises and equipment, net (5,206) (6,854)
Other items, net (903) 452
--------- ---------
Net cash (used) provided by investing activities (108,354) 275,282
- --------------------------------------------------------------------------------------------------
6
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
- ----------------------------------------------------------------------------------------
(Dollars in Thousands) Nine Months Ended
March 31,
-----------------------
1997 1996
- ---------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits $ (43,573) $ 123,304
Proceeds from Federal Home Loan Bank advances 562,975 1,169,500
Repayment of Federal Home Loan Bank advances (691,660) (1,515,009)
Proceeds from securities sold under agreements to repurchase 375,000 --
Repayment of securities sold under agreements to repurchase (95,000) (47,618)
Proceeds from issuance of other borrowings 94,500 --
Repayment of other borrowings (68,813) (6,031)
Payment of cash dividends on common stock (4,399) (2,863)
Repurchase of common stock (49,324) --
Issuance of common stock 1,398 1,560
Other items, net (18) 69
--------- -----------
Net cash provided (used) by financing activities 81,086 (277,088)
- ---------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS:
Increase in net cash position 15,047 15,513
Balance, beginning of year 35,827 35,145
--------- -----------
Balance, end of period $ 50,874 $ 50,658
========= ===========
- ---------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest expense $ 250,059 $ 246,678
Income taxes, net 9,254 11,946
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 34,292 50,315
Loans transferred to real estate 12,327 7,107
Loans to facilitate the sale of real estate 107 51
Common stock issued in connection with the
acquisition of businesses 19,420 25,826
- ---------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements
7
COMMERCIAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
A. BASIS OF CONSOLIDATION AND PRESENTATION:
----------------------------------------
The unaudited consolidated financial statements are prepared on an accrual basis
and include the accounts of Commercial Federal Corporation (the Corporation) and
its wholly-owned subsidiary, Commercial Federal Bank, a Federal Savings Bank
(the Bank), and all majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
The accompanying interim consolidated financial statements have not been audited
by independent auditors. However, in the opinion of management, all adjustments
(consisting only of normal recurring adjustments) considered necessary to fairly
present the financial statements have been included. The consolidated financial
statements should be read in conjunction with the audited financial statements
and notes thereto included in the Corporation's June 30, 1996, Annual Report to
Stockholders. The results of operations for the three and nine month periods
ended March 31, 1997, are not necessarily indicative of the results which may be
expected for the entire fiscal year 1997. Certain amounts in the prior fiscal
year periods have been reclassified for comparative purposes.
B. THREE-FOR-TWO STOCK SPLIT:
--------------------------
On November 18, 1996, the Board of Directors of the Corporation declared a
three-for-two stock split effected in the form of a 50 percent stock
dividend to stockholders of record on December 31, 1996. Par value remained at
$.01 per share. The stock dividend was paid on January 14, 1997, and totaled
7,163,476 shares of common stock. Also on January 14, 1997, fractional shares
resulting from the stock split were paid in cash totaling $17,792 based on the
closing price on the record date. All references to the number of shares, per
share amounts and stock prices for all periods presented have been adjusted on a
retroactive basis to reflect the effect of the stock split.
C. REFINANCING OF CORPORATE DEBT:
------------------------------
On December 2, 1996, the Corporation completed the issuance of $50.0 million of
7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the Notes).
Such offering resulted in the Corporation receiving $48.5 million, net of an
underwriting discount of $1.5 million. With the proceeds from the issuance of
the Notes the Corporation redeemed on December 27, 1996, its $40.25 million
10.25% subordinated debt due December 15, 1999, and its $6.9 million 10.0%
senior notes due January 31, 1999. Total expenses associated with this offering
approximated $1.9 million which are deferred and will be amortized over the life
of the Notes resulting in an effective interest rate of 8.52%. Contractual
interest on the Notes is set at 7.95% until December 1, 2001. The Corporation
will reset the interest rate for the Notes, at its option, effective December 1,
2001, to a rate and for a term of one, two, three or five years determined by
the Corporation and will reset the interest rate thereafter, at is option, upon
the date of expiration of each such new interest period prior to maturity. Any
such new interest rate shall not be less than 105% of the effective interest
rate on comparable maturity U.S. Treasury obligations (as defined). Interest is
paid monthly commencing January 15, 1997. There is no sinking fund. The Notes
may not be redeemed prior to December 1, 2001, and thereafter, the Corporation
may elect to redeem the Notes, in whole on December 1, 2001, and on any
subsequent interest reset date at par plus accrued interest to the date fixed
for redemption. The Notes will be unsecured general obligations of the
Corporation and are subordinated to all existing and future senior indebtedness
(as defined) of the Corporation. There are no restrictions in the Indenture on
the creation of additional senior indebtedness. The Indenture, among other
things, limits the ability of the Corporation to pay cash dividends or to make
other capital distributions under certain circumstances.
On December 13, 1996, the Corporation refinanced the $28.0 million short-term
promissory note due January 31, 1997, (obtained to assist in the finance of the
repurchase of 1,875,150 shares of common stock on August 21, 1996 - See Note F),
with a new five-year term note for $28.0 million due December 31, 2001. This
term note bears a monthly adjustable interest rate which was 7.75% at March 31,
1997, and is priced at 50 basis points below the quoted national base prime
rate. This term note has a seven year amortization with scheduled principal
payments of $1.0 million quarterly and a balloon of $8.0 million due December
31, 2001, with interest payable quarterly, and is unsecured but subject to
certain covenants. In addition, the Corporation also has a $2.0 million line of
credit available with the same financial institution. This revolving credit
promissory note is due in a single payment on December 31, 1997, with interest
rates, interest payments and covenants the same as the term note. Both the term
note and the revolving credit promissory note may be prepaid, in whole or in
part, without penalty, provided that proper written notice is given prior to the
prepayment. At March 31, 1997, the balance of the term note was $27.0 million,
with the interest rate 8.0% as of May 1, 1997 and the revolving credit
promissory note had not been drawn on.
8
D. EXTRAORDINARY ITEMS - LOSS ON EARLY RETIREMENT OF DEBT:
-------------------------------------------------------
In December 1996, the Corporation recognized an extraordinary loss of $583,000
(net of income tax benefit totaling $316,000), or $.03 loss per share, as a
result of the early retirement of debt. The extraordinary loss consisted
primarily of the write-off of the associated premiums and costs associated with
the issuance and redemption of such debt. With the proceeds from the issuance
of $50.0 million of 7.95% fixed-rate subordinated extendible notes due December
1, 2006, the Corporation redeemed on December 27, 1996, its $40.25 million
10.25% subordinated debt due December 15, 1999, and its $6.9 million 10.0%
senior notes due January 31, 1999. In addition, on December 13, 1996, the
Corporation refinanced its $28.0 million short-term promissory note due January
31, 1997, with a new five-year term note for $28.0 million due December 31,
2001. See Note C for additional information regarding these notes.
E. ACQUISITION OF HERITAGE FINANCIAL, LTD.:
----------------------------------------
On October 1, 1996, the Corporation consummated its acquisition of Heritage
Financial, Ltd. (Heritage), parent company of Hawkeye Federal Savings (Hawkeye
Federal) located in Iowa. Under the terms of the Reorganization and Merger
Agreement, the Corporation acquired all of the 180,762 outstanding shares of
Heritage's common stock. Each share of Heritage's common stock was exchanged
for $18.73 in cash ($3,386,000) and 3.74775 shares of the Corporation's common
stock (677,449 shares). Based on the Corporation's closing stock price of
$28.667 at October 1, 1996, the total consideration for this acquisition,
excluding cash paid for fractional shares, approximated $22,806,000.
At October 1, 1996, before purchase accounting adjustments, Heritage had assets
of approximately $182,938,000, deposits of approximately $157,911,000 and
stockholders' equity of approximately $10,308,000. Heritage operated six
branches located in Iowa. The Heritage acquisition was accounted for as a
purchase, with the fair value of the assets and liabilities being determined
including an independent core value study and branch appraisals, with completion
expected during calendar year 1997. Costs and expenses associated with this
acquisition are estimated to approximate $1,125,000. Core value of deposits
resulting from this transaction will be amortized on an accelerated basis over a
period not to exceed 10 years and goodwill amortized on a straight-line basis
over a period not to exceed 20 years. The effect of this acquisition on the
Corporation's consolidated financial statements as if this acquisition had
occurred at the beginning of the fiscal year would not be material.
