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, 1999
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 1-11515
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COMMERCIAL FEDERAL CORPORATION
__________________________________
(Exact name of registrant as specified in its charter)
NEBRASKA 47-0658852
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(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification Number)
2120 SOUTH 72ND STREET, OMAHA, NEBRASKA 68124
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(Address of principal executive offices) (Zip Code)
(402) 554-9200
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO ___________
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 10, 1999
- ----------------------------- ---------------------------
Common Stock, $0.01 Par Value 60,594,383 Shares
COMMERCIAL FEDERAL CORPORATION
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FORM 10-Q
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INDEX
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PART I. FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements:
Consolidated Statement of Financial Condition as of
March 31, 1999 and June 30, 1998 3
Consolidated Statement of Operations for the Three
and Nine Months Ended March 31, 1999 and 1998 4-5
Consolidated Statement of Comprehensive Income for the
Three and Nine Months Ended March 31, 1999 and 1998 6
Consolidated Statement of Cash Flows for the Nine
Months Ended March 31, 1999 and 1998 7-8
Notes to Consolidated Financial Statements 9-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-28
Item 3. Quantitative and Qualitative Disclosure About Market
Risk 29-30
PART II. OTHER INFORMATION
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Item 5. Other Information 31
Item 6. Exhibits and Reports on Form 8-K 31
SIGNATURE PAGE 32
EXHIBIT INDEX 33
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2
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
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(Dollars in Thousands) March 31, June 30,
ASSETS 1999 1998
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(Unaudited) (Unaudited)
Cash (including short-term investments of $15,802 and $62,886) $ 208,127 $ 217,012
Investment securities available for sale, at fair value 131,517 141,116
Mortgage-backed securities available for sale, at fair value 441,824 171,393
Loans held for sale, net 348,947 290,380
Investment securities held to maturity (fair value of $830,909 and $533,078) 835,305 532,188
Mortgage-backed securities held to maturity (fair value of $889,657 and $922,042) 888,284 920,456
Loans and leases receivable, net of allowances of $81,867 and $64,660 9,130,269 7,566,896
Federal Home Loan Bank stock 191,276 131,132
Interest receivable, net of allowances of $497 and $201 77,825 66,353
Real estate, net 32,949 22,195
Premises and equipment, net 182,154 134,951
Prepaid expenses and other assets 155,019 127,971
Intangible assets, net of accumulated amortization of $45,402 and $33,558 243,047 77,186
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Total Assets $12,866,543 $10,399,229
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Liabilities:
Deposits $ 7,721,529 $ 6,558,207
Advances from Federal Home Loan Bank 3,709,348 2,379,182
Securities sold under agreements to repurchase 163,961 334,294
Other borrowings 172,007 110,674
Interest payable 47,401 36,261
Other liabilities 70,079 119,416
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Total Liabilities 11,884,325 9,538,034
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Commitments and Contingencies -- --
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Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 120,000,000 shares authorized;
60,917,306 and 58,714,826 shares issued and outstanding 609 587
Additional paid-in capital 398,134 337,697
Retained earnings 585,543 534,245
Unearned Employee Stock Ownership Plans (ESOP) shares -- (11,404)
Accumulated other comprehensive income (loss), net (2,068) 70
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Total Stockholders' Equity 982,218 861,195
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Total Liabilities and Stockholders' Equity $12,866,543 $10,399,229
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See accompanying Notes to Consolidated Financial Statements.
3
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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(Dollars in Thousands Except Per Share Data) Three Months Ended Nine Months Ended
March 31, March 31,
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1999 1998 1999 1998
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Interest Income:
Loans and leases receivable $179,283 $154,798 $520,335 $462,027
Mortgage-backed securities 20,407 20,595 56,353 62,784
Investment securities 16,382 14,180 41,960 42,560
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Total interest income 216,072 189,573 618,648 567,371
Interest Expense:
Deposits 79,122 77,869 241,706 237,032
Advances from Federal Home Loan Bank 43,730 29,955 112,748 88,399
Securities sold under agreements to repurchase 2,335 7,446 10,211 25,074
Other borrowings 3,443 2,840 10,506 9,142
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Total interest expense 128,630 118,110 375,171 359,647
Net Interest Income 87,442 71,463 243,477 207,724
Provision for Loan and Lease Losses (2,800) (2,817) (9,600) (10,464)
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Net Interest Income After Provision for Loan and Lease Losses 84,642 68,646 233,877 197,260
Other Income (Loss):
Loan servicing fees 8,615 8,768 25,870 26,495
Retail fees and charges 8,912 7,328 27,834 22,045
Real estate operations (772) (178) (1,151) 1,701
Gain (loss) on sales of loans (65) 363 3,514 1,365
Gain on sales of securities 948 467 4,255 2,775
Other operating income 6,032 5,180 18,309 18,824
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Total other income 23,670 21,928 78,631 73,205
Other Expense:
General and administrative expenses -
Compensation and benefits 25,552 21,793 71,479 65,419
Occupancy and equipment 9,007 7,008 26,508 20,739
Data processing 2,969 7,204 8,112 13,021
Regulatory insurance and assessments 1,462 1,255 4,341 3,800
Advertising 3,299 3,099 10,547 9,393
Other operating expenses 13,461 13,435 37,047 36,046
Merger expenses 13,954 11,471 29,917 12,724
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Total general and administrative expenses 69,704 65,265 187,951 161,142
Amortization of intangible assets 4,376 2,033 11,844 5,571
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Total other expense 74,080 67,298 199,795 166,713
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Income Before Income Taxes 34,232 23,276 112,713 103,752
Provision for Income Taxes 18,063 9,648 50,195 38,714
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Net Income $ 16,169 $ 13,628 $ 62,518 $ 65,038
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4
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(UNAUDITED)
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(Dollars in Thousands Except Per Share Data) Three Months Ended Nine Months Ended
March 31, March 31,
------------------------- --------------------------
1999 1998 1999 1998
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Weighted average number of common shares
outstanding used in basic earnings per share calculation 59,723,304 57,007,689 59,266,347 56,005,245
Add assumed exercise of outstanding stock options
as adjustments for dilutive securities 478,169 1,258,741 636,098 1,322,630
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Weighted average number of common shares
outstanding used in diluted earnings per share calculation 60,201,473 58,266,430 59,902,445 57,327,875
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Earnings per common share:
Basic $ .27 $ .24 $ 1.05 $ 1.16
=========== =========== =========== ===========
Diluted $ .27 $ .23 $ 1.04 $ 1.13
=========== =========== =========== ===========
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Dividends declared per common share $ .065 $ .055 $ .185 $ .157
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See accompanying Notes to Consolidated Financial Statements.
5
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
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(Dollars in Thousands) Three Months Ended Nine Months Ended
March 31, March 31,
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1999 1998 1999 1998
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Net Income $16,169 $ 13,628 $62,518 $65,038
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale
arising during periods (3,161) (1,179) 966 2,875
Less reclassification adjustment for net gains included in net income (948) (467) (4,255) (2,775)
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(4,109) (1,646) (3,289) 100
Income tax provision (benefit) (1,438) (576) (1,151) 35
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Other comprehensive income (loss) (2,671) (1,070) (2,138) 65
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Comprehensive Income $13,498 $ 12,558 $60,380 $65,103
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See accompanying Notes to Consolidated Financial Statements.
