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, 2001
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-11515
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COMMERCIAL FEDERAL CORPORATION
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(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 [_]
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.
Title of Each Class Outstanding at May 7, 2001
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Common Stock, Par Value $.01 Per Share 51,344,822
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
---------------------- -------------
Item 1. Financial Statements:
Consolidated Statement of Financial Condition as of
March 31, 2001 and December 31, 2000 3
Consolidated Statement of Operations for the Three
Months Ended March 31, 2001 and 2000 4-5
Consolidated Statement of Comprehensive Income for the
Three Months Ended March 31, 2001 and 2000 6
Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 2001 and 2000 7-8
Notes to Consolidated Financial Statements 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-25
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Part II. Other Information
-----------------
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature Page 26
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2
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
-----------------------------
---------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) March 31, December 31,
ASSETS 2001 2000
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(Unaudited) (Audited)
Cash (including short-term investments of $1,183 and $1,283) $ 176,300 $ 192,358
Investment securities available for sale, at fair value 821,100 771,137
Mortgage-backed securities available for sale, at fair value 1,555,117 1,514,510
Loans and leases held for sale, net 470,901 242,200
Loans receivable, net of allowances of $83,594 and $82,263 8,540,727 8,651,174
Federal Home Loan Bank stock 197,302 251,537
Real estate, net 58,580 38,331
Premises and equipment, net 164,231 167,210
Bank owned life insurance 204,133 200,713
Other assets 351,410 303,707
Intangible assets, net of accumulated amortization of $74,544 and $70,502 203,260 207,427
---------------------------------------------------------------------------------------------------------------------
Total Assets $12,743,061 $12,540,304
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
---------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $ 7,641,095 $ 7,694,486
Advances from Federal Home Loan Bank 3,718,940 3,565,465
Other borrowings 273,560 175,343
Other liabilities 273,652 241,271
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Total Liabilities 11,907,247 11,676,565
=====================================================================================================================
Commitments and Contingencies -- --
---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; none issued -- --
Common stock, $.01 par value; 120,000,000 shares authorized;
51,717,381 and 53,208,628 shares issued and outstanding 517 532
Additional paid-in capital 222,576 255,870
Retained earnings 641,274 622,659
Accumulated other comprehensive loss, net (28,553) (15,322)
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Total Stockholders' Equity 835,814 863,739
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Total Liabilities and Stockholders' Equity $12,743,061 $12,540,304
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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) Three Months Ended
March 31,
----------------------------
2001 2000
--------------------------------------------------------------------------------------------------
Interest Income:
Loans receivable $180,699 $190,203
Mortgage-backed securities 26,242 20,986
Investment securities 17,137 21,340
--------------------------------------------------------------------------------------------------
Total interest income 224,078 232,529
Interest Expense:
Deposits 92,584 81,408
Advances from Federal Home Loan Bank 55,977 62,179
Other borrowings 3,688 3,871
--------------------------------------------------------------------------------------------------
Total interest expense 152,249 147,458
Net Interest Income 71,829 85,071
Provision for Loan Losses (4,443) (3,700)
--------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Loan Losses 67,386 81,371
Other Income (Loss):
Retail fees and charges 12,063 10,358
Loan servicing fees, net 1,068 6,665
Gain on sales of securities and changes in fair value
of derivatives, net 9,058 --
Loss on sales of loans (2,469) (239)
Real estate operations (515) (151)
Other operating income 11,505 6,421
--------------------------------------------------------------------------------------------------
Total other income 30,710 23,054
Other Expense:
General and administrative expenses -
Compensation and benefits 26,505 27,345
Occupancy and equipment 9,842 9,560
Data processing 4,605 4,756
Advertising 2,516 3,845
Communication 3,295 3,670
Item processing 3,954 4,020
Outside services 3,248 2,016
Other operating expenses 5,924 4,916
Exit costs and termination benefits 1,955 --
--------------------------------------------------------------------------------------------------
Total general and administrative expenses 61,844 60,128
Amortization of core value of deposits 1,943 1,301
Amortization of goodwill 2,120 2,355
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Total other expense 65,907 63,784
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Income Before Income Taxes 32,189 40,641
Provision for Income Taxes 9,955 14,151
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Net Income $ 22,234 $ 26,490
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4
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS (Continued)
(Unaudited)
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Three Months Ended
March 31,
---------------------------------
2001 2000
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Weighted Average Number of Common Shares
Outstanding Used in Basic Earnings Per Share Calculation 52,495,634 57,469,848
Assumed Exercise of Outstanding Stock Options
as Adjustments for Dilutive Securities 437,137 113,432
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Weighted Average Number of Common Shares
Outstanding Used in Diluted Earnings Per Share Calculation 52,932,771 57,583,280
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Basic Earnings Per Common Share:
Net income $ .42 $ .46
=========== ===========
-------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Common Share:
Net income $ .42 $ .46
=========== ===========
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Dividends Declared Per Common Share $ .07 $ .07
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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
March 31,
------------------------------
2001 2000
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Net Income $ 22,234 $26,490
Other Comprehensive Income (Loss):
Unrealized holding gains (losses) on securities available for sale 25,235 (1,157)
Fair value adjustment on interest rate swap agreements (32,097) --
Fair value change in interest only strips (1,158) 775
Reclassification of net losses (gains) included
in net income pertaining to:
Securities sold (8,091) --
Amortization of interest only strips 253 206
Amortization of fair value adjustments of interest rate swap agreements 509 --
------------------------------------------------------------------------------------------------------------
Other Comprehensive Loss Before Income Taxes (15,349) (176)
Income Tax Benefit (2,118) (422)
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Other Comprehensive Income (Loss) (13,231) 246
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Comprehensive Income $ 9,003 $26,736
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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) Three Months Ended
March 31,
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES 2001 2000
-----------------------------------------------------------------------------------------------------------------
Net income $ 22,234 $ 26,490
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Amortization of intangible assets 4,063 3,656
Provision for losses on loans and real estate 4,443 3,688
Depreciation and amortization 4,827 5,063
Amortization of deferred discounts and fees, net 871 1,161
Amortization of mortgage servicing rights 3,566 1,683
Valuation adjustment of mortgage servicing rights 5,484 --
Loss on sales of real estate and loans, net 2,202 239
Gain on sales of securities (8,091) --
Proceeds from sales of loans 577,758 235,327
Origination of loans for resale (228,525) (55,607)
Purchases of loans for resale (586,476) (139,488)
Increase in bank owned life insurance (3,420) --