F. REPURCHASE OF COMMON STOCK:
---------------------------
On August 21, 1996, the Corporation consummated the repurchase of 1,875,150
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, excluding $414,000 in transaction costs. 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. The Corporation also
reimbursed CAI Corporation for certain expenses totaling $2,200,000 incurred in
connection with its ownership of the 1,875,150 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. Such nonrecurring expenses paid to CAI Corporation are
included in other operating expenses. The cash portion of the repurchase was
financed in part by a short-term variable-rate promissory note due January 31,
1997, from a financial institution which was subsequently refinanced on a long-
term basis now due December 31, 2001 (See Note C).
9
G. FEDERAL DEPOSIT INSURANCE SPECIAL ASSESSMENT:
---------------------------------------------
During the quarter ended September 30, 1996, the Corporation incurred an after-
tax charge of $17,300,000 ($27,062,000 pre-tax) as a result of the imposition of
a special assessment by the Federal Deposit Insurance Corporation (FDIC) to
recapitalize the Savings Association Insurance Fund (SAIF). In order to
recapitalize the SAIF, the Deposit Insurance Funds Act of 1996, effective
September 30, 1996, authorized the FDIC to impose a one-time special assessment
on institutions with SAIF-assessable deposits based on the amount determined by
the FDIC to be necessary to increase the reserve levels of the SAIF to the
designated reserve ratio of 1.25% of insured deposits. Institutions were
assessed at the rate of .657% based on the amount of their SAIF- assessable
deposits as of March 31, 1995. This nonrecurring special assessment totaling
$27,062,000 on a pre-tax basis is recorded in the general and administrative
expenses section of the Consolidated Statement of Operations under a separate
line captioned "Federal deposit insurance special assessment." Such special
assessment reduced the Bank's tangible, core and risk-based capital at September
30, 1996, by $17,300,000. The Bank continues to exceed the minimum requirements
to be classified as a "well-capitalized" institution under applicable
regulations.
H. REPEAL OF THRIFT BAD DEBT RESERVES FOR TAX PURPOSES:
----------------------------------------------------
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) required 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
resulted in the recognition to income tax expense of additional deferred tax
liabilities of approximately $103,000 in the first quarter of fiscal year 1997.
The remaining unrecognized deferred tax liability totaling approximately
$31,690,000 at March 31, 1997, 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.
I. COMMITMENTS AND CONTINGENCIES:
------------------------------
At March 31, 1997, the Corporation had issued commitments, excluding undisbursed
portions of loans in process, totaling approximately $230,241,000 to fund and
purchase loans and investment securities as follows: $57,687,000 of single-
family adjustable-rate mortgage loans, $98,701,000 of single-family fixed-rate
mortgage loans, $19,590,000 of consumer loan lines of credit, $19,263,000 of
commercial real estate loans and $35,000,000 million of investment securities.
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.
Loans sold subject to recourse provisions totaled approximately $33,021,000,
which represents the total potential credit risk associated with these
particular loans. Such credit risk would, however, be offset by the value of
the single-family residential properties which collateralize these loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of business. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse affect on the Corporation's financial position or results of operation.
On September 13, 1994, the Corporation and 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
which it had entered into with the Bank. The suit alleges that such governmental
action constitutes a breach of contract and an unlawful taking of property by
the United States without just compensation or due process in violation of the
Constitution of the United States.
The litigation status and process of the litigation, as well as that of numerous
other actions alleging similar claims with respect to supervisory goodwill and
regulatory capital credits, make the value of the claims asserted by the Bank
uncertain as to their ultimate outcome, and contingent on a number of factors
and future events which are beyond the control of the Bank, both as to
substance, timing and the dollar amount of damages which may be awarded to the
Bank if it finally prevails in this litigation.
10
J. REGULATORY CAPITAL REQUIREMENTS:
--------------------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following table of tangible, core and total risk-based capital. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under the
regulatory framework for Prompt Correction Action provisions under FDICIA, the
Bank must maintain minimum Tier I leverage, Tier I risk-based and total risk-
based capital ratios as set forth in the following table. At March 31, 1997,
and June 30, 1996, 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 pursuant to the Office of Thrift Supervision
(OTS) and FDICIA.
- ---------------------------------------------------------------------------------
(Dollars in Thousands)
As of March 31, 1997
-----------------------------------------
Actual Capital Required Capital
---------------- ------------------
Amount Ratio Amount Ratio
- ---------------------------------------------------------------------------------
OTS capital adequacy:
Tangible capital $422,479 6.14 % $103,226 1.50 %
Core capital 435,068 6.31 206,830 3.00
Risk-based capital 472,287 13.32 283,722 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 435,068 6.31 344,716 5.00
Tier 1 risk-based capital 435,068 12.27 212,792 6.00
Total risk-based capital 472,287 13.32 354,653 10.00
- ---------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------
(Dollars in Thousands)
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 424,909 6.41 198,760 3.00
Risk-based 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 March 31, 1997, the most recent notification from the OTS categorized the
Bank as "well-capitalized" under the regulatory framework for Prompt Corrective
Action provisions under FDICIA. There are no conditions or events since such
notification that management believes have changed the Bank's classification.
11
K. CURRENT ACCOUNTING PRONOUNCEMENTS:
----------------------------------
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, de-recognizes assets when control has been
surrendered, and de-recognizes liabilities when extinguished. SFAS No. 125
provides consistent standards of distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. This statement is
effective for transfers and servicing of financial assets and extinguishment of
liabilities occurring after December 31, 1996, is to be applied prospectively,
and earlier or retroactive application is not permitted. However, in December
1996, the Financial Accounting Standards Board reconsidered certain provisions
of SFAS No. 125 and issued Statement of Financial Accounting Standards No. 127,
entitled "Deferral of the Effective Date of Certain Provisions of FASB Statement
No. 125, an amendment of FASB Statement No. 125" (SFAS No. 127), which defers
until after December 31, 1997, the effective date of implementation for
transactions related to repurchase agreements, dollar roll repurchase
agreements, securities lending and similar transactions. All provisions of SFAS
No. 125 should continue to be applied prospectively, and earlier or retroactive
application is not permitted. Management of the Corporation does not believe
that the adoption of these statements will have a material effect on the
Corporation's financial position, liquidity or results of operations.
EARNINGS PER SHARE:
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, entitled "Earnings Per Share" (SFAS No.
128). This statement establishes standards for computing and presenting
earnings per share (EPS), simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15, "Earnings Per Share," and makes
them comparable to international EPS standards. SFAS No. 128 supersedes APB
Opinion No. 15 and AICPA Accounting Interpretations 1-102 of APB Opinion No. 15
and supersedes or amends other accounting pronouncements related to computations
of EPS. The statement replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation with equal
prominence of basic and diluted EPS for income from continuing operations and
for net income on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted-average number
of common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
The provisions of SFAS No. 128 are effective for financial statements for both
interim and annual periods ending after December 15, 1997. Earlier application
is not permitted. However, an entity is permitted to disclose pro forma EPS
amounts computed using this statement in the notes to the financial statements
in periods prior to required adoption. After the effective date, all prior-
period EPS data presented shall be restated (including interim financial
statements, summaries of earnings, and selected financial data) to conform with
the provisions of SFAS No. 128. The effect of this accounting change, unaudited
and on a pro forma basis, on reported EPS for the three and nine months ended
March 31, 1997 and 1996 is as follows:
- ------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, March 31,
------------------- -----------------
1997 1996 1997 1996
- ------------------------------------------------------------------------------------
Primary EPS as reported $ .74 $ .73 $1.23 $1.79
Pro forma effect of SFAS No. 128 .01 .01 .02 .03
----- ----- ----- -----
Basic EPS as restated (pro forma) $ .75 $ .74 $1.25 $1.82
===== ===== ===== =====
Fully diluted EPS as reported $ .74 $ .72 $1.23 $1.79
Pro forma effect of SFAS No. 128 -- .01 -- --
----- ----- ----- -----
Diluted EPS as restated (pro forma) $ .74 $ .73 $1.23 $1.79
===== ===== ===== =====
- ------------------------------------------------------------------------------------
12
L. SUBSEQUENT EVENT - ACQUISITION OF INVESTORS FEDERAL SAVINGS:
------------------------------------------------------------
On May 1, 1997, the Corporation consummated its acquisition of Investors Federal
Savings (Investors) headquartered in Kinsley, Kansas. Under the terms of the
agreement, the Corporation acquired all 232,465 of the outstanding shares of
Investors' common stock for $23.00 in cash for a total consideration of
approximately $5,347,000.