6
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
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(Dollars in Thousands) Nine Months Ended
March 31,
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1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 62,518 $ 65,038
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization of intangible assets 11,844 5,571
Provision for loss on loans and leases and real estate 10,814 10,546
Depreciation and amortization 12,895 9,260
Accretion of deferred discounts and fees, net 2,373 (635)
Amortization of mortgage servicing rights 9,225 7,668
Amortization of deferred compensation on restricted
stock and deferred compensation plans and premiums on other borrowings 1,422 1,027
Termination of employee stock ownership plans 13,954 --
Gain on sales of real estate, loans and loan servicing rights, net (4,444) (4,008)
Gain on sales of securities (4,255) (2,775)
Stock dividends from Federal Home Loan Bank (7,649) (6,102)
Proceeds from the sale of loans 1,589,897 676,889
Origination of loans held for sale (474,423) (477,411)
Purchases of loans held for resale (1,163,201) (371,192)
Decrease in interest receivable 949 3,536
Decrease in interest payable and other liabilities (51,369) (13,893)
Other items, net (2,977) 1,599
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Total adjustments (54,945) (159,920)
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Net cash provided (used) by operating activities 7,573 (94,882)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of loans (1,267,991) (587,497)
Repayment of loans, net of originations 854,085 284,029
Principal repayments of mortgage-backed securities held to maturity 232,926 197,784
Purchases of mortgage-backed securities held to maturity (187,454) --
Purchases of mortgage-backed securities available for sale (446,186) (40,757)
Proceeds from sales of mortgage-backed securities available for sale 209,669 71,582
Principal repayments of mortgage-backed securities available for sale 56,673 56,687
Maturities and repayments of investment securities held to maturity 300,039 366,673
Purchases of investment securities held to maturity (613,996) (346,774)
Purchases of investment securities available for sale (33,801) (81,778)
Maturities and repayments of investment securities available for sale 134,996 23,076
Proceeds from sales of investment securities available for sale 30,152 20,148
Purchases of mortgage loan servicing rights (17,616) (9,035)
Purchases of Federal Home Loan Bank stock (51,213) (22,445)
Proceeds from sale of Federal Home Loan Bank stock 13,366 933
Proceeds from sales of real estate 12,850 17,165
Payments to acquire real estate (611) (2,639)
Acquisitions, net of cash received (88,350) 7,283
Purchases of premises and equipment, net (33,326) (8,169)
Other items, net (4,808) (8,974)
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Net cash used by investing activities (900,596) (62,708)
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7
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
(UNAUDITED)
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Dollars In Thousands
Nine Months Ended
March 31,
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1999 1998
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CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in deposits $ (144,988) $ (39,009)
Proceeds from Federal Home Loan Bank advances 1,648,055 964,280
Repayments of Federal Home Loan Bank advances (545,235) (485,398)
Proceeds from securities sold under agreements to repurchase 25,000 100,000
Repayments of securities sold under agreements to repurchase (200,000) (305,388)
Proceeds from issuances of other borrowings 85,000 11,950
Repayments of other borrowings (22,873) (63,066)
Proceeds from repayment of loans from employee stock ownership plans 11,058 --
Payments of cash dividends on common stock (13,539) (11,745)
Repurchases of common stock -- (1,886)
Issuance of common stock 43,256 4,047
Other items, net (1,596) 2,987
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Net cash provided by financing activities 884,138 176,772
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CASH AND CASH EQUIVALENTS:
Increase (decrease) in net cash position (8,885) 19,182
Balance, beginning of year 217,012 177,403
Adjustments to convert acquistions to fiscal year end -- (32,583)
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Balance, end of period $ 208,127 $ 164,002
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for -
Interest expense $ 375,204 $ 318,348
Income taxes, net 38,340 37,738
Non-cash investing and financing activities -
Loans exchanged for mortgage-backed securities 18,841 122,752
Loans transferred to real estate 13,349 5,381
Loans to facilitate the sale of real estate 128 302
Common stock issued in connection with acquisition of businesses -- 32,267
Common stock received in connection with stock options exercised, net -- (3,728)
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See accompanying Notes to Consolidated Financial Statements.
8
COMMERCIAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE NINE MONTHS ENDED MARCH 31, 1999
(UNAUDITED)
(Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts)
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A. BASIS OF CONSOLIDATION AND PRESENTATION:
----------------------------------------
The unaudited consolidated financial statements are prepared on an accrual basis
and include the accounts of Commercial Federal Corporation (the Corporation) and
its wholly-owned subsidiary, Commercial Federal Bank, a Federal Savings Bank
(the Bank), and all majority-owned subsidiaries. All significant intercompany
balances and transactions have been eliminated.
During the nine months ended March 31, 1999, the Corporation consummated the
acquisitions of AmerUs Bank (AmerUs), First Colorado Bancorp, Inc. (First
Colorado) and Midland First Financial Corporation (Midland). The accounts and
results of operations of AmerUs and Midland are reflected in the Corporation's
consolidated financial statements beginning July 31, 1998 and March 1, 1999,
respectively, since these acquisitions were accounted for as purchases. The
First Colorado acquisition was accounted for as a pooling of interests and,
accordingly, the Corporation's historical consolidated financial statements were
restated for all periods to include the accounts and results of operations of
First Colorado. See Note B for additional information regarding these
acquisitions.
Effective July 1, 1998, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 130 entitled "Reporting Comprehensive Income"
(SFAS No. 130). This statement requires disclosures of the components of
comprehensive income and the accumulated balance of other comprehensive income
within consolidated total stockholders' equity. The adoption of the provisions
of SFAS No. 130, disclosed in the Consolidated Statement of Comprehensive
Income, did not effect the Corporation's consolidated financial position,
results of operations or liquidity.
The accompanying interim consolidated financial statements have not been audited
by independent auditors. In the opinion of management, all adjustments
(consisting only of normal recurring adjustments, the required restatement of
all periods prior to the merger with First Colorado and the merger expenses and
other nonrecurring items recorded during the first nine months of fiscal year
1999) 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, 1998, Annual Report to Stockholders. The results of
operations for the three and nine month periods ended March 31, 1999, are not
necessarily indicative of the results which may be expected for the entire
fiscal year 1999. Certain amounts in the prior fiscal year periods have been
reclassified for comparative purposes.
B. CONSUMMATED ACQUISITIONS:
-------------------------
MIDLAND FIRST FINANCIAL CORPORATION. On March 1, 1999, the Corporation
consummated its acquisition of Midland, parent company of Midland Bank. Under
the terms of the agreement, the Corporation acquired in a taxable acquisition
all of the outstanding shares of Midland's common stock. The total purchase
consideration of this acquisition was $83,000,000, including cash to pay off
existing Midland debt totaling $5,550,000, the retirement of preferred stock of
both Midland and Midland Bank totaling $11,562,000 and $810,000 for advisor
fees.
Midland Bank was a privately held commercial bank headquartered in Lee's Summit,
Missouri that operated eight branches in the greater Kansas City area. At
February 28, 1999, Midland had total assets of approximately $399,231,000,
deposits of approximately $353,090,000 and stockholders' equity of approximately
$24,236,000. This acquisition was accounted for as a purchase with intangible
assets amortized for the month of March 1999. The fair value adjustments and
other purchase accounting adjustments, as well as amortization methods and
lives, is anticipated to be finalized during fiscal year 1999 pursuant to
generally accepted accounting principles. The effect of the Midland acquisition
on the Corporation's consolidated financial statements as if this acquisition
had occurred at the beginning of fiscal year 1999 is not material.
9
B. CONSUMMATED ACQUISITIONS (Continued):
-------------------------------------
FIRST COLORADO BANCORP, INC. On August 14, 1998, the Corporation consummated
its acquisition of First Colorado. Under the terms of the agreement, the
Corporation acquired in a tax-free reorganization all 18,564,766 outstanding
shares of First Colorado's common stock in exchange for 18,278,789 shares of its
common stock. Based on the Corporation's closing stock price of $26.375 at
August 14, 1998, the total consideration for this acquisition, including cash
paid for fractional shares, approximated $482,154,000. This acquisition was
accounted for as a pooling of interests.
First Colorado, headquartered in Lakewood, Colorado, was a unitary savings and
loan holding company and the parent company of First Federal Bank of Colorado, a
federally chartered stock savings bank that operated 27 branches located in
Colorado, with 23 branches located in the Denver metropolitan area and four in
Colorado's western slope region. At July 31, 1998, on a pro forma basis, First
Colorado had assets of approximately $1.6 billion, deposits of approximately
$1.2 billion and stockholders' equity of approximately $254.7 million.
The following table reconciles total interest income and other income, total
interest expense and net income previously reported by the Corporation and First
Colorado to give effect to the merger as currently presented in the financial
statements for the comparable three and nine months ended March 31, 1998,
included herein:
Corporation First Colorado Combined
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Three months ended March 31, 1998:
Total interest income and other income $182,300 $29,201 $211,501
Total interest expense 103,272 14,838 118,110
Net income 8,822 4,806 13,628
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Nine months ended March 31, 1998:
Total interest income and other income $550,868 $89,708 $640,576
Total interest expense 314,194 45,453 359,647
Net income 49,158 15,880 65,038
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Prior to its merger into the Corporation, results of operations for First
Colorado were reported on a calendar year basis. In restating prior periods, the
accounts and results of operations of First Colorado were conformed to the
Corporation's fiscal year ended June 30, 1998. Accordingly, in changing to the
Corporation's fiscal year, First Colorado's accounts and results of operations
for the six months ended June 30, 1997, including total interest income and
other income of $55,737,000, total interest expense of $29,399,000 and net
income of $8,840,000 were excluded from reported results of operations for the
restated combined companies. Such amounts, net of a cash dividend of $3,477,000,
are included in the Corporation's consolidated retained earnings of the
consolidated total stockholders' equity.
10
B. CONSUMMATED ACQUISITIONS (Continued):
-------------------------------------
AMERUS BANK. On July 31, 1998, the Corporation consummated its acquisition of
AmerUs, a wholly-owned subsidiary of AmerUs Group Co. Under the terms of the
Stock Purchase Agreement, the Corporation acquired through a taxable acquisition
all of the outstanding shares of the common stock of AmerUs for total
consideration of $178,269,000. Such consideration consisted of (i) certain
assets retained by AmerUs Group Co. in lieu of cash (primarily FHA Title One
single-family residential mortgage loans and a receivable for income tax
benefits) totaling approximately $85,027,000, (ii) cash (as adjusted per the
agreement) totaling $53,242,000, and (iii) promissory notes due July 31, 1999,
for $40,000,000 bearing interest, adjusted monthly, at 150 basis points over the
one-year Treasury bill rate.
AmerUs was a federally chartered savings bank headquartered in Des Moines, Iowa
and operated 47 branches in Iowa (26), Missouri (8), Nebraska (6), Kansas (4),
Minnesota (2) and South Dakota (1). At July 31, 1998, before purchase
accounting adjustments, AmerUs had total assets of approximately $1.3 billion,
deposits of approximately $949,700,000 and stockholder's equity of approximately
$84,800,000. This acquisition was accounted for as a purchase with purchase
accounting adjustments and intangible assets amortized for eight months through
March 31, 1999. The fair value adjustments and other purchase accounting
adjustments, as well as amortization methods and lives, will be finalized during
fiscal year 1999 pursuant to generally accepted accounting principles.