Decrease (increase) in interest receivable 10,208 (5,450)
Increase (decrease) in interest payable and other liabilities (2,176) 21,241
Other items, net (32,272) 43,327
--------- ---------
Total adjustments (247,538) 114,840
--------- ---------
Net cash provided (used) by operating activities (225,304) 141,330
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CASH FLOWS FROM INVESTING ACTIVITIES
-----------------------------------------------------------------------------------------------------------------
Purchases of loans (51,773) (161,404)
Repayment of loans, net of originations 98,309 52,092
Proceeds from sales of mortgage-backed securities available for sale 24,525 --
Principal repayments of mortgage-backed securities available for sale 92,015 12,801
Purchases of mortgage-backed securities available for sale (130,515) --
Principal repayments of mortgage-backed securities held to maturity -- 36,967
Purchases of mortgage-backed securities held to maturity -- (1,919)
Maturities and principal repayments of investment securities available for sale 21,523 686
Proceeds from sales of investment securities available for sale 196,954 --
Purchases of investment securities available for sale (258,161) --
Maturities and repayments of investment securities held to maturity -- 4,070
Purchases of investment securities held to maturity -- (1,500)
Purchases of mortgage loan servicing rights (5,001) (2,437)
Purchases of Federal Home Loan Bank stock (7,125) --
Proceeds from sales of Federal Home Loan Bank stock 61,360 1,334
Proceeds from sales of real estate 6,212 6,404
Payments to acquire real estate (33) (105)
Purchases of premises and equipment, net (1,848) (3,195)
Other items, net 2,165 (7,948)
--------- ---------
Net cash provided (used) by investing activities 48,607 (64,154)
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7
COMMERCIAL FEDERAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)
(Unaudited)
-----------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Three Months Ended
March 31,
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES 2001 2000
-----------------------------------------------------------------------------------------------------------------
Decrease in deposits $ (53,391) $ (12,218)
Proceeds from Federal Home Loan Bank advances 527,500 462,900
Repayments of Federal Home Loan Bank advances (374,025) (526,175)
Proceeds from securities sold under agreements to repurchase 102,752 3,527
Repayments of securities sold under agreements to repurchase (2,722) --
Repayments of other borrowings (1,813) (1,813)
Payments of cash dividends on common stock (3,729) (4,078)
Repurchases of common stock (35,383) (20,283)
Issuance of common stock 1,450 459
Other items, net - (38)
--------- ---------
Net cash provided (used) by financing activities 160,639 (97,719)
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CASH AND CASH EQUIVALENTS
-----------------------------------------------------------------------------------------------------------------
Decrease in net cash position (16,058) (20,543)
Balance, beginning of year 192,358 220,946
--------- ---------
Balance, end of period $ 176,300 $ 200,403
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
-----------------------------------------------------------------------------------------------------------------
Cash paid during the period for:
Interest expense $ 152,473 $ 147,080
Income taxes, net 15 55
Non-cash investing and financing activities:
Loans exchanged for mortgage-backed securities 11,682 3,778
Loans transferred to real estate 28,805 2,895
Loans to facilitate the sale of real estate 180 --
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8
COMMERCIAL FEDERAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2001
(Unaudited)
(Columnar Dollars in Footnotes are in Thousands Except Per Share Amounts)
--------------------------------------------------------------------------------
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"),
its wholly-owned subsidiary, Commercial Federal Bank, a Federal Savings Bank
(the "Bank"), and all majority-owned subsidiaries of the Corporation and Bank.
All significant intercompany balances and transactions have been eliminated.
Certain amounts in the prior year period have been reclassified for comparative
purposes.
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 and exit costs and termination
benefits) 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 Transition Report on Form 10-K for the six month transition
period ended December 31, 2000. The results of operations for the three months
ended March 31, 2001, are not necessarily indicative of the results which may be
expected for the entire calendar year 2001.
B. MORTGAGE BANKING ACTIVITIES:
---------------------------
The Corporation's mortgage banking subsidiary services real estate loans for
investors that are not included in the accompanying consolidated financial
statements. Mortgage servicing rights are established based on the cost of
acquiring the right to service mortgage loans or the allocated fair value of
servicing rights retained on originated loans sold. The mortgage banking
subsidiary also services a substantial portion of the Corporation's real estate
loan portfolio.
Mortgage servicing rights are included in the Consolidated Statement of
Financial Condition under the caption "other assets." The activity of mortgage
servicing rights is summarized as follows for the three months ended March 31:
---------------------------------------------------------------------------------
2001 2000
---------------------------------------------------------------------------------
Beginning balance $ 111,110 $ 84,053
Purchases of mortgage servicing rights 5,001 2,437
Mortgage servicing rights retained through loan sales 1,805 781
Amortization expense (3,566) (1,683)
Valuation adjustment (5,484) --
Other items, net (principally derivative activity) 3,255 61
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Ending balance $ 112,121 $ 85,649
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The fair value of the Corporation's mortgage servicing rights totaled
approximately $116,695,000 at March 31, 2001 compared to $133,454,000 at
December 31, 2000. The valuation allowance for impairment losses totaled
$6,067,000 at March 31, 2001 compared to $583,000 at December 31, 2000.
The following compares the key assumptions used in measuring the fair values and
the sensitivity of the fair values of mortgage servicing rights at March 31,
2001 and December 31, 2000.
------------------------------------------------------------------------------------------------------
March 31, 2001 December 31, 2000
------------------------------ ------------------------------
Conventional Governmental Conventional Governmental
-------------- -------------- -------------- --------------
Fair value $ 56,147 $ 60,548 $ 65,724 $ 67,730
Prepayment speed 0%-78.1% 0%-70.3% 5.3%-71.0% 0%-63.3%
Weighted average prepayment speed 16.1% 16.0% 12.3% 12.7%
Discount rate 10.1%-14.2% 12.2%-13.4% 10.1%-12.0% 12.2%-13.5%
------------------------------------------------------------------------------------------------------
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a variation in assumptions
generally cannot be extrapolated because the relationship of the change in
assumption to the change in fair value may not be linear. Also, in the table
the effect of a variation in a particular assumption on the fair value of the
mortgage servicing rights is calculated without changing any other assumption;
in reality, changes in one factor may result in changes in another (for example,
increases in market interest rates may result in lower prepayments and
increased credit losses) which might magnify or counteract the sensitivities.
Further, these sensitivities show only the change in the asset balances and do
not show any expected changes in the fair value of instruments used to manage
the prepayment risks associated with these assets or what actions management may
take to offset any adverse valuation adjustments.
C. EXIT COSTS AND TERMINATION BENEFITS:
-----------------------------------
On August 14, 2000, the Board of Directors approved a series of strategic
initiatives aimed at improving the overall operations of the Corporation. Key
initiatives included:
. A complete balance sheet review including the disposition of over $2.0
billion in low-yielding and higher risk investments and residential
mortgage loans. The proceeds from these dispositions are to be used to
reduce high-cost borrowings, repurchase additional shares of common stock
and reinvest in lower risk securities.
. A thorough assessment of the Bank's delivery and servicing systems.
. The sale of the leasing company acquired in a February 1998 acquisition.
. Acceleration of the disposition of other real estate owned.