As of March 31, 1997, Investors had assets of approximately $32,098,000,
deposits of approximately $27,031,000 and stockholders' equity of approximately
$4,769,000. Investors operated three branches (Kinsley, Dodge City, and Meade)
in southwest Kansas. As part of the acquisition consolidation process, the
Meade branch will be closed on May 24, 1997. This acquisition will be
accounted for as a purchase. Expenses and costs associated with this proposed
acquisition are estimated to approximate $350,000. Unidentifiable intangible
assets resulting from this acquisition will be amortized on a straight line
basis over a period not to exceed 20 years. The effect of this acquisition on
the Corporation's consolidated financial statements as if this acquisition had
occurred at the beginning of the fiscal year would not be material.
M. SUBSEQUENT EVENT - TRUST PREFERRED SECURITIES OFFERING:
-------------------------------------------------------
Effective May 14, 1997 the Corporation, through CFC Preferred Trust (Issuer),
a special-purpose Delaware trust subsidiary of the Corporation, sold
1,800,000 shares (issue price of $25.00 per share) totaling $45,000,000 of
fixed-rate 9.375% cumulative trust preferred securities (Capital Securities)
which are fully and unconditionally guaranteed by the Corporation. Also
effective May 14, 1997, the Corporation acquired all of the beneficial ownership
interest of the Issuer by purchasing common securities of the Issuer (Common
Securities) for $1,391,775. The Issuer, on May 14, 1997, invested the total
proceeds of $46,391,775 it received in 9.375% junior subordinated deferrable
interest debentures (Debentures) issued by the Corporation. Interest paid on the
Debentures will be distributed to the holders of the Capital Securities and to
the Corporation as holder of Common Securities. As a result, under current tax
law, distributions to the holders of the Capital Securities will be tax
deductible for the Corporation.
The distribution rate payable on the Capital Securities is cumulative, accrues
from and including the date of issuance of the Capital Securities, and is
payable quarterly in arrears commencing on September 30, 1997. The Corporation
has the right, subject to events of default, at any time, to defer payments of
interest on the Debentures by extending the interest payment period thereon for
a period not exceeding 20 consecutive quarters with respect to each deferral
period, provided that no extension period may extend beyond the redemption or
maturity date of the Debentures.
The Capital Securities are subject to mandatory redemption upon repayment of the
Debentures. The Debentures mature on May 15, 2027, which date may be shortened
to a date not earlier than May 15, 2002, if certain conditions (as defined) are
met. The Corporation has the right at any time to terminate the Issuer and cause
the Debentures to be distributed to holders of Capital Securities in liquidation
of the Issuer, all subject to the Corporation having received prior approval of
the Federal Reserve to do so if then required under applicable capital
guidelines or policies of the Federal Reserve.
Since all of the proceeds of the sale of the Capital Securities were invested by
the Issuer in the Debentures, the Corporation paid the underwriting commission
totaling $1,417,500. Other expenses associated with the offering are estimated
to approximate $275,000. The Corporation intends that the proceeds from the sale
of the Debentures will be used for general corporate purposes including, without
limitation, possible future acquisitions, funding investments in, or extensions
of credit to, the Corporation's subsidiaries, repayment of obligations and
redemption of securities. Pending such uses, the proceeds have been invested in
short-term investment-grade securities.
For financial reporting purposes, the Issuer will be treated as a subsidiary of
the Corporation and, accordingly, the accounts of the Issuer will be included in
the consolidated financial statements of the Corporation. The Capital
Securities will be presented as a separate line item in the Consolidated
Statement of Financial Condition of the Corporation before the Stockholders'
Equity section under the separate caption "Company Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior
Subordinated Debentures" and appropriate disclosures about the Capital
Securities, the guarantee and the Debentures will be included in the notes to
the consolidated financial statements. For financial reporting purposes, the
Corporation will record distributions payable on the Capital Securities as
minority interest expense, net of related tax benefit, in the Consolidated
Statement of Operations. The Capital Securities would qualify as Tier 1 capital
of the Corporation should the Corporation become subject to the Federal Reserve
capital requirements for bank holding companies. As a savings and loan holding
company, the Corporation is currently not subject to Federal Reserve capital
requirements for bank holding companies.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES:
- --------------------------------
The Corporation's principal asset is its investment in the capital stock of the
Bank, and because it does not generate any significant revenues independent of
the Bank, the Corporation's liquidity is dependent on the extent to which it
receives dividends from the Bank. The Bank's ability to pay dividends to the
Corporation is dependent on its ability to generate earnings and is subject to a
number of regulatory restrictions and tax considerations. Under capital
distribution regulations of the OTS, a savings institution that, immediately
prior to, and on a pro forma basis after giving effect to, a proposed dividend,
has total capital that is at least equal to the amount of its fully phased-in
capital requirements (a "Tier I Association") is permitted to pay dividends
during a calendar year in an amount equal to the greater of (i) 75.0% of its net
income for the recent four quarters, or (ii) 100.0% of its net income to date
during the calendar year plus an amount that would reduce by one-half the amount
by which its ratio of total capital to assets exceeded its fully phased-in risk-
based capital ratio requirement at the beginning of the calendar year. At March
31, 1997, the Bank qualified as a Tier I Association, and would be permitted to
pay an aggregate amount approximating $100.2 million in dividends under these
regulations. Should the Bank's regulatory capital fall below certain levels,
applicable law would require prior approval by the OTS of such proposed
dividends and, in some cases, would prohibit the payment of dividends.
On August 21, 1996, the Corporation repurchased 1,875,150 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 variable-rate promissory note totaling
$28.0 million due January 31, 1997, (ii) a dividend from the Bank totaling $18.0
million, and (iii) cash totaling $5.2 million paid directly by the parent
company. Transaction costs incurred by the Corporation for this repurchase
totaled approximately $414,000. Concurrent with 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.
On December 13, 1996, the Corporation refinanced the $28.0 million short-term
promissory note due January 31, 1997, with a new five-year term note for $28.0
million due December 31, 2001. This term note bears a monthly adjustable
interest rate which was 7.75% at March 31, 1997, and is priced at 50 basis
points below the quoted national base prime rate. This term note has a seven
year amortization with scheduled principal payments of $1.0 million quarterly
and a balloon of $8.0 million due December 31, 2001, with interest payable
quarterly, and is unsecured but subject to certain covenants. In addition, the
Corporation also has a $2.0 million line of credit available with the same
financial institution. This revolving credit promissory note is due in a single
payment on December 31, 1997, with interest rates, interest payments and
covenants the same as the term note. Both the term and the revolving credit
promissory note may be prepaid, in whole or in part, without penalty, provided
that proper written notice is given prior to the prepayment. At March 31, 1997,
the outstanding balance of the term note was $27.0 million, the interest rate
8.0% as of May 1, 1997 and the revolving credit promissory note had not been
drawn on.
On December 2, 1996, the Corporation completed the issuance of $50.0 million of
7.95% fixed-rate subordinated extendible notes due December 1, 2006 (the Notes).
