<PAGE>
As filed with the Securities and Exchange Commission on December 18, 1997
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
COMMERCIAL FEDERAL CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<CAPTION>
Nebraska 6135 47-0658852
<S> <C> <C>
(State or other Jurisdiction of (Primary Standard Industrial (IRS Employer Identification No.)
Incorporation or Organization) Classification Code Number)
</TABLE>
2120 South 72nd Street
Omaha, Nebraska 68124
(402) 554-9200
(Address, Including Zip Code, and Telephone Number, Including
Area Code, of Registrant's Principal Executive Offices)
Mr. James A. Laphen, President
Commercial Federal Corporation
2120 South 72nd Street
Omaha, Nebraska 68124
(402) 390-5361
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copies of all communications to:
Gary R. Bronstein, Esquire John S. Zeilinger, Esquire
Cynthia R. Cross, Esquire Baird, Holm, McEachen, Pedersen,
Housley Kantarian & Bronstein, P.C. Hamann & Strasheim
1220 19th Street, N.W., Suite 700 AND 1500 Woodmen Tower
Washington, D.C. 20036 Omaha, Nebraska 68102
Approximate date of commencement of proposed sale of the securities to
the public: At the Acquisition Merger Effective Time, as defined in the
Reorganization and Merger Agreement dated as of August 18, 1997 by and among the
Registrant and Liberty Financial Corporation, attached as Annex A to the
Prospectus/Proxy Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering.[_] _______
If this form is a post-effective amendment filed pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [_] ________________
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
Calculation of Registration Fee
<TABLE>
<CAPTION>
====================================================================================================================================
Proposed maximum Proposed maximum Amount
Title of each class of Amount to offering price aggregate offering of
securities to be registered be registered per unit price registration fee
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value (and
associated stock purchase rights) (1) 4,015,561 shares (2) N/A $49,815,000 (3) $14,696 (3)
====================================================================================================================================
</TABLE>
(1) Prior to the occurrence of certain events, the stock purchase rights will
not be evidenced separately from the common stock.
(2) Represents the estimated maximum number of shares of common stock, par
value $.01 per share, of Commercial Federal Corporation ("Commercial"),
expected to be issued in exchange for up to 8,748,500 shares of common
stock, par value $1.00 per share, of Liberty Financial Corporation
("Liberty"), upon consummation of the merger of Liberty with and into
Commercial, described herein.
(3) Estimated solely for the purpose of calculating the registration fee. The
registration fee has been computed pursuant to Rule 457(f)(2) under the
Securities Act of 1933, as amended, based on the book value ($49,815,000)
of shares of Liberty common stock on September 30, 1997.
================================================================================
<PAGE>
LIBERTY FINANCIAL CORPORATION
4201 WESTOWN PARKWAY, SUITE 320
WEST DES MOINES, IOWA 50266-6744
(515) 226-0500
__________ ___, 1997
Dear Stockholder:
You are invited to attend a special meeting of stockholders (the
"Special Meeting") of Liberty Financial Corporation ("Liberty") to be held at
__________________________________, ___________________, _____________, _____,
on ________, __________________, ____ at __:__ _.m., local time. Notice of the
Special Meeting, a Prospectus/Proxy Statement and a Proxy Card are enclosed.
The Special Meeting has been called in connection with the proposed
acquisition of Liberty and its banking subsidiaries (the "Liberty Banks") by
Commercial Federal Corporation ("Commercial") and its principal subsidiary,
Commercial Federal Bank, a Federal Savings Bank (the "Bank"), respectively, in
accordance with the Reorganization and Merger Agreement dated as of August 18,
1997 by and between Commercial and Liberty (the "Merger Agreement"). Pursuant to
the Merger Agreement (1) Liberty will merge into Commercial and each outstanding
share of Liberty's common stock will be converted into .459 shares of Commercial
common stock (the "Acquisition Merger") and (2) the Liberty Banks will,
following the Acquisition Merger, merge with and into the Bank (the "Bank
Mergers") (collectively with the Acquisition Merger, the "Merger").