. A management restructuring to further streamline the organization and
improve efficiencies as well as the appointment of a new chief operating
officer.
. A program to further strengthen the commercial lending portfolio by
actively recruiting new lenders in order to accelerate the growth in loans
experienced over the past year, while maintaining credit quality.
. A change in the Corporation's fiscal year end from June 30 to December 31 .
. An expansion of the Corporation's common stock repurchase program by up to
10% of its outstanding shares, or approximately 5,500,000 shares.
The balance sheet restructuring was completed during the six months ended
December 31, 2000.
The Corporation announced that 37 branches will be sold and 12 branches
consolidated. The branch consolidations and closings were completed in February
2001. Purchase agreements on 30 of the 37 branches to be sold have been
completed. These sales are scheduled to close in the second and third quarters
of 2001. The deposits associated with these 49 branches approximate
$464,000,000. During the three months ended March 31, 2001, the Corporation
recorded a pre-tax charge of $1,201,000 ($781,000 after-tax) related to
severance costs associated with right-sizing the branches.
9
C. EXIT COSTS AND TERMINATION BENEFITS (Continued):
-----------------------------------------------
A substantial portion of the leasing portfolio was sold on February 28, 2001.
Closing on the transaction was April 9, 2001. Additional expenses totaling
$754,000 ($490,000 after-tax) were recorded during the three months ended March
31, 2001 to finalize this transaction.
The third phase of the Corporation's stock repurchase program was started August
28, 2000. Through March 31, 2001, the Corporation has repurchased 3,668,800
shares at a cost of $72,047,000 or $19.64 per share. The remaining 1,831,200
shares are expected to be repurchased by June 30, 2001.
Total exit costs and termination benefits for the three months ended March 31,
2001, are summarized below:
--------------------------------------------------------------------------------
Branch right-sizing $1,201
Exiting leasing operations 754
--------------------------------------------------------------------------------
Total exit costs and termination benefits $1,955
--------------------------------------------------------------------------------
D. COMMON STOCK REPURCHASES:
------------------------
On August 14, 2000, the Board of Directors authorized a third repurchase of up
to 10% of the Corporation's outstanding common stock, or approximately 5,500,000
shares. Management anticipates to complete this repurchase by June 30, 2001.
Repurchases can be made at any time and in any amount, depending upon market
conditions and various other factors. Any repurchase generally will be on the
open-market, although privately negotiated transactions are also possible. In
compliance with Nebraska law, all repurchased shares will be cancelled. During
the three months ended March 31, 2001, a total of 1,629,900 shares were
repurchased at a cost of $35,383,000.
The following table details the Corporation's common stock repurchases since
April 1999:
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Shares of
Common Stock Cost
--------------------------------------------------------------------------------------------------------
First authorization on April 28, 1999 (completed December 1999) 3,000,000 $ 66,007
Second authorization on December 27, 1999 (completed August 2000) 3,000,000 46,395
Third authorization (through March 31, 2001) 3,668,800 72,047
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Totals 9,668,800 $184,449
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On May 7, 2001, the Board of Directors authorized the Corporation's fourth stock
repurchase program. This repurchase program consists of 5,000,000 shares of the
Corporation's outstanding common stock to be completed no later than December
31, 2002.
10
E. COMMITMENTS AND CONTINGENCIES:
-----------------------------
At March 31, 2001, the Corporation's outstanding commitments, excluding
undisbursed portions of loans in process, were as follows:
--------------------------------------------------------------------------------
Originate residential mortgage loans $202,552
Purchase residential mortgage loans 107,099
Originate commercial real estate loans 186,048
Originate consumer, commercial operating
and agricultural loans 23,391
Used lines of credit for commercial
and consumer use 209,690
--------------------------------------------------------------------------------
$728,780
--------------------------------------------------------------------------------
Loan commitments, which are funded subject to certain limitations, extend over
various periods of time. Generally, unused loan commitments are cancelled 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. At March 31, 2001, the Corporation had approximately $605,268,000
in mandatory forward delivery commitments to sell residential mortgage loans and
$8,990,000 in commitments to sell mortgage-backed securities. At March 31, 2001,
loans sold subject to recourse provisions totaled approximately $13,217,000
which represents the total potential credit risk associated with these
particular loans. Any credit risk would, however, be offset by the value of the
single-family residential properties that 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
relating to supervisory goodwill 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
Corporation and the Bank are pursuing alternative damage claims of up to
approximately $230,000,000. The Bank also assumed a lawsuit in the merger with
Mid Continent Bancshares, Inc. ("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 these 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.
11
F. SEGMENT INFORMATION:
-------------------
The Corporation identifies two distinct lines of business operations for the
purposes of management reporting: Community Banking and Mortgage Banking. These
segments were determined based on the Corporation's financial accounting and
reporting processes. Management makes operating decisions and assesses
performance based on a continuous review of these two primary operations.
The Community Banking segment involves a variety of traditional banking and
financial services. These services include retail banking services, consumer
checking and savings accounts, and loans for consumer, commercial real estate,
residential mortgage and business purposes. Also included in this segment is
insurance and securities brokerage services. The Community Banking services are
offered through the Bank's branch network, ATMs, 24-hour telephone centers and
the Internet. Community Banking is also responsible for the Corporation's
investment and mortgage-backed securities portfolios and the corresponding
management of deposits, advances from the Federal Home Loan Bank ("FHLB") and
certain other borrowings.
The Mortgage Banking segment involves the origination and purchase of
residential mortgage loans, the sale of these mortgage loans in the secondary
mortgage market, the servicing of mortgage loans and the purchase and
origination of rights to service mortgage loans. Mortgage Banking operations
are conducted through the Bank's branches, offices of a mortgage banking
subsidiary and a nationwide correspondent network of mortgage loan originators.
The Bank allocates expenses to the Mortgage Banking operation on terms that are
not necessarily indicative of those which would be negotiated between unrelated
parties. The Mortgage Banking segment also originates and sells loans to the
Bank. Substantially all loans sold to the Bank from the Mortgage Banking
operation are at net book value, resulting in no gains or losses.
The parent company includes interest income earned on intercompany cash balances
and intercompany transactions, interest expense on parent company debt and
operating expenses for general corporate purposes.