Such offering resulted in the Corporation receiving $48.5 million, net of an
underwriting discount of $1.5 million. With the proceeds from the issuance of
the Notes the Corporation redeemed on December 27, 1996, its $40.25 million
10.25% subordinated debt due December 15, 1999, and its $6.9 million 10.0%
senior notes due January 31, 1999. Total expenses associated with this offering
approximated $1.9 million which are deferred and will be amortized over the life
of the Notes resulting in an effective interest rate of 8.52%. Contractual
interest on the Notes is set at 7.95% until December 1, 2001. The Corporation
will reset the interest rate for the notes, at its option, effective December
1, 2001, to a rate and for a term of one, two, three or five years determined by
the Corporation and will reset the interest rate thereafter, at its option, upon
the date of expiration of each new interest period prior to maturity. Any such
new interest rate shall not be less than 105% of the effective interest rate on
comparable maturity U.S. Treasury obligations (as defined). Interest is paid
monthly commencing January 15, 1997. There is no sinking fund. The Notes may
not be redeemed prior to December 1, 2001, and thereafter, the Corporation may
elect to redeem the Notes, in whole on December 1, 2001, and on any subsequent
interest reset date at par plus accrued interest to the date fixed for
redemption. The Notes will be unsecured general obligations of the Corporation
and are subordinated to all existing and future senior indebtedness (as defined)
of the Corporation. There are no restrictions in the Indenture on the creation
of additional senior indebtedness. The Indenture, among other things, limits
the ability of the Corporation to pay cash dividends or make other capital
distributions under certain circumstances.
14
LIQUIDITY AND CAPITAL RESOURCES(Continued):
- -------------------------------------------
Effective May 14, 1997 the Corporation, through CFC Preferred Trust (Issuer), a
special-purpose Delaware trust subsidiary of the Corporation, sold 1,800,000
shares (issue price of $25.00 per share) totaling $45,000,000 of fixed-rate
9.375% cumulative trust preferred securities (Capital Securities) which are
fully and unconditionally guaranteed by the Corporation. Also effective May 14,
1997, the Corporation acquired all of the beneficial ownership interest of the
Issuer by purchasing common securities of the Issuer (Common Securities) for
$1,391,775. The Issuer, on May 14, 1997, invested the total proceeds of
$46,391,775 it received in 9.375% junior subordinated deferrable interest
debentures (Debentures) issued by the Corporation. Interest paid on the
Debentures will be distributed to the holders of the Capital Securities and to
the Corporation as holder of the Common Securities. As a result, under current
tax law, distributions to the holders of the Capital Securities will be tax
deductible for the Corporation. The distribution rate payable on the Capital
Securities is cumulative, accrues from and including the date of issuance of the
Capital Securities, and is payable quarterly in arrears commencing on September
30, 1997. The Corporation has the right, subject to events of default, at any
time, to defer payments of interest on the Debentures by extending the interest
payment period thereon for a period not exceeding 20 consecutive quarters with
respect to each deferral period, provided that no extension period may extend
beyond the redemption or maturity date of the Debentures. The Capital Securities
are subject to mandatory redemption upon repayment of the Debentures. The
Debentures mature on May 15, 2027, which date may be shortened to a date not
earlier than May 15, 2002, if certain conditions (as defined) are met. The
Corporation has the right at any time to terminate the Issuer and cause the
Debentures to be distributed to holders of Capital Securities in liquidation of
the Issuer, all subject to the Corporation having received prior approval of the
Federal Reserve to do so if then required under applicable capital guidelines or
policies of the Federal Reserve. Since all of the proceeds of the sale of the
Capital Securities were invested by the Issuer in the Debentures, the
Corporation paid the underwriting commission totaling $1,417,500. Other expenses
associated with the offering are estimated to approximate $275,000. The
Corporation intends that the proceeds from the sale of the Debentures will be
used for general corporate purposes including, without limitation, possible
future acquisitions, funding investments in, or extensions of credit to, the
Corporation's subsidiaries, repayment of obligations and redemption of
securities. Pending such uses, the proceeds have been invested in short-term
investment-grade securities.
At March 31, 1997, cash of Commercial Federal Corporation (the parent company)
totaled $15.8 million. Due to the parent company's limited independent
operations, management believes that the cash balance at March 31, 1997, is
currently sufficient to meet operational needs. However, the parent company's
ability to make future interest and principal payments on the Notes, on the
$27.0 million promissory term note due December 31, 2001, and on the junior
subordinated debentures due May 15, 2027, is dependent upon its receipt of
dividends from the Bank. For the three and nine months ended March 31, 1997,
dividends totaling $5.0 million and $34.667 million, respectively, were paid by
the Bank to the parent company. These dividends from the Bank were paid to
cover (i) interest payments totaling $6.150 million on the parent company's
debt, (ii) a principal payment of $1.0 million on the parent company's
promissory term note, (iii) common stock cash dividends totaling $5.907 million
paid by the parent company, (iv) the October 1, 1996, payment totaling $3.610
million to acquire Heritage Financial, Ltd. and (v) the first quarter payment
totaling $18.0 million to assist in the finance of the repurchase of 1,875,150
shares of the Corporation's common stock on August 21, 1996. The Bank will
continue to pay dividends to the parent company, pursuant to regulatory
restrictions, to cover the cash dividends on common stock that the parent
company intends to pay on a quarterly basis and on future principal and interest
payments on the parent company's debt. Dividends totaling $21.9 million were
paid by the Bank to the parent company during the nine months ended March 31,
1996. The parent company also receives cash from the exercise of stock options
and the sale of stock under its employee benefit plan.
The Corporation's primary sources of funds are (i) deposits, (ii) principal
repayments on loans, mortgage-backed and investment securities, (iii) advances
from the Federal Home Loan Bank (FHLB) of Topeka, (iv) securities sold under
agreements to repurchase, and (v) cash generated from operations. As reflected
in the Consolidated Statement of Cash Flows, net cash flows provided by
operating activities totaled $42.3 million and $17.3 million, respectively, for
the nine months ended March 31, 1997 and 1996. Amounts fluctuate from period
to period primarily as a result of mortgage banking activity relating to the
purchase and origination of loans for resale and the subsequent sale of such
loans.
Net cash flows used by investing activities for the nine months ended March 31,
1997, totaled $108.4 million and net cash flows provided by investing activities
for the nine months ended March 31, 1996, totaled $275.3 million. Amounts
fluctuate from period to period primarily as a result of (i) principal
repayments on loans and mortgage-backed securities, and (ii) the purchase and
origination of loans, mortgage-backed securities and investment securities. The
acquisition of Heritage effective October 1, 1996, resulted in cash paid
totaling approximately $3.4 million for Heritage's common stock as well as the
exchange of 677,449 shares of the Corporation's common stock. This cash payment
was paid from the Bank to the parent company as a cash dividend in October 1996.
In addition, the acquisition of Investors effective May 1, 1997, resulted in
cash paid totaling approximately $5.3 million for its common stock. (see Note
L).
15
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- --------------------------------------------
Net cash flows provided by financing activities totaled $81.1 million for the
nine months ended March 31, 1997, and net cash used by financing activities
totaled $277.1 million for the nine months ended March 31, 1996. Advances from
the FHLB have been the primary sources to balance the Corporation's funding
needs during each of the periods presented. In addition, during the nine months
ended March 31, 1997, the Corporation utilized securities sold under agreements
to repurchase primarily for liquidity and asset liability management purposes.
Also, during the nine months ended March 31, 1997, the Corporation borrowed
$28.0 million to partially finance the repurchase of 1,875,150 shares of the
Corporation's common stock which was refinanced on December 13, 1996, and is now
due December 31, 2001. In addition, as previously discussed, the Corporation's
$40.25 million 10.25% subordinated debt and $6.9 million 10.0% senior notes were
paid in full on December 27, 1996, from the proceeds of the Corporation's $50.0
million 7.95% subordinated extendible notes due December 1, 2006.