The accounts and consolidated results of operations for the nine months ended
March 31, 1999 include the results of AmerUs beginning July 31, 1998. The
following table summarizes results (for the quarter that the acquisition
consummated and the preceding fiscal year) on an unaudited consolidated pro
forma basis (including an after-tax loss of $22,504,000 from AmerUs for the
month of July 1998) as though this purchase had occurred at the beginning of
fiscal year 1998:
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Three Months Fiscal Year
Ended Ended
September 30, 1998 June 30, 1998
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Total interest income and other income $206,513 $871,127
Net income (loss) (7,975) 69,481
Diluted earnings (loss) per common share (.13) 1.67
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11
C. MERGER EXPENSES AND OTHER NONRECURRING ITEMS:
--------------------------------------------
The Corporation incurred pre-tax merger expenses and other nonrecurring items
totaling $30,043,000 for the nine months ended March 31, 1999, associated
primarily with the First Colorado acquisition and the termination of employee
stock ownership plans (ESOP) acquired in the mergers of three financial
institutions. These items are detailed below with their classification noted
parenthetically as to where such items are included in the Consolidated
Statement of Operations.
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Three Months Ended Nine Months Ended
March 31, March 31,
-------------------- -------------------
1999 1998 1999 1998
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Merger Expenses:
Termination of employee stock ownership plans $13,954 $ -- $13,954 $ --
Transaction costs relating to the combinations -- 4,740 8,015 5,993
Employee severance and other termination costs -- 5,183 1,449 5,183
Costs to combine operations -- 1,548 6,499 1,548
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13,954 11,471 29,917 12,724
Other nonrecurring items:
Additional loan loss reserves -
(provision for loan and lease losses) -- -- 1,000 2,431
Gain on sale of First Colorado branch -
(other operating income) -- -- (1,076) --
Reserves on leasing operations -
(other operating income) -- 597 -- 597
Accelerated amortization of computer systems and
software - (data processing) -- 4,314 -- 4,314
Conforming accounting practices of combining
companies - (compensation and benefits) -- 161 202 161
Conforming accounting practices of combining
companies - (other operating expenses) -- 2,364 -- 2,364
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Total merger expenses and other nonrecurring
items, before income taxes 13,954 18,907 30,043 22,591
Income tax benefit -- (5,363) (2,954) (6,755)
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Total merger expenses and other
nonrecurring items, after-tax $13,954 $13,544 $27,089 $15,836
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The Corporation recorded merger-related charges totaling $13,954,000 from the
termination of three ESOPs acquired in conjunction with three business
combinations accounted for under the pooling of interests method of accounting:
First Colorado, Mid Continent Bancshares, Inc. (Mid Continent) and Perpetual
Midwest Financial, Inc. These plans were to be terminated as soon as possible
following consummation of the mergers and receipt of determination letters from
the Internal Revenue Service to terminate such plans. During the three months
ended March 31, 1999, the related outstanding loans totaling $11,058,000
associated with these plans were repaid from the ESOP trusts to the Corporation.
The remaining amount of unallocated shares with a market value of $13,954,000 at
March 31, 1999 is expected to be distributed to plan participants by June 30,
1999.
12
D. COMMITMENTS AND CONTINGENCIES:
-----------------------------
At March 31, 1999, the Corporation issued commitments, excluding undisbursed
portions of loans in process, of approximately $879,797,000 as follows:
$334,965,000 to originate loans, $157,138,000 to purchase loans, $50,000,000 to
purchase mortgage-backed securities, $7,750,000 to purchase investment
securities and $329,944,000 to provide unused lines of credit for commercial and
consumer use. Loan commitments, which are funded subject to certain
limitations, extend over various periods of time. Generally, unused loan
commitments are canceled upon expiration of the commitment term as outlined in
each individual contract. These outstanding loan commitments to extend credit
do not necessarily represent future cash requirements since many of the
commitments may expire without being drawn upon. In addition, at March 31,
1999, the Corporation had issued commitments to sell mortgage loans and
securities totaling $502,979,000 as follows: $452,979,000 in mandatory forward
delivery commitments to sell residential mortgage loans and $50,000,000 in
commitments to sell mortgage-backed securities. Loans sold subject to recourse
provisions totaled approximately $18,232,000, which represents the total
potential credit risk associated with these particular loans. Such credit risk
would, however, be offset by the value of the single-family residential
properties which collateralize these loans.
The Corporation is subject to a number of lawsuits and claims for various
amounts which arise out of the normal course of its business. In the opinion of
management, the disposition of claims currently pending will not have a material
adverse effect on the Corporation's financial position or results of operations.
On September 12, 1994, the Bank and the Corporation 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
that 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 Bank also assumed a lawsuit in the merger
with Mid Continent against the United States also relating to a supervisory
goodwill claim filed by the former Mid Continent. The litigation status and
process of legal actions, as well as that of numerous actions brought by others
alleging similar claims with respect to supervisory goodwill and regulatory
capital credits, make the value of the claims asserted by the Bank (including
the Mid Continent claim) 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 that may be
awarded to the Bank and the Corporation if they finally prevail in this
litigation.
E. CURRENT ACCOUNTING PRONOUNCEMENTS:
----------------------------------
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION:
Effective July 1, 1998, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 131 entitled "Disclosures About Segments of
an Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 does not
need to be applied to interim statements in the initial year of application but
such comparative information will be required in interim statements for the
second year. Comparative information for earlier years will be restated in the
initial year of application. This statement supersedes SFAS No. 14, "Financial
Reporting for Segments of a Business Enterprise," and utilizes the "management
approach" for segment reporting. The management approach is based on the way
that the chief operating decision maker organizes segments within a company for
making operating decisions and assessing performance. Reportable segments are
based on any manner in which management disaggregates its company such as by
products and services, geography, legal structure and management structure.
SFAS No. 131 requires disclosures for each segment that are similar to those
required under current standards with the addition of quarterly disclosure
requirements and more specific and detailed geographic disclosures especially by
countries as opposed to broad geographic regions. This statement also requires
descriptive information about the way the operating segments were determined,
the products/services provided by the operating segments, the differences
between the measurements used in reporting segment information and those used in
the general purpose financial statements, and the changes in the measurement of
segment amounts from period to period. Such disclosure will be provided in the
Corporation's Annual Report for fiscal year ended June 30, 1999.
13
E. CURRENT ACCOUNTING PRONOUNCEMENTS (Continued):
----------------------------------------------
EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS:
Effective July 1, 1998, the Corporation adopted the provisions of Statement of
Financial Accounting Standards No. 132 entitled "Employers' Disclosures About
Pensions and Other Postretirement Benefits" (SFAS No. 132). This statement
amends Statement Nos. 87 and 88 relating to pension disclosures, and SFAS No.
106 "Employers' Accounting for Postretirement Benefits Other Than Pensions" to
disclose the effects of a one-percentage-point decrease in the assumed health
care cost trend rate as well as the required effects of a one-percentage-point
increase in the same. Restatement of disclosures for earlier periods provided
for comparable purposes is required unless the information is not readily
available, in which case the notes to financial statements should include all
available information and a description of the information not available. Such
disclosure will be provided in the Corporation's Annual Report for fiscal year
ended June 30, 1999.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133 entitled "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). This statement requires the
recognition of all derivative financial instruments as either assets or
liabilities in the statement of financial position and measurement of those
instruments at fair value. The accounting for gains and losses associated with
changes in the fair value of a derivative and the effect on the consolidated
financial statements will depend on its hedge designation and whether the hedge
is highly effective in achieving offsetting changes in the fair value or cash
flows of the asset or liability hedged. Under the provisions of SFAS No. 133,
the method that will be used for assessing the effectiveness of a hedging
derivative, as well as the measurement approach for determining the ineffective
aspects of the hedge, must be established at the inception of the hedge. The
methods must be consistent with the entity's approach to managing risk.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999, or not later than July 1, 1999, for the Corporation, with
initial application as of the beginning of any fiscal quarter that begins after
the issuance of this statement. On that initial application date, hedging
relationships must be designated anew and documented pursuant to the provisions
of this statement. Management of the Corporation does not believe that such
adoption will have a material effect on the Corporation's financial position,
liquidity or results of operations.
ACCOUNTING FOR MORTGAGE-BACKED SECURITIES RETAINED AFTER THE SECURITIZATION OF
MORTGAGE LOANS HELD FOR SALE BY A MORTGAGE BANKING ENTERPRISE:
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134 entitled "Accounting for Mortgage-Backed Securities Retained After the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise,
an amendment of FASB Statement No. 65" (SFAS No. 134). FASB Statement 65, as
amended by FASB Statements No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," and No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," requires that after the
securitization of a mortgage loan held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed security as a trading
security. SFAS No. 134 further amends Statement 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This Statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a nonmortgage banking enterprise.
The provisions of SFAS No. 134 shall be effective for the first fiscal quarter
beginning after December 15, 1998, or as of July 1, 1999 for the Corporation.