The contributions of the major business segments to the consolidated results for
the three months ended March 31, 2001 and 2000 are summarized in the following
tables:
----------------------------------------------------------------------------------------------------------------
Community Mortgage Parent Eliminations/ Consolidated
Banking Banking Company Adjustments Total
----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2001:
Net interest income (expense) $ 67,620 $ 2,419 $(3,574) $ 5,364 $ 71,829
Provision for loan losses (4,340) (103) - - (4,443)
Non-interest income 32,828 5,226 24,847 (32,191) 30,710
Total other expense 59,512 6,148 277 (30) 65,907
Net income 25,904 893 22,234 (26,797) 22,234
Total revenue 250,362 7,645 24,849 (28,068) 254,788
Intersegment revenue 4,788 1,017 24,853
----------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2000:
Net interest income (expense) $ 77,346 $ 5,145 $(3,661) $ 6,241 $ 85,071
Provision for loan losses (3,520) (180) -- -- (3,700)
Non-interest income 27,138 12,625 28,992 (45,701) 23,054
Total other expense 57,962 5,789 124 (91) 63,784
Net income 31,224 8,145 26,490 (39,369) 26,490
Total revenue 250,057 17,773 28,992 (41,239) 255,583
Intersegment revenue 7,721 6,367 29,528
----------------------------------------------------------------------------------------------------------------
12
G. REGULATORY CAPITAL:
------------------
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Regulators can initiate certain mandatory, and
possibly additional discretionary, actions if the Bank fails to meet minimum
capital requirements. These actions could have a direct material effect on the
Corporation's financial position and results of operations. The regulations
require the Bank to meet specific capital adequacy guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain off-
balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital classification is also subject to qualitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios as set forth in the
following table. Prompt corrective action provisions pursuant to 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 certain minimum capital ratios
as set forth in the following table. At March 31, 2001, 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, 2001:
------------------------------------------------------------------------------------------------------------------------------------
Actual Capital Required Capital
-------------- ----------------
Amount Ratio Amount Ratio
------------------------------------------------------------------------------------------------------------------------------------
OTS capital adequacy:
Tangible capital $785,620 6.28% $187,557 1.50%
Core capital 790,224 6.32 375,252 3.00
Risk-based capital 865,581 11.41 607,107 8.00
FDICIA regulations to be
classified well-capitalized:
Tier 1 leverage capital 790,224 6.32 625,420 5.00
Tier 1 risk-based capital 790,224 10.41 455,330 6.00
Total risk-based capital 865,581 11.41 758,883 10.00
------------------------------------------------------------------------------------------------------------------------------------
As of March 31, 2001, 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.
13
H. SUBSEQUENT EVENTS:
------------------
On May 7, 2001, the Board of Directors authorized the Corporation's fourth stock
repurchase program. This repurchase consists of 5,000,000 shares of the
Corporation's outstanding common stock to be completed no later than December
31, 2002. These repurchases can be made at any time and in any amount,
depending upon market conditions and various other factors. Any repurchase
generally will be on the open-market, although privately negotiated transactions
are also possible. In compliance with Nebraska law, all repurchased shares will
be cancelled.
On May 7, 2001, the Corporation's Board of Directors also approved an increase
to the Corporation's quarterly cash dividend to $.08 per common share from $.07
per common share. The new dividend rate of $.08 per common share will be paid
on July 12, 2001 to stockholders of record as of June 28, 2001.
On May 8, 2001, the Corporation's Board of Directors adopted an amendment to the
Corporation's By-Laws which increased the Corporation's board of director seats
to eleven from ten. In addition, on May 8, 2001, the Corporation's Board of
Directors appointed the President and Chief Operating Officer as a director,
bringing the total number of Board of Directors of the Corporation to eleven.
I. CURRENT ACCOUNTING PRONOUNCEMENTS:
----------------------------------
On September 29, 2000, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No.
140") which replaces SFAS No. 125. SFAS No. 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain disclosures, but carries over most of the
provisions of SFAS No. 125. In recent years, transfers of financial assets in
which the transferor has some continuing involvement with the transferred assets
or with the transferee have grown in volume, variety, and complexity. The
transfers raise the issues of whether transferred financial assets should be
considered to be sold and a related gain or loss recorded, whether the assets
should be considered to be collateral for borrowings, or whether the transfer
should be accounted for at all. SFAS No. 125 addressed those issues, but
further issues arose in implementation. SFAS No. 140 resolved those
implementation issues. SFAS No. 140 provides accounting and reporting standards
for transfers and servicing of financial assets and extinguishments of
liabilities. Those standards are based on consistent application of a
financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred, derecognizes
financial assets when control has been surrendered, and derecognizes liabilities
when extinguished. SFAS No. 140 provides consistent standards for
distinguishing transfers of financial assets that are sales from transfers that
are secured borrowings. A transfer of financial assets in which the transferor
surrenders control over the assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The transferor has surrendered control over transferred
assets if and only if all of certain specified conditions are met.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. SFAS No. 140 is
to be applied prospectively with certain exceptions and with earlier or
retroactive application not permitted. Management of the Corporation does not
believe that the adoption of the accounting provisions of this statement will
have any material effect on the Corporation's financial position, liquidity or
results of operations.
14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
-----------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
The statements in this management's discussion and analysis of financial
condition and results of operations that are not historical fact are forward-
looking statements that involve inherent risks and uncertainties. Management
cautions readers that a number of important factors could cause actual results
to differ materially from those in the forward-looking statements. Factors that
might cause a difference include, but are not limited to: fluctuations in
interest rates, inflation, the effect of regulatory or government legislative
changes, expected cost savings and revenue growth not fully realized, the
progress of strategic initiatives and whether realized within expected time
frames, general economic conditions, adequacy of allowance for credit losses,
costs or difficulties associated with restructuring initiatives, technology
changes and competitive pressures in the geographic and business areas where the
Corporation conducts its operations. These forward-looking 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.
CHANGE IN FISCAL YEAR END:
--------------------------
On August 14, 2000, the Board of Directors approved a change in the
Corporation's year end from June 30 to December 31. This change was effective
for calendar year 2000. A December 31 year end allows the Corporation to be
aligned with the financial industry from a reporting perspective and facilitates
comparisons with industry norms.
KEY STRATEGIC INITIATIVES - AUGUST 2000:
----------------------------------------
On August 14, 2000, the Board of Directors approved a series of key strategic
initiatives aimed at improving the overall operations of the Corporation,
strengthening earnings and enhancing shareholder value. These key initiatives
included a complete balance sheet review, a thorough assessment of the Bank's
delivery and servicing systems, the sale of the underperforming leasing company,
an acceleration of the disposition of other real estate owned and a management
restructuring. Total expenses related to these strategic initiatives totaled
$2.0 million ($1.3 million after-tax, or $.02 per diluted share) during the
three months ended March 31, 2001. These expenses are classified in the general
and administrative category "exit costs and termination benefits." See Note C
"Exit Costs and Termination Benefits" in the Notes to Consolidated Financial
Statements for additional information.
LIQUIDITY AND CAPITAL RESOURCES:
--------------------------------
The Corporation's principal asset is its investment in the capital stock of the
Bank. Since the Corporation 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 the capital distribution regulations of the Office of Thrift Supervision
("OTS"), the Bank is permitted to pay capital distributions during a calendar
year up to 100.0% of its retained net income (net income determined in
accordance with generally accepted accounting principles less total capital
distributions declared) for the current calendar year combined with the Bank's
retained net income for the preceding two calendar years without requiring an
application for approval to be filed with the OTS. At March 31, 2001, the
Bank's total distributions exceeded its retained income by $137.3 million under
this regulation. Currently, the Bank is required to file an application with
the OTS for approval of any capital distributions.
