Commercial Federal Corporation

1887–1994

Commercial Federal Corporation is the largest financial institution based in Nebraska and is that state's largest business overall. Through an aggressive acquisition program, the company extended its operations to Colorado, Kansas, and Oklahoma during the 1980s. Following the period of economic malaise generally characterizing the savings and loan (thrift) industry as a whole in 1989 and 1990, Commercial Federal rebounded and was again expanding its operations in the mid-1990s. In 1992 Commercial Federal ranked seventh among public thrifts based on five-year average return on equity and tenth based on profits per employee. Moreover, the company was among the 17 largest thrift institutions in the nation in 1994.

The history of Commercial Federal may be traced to the 1880s, when a group of Omaha businessmen bought land just south of the city limits, near the new Union Stockyards then under construction. In 1887, only a year after the village was incorporated, the South Omaha Loan and Building Association was opened. It was a mutual (depositor-owned) savings association, with voting privileges for all who subscribed for five shares at $200 a share. Customers paid for their shares through a regular savings plan and, to encourage regular saving, were fined if they missed a monthly payment. Once payments and interest reached $200 a share, the saver could then exchange the five shares for $1,000. A customer whose payments had reached one quarter to one-third of the value of the shares could pledge them for a mortgage on a $2,000 home.

One of the savings and loan's early customers was an Irish immigrant named James J. Fitzgerald. In 1893 Fitzgerald was elected to the board of directors. Five years later he quit his job in a packing plant to become secretary-manager of the association at a salary of $60 a month. By 1910 the association was prosperous enough to establish an office in downtown Omaha and changed its name to the Commercial Savings and Loan Association. When South Omaha was annexed by Omaha in 1915, however, the association closed the downtown office and used the savings to purchase its own three-story office building.

By 1929 Commercial's assets had grown from the original $10,000 to $4 million. Under the impact of the Great Depression, however, assets fell to $2.1 million in 1935. During this bleak period, the thrift institution made every effort to avoid foreclosing on the property of its borrowers, in order to maintain good customer relations and because land sold after foreclosure typically resulted in a sharply reduced selling price. Commercial also refinanced mortgages at lower interest rates during this time, which meant smaller returns on its investments. Unlike some thrift institutions, Commercial did not go "on notice"--meaning the institution was not required to have the cash to pay for all withdrawals. Fitzgerald's younger son William F. Fitzgerald, who became a teller in 1933, later recalled that sometimes, when a customer would come in to withdraw his funds, "I would count the money very slowly to give them time to think.... Once they realized the cash was there and Commercial would be able to meet their withdrawal, they would decide to leave the money and let it continue to earn dividends."

Total assets did not begin to rise again until 1939, and by 1945 assets had again reached the 1929 level. By this time James Fitzgerald was the company's president, and William was serving as secretary-treasurer. Commercial, fifth in assets among the six Omaha savings and loan associations at the end of World War II, soon became the largest lender to veterans in Nebraska under the G.I. Bill. It was also aggressive in meeting the pent-up postwar demand for housing, by financing tract developments. Commercial placed the first television ad in Omaha, promoting its sixty-fifth anniversary in 1952 widely, and in 1953 it opened a drive-in teller window--Nebraska's first. In 1959 Commercial got into data processing, signing up other savings-and-loans to help pay for a computer that more than met its own needs at the time.

Although James Fitzgerald retired in 1955, he continued to serve as board chairperson and went to the office nearly every day until his death the following year at the age of 87. William Fitzgerald became president in 1950, and his son, William A. Fitzgerald, joined the company in 1955. The younger William would rise in the corporate ranks, becoming president in 1974, chief executive officer in 1983, and board chairperson in 1994.

By 1929 Commercial's assets had grown from the original $10,000 to $4 million.

1960–1988

By 1960 Commercial had five locations, and a new home office was opened two years later, when assets reached $100 million. This three-story structure featured an 85-foot tower with carillon bells and served as the model for all later Commercial branches.