Legislation signed into law on September 30, 1996, to recapitalize the SAIF fund
required SAIF-insured institutions to pay a one-time special assessment of .657%
of SAIF-insured deposits held as of March 31, 1995. This nonrecurring special
assessment resulted in a one-time after-tax charge to the Corporation of
approximately $17.3 million ($27.1 million pre-tax) incurred in the quarter
ended September 30, 1996. Such a special assessment substantially eliminated the
deposit insurance premium disparity between BIF-insured and SAIF-insured
institutions and is anticipated to fully recapitalize the SAIF. Such results
associated with this special assessment will have the effect of significantly
reducing the Corporation's deposit insurance premiums to the SAIF, thereby
increasing net income in future periods. The FDIC has adopted a new assessment
schedule for SAIF deposit insurance pursuant to which the assessment rate for
well-capitalized institutions with the highest supervisory ratings would be
reduced to zero and institutions in the lowest risk assessment classification
will be assessed at the rate of .27% of insured deposits. Until December 31,
1999, however, SAIF-insured institutions will be required to pay assessments to
the FDIC at the rate of .064% to help fund interest payments on certain bonds
issued by the Financing Corporation (FICO), an agency of the federal government
established to finance takeovers of insolvent thrifts. During this period, BIF
members will be assessed for FICO obligations at the rate of .013%. After
December 31, 1999, both BIF and SAIF members will be assessed at the same rate
for FICO payments. Based on the Corporation's level of deposits as of September
30, 1996, such a reduction in rates from .23% of insured deposits (adjusted to
.18% of insured deposits for the quarter ended December 31, 1996, pursuant to a
deposit insurance premium refund received totaling $544,000) to .064% of insured
deposits effective January 1, 1997, for SAIF insurance premiums will result in
an annual pre-tax increase to operating earnings approximating $7.0 million.
The Deposit Insurance Funds Act of 1996 provides that the BIF and the SAIF will
be merged into a single deposit insurance fund effective December 31, 1999, but
only if there are no insured savings associations on that date. The legislation
directed the Department of Treasury to make recommendations to Congress by March
31, 1997, for the establishment of a single charter for banks and thrifts.
Management of the Corporation cannot predict accurately at this time what effect
this legislation will have on the Corporation.
The Corporation has considered and will continue to consider possible mergers
with and acquisitions of other selected financial institutions. During fiscal
year 1997 to date, the Corporation consummated its acquisitions of Heritage
Financial, Ltd. and Investors Federal Savings (effective May 1, 1997), and
during fiscal year 1996, consummated the acquisitions of Railroad Financial
Corporation (Railroad) and Conservative Savings Corporation (Conservative).
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 March 31, 1997, the Corporation had issued commitments, excluding undisbursed
portions of loans in process, totaling approximately $230.2 million to fund and
purchase loans and investment securities as follows: $57.7 million of single-
family adjustable-rate mortgage loans, $98.7 million of single-family fixed-rate
mortgage loans, $19.6 million of consumer loan lines of credit, $19.2 million of
commercial real estate loans and $35.0 million of investment securities. These
outstanding loan commitments to extend credit in order to originate loans or
fund consumer loan lines of credit do not necessarily represent future cash
requirements since many of the commitments may expire without being drawn. The
Corporation expects to fund these commitments, as necessary, from the sources of
funds previously described.
The maintenance of an appropriate level of liquid resources to meet not only
regulatory requirements but also to provide funding necessary to meet the
Corporation's current business activities and obligations is an integral element
in the management of the Corporation's assets. The Corporation is required by
federal regulation to maintain a minimum average daily balance of cash and
certain qualifying liquid investments equal to 5.0% of the aggregate of the
prior month's daily average savings deposits and short-term borrowings. The
Corporation's liquidity ratio was 5.76% at March 31, 1997. Liquidity levels
will vary depending upon savings flows, future loan fundings, cash operating
needs, collateral requirements and general prevailing economic conditions. The
Corporation does not foresee any difficulty in meeting its liquidity
requirements.
16
RESULTS OF OPERATIONS:
- ----------------------
Net income for the three months ended March 31, 1997, was $16.2 million, or $.74
per share, compared to net income of $16.4 million, or $.73 per share, for the
three months ended March 31, 1996. The decrease in net income for the three
months ended March 31, 1997, compared to the three months ended March 31, 1996,
is primarily due to net increases of $2.1 million, $847,000 and $241,000,
respectively, in the provision for income taxes, provision for loan losses and
amortization of intangible assets. These decreases to net income were partially
offset by a net increase of $2.0 million in total other income, a net increase
of $61,000 in net interest income and a net improvement of $955,000 in general
and administrative expenses.
Net income for the nine months ended March 31, 1997, was $27.0 million, or $1.23
per share (including an after-tax loss on early retirement of debt totaling
$583,000, or $.03 loss per share, classified as an extraordinary item), compared
to net income of $39.5 million, or $1.79 per share, for the nine months ended
March 31, 1996. The decrease in net income for the nine months ended March 31,
1997, compared to the nine months ended March 31, 1996, is primarily due to the
following: the $27.1 million nonrecurring Federal deposit insurance special
assessment, an increase of $1.5 million in the provision for loan losses, an
increase of $966,000 in amortization expense of intangible assets, the
extraordinary loss on early retirement of debt totaling $583,000 and an
increase of $252,000 in general and administrative expenses. These decreases to
net income were partially offset by an increase of $7.1 million in total other
income, a net increase of $5.9 million in net interest income and a reduction in
the provision for income taxes totaling $4.9 million.
Net Interest Income:
- --------------------
Net interest income was $42.6 million for both the three months ended March 31,
1997, and the three months ended March 31, 1996. Net interest income was $125.2
million for the nine months ended March 31, 1997, compared to $119.3 million for
the nine months ended March 31, 1996, resulting in an increase of $5.9 million,
or 5.0%. The interest rate spread was 2.46% at March 31, 1997, compared to
2.52% at March 31, 1996, a decrease of six basis points. During the three
months ended March 31, 1997 and 1996, interest rate spreads were 2.38% and
2.45%, respectively, a decrease of seven basis points. The interest rate
spreads were lower for the current fiscal year quarter compared to the prior
fiscal year period primarily due to a decrease of 25 basis points in the total
yield on loans partially offset by an improvement of four basis points in rates
on total interest-bearing liabilities. Interest rate spreads increased ten basis
points from 2.31% to 2.41% during the nine months ended March 31, 1997, compared
to March 31, 1996. The sale of approximately $230.8 million of securities
available-for-sale during the last six months of fiscal year 1996 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),
the general reduction in interest rates on interest-bearing liabilities ( 5.32%
for the nine months ended March 31, 1997, compared to 5.46% for the nine months
ended March 31, 1996) and the acquisitions of Conservative effective February 1,
1996, and Heritage effective October 1, 1996, have improved the interest rate
spreads and yields for the current fiscal year period compared to the prior
fiscal year period. The future trend in interest rate spreads and net interest
income will be dependent upon such factors as the composition and size of the
Corporation's interest-earning assets and interest-bearing liabilities, the
interest rate risk exposure of the Corporation, and the maturity and repricing
activity of interest-sensitive assets and liabilities, as influenced by changes
in and levels of both short-term and long-term market interest rates.
17
Net Interest Income (Continued):
- --------------------------------
The following table presents certain information concerning yields earned on
interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the periods presented.
For the Three For the Nine
Months Ended Months Ended At
March 31, March 31, March 31,
-------------- ------------ ------------
1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ----
Weighted average yield on:
Loans 8.06% 8.31% 8.13% 8.30% 8.10% 8.23%
Mortgage-backed securities 6.44 6.43 6.53 6.45 6.69 6.73
Investments 6.26 6.09 6.30 6.09 6.56 6.00
---- ---- ---- ---- ---- ----
Interest-earning assets 7.69 7.80 7.73 7.77 7.78 7.82
---- ---- ---- ---- ---- ----
Weighted average rate paid on:
Savings deposits 3.12 2.89 3.10 2.73 3.20 2.85
Other time deposits 5.72 5.87 5.73 6.19 5.71 5.83
Advances from FHLB 5.80 5.70 5.72 5.81 5.85 5.67
Securities sold under agreements
to repurchase 6.03 7.09 6.15 7.03 6.02 7.09
Other borrowings 8.29 10.94 9.51 10.86 8.28 11.00
---- ---- ---- ---- ---- ----
Interest-bearing liabilities 5.31 5.35 5.32 5.46 5.32 5.30
---- ---- ---- ---- ---- ----
Interest rate spread 2.38% 2.45% 2.41% 2.31% 2.46% 2.52%
==== ==== ==== ==== ==== ====
Net annualized yield on
interest-earning assets 2.61% 2.70% 2.58% 2.52% 2.61% 2.74%
- -------------------------------------------------------------------------------------------
18
Net Interest Income (Continued):
- --------------------------------
The following table presents average interest-earning assets and average
interest-bearing liabilities, interest income and interest expense and average
yields and rates during the three and nine months ended March 31, 1997. The
table below includes nonaccruing loans averaging $41.2 million and $40.1
million, respectively, for the three and nine months ended March 31, 1997, as
interest-earning assets at a yield of zero percent.