15
LIQUIDITY AND CAPITAL RESOURCES (Continued):
--------------------------------------------
The Corporation manages its liquidity at both the parent company and subsidiary
levels. At March 31, 2001, the cash of Commercial Federal Corporation (the
"parent company") totaled $38.7 million. Due to the parent company's limited
independent operations, management believes that its cash balance at March 31,
2001, is currently sufficient to meet operational needs excluding funds
necessary for interest and principal payments and the repurchase of common
stock. 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, on its $46.4 million of 9.375% fixed-rate junior
subordinated debentures due May 15, 2027, and on its term and revolving credit
notes is dependent upon its receipt of dividends from the Bank. During the
three months ended March 31, 2001, the parent company received cash dividends
totaling $44.0 million from the Bank. These dividends received from the Bank
were for (i) common stock cash dividends totaling $3.6 million paid by the
parent company to its common stock shareholders, (ii) interest payments totaling
$994,000 on the parent company's debt and (iii) the financing of common stock
repurchases totaling $39.4 million. The Bank will continue to pay dividends to
the parent company, subject to regulatory restrictions, to cover future
principal and interest payments on the parent company's debt and quarterly cash
dividends on common stock when and as declared by the parent company. 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.
The Corporation continues repurchasing shares of its outstanding common stock
that began in April 1999. On August 14, 2000, the Corporation's Board of
Directors authorized the repurchase of up to 10% of its outstanding stock, or
approximately 5,500,000 shares. Management anticipates to complete this
repurchase by June 30, 2001. During the three months ended March 31, 2001, the
Corporation purchased 1,629,900 shares of its common stock at a cost of $35.4
million. On May 7, 2001, the Board of Directors authorized the repurchase of
5,000,000 shares of the Corporation's outstanding common stock to be completed
no later than December 31, 2002.
The Corporation's primary sources of funds are (i) deposits, (ii) principal
repayments on loans, mortgage-backed and investment securities, (iii) advances
from the FHLB and (iv) cash generated from operations. Net cash flows used by
operating activities totaled $225.3 million for the three months ended March 31,
2001, and net cash flows provided by operating activities totaled $141.3 million
for the three months ended March 31, 2000. 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. Certain amounts from operating activities for the three months ended
March 31, 2001, reflect the balance sheet restructuring announced in August
2000. During the three months ended March 31, 2001, the Corporation sold
investment and mortgage-backed securities totaling $213.4 million resulting in a
pre-tax gain of $8.1 million. These gains on the sales of investment and
mortgage-backed securities were recognized to offset the valuation adjustment
loss of $5.5 million in the mortgage servicing rights portfolio. A substantial
portion of the leasing portfolio was sold February 28, 2001 with closing on the
transaction occurring April 9, 2001. The Corporation realized cash proceeds in
April 2001 totaling $34.8 million from the sale and originated a secured loan
totaling $9.5 million at prime plus 100 basis points for a one-year term with
two annual renewals.
Net cash flows provided by investing activities totaled $48.6 million for the
three months ended March 31, 2001, and net cash flows used by investing
activities totaled $64.2 million for the three months ended March 31, 2000.
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.
Net cash flows provided by financing activities totaled $160.6 million for the
three months ended March 31, 2001 and for the three months ended March 31, 2000,
net cash flows used by financing activities totaled $97.7 million. Advances
from the FHLB and deposits have been the primary sources to balance the
Corporation's funding needs during each of the periods presented. The
Corporation experienced net decreases in deposits of $53.4 million for the three
months ended March 31, 2001. The net decrease in deposits for the current
period is primarily due to the Corporation's reduction of brokered deposits for
funding needs. At March 31, 2001, brokered certificates of deposits totaled
$208.8 million compared to $322.2 million at December 31, 2000. The net
decrease in deposits of $12.2 million for the three months ended March 31, 2000,
was primarily due to depositors seeking higher-yielding investment options. As
part of the Corporation's key strategic initiatives, it was announced that 49
branches would be closed or sold in 2001. During the current quarter, 12
branches were closed. Management anticipates that the 37 other branches will be
sold by September 30, 2001. Deposits associated with these 49 branches
approximated $464.0 million. During the three months ended March 31, 2001, the
Corporation continued to borrow long-term FHLB advances that are callable at the
option of the FHLB. At March 31, 2001, the Corporation had fixed-rate advances
with a weighted average rate of 5.29% totaling $1.7 billion that were
convertible into adjustable-rate advances. These convertible advances have call
dates after March 2004. During the three months ended March 31, 2001 and 2000
the Corporation repurchased shares of its common stock totaling $35.4 million
and $20.3 million, respectively.
16
LIQUIDITY AND CAPITAL RESOURCES (Continued):
--------------------------------------------
At March 31, 2001, the Corporation issued commitments totaling approximately
$728.8 million to fund and purchase loans as follows: $69.7 million of single-
family adjustable-rate mortgage loans, $239.9 million of single-family fixed-
rate mortgage loans, $186.1 million of commercial real estate loans, $23.4
million of consumer, commercial operating and agricultural loans and
approximately $209.7 million of unused lines of credit for commercial and
consumer use. These outstanding loan commitments to extend credit in order to
originate loans or fund commercial and consumer loans 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, 2001, the Corporation had approximately $605.3 million in mandatory
forward delivery commitments to sell residential mortgage loans and $9.0 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 OTS established an interim
rule whereby savings institutions are only required to maintain sufficient
liquidity to ensure their safe and sound operation. The Bank's liquidity ratio
was 17.33% at March 31, 2001. 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, 2001, was $22.2 million, or $.42
per basic and diluted share, compared to net income of $26.5 million, or $.46
per basic and diluted share for the three months ended March 31, 2000. The net
decrease in income comparing the respective quarters is primarily due to a net
decrease of $14.0 million in net interest income after provision for loan losses
and a net increase of $2.1 million in total other expense. These net decreases
to income were partially offset by a net increase of $7.7 million in total other
income and a decrease of $4.2 million in provision for income taxes.
Net Interest Income:
--------------------
Net interest income totaled $71.8 million for the three months ended March 31,
2001, compared to $85.1 million for the three months ended March 31, 2000, a
decrease of approximately $13.3 million, or 15.6%. During the three months
ended March 31, 2001 and 2000, interest rate spreads were 2.45% and 2.66%,
respectively, a decrease of 21 basis points; and the net yield on interest-
earning assets was 2.49% and 2.75%, a decrease of 26 basis points.