On the date that SFAS No. 134 is initially applied, an enterprise may reclassify
mortgage-backed securities and other beneficial interests retained after the
securitization of mortgage loans held for sale from the trading category, except
for those with sales commitments in place. Those securities and other interests
shall be classified based on the entity's ability and intent, on the date this
Statement is initially applied, to hold those investments. Transfers from the
trading category that result from implementing this Statement shall be accounted
for in accordance with the provisions of Statement 115. Management of the
Corporation does not believe that the adoption of SFAS No. 134 will have a
material effect on the Corporation's financial position, liquidity or results of
operations.
14
F. REGULATORY CAPITAL REQUIREMENTS:
--------------------------------
The Bank is subject to various regulatory capital requirements administered by
the Office of Thrift Supervision (OTS) and other federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory, and
possibly additional discretionary, actions by regulators that, if undertaken,
could have a direct material effect on the Corporation's financial position and
results of operations. The regulations require the Bank to meet specific
capital adequacy guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital classification is also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following tables of tangible, core and total risk-based capital. Prompt
Corrective Action provisions contained in the Federal Deposit Insurance
Corporation Improvement Act of 1991 (FDICIA) require specific supervisory
actions as capital levels decrease. To be considered well-capitalized under the
regulatory framework for Prompt Corrective Action provisions under FDICIA, the
Bank must maintain minimum Tier I leverage, Tier I risk-based and total risk-
based capital ratios as set forth in the following table. At March 31, 1999,
and June 30, 1998, the Bank exceeded the minimum requirements for the well-
capitalized category.
The following presents the Bank's regulatory capital levels and ratios relative
to its minimum capital requirements:
- -----------------------------------------------------------------------------------------------------------------------------------
As of March 31, 1999
-------------------------------------------------------------------------
Actual Capital Required Capital
--------------------------------- -----------------------------
Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
OTS capital adequacy:
Tangible capital $866,753 6.79% $191,577 1.50%
Core capital 877,854 6.87 383,488 3.00
Risk-based capital 948,280 13.32 569,605 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 877,854 6.87 639,146 5.00
Tier 1 risk-based capital 877,854 12.33 427,204 6.00
Total risk-based capital 948,280 13.32 712,006 10.00
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
As of June 30, 1998
------------------------------------------------------------------------
Actual Capital Required Capital
----------------------------- ---------------------------
Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------------
OTS capital adequacy:
Tangible capital $813,961 7.88% $154,993 1.50%
Core capital 826,686 7.99 310,278 3.00
Risk-based capital 878,363 15.49 453,593 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 826,686 7.99 517,130 5.00
Tier 1 risk-based capital 826,686 14.58 340,195 6.00
Total risk-based capital 878,363 15.49 566,992 10.00
- ----------------------------------------------------------------------------------------------------------------------------------
As of March 31, 1999, 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.
15
G. SUBSEQUENT EVENT - COMMON STOCK REPURCHASE:
------------------------------------------
Effective April 28, 1999, the Corporation's Board of Directors authorized the
repurchase of up to five percent of the Corporation's outstanding common stock
during the next 18 months. Such repurchase is expected to approximate 3,000,000
shares of common stock. Repurchases will be made at any time and in any amount,
depending upon market conditions and various other factors. Any repurchase
generally would be on the open-market, although privately negotiated
transactions are also possible. In compliance with Nebraska law, all
repurchased shares will be cancelled.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
This management's discussion and analysis of financial condition and results of
operations contains or incorporates by reference forward-looking statements that
involve inherent risks and uncertainties. The Corporation cautions readers that
a number of important factors could cause actual results to differ materially
from those in the forward-looking statements. Those factors include
fluctuations in interest rates, inflation, government regulations, the progress
of integrating acquisitions, economic conditions, adequacy of allowance for
credit losses, the costs or difficulties associated with the resolution of Year
2000 issues on computer systems greater than anticipated, technology changes and
competition in the geographic and business areas in which the Corporation
conducts its operations. These statements are based on management's current
expectations. Actual results in future periods may differ materially from those
currently expected because of various risks and uncertainties.
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, 1999, the Bank qualified as a Tier I Association, and would be permitted to
pay an aggregate amount approximating $171.4 million in dividends under these
regulations. Should the Bank's regulatory capital fall below certain levels,
applicable law would require approval by the OTS of such proposed dividends and,
in some cases, would prohibit the payment of dividends.
At March 31, 1999, cash of Commercial Federal Corporation (the parent company)
totaled $34.4 million. On November 13, 1998, the parent company partially paid
down its unsecured variable rate term note due July 31, 2003, by $8.75 million
and paid scheduled quarterly principal payments totaling $3.75 million resulting
in a remaining principal balance of $32.5 million at March 31, 1999. Due to the
parent company's limited independent operations, management believes that its
cash balance at March 31, 1999, is currently sufficient to meet operational
needs. However, the parent company's ability to make future interest and
principal payments on its $50.0 million of 7.95% fixed-rate subordinated
extendible notes due December 1, 2006 (the Notes), on its $46.4 million of
9.375% fixed-rate junior subordinated debentures due May 15, 2027 (the
Debentures), on its $40.0 million of one-year variable rate notes due July 31,
1999, and on its $32.5 million unsecured variable rate term note due July 31,
2003, is dependent upon its receipt of dividends from the Bank. Accordingly, for
the three and nine months ended March 31, 1999, dividends totaling $32.863
million and $59.109 million, respectively, were paid by the Bank to the parent
company. Such dividends from the Bank were paid primarily to cover (i) interest
payments totaling $8.139 million on all of the parent company's debt, (ii)
principal payments of $4.75 million on the parent company's variable rate term
notes (iii) the quarterly common stock cash dividends totaling $11.220 million
payable to the common stock shareholders through March 31 1999, (iv) the payment
of $10.0 million related to the acquisition of AmerUs on July 31, 1998 and (v)
the payment of $25.0 million related to the acquisition of Midland on March 1,
1999. The Bank will continue to pay dividends to the parent company, pursuant to
regulatory restrictions, to cover future principal and interest payments on the
parent company's debt and cash dividends on common stock when and as declared by
the parent company on a quarterly basis. Dividends totaling $14.002 million were
paid by the Bank to the parent company during the nine months ended March 31,
1998. The parent company also receives cash from the exercise of stock options
and the sale of common stock under its employee benefit plans, as well as from
the Bank for income tax benefits from operating losses of the parent company as
provided in the corporate tax sharing agreement.
Effective April 28, 1999, the parent company was authorized to repurchase up to
five percent of its outstanding common stock during the next 18 months. Such
repurchase is expected to approximate three million shares of common stock. The
repurchase will be financed from a combination of parent company funds, capital
distributions from the Bank and/or additional borrowings. See note G in the
Notes to the Consolidated Financial Statements for additional information on
this stock repurchase.
The Bank's primary sources of funds are (i) deposits, (ii) principal repayments
on loans, mortgage-backed and investment securities, (iii) advances from the
Federal Home Loan Bank (FHLB), (iv) cash generated from operations and (v)
securities sold under agreements to repurchase. As reflected in the
Consolidated Statement of Cash Flows, net cash flows provided by operating
activities totaled $7.6 million for the nine months ended March 31, 1999 and net
cash flows used by operating activities totaled $94.9 million for the nine
months ended March 31, 1998. 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.
17
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- --------------------------------------------
Net cash flows used by investing activities totaled $900.6 million and $62.7
million for the nine months ended March 31, 1999 and 1998, respectively.
Amounts fluctuate from period to period primarily as a result of (i) principal
repayments on loans and mortgage-backed securities and (ii) the purchase and
origination of loans, mortgage-backed and investment securities. The acquisition
of First Colorado (consummated August 14, 1998) had no material effect on
liquidity, except for the net cash outlays totaling $16.2 million relating to
nonrecurring merger related costs, since such transaction was consummated in an
exchange of common stock between the financial institutions. The acquisition of
AmerUs on July 31, 1998 resulted in a cash outlay of approximately $53.2 million
and the acquisition of Midland on March 1, 1999, resulted in a cash outlay of
$83.0 million. The acquisition of AmerUs was financed by $40.0 million of one-
year purchase notes (due July 31, 1999) from the seller bearing interest at 150
basis points over the one-year Treasury bill rate, a $10.0 million capital
distribution to the parent company from the Bank and, in part, by a $45.0
million term note borrowed by the Corporation on July 30, 1998. This note is a
five-year term note due July 31, 2003, unsecured, with quarterly principal
payments of $1.25 million and interest payable quarterly at 100 basis points
below the lender's national base rate. On November 13, 1998, this term note was
partially paid down by an additional $8.75 million, resulting in a remaining
principal balance of $32.5 million at March 31, 1999. The acquisition of
Midland was financed by parent company funds and a $25.0 million capital
distribution to the parent company from the Bank.
Net cash flows provided by financing activities totaled $884.1 million and
$176.8 million, respectively, for the nine months ended March 31, 1999 and 1998.