Three Months Ended Nine Months Ended
March 31, 1997 March 31, 1997
------------------------------- ----------------------------------
Annualized Annualized
Average Yield/ Average Yield/
(Dollars in Thousands) Balance Interest Rate Balance Interest Rate
- ---------------------- ------- -------- ---------- ------- -------- ----------
Interest-earning assets:
Loans $5,073,915 $102,101 8.06% $4,975,419 $302,902 8.13%
Mortgage-backed securities 1,096,698 17,668 6.44 1,146,175 56,095 6.53
Investments 361,884 5,667 6.26 359,416 16,972 6.30
---------- -------- ---- ---------- -------- ----
Interest-earning assets 6,532,497 125,436 7.69 6,481,010 375,969 7.73
---------- -------- ---- ---------- -------- ----
Interest-bearing liabilities:
Savings deposits 1,188,858 9,144 3.12 1,166,816 27,161 3.10
Other time deposits 3,228,410 45,492 5.72 3,221,822 138,549 5.73
Advances from FHLB 1,141,770 16,332 5.80 1,224,408 52,586 5.72
Securities sold under
agreements to repurchase 666,088 10,033 6.03 568,263 26,580 6.15
Other borrowings 87,453 1,813 8.29 82,478 5,882 9.51
---------- -------- ---- ---------- -------- ----
Interest-bearing liabilities 6,312,579 82,814 5.31 6,263,787 250,758 5.32
---------- -------- ---- ---------- -------- ----
Net earnings balance $ 219,918 $ 217,223
========== ==========
Net interest income $ 42,622 $125,211
======== ========
Interest rate spread 2.38% 2.41%
==== ====
Net annualized yield on
interest-earnings assets 2.61% 2.58%
==== ====
- -------------------------------------------------------------------------------------------------------------------
During the three and nine months ended March 31, 1997, the Corporation
experienced lower costs on interest-bearing liabilities primarily due to
decreases in the interest rate offered on certain types of deposit products and
decreases in interest rates primarily on securities sold under agreements to
repurchase and other borrowings. The net earnings balance (the difference
between average interest-bearing liabilities and average interest-earning
assets) decreased by $62.5 million and $58.5 million, respectively, for the
three and nine months ended March 31, 1997, compared to the three and nine
months ended March 31, 1996, primarily due to cash outlays totaling (i)
approximately $51.7 million for federal and state tax liabilities principally
paid in June 1996 associated with taxable income recognized from the final
disposition of a subsidiary's interest in a nuclear generating facility in
February 1996, and (ii) approximately $51.2 million for the Corporation's
repurchase of its common stock during the first quarter of this fiscal year.
The effects of these decreases were partially offset by improvements from the
acquisitions of Conservative and Heritage (both of which were partially paid for
through the issuance of common stock).
19
Net Interest Income (Continued):
- --------------------------------
The following table presents the dollar amount of changes in interest income and
expense for each major component of interest-earning assets and interest-bearing
liabilities, respectively, and the amount of change in each attributable to: (i)
changes in volume (change in volume multiplied by prior year rate), and (ii)
changes in rate (change in rate multiplied by prior year volume). The net
change attributable to change in both volume and rate, which cannot be
segregated, has been allocated proportionately to the change due to volume and
the change due to rate. The table demonstrates the effect of the increased
volume of interest-earning assets and interest-bearing liabilities, the
decreasing interest rates and the effect on the interest rate spreads previously
discussed.
- --------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, 1997 Compared March 31, 1997 Compared
to March 31, 1996 to March 31, 1996
-------------------------- -----------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- -----------------------------
(In Thousands) Volume Rate Net Volume Rate Net
- -------------- ------ ---- --- ------ ---- ---
Interest Income:
Loans $ 8,500 $(3,434) $ 5,066 $ 23,230 $ (6,289) $ 16,941
Mortgage-backed securities (2,285) 49 (2,236) (8,324) 706 (7,618)
Investments (463) 170 (293) (1,824) 512 (1,312)
------- ------- ------- -------- -------- --------
Interest income 5,752 (3,215) 2,537 13,082 (5,071) 8,011
------- ------- ------- -------- -------- --------
Interest expense:
Savings deposits 376 615 991 (906) 3,204 2,298
Other time deposits 1,829 (1,393) 436 14,223 (10,769) 3,454
Advances from FHLB (6,341) 389 (5,952) (19,617) (1,078) (20,695)
Securities sold under
agreements to repurchase 7,384 (558) 6,826 17,689 (1,470) 16,219
Other borrowings 635 (460) 175 1,498 (689) 809
------- ------- ------- -------- -------- --------
Interest expense 3,883 (1,407) 2,476 12,887 (10,802) 2,085
Net effect on net interest income $ 1,869 $(1,808) $ 61 $ 195 $ 5,731 $ 5,926
======= ======= ======= ======== ======== ========
Provision for Loan Losses and Real Estate Operations:
- -----------------------------------------------------
The Corporation recorded loan loss provisions totaling $2.4 million and $6.1
million, respectively, for the three and nine months ended March 31, 1997,
compared to $1.5 million and $4.6 million, respectively, for the three and nine
months ended March 31, 1996. The loan loss provisions increased over the
respective periods due primarily to the addition of general reserves recorded in
the second and third quarters of this fiscal year recorded to cover consumer
loan losses. The allowance for loan losses is based upon management's continuous
evaluation of the collectibility of outstanding loans, which takes into
consideration such factors as changes in the composition of the loan portfolio
and current economic conditions that may affect the borrower's ability to pay,
regular examinations by the Corporation's credit review group of specific
problem loans and of the overall portfolio quality and real estate market
conditions in the Corporation's lending areas.
The Corporation recorded a net loss from real estate operations of $156,000 for
the three months ended March 31, 1997 and net income of $978,000 for the nine
months ended March 31, 1997, compared to net income of $222,000 and $391,000,
respectively, for the three and nine months ended March 31, 1996. Real estate
operations reflect provisions for real estate losses, net real estate operating
activity, and gains and losses on dispositions of real estate The decline in
real estate operations for the three months ended March 31, 1997 compared to the
three months ended March 31, 1996, is primarily due to the net gain on sales of
residential real estate properties in the prior fiscal year quarter totaling
$510,000 compared to $201,000 in the current fiscal year quarter. The
improvement in real estate operations for the nine months ended March 31, 1997,
compared to the respective prior fiscal year nine months is primarily due to the
recognized gain on sale of two commercial properties totaling approximately $1.1
million recorded in the current fiscal year second quarter.