Net interest income decreased for the three months ended March 31, 2001 compared
to 2000 due to the generally higher interest rate environment experienced during
calendar year 2000 and to the decrease in the net earnings balance. The
decrease in the interest rate spread is due primarily to a 48 basis point
increase in costing liabilities as a result of the maturity of lower-cost
fundings. Total interest expense increased $4.8 million comparing the three
months ended March 31, 2001 to 2000 due to higher costs of funds partially
offset by a net decrease of $594.9 million in average interest-bearing
liabilities. Total interest income decreased $8.5 million over the same three-
month periods primarily due to a net decrease of $846.3 million in average
interest-earning assets. The decreases in these average balances is due to the
balance sheet restructuring completed during the six months ended December 31,
2000.
17
RESULTS OF OPERATIONS (Continued):
---------------------------------
Based on the completion of the balance sheet restructuring and the current
interest rate environment, management anticipates a relatively stable margin for
the remainder of 2001. However, the future trend in interest rate spreads and
net interest income will be dependent upon such factors as the composition and
size of the Corporation's interest-earning assets and interest-bearing
liabilities, the interest rate risk exposure of the Corporation and the maturity
and repricing activity of interest-sensitive assets and liabilities, as
influenced by changes in and levels of both short-term and long-term market
interest rates.
The following table presents certain information concerning yields earned on
interest-earning assets and rates paid on interest-bearing liabilities during
and at the end of each of the periods presented:
------------------------------------------------------------------------------------------------------------------
For the Three
Months Ended At
March 31, March 31,
---------------------- ---------------------
2001 2000 2001 2000
------------------------------------------------------------------------------------------------------------------
Weighted average yield on:
Loans 8.06% 7.73% 8.03% 7.81%
Mortgage-backed securities 6.75 6.44 6.76 6.50
Investments 6.89 6.87 6.26 6.69
------------------------------------------------------------------------------------------------------------------
Interest-earning assets 7.78 7.51 7.70 7.56
------------------------------------------------------------------------------------------------------------------
Weighted average rate paid on:
Savings deposits 3.16 3.17 2.87 3.27
Other time deposits 6.22 5.30 6.42 5.39
Advances from FHLB 6.12 5.48 5.53 5.64
Securities sold under agreements
to repurchase 5.29 4.92 6.25 5.02
Other borrowings 8.55 7.98 8.34 8.47
------------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 5.33 4.85 5.10 4.96
------------------------------------------------------------------------------------------------------------------
Net interest rate spread 2.45% 2.66% 2.60% 2.60%
------------------------------------------------------------------------------------------------------------------
Net annualized yield on
interest-earning assets 2.49% 2.75% 2.60% 2.73%
------------------------------------------------------------------------------------------------------------------
18
Net Interest Income (Continued):
--------------------------------
The following table presents average interest-earning assets and average
interest-bearing liabilities, interest income and interest expense, and average
yields and rates during the three months ended March 31, 2001. This table
includes nonaccruing loans averaging $105.1 million for the three months ended
March 31, 2001, as interest-earning assets at a yield of zero percent:
-------------------------------------------------------------------------------------------------------------------
Three Months Ended
March 31, 2001
--------------------------------------------------
Annualized
Average Yield/
Balance Interest Rate
------------------------------------------------------------------------------------------------------------------
Interest-earning assets:
Loans $ 8,974,298 $180,699 8.06%
Mortgage-backed securities 1,555,555 26,242 6.75
Investments 1,012,783 17,137 6.89
----------------------------------------------------------------------------------------------------------------
Interest-earning assets 11,542,636 224,078 7.78
----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities:
Savings deposits 3,348,651 26,082 3.16
Other time deposits 4,334,903 66,502 6.22
Advances from FHLB 3,656,051 55,977 6.12
Securities sold under
agreements to repurchase 9,613 127 5.29
Other borrowings 166,645 3,561 8.55
----------------------------------------------------------------------------------------------------------------
Interest-bearing liabilities 11,515,863 152,249 5.33
----------------------------------------------------------------------------------------------------------------
Net earnings balance $ 26,773
===========
Net interest income $ 71,829
========
Net interest rate spread 2.45%
----------------------------------------------------------------------------------------------------------------
Net annualized yield on
interest-earnings assets 2.49%
----------------------------------------------------------------------------------------------------------------
The Corporation's net earnings balance (the difference between average interest-
bearing liabilities and average interest-earning assets) decreased by $251.5
million during the three months ended March 31, 2001, compared to the three
months ended March 31, 2000. This decrease in the net earnings balance
comparing these periods is primarily due to the restructuring of the balance
sheet, the repurchases of common stock totaling $97.9 million over the last
twelve months and the funding of the $200.0 million bank owned life insurance
("BOLI") program. The BOLI asset is excluded from the average balance of
interest-earning assets and the BOLI related income is recorded in other income.
19
Net Interest Income (Continued):
-------------------------------
The following table presents the dollar amount of changes in interest income and
expense for each major component of interest-earning assets and interest-bearing
liabilities, and the amount of change in each attributable to: (i) changes in
volume (change in volume multiplied by prior year rate), and (ii) changes in
rate (change in rate multiplied by prior year volume). The net change
attributable to change in both volume and rate, which cannot be segregated, has
been allocated proportionately to the change due to volume and the change due to
rate. This table demonstrates the effect of the decreased 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
March 31, 2001 Compared
to March 31, 2000
---------------------------------------
Increase (Decrease) Due to
---------------------------------------------------------------------------------------------------------------
Volume Rate Total
---------------------------------------------------------------------------------------------------------------
Interest income:
Loans $(16,384) $ 6,880 $ (9,504)
Mortgage-backed securities 4,215 1,041 5,256
Investments (4,267) 64 (4,203)
---------------------------------------------------------------------------------------------------------------
Interest income (16,436) 7,985 (8,451)
---------------------------------------------------------------------------------------------------------------
Interest expense:
Savings deposits 2,679 (1,447) 1,232
Other time deposits 679 9,265 9,944
Advances from FHLB (12,717) 6,515 (6,202)
Securities sold under agreements to repurchase (233) 23 (210)
Other borrowings (215) 242 27
---------------------------------------------------------------------------------------------------------------
Interest expense (9,807) 14,598 4,791
---------------------------------------------------------------------------------------------------------------
Effect on net interest income $ (6,629) $(6,613) $(13,242)
---------------------------------------------------------------------------------------------------------------
Provision for Loan Losses and Real Estate Operations:
----------------------------------------------------
The Corporation recorded loan loss provisions totaling $4.4 million and $3.7
million, respectively, for the three months ended March 31, 2001 and 2000. Net
loans charged-off totaled $4.0 million for the three months ended March 31,
2001, compared to $5.0 million for the three months ended March 31, 2000. The
net charge-offs are lower for the current quarter due to commercial real estate
charge-offs totaling $1.7 million for the 2000 period compared to no charge-offs
for the 2001 period and a decrease of $318,000 in lease charge-offs. These
decreases are partially offset by increases in consumer and construction loan
charge-offs totaling $852,000 and $252,000, respectively. The allowance for
loan losses is based upon management's continuous evaluation of the
collectibility of outstanding loans, which takes into consideration such factors
as changes in the composition of the loan portfolio and economic conditions that
may affect the borrower's ability to pay, regular examinations by the
Corporation's credit review group of specific problem loans and of the overall
portfolio quality and real estate market conditions in the Corporation's lending
areas. The allowance for credit losses totaled $83.9 million at March 31, 2001,
or 95.2% of total nonperforming loans, compared to $83.4 million, or 87.0% at
December 31, 2000.