Advances from the FHLB, retail deposits and securities sold under agreements to
repurchase have been the primary sources to balance the Corporation's funding
needs during each of the periods presented. The Corporation experienced net
decreases in retail deposits of $145.0 million and $39.0 million, respectively,
for the nine months ended March 31, 1999 and 1998, primarily due to depositors
leaving for higher interest rates. In addition, for the nine months ended March
31, 1999, First Colorado issued 1,400,000 shares of common stock on August 14,
1998 prior to its merger with the Corporation. Such offering resulted in the
receipt of proceeds totaling $32.5 million.
The Corporation will continue to grow its franchise through an ongoing program
of selective acquisitions of other financial institutions, as well as through
internal growth. The Corporation has considered and will continue to consider
possible mergers with and acquisitions of other selected financial institutions.
During the nine months ended March 31, 1999, the Corporation consummated the
acquisitions of AmerUs, First Colorado and Midland. See Note B in the Notes to
the Consolidated Financial Statements for additional information on these
completed acquisitions. Such acquisitions present the Corporation with the
opportunity to further expand its community banking retail network in its
existing markets; and to increase its earnings potential by increasing its
mortgage, consumer and commercial loan volumes funded primarily by deposits
which generally bear lower rates of interest than alternative sources of funds
and by lower costing callable FHLB advances. Acquisition candidates are selected
based on the extent to which the candidate can enhance the Corporation's retail
presence in new or existing markets and complement the Corporation's present
retail network.
18
LIQUIDITY AND CAPITAL RESOURCES (Continued):
- --------------------------------------------
At March 31, 1999, the Corporation issued commitments totaling approximately
$879.8 million to fund and purchase loans, mortgage-backed and investment
securities as follows: $421.5 million of single-family fixed-rate mortgage
loans, $40.7 million of single-family adjustable-rate mortgage loans, $329.9
million of unused lines of credit for commercial and consumer use, $29.9 million
of commercial real estate loans, $50.0 million of mortgage-backed securities
and $7.8 million of investment securities. These outstanding loan commitments
to extend credit in order to originate loans or fund commercial and consumer
loan lines of credit do not necessarily represent future cash requirements since
many of the commitments may expire without being drawn. The Corporation expects
to fund these commitments, as necessary, from the sources of funds previously
described. In addition, at March 31, 1999, the Corporation had approximately
$453.0 million in mandatory forward delivery commitments to sell residential
mortgage loans and $50.0 million in commitments to sell mortgage-backed
securities.
The maintenance of an appropriate level of liquid resources to meet not only
regulatory requirements but also to provide funding necessary to meet the
Corporation's current business activities and obligations is an integral element
in the management of the Corporation's assets. The Bank is required by federal
regulation to maintain a minimum average daily balance of cash and certain
qualifying liquid investments equal to 4.0% of the aggregate of the prior
month's daily average savings deposits and short-term borrowings. The Bank's
liquidity ratio was 11.23 % at March 31, 1999. Liquidity levels will vary
depending upon savings flows, future loan fundings, cash operating needs,
collateral requirements and general prevailing economic conditions. The Bank
does not foresee any difficulty in meeting its liquidity requirements.
RESULTS OF OPERATIONS:
- ----------------------
Net income for the three months ended March 31, 1999, was $16.2 million, or $.27
per basic and diluted share, compared to net income of $13.6 million, or $.23
per diluted share ($.24 per basic share) for the three months ended March 31,
1998. The net increase in net income for the three months ended March 31, 1999,
compared to the three months ended March 31, 1998, is primarily due to net
increases of $16.0 million in net interest income after provision for loan and
lease losses and $1.7 million in total other income partially offset by net
increases of $8.4 million in provision for income taxes, $2.5 million in merger
expenses (included within the general and administrative expenses category),
$2.3 million in amortization of intangible assets and $1.9 million in general
and administrative expenses.
Net income for the nine months ended March 31, 1999 was $62.5 million, or $1.04
per diluted share ($1.05 per basic share), compared to net income of $65.0
million, or $1.13 per diluted share ($1.16 per basic share) for the nine
months ended March 31, 1998. Such net decrease in net income is due to net
increases of $17.2 million in merger expenses (included within the general and
administrative expenses category ), $11.5 million in provision for income taxes,
$9.6 million in other general and administrative expenses and $6.3 million in
amortization of intangible assets. These decreases to net income were partially
offset by net increases of $36.6 million in net interest income after provision
for loan and lease losses and $5.5 million in total other income.
19
RESULTS OF OPERATIONS (Continued):
- ----------------------------------
Net Interest Income:
- --------------------
Net interest income was $87.4 million for the three months ended March 31, 1999,
compared to $71.5 million for the three months ended March 31, 1998, resulting
in an increase of approximately $16.0 million, or 22.4%. Net interest income was
$243.5 million for the nine months ended March 31, 1999, compared to $207.7
million for the nine months ended March 31, 1998, resulting in an increase of
$35.8 million, or 17.2%. The interest rate spread was 2.88% at March 31, 1999
compared to 2.71% at March 31, 1998, an increase of 17 basis points. During the
three months ended March 31, 1999 and 1998, interest rate spreads were 2.84% and
2.61%, respectively, an increase of 23 basis points; and the yield on interest-
earning assets was 3.01% and 2.91%, up 10 basis points over the same respective
periods of time. The interest rate spreads also increased 24 basis points from
2.59% to 2.83% during the nine months ended March 31, 1999 compared to 1998,
while the yield on interest-earning assets increased 14 basis points from 2.85%
to 2.99%. The interest rate spreads and net annualized yields for the fiscal
year 1999 periods increased compared to the respective periods for fiscal year
1998 due to the declining interest rate environment, primarily in short-term
borrowings. The average balance of interest-earning assets increased $1.778
billion for the three months ended March 31, 1999 compared to the same period
ended March 31, 1998, while the average balance of interest-bearing liabilities
increased $1.926 billion over the same respective periods of time. The average
balance of interest-earning assets increased $1.145 billion for the nine months
ended March 31, 1999 compared to 1998 and the average balance of interest-
bearing liabilities increased $1.283 billion. The increases in these average
balances are due to the acquisitions of AmerUs on July 31, 1998, Midland on
March 1, 1999, First National Bank Shares, LTD (First National) on January 30,
1998 and to internal growth. Net interest income increased for the three and
nine months ended March 31, 1999 compared to 1998 due to the increase in the
average balances for loans and leases (even though average rates declined)
partially offset by increases in the average balances of savings deposits and
FHLB advances. The future trend in interest rate spreads and net interest income
will be dependent upon such factors as the composition and balances of the
Corporation's interest-earning assets and interest-bearing liabilities, the
interest rate risk exposure of the Corporation and the maturity and repricing
activity of interest-sensitive assets and liabilities, as influenced by changes
in and levels of both short-term and long-term market interest rates.
The following table presents certain information concerning yields earned on
interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the periods presented:
- ---------------------------------------------------------------------------------------------------------------------------------
For the Three For the Nine
Months Ended Months Ended At
March 31, March 31, March 31,
------------------------ ------------------------ -----------------
1999 1998 1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average yield on:
Loans and leases 7.75% 8.07% 7.90% 8.14% 7.74% 8.07%
Mortgage-backed securities 6.14 6.52 6.20 6.35 6.21 6.77
Investments 6.52 6.37 6.49 6.84 6.52 6.60
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-earning assets 7.46 7.72 7.59 7.79 7.44 7.78
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average rate paid on:
Savings deposits 2.74 2.91 2.79 2.99 2.75 2.96
Other time deposits 5.32 5.73 5.46 5.76 5.29 5.68
Advances from FHLB 5.06 5.91 5.34 5.95 4.98 5.77
Securities sold under agreements
to repurchase 5.81 6.02 5.87 6.03 5.83 5.95
Other borrowings 7.85 8.59 8.16 9.79 8.00 8.81
- ---------------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 4.62 5.11 4.76 5.20 4.56 5.07
- ---------------------------------------------------------------------------------------------------------------------------------
Interest rate spread 2.84% 2.61% 2.83% 2.59% 2.88% 2.71%
- ---------------------------------------------------------------------------------------------------------------------------------
Net annualized yield on
interest-earning assets 3.01% 2.91% 2.99% 2.85% 2.99% 2.95%
- ---------------------------------------------------------------------------------------------------------------------------------
20
Net Interest Income (Continued):
- --------------------------------
The table below presents average interest-earning assets and average interest-
bearing liabilities, interest income and interest expense, and average yields
and rates during the three and nine months ended March 31, 1999. The following
table includes nonaccruing loans averaging $74.0 million and $61.7 million,
respectively, for the three and nine months ended March 31, 1999, as interest-
earning assets at a yield of zero percent:
- ------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, 1999 March 31, 1999
------------------------------------------ -----------------------------------------
Annualized Annualized
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
- ------------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans and leases $ 9,283,946 $179,283 7.75% $ 8,786,297 $520,335 7.90%
Mortgage-backed securities 1,330,046 20,407 6.14 1,211,896 56,353 6.20
Investments 1,004,622 16,382 6.52 862,299 41,960 6.49
- ------------------------------------------------------------------------------------------------------------------------
Interest-earning assets 11,618,614 216,072 7.46 10,860,492 618,648 7.59
- ------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 2,911,564 19,683 2.74 2,815,679 59,050 2.79
Other time deposits 4,534,071 59,439 5.32 4,459,590 182,656 5.46
Advances from FHLB 3,507,561 43,730 5.06 2,813,088 112,748 5.34
Securities sold under
agreements to repurchase 160,796 2,335 5.81 228,394 10,211 5.87
Other borrowings 175,485 3,443 7.85 171,752 10,506 8.16
- ------------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 11,289,477 128,630 4.62 10,488,503 375,171 4.76
- ------------------------------------------------------------------------------------------------------------------------
Net earnings balance $ 329,137 $ 371,989
=========== ===========
Net interest income $ 87,442 $243,477
======== ========
Interest rate spread 2.84% 2.83%
- ------------------------------------------------------------------------------------------------------------------------
Net annualized yield on
interest-earnings assets 3.01% 2.99%
- ------------------------------------------------------------------------------------------------------------------------
The net earnings balance (the difference between average interest-bearing
liabilities and average interest-earning assets) decreased by $147.2 million and
$137.5 million, respectively, for the three and nine months ended March 31,
1999, compared to the three and nine months ended March 31, 1998. Such decreases
are primarily due to (i) the acquisition of AmerUs that was financed by the
$40.0 million one year notes, in part by the $45.0 million unsecured term note
due July 31, 2003 and by the outlay of existing cash and (ii) the acquisition of
Midland that was financed entirely by existing cash. In addition, the average
balances of mortgage-backed securities decreased $66.7 million and $107.2
million, respectively, over the same respective fiscal year 1998 periods due to
principal repayments and sales.