20
Provision for Loan Losses and Real Estate Operations (Continued):
- -----------------------------------------------------------------
Nonperforming assets are monitored closely on a regular basis by the
Corporation's internal credit review and asset workout groups. Nonperforming
assets increased $3.0 million at March 31, 1997, compared to June 30, 1996,
resulting from net increases of $2.2 million in nonperforming loans and $3.5
million in real estate partially offset by a net decrease of $2.7 million in
troubled debt restructurings. Nonperforming assets as of the dates indicated are
summarized below:
- -------------------------------------------------------------------------------------------
March 31, June 30, March 31,
(Dollars in Thousands) 1997 1996 1996
- -------------------------------------------------------------------------------------------
Nonperforming loans:
Residential real estate $35,951 $34,660 $36,021
Commercial real estate 1,912 2,357 3,116
Consumer 2,266 888 789
------- ------- -------
Total 40,129 37,905 39,926
------- ------- -------
Real estate:
Commercial 9,081 8,850 9,029
Residential 8,227 4,986 3,033
------- ------- -------
Total 17,308 13,836 12,062
------- ------- -------
Troubled debt restructurings:
Commercial 11,226 13,894 14,112
Residential 837 909 1,151
------- ------- -------
Total 12,063 14,803 15,263
------- ------- -------
Total nonperforming assets $69,500 $66,544 $67,251
======= ======= =======
Nonperforming loans to total loans .77% .77% .81%
Nonperforming assets to total assets 1.01% 1.01% 1.02%
Allowance for loan losses:
Other loans (1) $38,017 $36,513 $36,352
Bulk purchased loans (2) 11,288 12,765 13,361
------- ------- -------
Total $49,305 $49,278 $49,713
======= ======= =======
Allowance for loan losses to total loans .94% .99% 1.01%
Allowance for loan losses to total nonperforming assets 70.94% 74.05% 73.92%
- -------------------------------------------------------------------------------------------
(1) Includes $80,000, $78,000, and $409,000, at March 31, 1997, June 30, 1996,
and March 31, 1996, respectively, in general allowance for losses
established primarily to cover risks associated with borrowers'
delinquencies and defaults on loans held for sale.
(2) Represents the allowance for loan losses for single-family residential whole
loans purchased between January 1991 and June 30, 1992 (bulk purchased
loans), which had been allocated from the amount of net discounts associated
with the Corporation's purchase of these loans to provide for the credit
risk associated with such bulk purchased loans. These bulk purchased loans
had principal balances of $516.8 million, $574.4 million, and $604.6
million, respectively, at March 31, 1997, June 30, 1996, and March 31, 1996.
These allowances are available only to absorb losses associated with
respective bulk purchased loans and are not available to absorb losses from
other loans.
21
Provision for Loan Losses and Real Estate Operations (Continued):
- -----------------------------------------------------------------
The ratio of nonperforming loans to total loans was .77% at March 31, 1997,
based on loan balances of $5.230 billion, compared to .77% and .81%,
respectively, at June 30, 1996, and March 31, 1996, based on respective loan
balances approximating $4.955 billion and $4.921 billion. The ratio of
nonperforming assets to total assets was 1.01% at March 31, 1997 (compared to
1.01% and 1.02% at June 30, 1996 and March 31, 1996, respectively). Ratios for
both nonperforming loans to total loans and nonperforming assets to total assets
remain unchanged compared to June 30, 1996, and improved compared to March 31,
1996 primarily due to net increases in total loans compared to the respective
periods. The ratios for allowance for loan losses to total loans and to total
nonperforming assets decreased compared to June 30, 1996, and March 31, 1996,
primarily due to net increases in total loans and in total nonperforming assets,
respectively.
Nonperforming loans at March 31, 1997, increased by $2.2 million compared to
June 30, 1996, primarily due to net increases in delinquent consumer loans
totaling $1.4 million and delinquent residential construction loans totaling
$1.4 million. These increases were partially offset by net decreases in
delinquent commercial real estate loans totaling $445,000 and delinquent
residential real estate loans totaling $135,000. The net increase in real
estate of $3.5 million at March 31, 1997, compared to June 30, 1996, is
primarily due to the addition of residential and commercial real estate totaling
$11.2 million and $2.0 million, respectively, partially offset by the
disposition of certain residential and commercial real estate properties
totaling $8.2 million and $1.7 million, respectively. The net decrease of $2.7
million in troubled debt restructurings at March 31, 1997, compared to June 30,
1996, is primarily attributable to the payoff of three loans.
Loan Servicing Fees:
- --------------------
Fees from loans serviced for other institutions totaled $7.9 million and $22.6
million, respectively, for the three and nine months ended March 31, 1997,
compared to $7.4 million and $20.7 million, respectively, for the three and nine
months ended March 31, 1996. The increases comparing the respective periods are
primarily due to increases in the size of the Corporation's loan servicing
portfolio. At March 31, 1997, and 1996, the Corporation's mortgage servicing
portfolio approximated $6.004 billion and $5.773 billion, respectively.
The value of the Corporation's loan servicing portfolio increases as mortgage
interest rates rise and loan prepayments decrease. It is expected that income
generated from the Corporation's loan servicing portfolio will increase in such
an environment. However, this positive effect on the Corporation's income is
offset, in part, by a decrease in additional servicing fee income attributable
to new loan originations, which historically decrease in periods of higher, or
increasing, mortgage interest rates, and by an increase in expenses from loan
production costs since a portion of such costs cannot be deferred due to lower
loan originations. Conversely, the value of the Corporation's loan servicing
portfolio will decrease as mortgage interest rates decline.
Retail Fees and Charges:
- ------------------------
Retail fees and charges totaled $4.0 million and $11.9 million, respectively,
for the three and nine months ended March 31, 1997, compared to $3.4 million and
$9.1 million, respectively, for the three and nine months ended March 31, 1996.
The net increases of $614,000 and $2.8 million, respectively, primarily result
from increases in certain checking account fees and related ancillary fees for
overdraft and insufficient funds charges and net VISA check card fees from the
Corporation's increased retail customer deposit base, both in number of accounts
and dollar amounts, over the same respective periods.
Gain (Loss) on Sales of Loans:
- ------------------------------
The Corporation sold loans to third parties through its mortgage banking
operations resulting in net pre-tax gains of $92,000 and $219,000, respectively,
on loans sold totaling $155.7 million and $501.2 million, respectively, for the
three and nine months ended March 31, 1997, compared to net pre-tax losses of
$136,000 for the three months ended March 31, 1996, and net pre-tax gains of
$34,000 for the nine months ended March 31, 1996, on loans sold totaling $148.4
million and $482.3 million, respectively. Mortgage loans are generally sold in
the secondary market with loan servicing retained and without recourse to the
Corporation. The net gains are attributable to the relatively stable interest
rate environment over the respective periods.
22
Other Operating Income:
- -----------------------
Other operating income totaled $2.9 million and $7.3 million, respectively, for
the three and nine month periods ended March 31, 1997, compared to $1.9 million
and $5.8 million, respectively, for the three and nine months ended March 31,
1996. The major components of other operating income are from brokerage,
insurance and credit life and disability commissions which increased $364,000,
$144,000 and $211,000, respectively, for the three months ended March 31, 1997,
compared to March 31, 1996, and $790,000, $626,000 and $193,000, respectively,
for the nine months ended March 31, 1997, compared to March 31, 1996. The year-
to-date increases were partially offset by a net gain recorded on the sale of
loan servicing rights which totaled $452,000 for the nine months ended March 31,
1996, of which all such sales activity was from the former Railroad Savings Bank
prior to acquisition which have been combined under the pooling of interests
accounting treatment.
General and Administrative Expenses:
- ------------------------------------
General and administrative expenses, excluding the $27.1 million Federal deposit
insurance special assessment, totaled $27.4 million and $85.1 million,
respectively, for the three and nine months ended March 31, 1997, compared to
$28.4 million and $84.9 million, respectively, for the three and nine months
ended March 31, 1996. The net decrease of $955,000 for the three months ended
March 31, 1997, compared to the three months ended March 31, 1996, was primarily
due to net decreases of $1.8 million in regulatory insurance and assessments and
$175,000 in other operating expenses partially offset by net increases in
advertising of $439,000, occupancy and equipment of $474,000 and compensation
and benefits of $125,000.
The net increase of $252,000 comparing the nine months ended March 31, 1997, to
the nine months ended March 31, 1996, was primarily due to net increases of $1.2
million in advertising and $1.2 million in occupancy and equipment offset by net
decreases of $1.9 million in regulatory insurance and assessments, $115,000 in
other operating expenses and $99,000 in compensation and benefits.
The net decrease of $955,000 for the three months ended March 31, 1997, compared
to March 31, 1996, is due primarily to decreases in regulatory insurance expense
totaling $1.8 million from reduced deposit insurance premiums (from a rate of
.23% of insured deposits for the third quarter of last fiscal year to .064% of
insured deposits beginning January 1, 1997) and nonrecurring expenses associated
with the Railroad merger and the 1995 proxy contest recorded last fiscal year
quarter totaling $131,000. Partially offsetting the effect of these changes are
net increases in general and administrative expenses recorded this current
fiscal year quarter from acquisitions totaling $518,000 and net increases in
marketing costs for checking accounts and related products and consumer loans
totaling $439,000. The net increases in general and administrative expenses
totaling $518,000 resulting from the acquisitions of Conservative and Heritage
result from increased personnel wages and benefits and costs of operating
additional branches. Other expenses were also incurred on an indirect basis
attributable to these acquisitions.