The Corporation recorded net losses from real estate operations totaling
$515,000 and $151,000 for the three months ended March 31, 2001 and 2000. Real
estate operations reflect impairment losses for real estate, net real estate
operating activity, and gains and losses on dispositions of real estate. The
net increase in the losses for real estate operations for the three months ended
March 31, 2001 compared to 2000 is due primarily to increases in impairment
losses of $497,000, partially offset by decreases in net real estate operating
expense of $106,000 and increases in net gains on disposition of real estate
totaling $27,000.
20
Provision for Loan Losses and Real Estate Operations (Continued):
----------------------------------------------------------------
Management of the Corporation believes that present levels of allowances for
loan losses are adequate to reflect the risks inherent in its portfolios.
However, 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.
Nonperforming assets are monitored on a regular basis by the Corporation's
internal credit review and problem asset groups. Nonperforming assets are
summarized as of the dates indicated:
----------------------------------------------------------------------------------------------------
March 31, December 31,
2001 2000
----------------------------------------------------------------------------------------------------
Nonperforming loans:
Residential real estate $ 62,805 $ 81,406
Commercial real estate 16,463 4,446
Consumer 8,545 7,271
Leases and other loans 327 2,748
-------------------------------------------------------------------------------------------------
Total 88,140 95,871
-------------------------------------------------------------------------------------------------
Real estate:
Commercial 6,753 10,198
Residential 38,810 15,824
-------------------------------------------------------------------------------------------------
Total 45,563 26,022
-------------------------------------------------------------------------------------------------
Troubled debt restructurings:
Commercial 4,158 4,195
Residential 88 90
-------------------------------------------------------------------------------------------------
Total 4,246 4,285
-------------------------------------------------------------------------------------------------
Total nonperforming assets $137,949 $126,178
-------------------------------------------------------------------------------------------------
Nonperforming loans to total loans .95% 1.05%
Nonperforming assets to total assets 1.08% 1.01%
-------------------------------------------------------------------------------------------------
Total allowance for loan losses (1) $ 83,873 $ 83,439
-------------------------------------------------------------------------------------------------
Allowance for loan losses to total loans .90% .91%
Allowance for loan losses to total nonperforming assets 60.80% 66.13%
-------------------------------------------------------------------------------------------------
(1) Includes $279,000 and $1,076,000 at March 31, 2001 and December 31, 2000,
respectively, in allowance for losses established on loans and leases held
for sale.
21
Provision for Loan Losses and Real Estate Operations (Continued):
----------------------------------------------------------------
Nonperforming loans at March 31, 2001, decreased by $7.7 million compared to
December 31, 2000, primarily due to the foreclosure of a residential
construction loan totaling $22.7 million partially offset by a commercial real
estate group of loans totaling $11.7 million becoming 90 days past due. The
$2.4 million net decrease in leases and other loans reflects the Corporation's
sale of a substantial portion of the leasing portfolio during the current
quarter. The net increase in real estate of $19.5 million at March 31, 2001,
compared to December 31, 2000, is due primarily to the foreclosure of the
residential construction property discussed above for $22.7 million.
Loan Servicing Fees:
-------------------
Loan servicing fees totaled $1.1 million and $6.7 million, respectively, for the
three months ended March 31, 2001 and 2000. The amount of revenue generated
from loan servicing fees, and changes in comparing periods, is primarily due to
the average size of the Corporation's portfolio of mortgage loans serviced for
other institutions and the level of rates for service fees collected partially
offset by the amortization expense of mortgage servicing rights and possible
valuation allowances. The loan servicing fees category also includes fees
collected for late loan payments. During the three months ended March 31, 2001,
service fees and late charges totaled $10.2 million compared to $8.3 million for
the three months ended March 31, 2000. This net increase was due to a higher
average balance of mortgage loans serviced slightly offset by a lower level of
service fee rates comparing the respective periods. Amortization expense of
mortgage servicing rights totaled $3.6 million and $1.7 million, respectively,
for the three months ended March 31, 2001 and 2000. This increase reflects an
increase in prepayments due to the lower interest rate environment comparing the
respective periods. The amount of amortization expense of mortgage servicing
rights is determined, in part, by mortgage loan pay-downs in the servicing
portfolio that are influenced by changes in interest rates. In addition, a
valuation allowance totaling $5.5 million in impairment losses was recorded as
of March 31, 2001, as a reduction of loan servicing fees and of the carrying
amount of the mortgage servicing rights portfolio. This valuation allowance was
due to an increase in loan prepayment speeds resulting from a decrease in
interest rates at March 31, 2001 compared to December 31, 2000. At March 31,
2001 and 2000, the Corporation's portfolio of mortgage loans serviced for other
institutions approximated $9.240 billion and $7.325 billion, respectively. The
mortgage loans serviced balance at March 31, 2001, includes the $1.6 billion of
residential loans securitized and sold in November 2000 with servicing retained.
The fair 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 $12.1 million for the three months ended March
31, 2001, compared to $10.4 million for the three months ended March 31, 2000.
Increases in certain checking account fees and related ancillary fees for
overdraft and insufficient funds charges and debit card fees are all
attributable for the increase over the March 31, 2000, quarter.
22
Loss on Sales of Loans:
----------------------
During the three months ended March 31, 2001 and 2000, loans were sold totaling
approximately $580.2 million and $235.6 million, respectively, resulting in pre-
tax losses of $2.5 million and $239,000, respectively. These loans are
typically originated by the mortgage banking operations and sold in the
secondary market with loan servicing retained and without recourse to the
Corporation.