21
Net Interest Income (Continued):
- --------------------------------
The table below presents the dollar amount of changes in interest income and
expense for each major component of interest-earning assets and interest-bearing
liabilities, respectively, and the amount of change in each attributable to: (i)
changes in volume (change in volume multiplied by prior year rate), and (ii)
changes in rate (change in rate multiplied by prior year volume). The net
change attributable to change in both volume and rate, which cannot be
segregated, has been allocated proportionately to the change due to volume and
the change due to rate. The following table demonstrates the effect of the
increased volume of interest-earning assets and interest-bearing liabilities,
the changes in interest rates and the effect on the interest rate spreads
previously discussed:
- -------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
March 31, 1999 Compared March 31, 1999 Compared
to March 31,1998 to March 31,1998
------------------------------------------------------------------------------
Increase (Decrease) Due to Increase (Decrease) Due to
- -------------------------------------------------------------------------------------------------------------------------------
Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------------------------------------
Interest income:
Loans and leases $33,087 $ (8,602) $24,485 $ 76,288 $(17,980) $ 58,308
Mortgage-backed securities 1,057 (1,245) (188) (5,012) (1,419) (6,431)
Investments 1,850 352 2,202 1,625 (2,225) (600)
- -------------------------------------------------------------------------------------------------------------------------------
Interest income 35,994 (9,495) 26,499 72,901 (21,624) 51,277
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 3,792 (1,177) 2,615 12,201 (3,268) 8,933
Other time deposits 3,205 (4,567) (1,362) 5,822 (10,081) (4,259)
Advances from FHLB 18,634 (4,859) 13,775 34,090 (9,741) 24,349
Securities sold under agreements to repurchase (4,864) (247) (5,111) (14,247) (616) (14,863)
Other borrowings 869 (266) 603 3,163 (1,799) 1,364
- -------------------------------------------------------------------------------------------------------------------------------
Interest expense 21,636 (11,116) 10,520 41,029 (25,505) 15,524
- -------------------------------------------------------------------------------------------------------------------------------
Effect on net interest income $14,358 $ 1,621 $15,979 $ 31,872 $ 3,881 $ 35,753
- -------------------------------------------------------------------------------------------------------------------------------
The net improvements due to changes in volume and rates for the three and nine
months ended March 31, 1999, compared to March 31, 1998, reflect the net growth
the Corporation has experienced, both internally and from acquisitions, and the
decreases in rates on interest-earning assets that were more than offset by
decreases in rates on interest-bearing liabilities, primarily other time
deposits and FHLB advances. The increases in volume due to internal growth of
interest-earning assets has been funded, at favorable rates, primarily by
callable FHLB advances and deposits.
22
Provision for Loan and Lease Losses and Real Estate Operations:
- ---------------------------------------------------------------
The Corporation recorded loan and lease loss provisions totaling $2.8 million
and $9.6 million, respectively, for the three and nine months ended March 31,
1999, compared to $2.8 million and $10.5 million, respectively, for the three
and nine months ended March 31, 1998. The provision for the nine months ended
March 31, 1999 is lower by $864,000 compared to the nine months ended March 31,
1998, primarily due to net decreases in loss reserves recorded to conform the
reserve positions of pooled acquisitions to the policies of the Corporation.
Such loss reserves totaled $2.4 million for the nine months ended March 31, 1998
compared to $1.0 million for the nine months ended March 31, 1999. Loan and
lease loss provisions for the nine months ended March 31, 1999, excluding the
$1.0 million recorded to conform the reserve positions of First Colorado to the
policies of the Corporation, have exceeded net charge-offs totaling $8.2 million
for the same nine month period by $422,000. The allowance for loan and lease
losses is based upon management's continuous evaluation of the collectibility of
outstanding loans and leases, which takes into consideration such factors as
changes in the composition of the loan and lease portfolios and economic
conditions that may affect the borrower's ability to pay, regular examinations
by the Corporation's credit review group of specific problem loans and leases
and of the overall portfolio quality and real estate market conditions in the
Corporation's lending areas.
The Corporation recorded net losses from real estate operations totaling
$772,000 and $1.2 million, respectively, for the three and nine months ended
March 31, 1999, compared to a net loss of $178,000 for the three months ended
March 31, 1998 and net income of $1.7 million for the nine months ended March
31, 1998. Real estate operations reflect provisions for real estate losses, net
real estate operating activity, and gains and losses on dispositions of real
estate. The net loss in real estate operations for the three months ended March
31, 1999 compared to March 31, 1998, is greater primarily due to a net increase
in provisions for real estate losses and increased operating expenses. The net
decrease for the nine months ended March 31, 1999 compared to March 31, 1998 is
due primarily to a decrease in net gains on dispositions of real estate in the
current fiscal year of approximately $1.3 million, a net increase in operating
expenses of approximately $446,000 and a net increase in provisions for real
estate losses.
Although the Corporation believes that present levels of allowances for loan
losses are adequate to reflect the risks inherent in its portfolios, there can
be no assurance that the Corporation will not experience increases in its
nonperforming assets, that it will not increase the level of its allowances in
the future or that significant provisions for losses will not be required based
on factors such as deterioration in market conditions, changes in borrowers'
financial conditions, delinquencies and defaults.
23
Provision for Loan and Lease Losses and Real Estate Operations (Continued):
- ---------------------------------------------------------------------------
Nonperforming assets are monitored on a regular basis by the Corporation's
internal credit review and asset workout groups. Nonperforming assets increased
$25.0 million at March 31, 1999, compared to June 30, 1998, resulting from net
increases of $16.4 million in nonperforming loans and leases, approximately $6.1
million in real estate and $2.5 million in troubled debt restructurings.
Nonperforming assets as of the dates indicated are summarized as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
March 31, June 30,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans and leases:
Residential real estate loans $53,206 $43,212
Commercial real estate loans 1,294 1,369
Consumer loans 7,042 2,651
Leases and other loans 4,233 2,134
- ----------------------------------------------------------------------------------------------------------------------------------
Total 65,775 49,366
- ----------------------------------------------------------------------------------------------------------------------------------
Real estate:
Commercial 7,578 8,945
Residential 16,353 8,821
- ----------------------------------------------------------------------------------------------------------------------------------
Total 23,931 17,766
- ----------------------------------------------------------------------------------------------------------------------------------
Troubled debt restructurings:
Commercial 6,618 3,524
Residential 155 778
- ----------------------------------------------------------------------------------------------------------------------------------
Total 6,773 4,302
- ----------------------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $96,479 $71,434
- ----------------------------------------------------------------------------------------------------------------------------------
Nonperforming loans and leases to total loans and leases .68% .62%
Nonperforming assets to total assets .75% .69%
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses:
Loans and leases (1) $75,135 $56,295
Bulk purchased loans (2) 6,890 8,462
- ----------------------------------------------------------------------------------------------------------------------------------
Total $82,025 $64,757
- ----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan and lease losses to total loans and leases .85% .81%
Allowance for loan and lease losses to total nonperforming assets 85.02% 90.65%
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Includes $158,000 and $97,000 at March 31, 1999 and June 30, 1998,
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 $304.7 million and $388.5 million, respectively,
at March 31, 1999 and June 30, 1998. These allowances are available only to
absorb losses associated with respective bulk purchased loans and are not
available to absorb losses from other loans.