In 1967 the association moved outside the Omaha metropolitan area for the first time by merging with Allied Building and Loan of Norfolk. Soon Commercial had branches in other Nebraska communities as well, some started from scratch, others by merger with an established savings and loan institution. By the end of 1974 Commercial was the largest savings and loan association in Nebraska, with 15 offices and $516 million in assets. In 1979 it became the first such thrift in its market to sell mortgage-backed bonds. Two years later it was among the first savings and loans to offer checking accounts. Also in 1981 Commercial introduced automated teller machines and spun off its lending division into a separate mortgage-banking subsidiary. A full-service brokerage program was introduced in 1983.

Reincorporated in Nebraska on August 18, 1983, as Commercial Federal Savings & Loan Association, the company converted the next year from a depositor-owned federal mutual savings and loan to a publicly traded, investor-owned institution. A holding company, Commercial Federal Corporation, became the parent company of the savings and loan association. A national public offering of shares in Commercial Federal was completed before the end of 1984, with 1.76 million shares of common stock sold at $8.50 each.

Commercial Federal's business strategy in the 1980s was based on expansion, diversification, offering high-quality loans, and achieving economies of scale through computer technology. By early 1986 it was the largest depository financial institution in Nebraska, with assets in excess of $3 billion. On March 3, 1986, Commercial Federal opened its first depository institution outside the state, acquiring about $86 million in insured deposits of the insolvent Denver-based Sierra Federal Savings and Loan Association from the Federal Savings and Loan Insurance Corp. Fitzgerald told American Banker that the acquisition was "part of an overall plan for targeted expansion in the Midwest," which would mean expanding into "four additional states within the next four years."

The company already had loan mortgage banking offices in surrounding states, was offering discount stock brokerage services, and was adding a full range of insurance products. By early 1988 the company also had a subsidiary, Commercial Service Corp., which acted as a vehicle for insurance sales, real estate developments and the marketing of pooled real estate investments, and other projects.

In September 1984, even before the holding company was formed, Commercial Federal had purchased an 81.3 percent interest in Systems Marketing Inc., a firm that primarily leased IBM peripheral computer equipment to Fortune 500 companies. And it was active in the mortgage market, buying fixed-rate mortgage loans and securities with long-term Federal Home Loan Bank borrowings. By March 1986 the company had realized substantial gains from these investments, while avoiding direct loans to agriculture, despite its location in the nation's farm belt. Its rate of nonperforming loans was less than one percent, and its stock had risen from the original $8.50 a share to about $27.

1985–1994

Soon thereafter, Commercial Federal acquired two failed thrift institutions. The first, in August 1986, was Coronado Federal Savings and Loan Association of Kansas City, Kansas. One month later it bought Denver's Empire Savings, Building and Loan Association from bankrupt Baldwin-United Corp. for $45 million in cash. The purchase price, about 57 percent of Empire's regulatory net worth, was considered a bargain. To help pay for the acquisition, Commercial Federal issued $60 million of preferred stock to El Paso Electric Co. The company then moved into its fourth state--Oklahoma--when it acquired insolvent Territory Savings and Loan Association of Seminole, Oklahoma, in January 1988 for $4.2 million.

The fourth leg of the company's strategy--computer technology--was represented by several efforts. In 1985, for example, Commercial Federal became the first financial institution in the nation to introduce personal banking machines (PBMs) in branch offices. By April 1988 it had 68 branches and was providing at least one product or service to 54 percent of the households in its home market of Omaha. To better understand its customer base, the company had created a Marketing Customer Information File--a database of its account relationships. One objective of this database was to increase revenues by repackaging and repricing products for specific customer segments. And the paper records of the company's largest subsidiary, Commercial Federal Mortgage Corp., were transferred to a microfilm-based computer-assisted retrieval system. By 1994 the company credited its computer-driven automation with allowing each agent to service 850 loans, compared to an industry average of about 600.