Gain on Sales of Securities and Changes in Fair Value of Derivatives:
--------------------------------------------------------------------
During the three months ended March 31, 2001, the following transactions were
recorded:
-------------------------------------------------------------------------------------------------------
Gain on the sales of available-for-sale securities:
Investment securities $ 7,133
Mortgages-backed securities 958 $8,091
---------------------------------------------------------------------------------------------------
Changes in the fair value of derivative financial intruments
not qualifying for hedge accounting and certain hedged items:
Interest rate floor agreements 1,057
Forward loan sales commitments 519
Conforming loan commitments 65
Forward loan sales fair value hedge (2,818)
Loan warehouse fair value hedge 2,667 1,490
---------------------------------------------------------------------------------------------------
Other activity:
Amortization expense on the deferred loss ($8,601)
on terminated interest rate swap agreements (509)
Other (14) (523)
---------------------------------------------------------------------------------------------------
Gain on sales of securities, hedging and termination
of interest rate swap agreements, net $ 9,058
---------------------------------------------------------------------------------------------------
During the three months ended March 31, 2001, the Corporation realized pre-tax
gains on the sales of available-for-sale investment and mortgage-backed
securities totaling $8.1 million. The gains were recognized to offset the
valuation adjustment loss of $5.5 million in the mortgage servicing rights
portfolio. During the three months ended March 31, 2000, there were no sales of
securities. Effective July 1, 2000, the Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). At March 31, 2001, the
Corporation had derivative financial instruments that under SFAS No. 133 are
recorded at fair value with the changes in fair value totaling $1,490,000
reported in current earnings. In addition, in December 2000, the Corporation
incurred losses totaling $8,601,000 on terminated interest rate swap agreements
since the related hedged FHLB advances and deposit liabilities were not paid.
This loss is included in other comprehensive income (loss) with $509,000
amortized to operations during the three months ended March 31, 2000. The
unamortized balance totaled $7,923,000 at March 31, 2001.
23
Other Operating Income:
----------------------
Other operating income totaled $11.5 million for the three months ended March
31, 2001, compared to $6.4 million for the three months ended March 31, 2000.
The major components of other operating income are brokerage commissions, credit
life and disability commissions and insurance commissions. In December 2000, the
Corporation invested in a BOLI program with a contract value of $200.0 million.
During the three months ended March 31, 2001, revenue from the BOLI program
totaled $3.6 million. The net increase for the three months ended March 31,
2001, compared to the prior year period is primarily attributable to the revenue
from the BOLI program and to increased revenue from various consumer loan fees
and rental income.
General and Administrative Expenses:
-----------------------------------
Total general and administrative expenses approximated $61.8 million for the
three months ended March 31, 2001, compared to $60.1 million for the three
months ended March 31, 2000. Excluding charges for exit costs and termination
benefits, general and administrative expenses totaled $59.9 million for the
three months ended March 31, 2001, a net decrease of $239,000 from the prior
year quarter. This net decrease is primarily due to a lower number of full-time
equivalent employees comparing the respective periods, management's emphasis on
tighter cost controls and the effect of certain initiatives beginning with the
November 1999 branch divestitures and employee outplacement and the August 2000
key strategic initiatives.
Amortization of Core Value of Deposits and Goodwill:
---------------------------------------------------
For the three months ended March 31, 2001 and 2000 amortization of core value of
deposits and goodwill totaled $4.1 million and $3.7 million, respectively. The
net increase in amortization expense is primarily due to activity occurring in
the prior year quarter. The purchase accounting adjustments and core value study
were finalized for a March 1999 acquisition during the quarter ended March 31,
2000, resulting in a credit adjustment of amortization expense.
Provision for Income Taxes:
--------------------------
For the three months ended March 31, 2001, the provision for income taxes
totaled $10.0 million compared to $14.2 million for the three months ended March
31, 2000. The effective income tax rates for the three months ended March 31,
2001 and 2000 were 30.9% and 34.8%, respectively. The effective income tax rate
is lower for the quarter ended March 31, 2001 compared to 2000 due to increases
in tax-exempt interest income and the tax benefits from the BOLI program.
The effective tax rate for the three months ended March 31, 2001 varies from the
statutory rate primarily due to tax benefits from the BOLI, tax-exempt interest
and tax credits.
Item 3. QUANTITATIVE AND QUALITATIVE
------------------------------------
DISCLOSURES ABOUT MARKET RISK
-----------------------------
Information as of March 31, 2001, concerning the Corporation's exposure to
market risk, which has remained relatively unchanged from December 31, 2000, is
incorporated by reference under Item 7A "Quantitative and Qualitative
Disclosures About Market Risk" in the Form 10-K Transition Report for the
Corporation's six month transition period ended December 31, 2000.
24
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a). The Corporation held its Annual Meeting of Stockholders on May 8,
2001, in Omaha, Nebraska. The inspector of election issued his
certified final report on May 8, 2001 for the election of
directors voted upon at such Annual Meeting.
(b). Not applicable.
(c). The proposal voted upon at the Annual Meting was for the election
of three individuals as directors for three year terms. The
results of voting were as follows:
Proposal 1 - Election of Directors:
----------------------------------
Nominees (for terms to expire in 2004): Votes for Votes Withheld
-------------------------------------- ---------- --------------
Talton K. Anderson 44,240,205 2,879,709
Carl G. Mammel 44,236,893 2,883,021
James P. O'Donnell 43,079,667 4,040,247
(d). Not applicable.
Item 5. Other Information
-----------------
On April 19, 2001, the Corporation announced the appointment of Robert J.
Hutchinson as President and Chief Operating Officer. A Form 8-K was filed on
April 24, 2001 regarding this appointment.
On May 7, 2001, the Board of Directors authorized the Corporation's fourth stock
repurchase program. This repurchase consists of 5,000,000 shares of the
Corporation's outstanding common stock to be completed no later than December
31, 2002. These repurchases can be made at any time and in any amount,
depending upon market conditions and various other factors. Any repurchase
generally will be on the open-market, although privately negotiated transactions
are also possible. In compliance with Nebraska law, all repurchased shares will
be cancelled.
On May 7, 2001, the Corporation's Board of Directors also approved an increase
to the Corporation's quarterly cash dividend to $.08 per common share from $.07
per common share. The new dividend rate of $.08 per common share will be paid
on July 12, 2001 to stockholders of record as of June 28, 2001.
On May 8, 2001, the Corporation's Board of Directors adopted an amendment to the
Corporation's By-Laws which increased the Corporation's board of director seats
to eleven from ten. In addition, on May 8, 2001, the Corporation's Board of
Directors appointed Robert J. Hutchinson, President and Chief Operating Officer,
as a director, bringing the total number of Board of Directors of the
Corporation to eleven.
On May 10, 2001, the Corporation filed a Form 8-K, which is incorporated by
reference herein, regarding the common stock repurchase of 5,000,000 shares, the
quarterly cash dividend increase to $.08 per common share, the adoption of the
amendment to the By-Laws with the amended By-Laws included as an exhibit, and
the appointment of Mr. Hutchinson as a director.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a). Exhibits:
None
(b). Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
March 31, 2001.
25
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMERCIAL FEDERAL CORPORATION
------------------------------
(Registrant)
Date: May 14, 2001 /s/ David S. Fisher
------------ -----------------------------------------
David S. Fisher, Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 2001 /s/ Gary L. Matter
------------ -----------------------------------------
Gary L. Matter, Senior Vice President,
Controller and Secretary
(Principal Accounting Officer)
26