The net increase of $252,000 in general and administrative expenses, excluding
the deposit insurance special assessment, for the nine months ended March 31,
1997, compared to the nine months ended March 31, 1996, is primarily
attributable to the nonrecurring expenses associated with the repurchase of
1,875,150 shares of the Corporation's common stock totaling $2.3 million, net
acquisitions growth totaling $2.0 million, net increases in expenses associated
with mortgage loan production costs totaling $1.5 million, increased marketing
costs for checking accounts and related products and consumer loans totaling
$1.2 million, increased data processing costs totaling $682,000 and operating
expenses from the addition of three branches and customer-related software.
Offsetting these increases are the nonrecurring expenses incurred during the
nine months ended March 31, 1996, related to the Railroad merger and the 1995
proxy contest totaling $4.4 million, the deferral of consumer loan production
costs totaling $1.7 million and a reduction in regulatory insurance and
assessments costs totaling $1.9 million due primarily to the deposit insurance
rate reductions of insured deposits.
23
Amortization of Goodwill and Core Value of Deposits:
- ----------------------------------------------------
Amortization of goodwill and core value of deposits totaled $2.7 million and
$7.9 million, respectively, for the three and nine months ended March 31, 1997,
compared to $2.5 million and $6.9 million, respectively, for the three and nine
months ended March 31, 1996. The net increases of $241,000 and $966,000,
respectively, for the three and nine months ended March 31, 1997, compared to
the prior fiscal year periods are due to the amortization of core value of
deposits and goodwill resulting from the Conservative acquisition consummated
February 1, 1996, and the Heritage acquisition consummated October 1, 1996.
Provision for Income Taxes:
- ---------------------------
For the three and nine months ended March 31, 1997, the provision for income
taxes totaled $8.7 million and $14.5 million, respectively, compared to $6.6
million and $19.4 million, respectively, for the three and nine months ended
March 31, 1996. The effective income tax rates for the three and nine months
ended March 31, 1997, were 35.0% and 34.5%, respectively, compared to 28.7% and
33.0%, respectively, for the three and nine months ended March 31, 1996. The
effective tax rates for both periods vary from the federal statutory rate
primarily due to the nondeductibility of amortization of goodwill and core value
of deposits, and certain merger and acquisition costs, in relation to the level
of taxable income for the respective periods. An income tax benefit
approximating $1.0 million recognized in the third quarter ended March 31, 1996,
as the financial accounting effect from a leveraged lease settlement reduced the
1996 tax provision accordingly.
Extraordinary Items - Loss on Early Retirement of Debt:
- -------------------------------------------------------
In December 1996, the Corporation recognized an extraordinary loss of $583,000
(net of income tax benefit totaling $316,000), or $.03 loss per share, as a
result of the early retirement of debt. The extraordinary loss consisted
primarily of the write-off of the associated premiums and costs associated with
the issuance and redemption of such debt. Proceeds from the issuance of $50.0
million of 7.95% fixed rate subordinated extendible notes due December 1, 2006,
allowed the Corporation to redeem on December 27, 1996, its $40.25 million
10.25% subordinated debt due December 15, 1999, and its $6.9 million 10.0%
senior notes due January 31, 1999. In addition, on December 13, 1996, the
Corporation refinanced its $28.0 million short-term promissory note due January
31, 1997, with a new five-year term note due December 31, 2001. See Note C for
additional information regarding these notes.
24
PART 11. OTHER INFORMATION
--------------------------
Item 5. Other Information
-----------------
Effective May 14, 1997 the Corporation, through CFC Preferred Trust
(Issuer), a special-purpose Delaware trust subsidiary of the
Corporation, sold 1,800,000 shares (issue price of $25.00 per share)
totaling $45,000,000 of fixed-rate 9.375% cumulative trust preferred
securities (Capital Securities) which are fully and unconditionally
guaranteed by the Corporation. Also effective May 14, 1997, the
Corporation acquired all of the beneficial ownership interest of the
Issuer by purchasing common securities of the Issuer (Common
Securities) for $1,391,775. The Issuer, on May 14, 1997, invested the
total proceeds of $46,391,775 it received in 9.375% junior subordinated
deferrable interest debentures (Debentures) issued by the Corporation.
Interest paid on the Debentures will be distributed to the holders of
the Capital Securities and to the Corporation as holder of Common
Securities. As a result, under current tax law, distributions to the
holders of the Capital Securities will be tax deductible for the
Corporation.
The distribution rate payable on the Capital Securities is cumulative,
accrues from and including the date of issuance of the Capital
Securities, and is payable quarterly in arrears commencing on September
30, 1997. The Corporation has the right, subject to events of default,
at any time, to defer payments of interest on the Debentures by
extending the interest payment period thereon for a period not
exceeding 20 consecutive quarters with respect to each deferral period,
provided that no extension period may extend beyond the redemption or
maturity date of the Debentures.
The Capital Securities are subject to mandatory redemption upon
repayment of the Debentures. The Debentures mature on May 15, 2027,
which date may be shortened to a date not earlier than May 15, 2002, if
certain conditions (as defined) are met. The Corporation has the right
at any time to terminate the Issuer and cause the Debentures to be
distributed to holders of Capital Securities in liquidation of the
Issuer, all subject to the Corporation having received prior approval
of the Federal Reserve to do so if then required under applicable
capital guidelines or policies of the Federal Reserve.
Since all of the proceeds of the sale of the Capital Securities were
invested by the Issuer in the Debentures, the Corporation paid the
underwriting commission totaling $1,417,500. Other expenses associated
with the offering are estimated to approximate $275,000. The
Corporation intends that the proceeds from the sale of the Debentures
will be used for general corporate purposes including, without
limitation, possible future acquisitions, funding investments in, or
extensions of credit to, the Corporation's subsidiaries, repayment of
obligations and redemption of securities. Pending such uses, the
proceeds have been invested in short-term investment-grade securities.
For financial reporting purposes, the Issuer will be treated as a
subsidiary of the Corporation and, accordingly, the accounts of the
Issuer will be included in the consolidated financial statements of the
Corporation. The Capital Securities will be presented as a separate
line item in the Consolidated Statement of Financial Condition of the
Corporation before the Stockholders' Equity section under the separate
caption "Company Obligated Mandatorily Redeemable Preferred Securities
of Subsidiary Trust Holding Solely Junior Subordinated Debentures" and
appropriate disclosures about the Capital Securities, the guarantee and
the Debentures will be included in the notes to the consolidated
financial statements. For financial reporting purposes, the Corporation
will record distributions payable on the Capital Securities as minority
interest expense, net of related tax benefit, in the Consolidated
Statement of Operations. The Capital Securities would qualify as Tier 1
capital of the Corporation should the Corporation become subject to the
Federal Reserve capital requirements for bank holding companies. As a
savings and loan holding company, the Corporation is currently not
subject to Federal Reserve capital requirements for bank holding
companies.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). Exhibits:
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedules (EDGAR)
(b). Reports on Form 8-K:
No Current Reports on Form 8-K were filed during the quarter
ended March 31, 1997.
25
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMERCIAL FEDERAL CORPORATION
------------------------------
(Registrant)
Date: May 15, 1997 /s/ James A. Laphen
------------ ----------------------------------------------
James A. Laphen, President, Chief
Operating Officer and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
Date: May 15, 1997 /s/ Gary L. Matter
------------ ----------------------------------------------
Gary L. Matter, Senior Vice President,
Controller and Secretary
(Principal Accounting Officer)
26
EXHIBIT INDEX
-------------
Page Number
-----------
Exhibit 11. Computation of Earnings Per Share 28
Exhibit 27. Financial Data Schedules (EDGAR only) --
27