However, Commercial Federal faced some major challenges beginning in 1989. With Denver's economy in a serious slump, Empire Savings became a liability rather than an asset. Part of the problem was attributed to federal regulators, who had imposed tighter capital restrictions, making it harder for Commercial Federal to mark down Empire's bad loans as goodwill. The objective of the regulators, Fitzgerald later said in a 1994 interview published in American Banker, "was to see how many writedowns they could take to finally find the bottom in the value of a financial institution. Whether or not you agreed with them, it didn't matter."

Suddenly Commercial Federal was facing the same abyss that had swallowed so many of the savings and loans during this time. "They had one foot in the grave," a banking analyst recalled of Commercial Federal in an American Banker article, noting that "on a tangible net worth basis, they were bankrupt." Company executives responded by shedding nonperforming assets--mostly commercial loans--and cutting costs. Over a 15-month period, they reduced assets from $6.8 billion to $4.8 billion, closed 20 branches, and laid off 400 employees. All lending was halted, and all assets were converted to mortgage-backed securities. The company's stock fell below $2 a share in 1990.

Commercial Federal emerged by issuing a capital plan that was approved by the Federal Office of Thrift Supervision in May 1990. By then the holding company had purchased Commercial Federal Savings and Loan's outstanding preferred stock, augmenting tangible capital by $61.4 million. The plan called for adding $70 million to its capital by mid-1991 and meeting the new federal capital guidelines about two years before the compliance deadline of December 31, 1994. Commercial Federal Savings and Loan Association converted its federal charter to a federal savings bank on July 30, 1990, changing its name to Commercial Federal Bank, FSB (the initials standing for Federal Savings Bank).

During a six-month period in 1992, the parent company sold all $3.3 billion of its mortgage-backed securities to several investors. In addition, the company sold $950 million in loan servicing rights to Source One Mortgage Services Corp. of Detroit in a single transaction. Then it offered about $40 million in equity and a similar amount in subordinated notes to improve its capital position and, in Fitzgerald's words, "get the regulators off our backs."

1993–1995

Commercial Federal also began bolstering its thrift holdings again in 1993, acquiring 19 thrift branches in Oklahoma and Kansas to reach a total of 67. In October 1993 the company paid $18.2 million to the Federal Deposit Insurance Corp. for 12 offices and the $567.9 million of deposits of Heartland Federal Savings and Loan Association of Ponca City, Oklahoma. In June 1994 it acquired four branches and about $255.7 million of deposits of the bankrupt Franklin Federal Savings Association in Kansas from the Resolution Trust Corp., a federal bailout agency, for about $9 million. In July 1994 the company announced it had paid about $9 million for the two branch offices and $87.1 million of deposits of the Home Federal Savings & Loan of Ada, Oklahoma.

By 1993 Commercial Federal had recovered so well that it had become the subject of takeover talk. CAI Corp., a Dallas-based investor group with a stake of nearly ten percent in the company, campaigned for a sale, driving the stock price to over $23 a share in June. However, the offer was ultimately rejected. Over the course of the following year, the company's stock value ranged between $28 and $17.50 per share. Moreover, for fiscal 1994 (the year ended June 30), operating earnings had increased 20 percent and total assets had reached $5.52 billion on deposits of $3.36 billion. By the end of the calendar year, total assets had grown to $5.8 billion.

In April 1995 Commercial Federal announced that it had acquired the Provident Federal Savings Bank of Lincoln, Nebraska. In the transaction, Commercial Federal gained five offices in Lincoln with assets of around $95 million and deposits of $57 million. Also during this time, the company entered into an agreement to acquire Railroad Financial Corporation of Wichita, Kansas. In a press release, chairperson and CEO Fitzgerald noted that "the acquisitions will immediately strengthen our retail franchise and our future earnings potential."

A booming economy was helping the company, with unemployment below four percent in all four states where it maintained bank branches. "The goal now," company vice-president Stan Blakey told American Banker, "is to make yourself a little more profitable, to exceed the analysts' estimates by a little bit every quarter, and to do a little better than the rest of the guys out there."