24
Provision for Loan and Lease Losses and Real Estate Operations (Continued):
- ---------------------------------------------------------------------------
The ratio for nonperforming loans and leases to total loans and leases increased
compared to June 30, 1998, due to increases in such nonperforming loans and
leases, primarily delinquent residential real estate loans and consumer loans,
partially offset by the net increase in loans and leases at March 31, 1999,
compared to June 30, 1998. The ratio for nonperforming assets to total assets
increased compared to June 30, 1998 due to the increase in total nonperforming
assets partially offset by the net increase in total assets. The percentage of
allowance for loan and lease losses to total loans and leases increased compared
to June 30, 1998, due to the net increase in the loss allowance at March 31,
1999, compared to June 30, 1998 partially offset by the net increase in loan and
leases over the same periods of time. The allowance for loan and lease losses
to total nonperforming assets decreased at March 31, 1999 compared to June 30,
1998 due to the net increase in the total nonperforming assets partially offset
by the increase in the loss allowance.
Nonperforming loans and leases at March 31, 1999, increased by $16.4 million
compared to June 30, 1998, primarily due to net increases totaling $10.0
million, $4.4 million and $2.1 million respectively, for delinquent residential
real estate loans, delinquent consumer loans and delinquent leases and other
loans. The increases are due to growth in the respective portfolios and to
nonperforming loans and leases from the AmerUs acquisition. The net increase in
real estate of approximately $6.1 million at March 31, 1999, compared to June
30, 1998, is due primarily to real estate acquired from the AmerUs and Midland
acquisitions. The net increase of $2.5 million in troubled debt restructurings
at March 31, 1999, compared to June 30, 1998, is primarily attributable to the
addition of nine commercial troubled debt restructurings totaling approximately
$5.8 million partially offset by the payoff of seven commercial and residential
loans with balances totaling $1.9 million at June 30, 1998 and the movement of
$1.6 million out of troubled debt restructurings.
Loan Servicing Fees:
- --------------------
Fees from loans serviced for other institutions totaled $8.6 million and $25.9
million, respectively, for the three and nine months ended March 31, 1999
compared to $8.8 million and $26.5 million, respectively, for the three and nine
months ended March 31, 1998. The net decrease comparing the respective periods
is primarily due to a slightly lesser average service fee collected by the
Corporation. comparing the fiscal year 1999 periods to fiscal 1998. At March 31,
1999 and 1998, the Corporation's mortgage servicing portfolio approximated
$7.451 billion and $7.174 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 $8.9 million and $27.8 million, respectively,
for the three and nine months ended March 31, 1999 compared to $7.3 million and
$22.0 million, respectively, for the three and nine months ended March 31, 1998.
The net increases result primarily from the AmerUs, First National and Midland
acquisitions, accounted for as purchases and included in operations since their
respective dates of consummation, contributing $1.1 million and $3.1 million in
retail fees and charges for the three and nine months ended March 31, 1999.
Increases in certain checking account fees and related ancillary fees for
overdraft and insufficient funds charges due to increases in the number of
retail checking accounts at March 31, 1999, compared to March 31, 1998 also
contributed to such increase.
25
Gain (Loss) on Sales of Loans:
- ------------------------------
The Corporation sold loans to third parties through its mortgage banking
operations resulting in a net pre-tax loss of $65,000 for the three months ended
March 31, 1999 and in net pre-tax gains of $3.5 million for the nine months
ended March 31, 1999 on loans sold totaling $575.0 million and $1.586 billion,
respectively, for the three and nine months ended March 31, 1999, compared to
net pre-tax gains of $363,000 and $1.4 million, respectively, on loans sold
totaling $249.2 million and $675.5 million for the three and nine months ended
March 31, 1998. Mortgage loans are generally sold in the secondary market with
loan servicing retained and without recourse to the Corporation. The net gains
are attributable to the relatively stable interest rate environments over the
respective periods. The net loss for the three months ended March 31, 1999, is
primarily due to a market value adjustment totaling $253,000 recorded on the
held for sale portfolio at March 31, 1999.
Gain on Sales of Securities:
- ----------------------------
The Corporation sold securities available for sale resulting in net pre-tax
gains of $948,000 and $4.3 million, respectively, for the three and nine months
ended March 31, 1999, on sales totaling $9.4 million and $235.6 million,
respectively, compared to net pre-tax gains of $467,000 and $2.8 million for the
three and nine months ended March 31, 1998 on sales totaling $38.8 million and
$89.0 million, respectively.
Other Operating Income:
- -----------------------
Other operating income totaled $6.0 million and $18.3 million, respectively, for
the three and nine months ended March 31, 1999, compared to $5.2 million and
$18.8 million, respectively, for the three and nine months ended March 31, 1998.
The major components of other operating income are brokerage commissions, credit
life and disability commissions, insurance commissions and leasing operations.
The net increase for the three months ended March 31, 1999, compared to 1998 is
primarily attributable to an increase in brokerage commissions of $1.3 million
partially offset by nonrecurring charges totaling $597,000 recorded in the prior
fiscal year quarter for certain reserves on leasing operations acquired in a
fiscal year 1998 merger.
For the nine months ended March 31, 1999, compared to 1998, the net decrease is
primarily attributable to decreases in lease securitizations totaling $2.5
million, nonrecurruing excess trustee funds on debt payoff totaling $1.2 million
and receipts from bankruptcy settlements totaling $402,000. Such decreases are
partially offset by increases from brokerage commissions totaling $2.6 million
and the nonrecurring gain on the sale of the branch closed pursuant to the First
Colorado merger totaling $1.1 million.
General and Administrative Expenses:
- ------------------------------------
General and administrative expenses totaled $69.7 million and $188.0 million,
respectively, for the three and nine months ended March 31, 1999, compared to
$65.3 million and $161.1 million, respectively, for the three and nine months
ended March 31, 1998.
The net increase of $4.4 million for the three months ended March 31, 1999,
compared to the three months ended March 31, 1998, is primarily due to net
increases in compensation and benefits of $3.8 million, merger expenses of $2.5
million and occupancy and equipment of $2.0 million offset primarily by a net
decrease of $4.2 million in data processing. The AmerUs, First National and
Midland acquisitions, which were accounted for under the purchase method of
accounting, contributed approximately $3.7 million in general and administrative
expenses for the three months ended March 31, 1999. These acquisitions result
in increased personnel wages and benefits and costs of operating additional
branches, as well as other expenses also incurred on an indirect basis
attributable to these acquisitions. The net decrease in data processing for the
three and nine months ended March 31, 1999 compared to 1998 is due to the
accelerated amortization recorded in the quarter ended March 31, 1998 of certain
computer systems and software necessitated by Year 2000 compliance and the
related planned systems conversions.
The net increase of approximately $26.8 million for the nine months ended March
31, 1999, compared to the nine months ended March 31, 1998, is primarily due to
net increases in merger expenses of $17.2 million, compensation and benefits of
$6.1 million, occupancy and equipment of $5.8 million, and advertising of $1.2
million offset primarily by a net decrease of $4.9 million in data processing.
Such net increase comparing the two periods is primarily due to the current
fiscal year merger expenses totaling $29.9 million associated with the First
Colorado acquisition and the termination of the three employee stock ownership
plans compared to the $12.7 million recorded in the nine months ended March 31,
1998 associated with the fiscal year 1998 acquisitions. See Note C in the Notes
to the Consolidated Financial Statements for additional information on these
merger expenses. The AmerUs, First National and Midland acquisitions contributed
approximately $11.4 million in general and administrative expenses for the nine
months ended March 31, 1999.
26
Amortization of Intangible Assets:
- ----------------------------------
Amortization of intangible assets totaled $4.4 million and $11.8 million,
respectively, for the three and nine months ended March 31, 1999, compared to
$2.0 million and $5.6 million, respectively, for the three and nine months ended
March 31, 1998. The net increases for the three and nine months ended March 31,
1999 compared to 1998 are due to the AmerUs, First National and Midland
acquisitions. Amortization of the intangible assets from these acquisitions
totaled $2.8 million and $7.0 million for the three and nine months ended
March 31, 1999 compared to $300,000 for both the three and nine months ended
March 31, 1998.
Provision for Income Taxes:
- ---------------------------
For the three and nine months ended March 31, 1999, the provision for income
taxes totaled $18.1 million and $50.2 million, respectively, compared to $9.6
million and $38.7 million, respectively, for the three and nine months ended
March 31, 1998. The effective income tax rates for the three and nine months
ended March 31, 1999 were 52.8% and 44.5%, respectively, compared to 41.5% and
37.3%, respectively, for the three and nine months ended March 31, 1998. The
effective tax rates for all periods vary from the applicable statutory rates
primarily due to the nondeductibility of amortization of intangible assets in
relation to the level of taxable income for the respective periods and to the
amount and the nondeductibility of certain merger-related expenses and other
nonrecurring charges.
27
Year 2000:
- ----------
The year 2000 poses an important business issue regarding how existing
application software programs and operating systems can accommodate this date
value. Many computer programs that can only distinguish the final two digits of
the year entered are expected to read entries for the year 2000 as the year
1900. Like most financial service providers, the Corporation may be
significantly affected by the Year 2000 issue due to the nature of financial
information. Software, hardware and equipment both within and outside the
Corporation's direct control and with whom the Corporation electronically or
operationally interfaces are likely to be affected. If computer systems are not
adequately changed to identify the Year 2000, many computer applications could
fail or create erroneous results. As a result, many calculations that rely on
the data field information, such as interest, payment or due dates and other
operating functions, may generate results that could be significantly misstated,
and the Corporation could experience a temporary inability to process
transactions and engage in normal business activities.
All of the significant computer programs of the Corporation that could be
affected by this issue are provided by major third party vendors. The
Corporation is nearly complete in the process of replacing/upgrading most of its
computer systems and programs, as well as most equipment, in order to provide
cost-effective and efficient delivery of services to its customers, information
to management, and to provide additional capacity for processing information and
transactions due to acquisitions. The total cost of the Year 2000 project is
estimated to approximate $14.0 million which will be funded through cash flows
from operations. Most of the total project cost is expected to be capitalized
since it involves the purchase of computer systems, programs and equipment.
During the three and nine months ended March 31, 1999, approximately $2.5
million and $2.9 million, respectively, was expensed that related to systems
conversion costs, internal staff costs as well as consulting and other Year 2000
expenses. In addition, during fiscal year 1998 the Corporation expensed $4.3
million due to accelerated amortization of certain computer systems and software
necessitated by Year 2000 compliance and the related planned systems
conversions. The adjusted carrying amount of these computer systems and software
was depreciated until their disposal at the date of conversion.
The third party vendors have advised the Corporation that all such mission
critical computer systems and programs are Year 2000 compliant. The Corporation
tests all such systems for Year 2000 compliance before integration into its
computer environment. The Corporation scheduled certain operations that began
conversions in October 1998. These conversions allow the Corporation to resolve
application and conversion problems that arise and to do further testing to
enhance software programs and future conversions. Final conversions that will be
Year 2000 compliant are scheduled for completion by June 1999. Other mission
critical systems are being tested in conjunction with certain nationwide
financial industry test programs. All Year 2000 testing is expected to be
substantially completed June 30, 1999. In addition, as a financial services
institution, the Corporation is under the supervision of federal regulatory
agencies that have guidelines and perform ongoing monitoring and evaluation of
the Corporation's Year 2000 readiness.
The Corporation is also working with non-mainframe software and hardware vendors
to determine the extent to which the Corporation's interface systems may be
vulnerable to those third parties' failure to remediate their own Year 2000
issues. If the third party vendors are unable to resolve Year 2000 issues in
time, the conversion is delayed significantly or major problems arise as a
result of the conversion, the Corporation would likely experience significant
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the financial condition and results
of operations of the Corporation. In addition, there can be no assurance that
the systems of other companies on which the Corporation's systems rely will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the Corporation's systems, would not have a
material adverse effect on the Corporation. The Corporation has developed a Year
2000 contingency plan that addresses, among other issues, critical operations
and potential failures thereof, and strategies for business continuation such as
contracting with alternative vendors and re-deployment of internal staff as
needed in critical areas. This contingency plan is scheduled for testing mid-
year 1999. The Corporation has also evaluated non-technical systems that rely on
imbedded technology in their critical processes so that such systems will
continue to operate without interruption.
28
ITEM 3. QUANTITATIVE AND QUALITATIVE
---------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
The Corporation's Asset Liability Management Committee, which includes senior
management representatives, monitors and considers methods of managing the rate
and sensitivity repricing characteristics of the balance sheet components
consistent with maintaining acceptable levels of changes in net portfolio value
(NPV) and net interest income. A primary purpose of the Corporation's asset and
liability management is to manage the volatility of net interest rate risk to
effectively invest the Corporation's capital and to preserve the value created
by its core business operations. As such, certain management monitoring
processes are designed to minimize the impact of sudden and sustained changes in
interest rates on NPV and net interest income.
Interest rate risk exposure is measured using interest rate sensitivity analysis
to determine the Corporation's change in NPV in the event of hypothetical
changes in interest rates and interest rate sensitivity gap analysis is used to
determine the repricing characteristics of the Bank's assets and liabilities.
In order to reduce the exposure to interest rate fluctuations, the Corporation
has developed strategies to manage its liquidity, shorten its effective
maturities of certain interest-earning assets, and increase the interest rate
sensitivity of its asset base.
The Corporation's assets and liabilities increased and the asset/liability mix
has changed at March 31, 1999 compared to June 30, 1998 due to the acquisitions
of AmerUs, First Colorado and Midland and to asset/liability strategies
implemented by management. The Corporation has also increased its balance of
callable investment securities and fixed-rate mortgage-backed securities,
leveraged its balance sheet by taking down callable FHLB advances, and expanded
its community banking operations with increased emphasis on commercial,
agricultural and consumer loans.
On December 1, 1998, the provisions of Thrift Bulletin 13a (TB-13a) became
effective. This bulletin requires that the Corporation's Board of Directors set
interest rate risk limits that would prohibit the Corporation from exhibiting a
post-shock NPV ratio and interest rate sensitivity measure of "significant risk"
or greater. The primary objective for interest rate risk management is to manage
the short-term and long-term interest rate risk of the Corporation according to
Board-established quidelines, the profitability objectives defined in the
Corporation's operating plans and the regulatory requirements of TB-13a. The
short-term interest rate risk objective is to manage the effect on net interest
income, over the course of a one-year period, caused by market interest rate
fluctuations. The long-term interest rate risk objective is to manage the effect
on NPV of market interest rate fluctuations.
Net interest income sensitivity is a valuable tool the Corporation uses in
determining the overall quality of its interest rate risk management system.
Management utilizes a net interest income simulation that captures the dynamic
nature of the balance sheet by presenting probable balance sheet and off-balance
sheet strategies and volumes under different interest rate scenarios over the
course of a one-year period. The change in net interest income sensitivity
methodology from a static balance sheet to a dynamic balance sheet presents a
more accurate indication of the true net interest income risk affecting the
Corporation over a twelve-month time period. Net interest income sensitivity,
calculated pursuant to guidelines established by TB-13a, presents the effects of
changes in the NPV, which was previously presented by the Corporation.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE
--------------------------------------
DISCLOSURES ABOUT MARKET RISK (CONTINUED)
-----------------------------------------
Considering such increases from the AmerUs, First Colorado and Midland
acquisitions, and the changes in the Corporation's asset/liability mix, the
following table presents the Corporation's projected change in net interest
income for the various hypothetical changes in interest rates at March 31, 1999
compared to June 30, 1998.
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 1999 June 30, 1998
------------------------------------------- ----------------------------------------
Hypothetical Net Interest Net Interest
Change in Net Interest Income Percent Net Interest Income Percent
Interest Rates Income Change Change Income Change Change
- --------------------- ----------------------------------------------------------------------------------------------
300 basis point rise $294,989 $(94,076) (24.2)% $219,531 $(32,716) (13.0)%
200 basis point rise 333,429 (55,636) (14.3) 237.011 (15,236) (6.0)
100 basis point rise 366,266 (22,799) (5.9) 248,741 (3,506) (1.4)
Base Model Scenario 389,065 - - 252,247 - -
100 basis point decline 391,283 2,218 .6 258,150 5,903 2.3
200 basis point decline 394,862 5,797 1.5 264,632 12,385 4.9
300 basis point decline 399,103 10,038 2.6 277,295 25,048 9.9
- -----------------------------------------------------------------------------------------------------------------------------------
The preceding table indicates that the Corporation's net interest income
sensitivity to both hypothetical rising and declining interest rate shock
scenarios has increased at March 31, 1999 compared to June 30, 1998. The
preceding table also indicates, as compared to June 30, 1998, that the
Corporation is more sensitive to hypothetical rising interest rates than it is
to hypothetical declining interest rates.
30
PART II. OTHER INFORMATION
--------------------------
Item 5. Other Information
-----------------
Effective May 10, 1999, Director W. A. Krause resigned from the
Corporation's Board of Directors.
Effective April 28, 1999, the Corporation's Board of Directors
authorized the repurchase of up to five percent of the Corporation's
outstanding common stock during the next 18 months. Such repurchase is
expected to approximate 3,000,000 shares of common stock. Repurchases
will be made at any time and in any amount, depending upon market
conditions and various other factors. Any repurchase generally would be
on the open-market, although privately negotiated transactions are also
possible. In compliance with Nebraska law, all repurchased shares will
be cancelled.
On February 11, 1999, the credit rating on the Corporation and its
subsidiaries was revised by Moody's Investors Service to "positive" from
"stable." The credit rating on the Corporation's subordinated debt was
rated at "B1." Commercial Federal Bank, a Federal Savings Bank, and
wholly-owned subsidiary of the Corporation, had its credit ratings
valued by Moody's Investors Service as follows: long-term deposit rating
of "Ba1," other senior obligation and issuer ratings of "Ba2," and
short-term deposit and other short-term senior obligation ratings of
"Not Prime."
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). Exhibits:
. Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedules
(b). Reports on Form 8-K:
There were no reports filed on Form 8-K during the quarter ended March
31, 1999.
31
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 13, 1999 /s/ James A. Laphen
------------ ------------------------------------
James A. Laphen, President, Chief
Operating Officer and Chief
Financial Officer (Duly Authorized
and Principal Financial Officer)
Date: May 13, 1999 /s/ Gary L. Matter
------------ -----------------------------------
Gary L. Matter, Senior Vice President,
Controller and Secretary
(Principal Accounting Officer)
32
EXHIBIT INDEX
-------------
Exhibit 11. Computation of Earnings Per Share
Exhibit 27. Financial Data Schedules
33