Following the Merger, Commercial will be the resulting holding company,
and the Bank will be the resulting subsidiary institution. Consummation of the
Merger is conditioned upon, among other things, receipt of all required
regulatory approvals and approval by Liberty's stockholders.
At the Special Meeting, stockholders of Liberty will consider and vote
upon approval of the Acquisition Merger and the Merger Agreement. Your Board of
Directors has approved the Merger Agreement, including the Acquisition Merger,
and believes that the Acquisition Merger and the Merger Agreement are in the
best interests of Liberty and its stockholders. Accordingly, your Board of
Directors unanimously recommends that you vote FOR approval of the Acquisition
Merger and the Merger Agreement.
You are urged to read the accompanying Prospectus/Proxy Statement,
which provides detailed information concerning the Merger and related matters.
Your vote is important, regardless of the number of shares you own. ON
BEHALF OF THE BOARD OF DIRECTORS, I URGE YOU TO SIGN, DATE AND RETURN THE
ENCLOSED PROXY CARD AS SOON AS POSSIBLE EVEN IF YOU CURRENTLY PLAN TO ATTEND THE
SPECIAL MEETING. This will not prevent you from voting in person but will assure
that your vote is counted if you are unable to attend the Special Meeting.
Sincerely,
[SIGNATURE APPEARS HERE]
Russell G. Olson
President
* PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME *
<PAGE>
LIBERTY FINANCIAL CORPORATION
4201 WESTOWN PARKWAY, SUITE 320
WEST DES MOINES, IOWA 50266-6744
(515) 226-0500
-------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON ____________________, 1998
------------------------------
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the
"Special Meeting") of Liberty Financial Corporation ("Liberty") will be held on
_________, ____________, 1998 at __:__ _.m. at ____________________,
______________________, ____________, ____, for the following purposes:
(1) To approve the merger of Liberty into Commercial Federal
Corporation ("Commercial"), with Commercial as the surviving
corporation, pursuant to which each outstanding share of
Liberty's common stock, $1.00 par value per share (the "Liberty
Common Stock") will be converted into .459 shares of Commercial
common stock, $.01 par value per share ("Commercial Common
Stock") as set forth in the accompanying Prospectus/Proxy
Statement (the "Acquisition Merger"), and to adopt the
Reorganization and Merger Agreement by and between Commercial and
Liberty dated as of August 18, 1997 (the "Merger Agreement"),
which sets forth the terms and conditions of the Acquisition
Merger and also provides for the subsequent merger of Liberty's
banking subsidiaries (the "Liberty Banks") with and into
Commercial Federal Bank, a Federal Savings Bank (the "Bank"),
with the Bank as the surviving institution.
(2) Such other business as may properly come before the Special
Meeting or any adjournments thereof.
NOTE: The Board of Directors of Liberty is not aware of any other business to
come before the Special Meeting.
The stockholders of Liberty have the statutory right to dissent from
the Acquisition Merger and, if the Acquisition Merger is consummated, to receive
payment in cash for the "fair value" of their shares of Liberty common stock
upon strict compliance with the provisions of the Iowa Business Corporation Act
("IBCA"). A copy of Division XIII of the IBCA is attached to the
Prospectus/Proxy Statement as Annex B.
The Board of Directors of Liberty has fixed the close of business on
____________, 1997 as the record date for the determination of stockholders
entitled to notice of and to vote at the Special Meeting. Only stockholders of
record at the close of business on that date will be entitled to notice of and
to vote at the Special Meeting.
By Order of the Board of Directors,
[SIGNATURE APPEARS HERE]
Russell G. Olson
President and Chief Executive Officer
West Des Moines, Iowa
December __, 1997
- --------------------------------------------------------------------------------
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. THEREFORE, WHETHER OR NOT YOU
PLAN TO BE PRESENT IN PERSON AT THE SPECIAL MEETING, PLEASE DATE, SIGN AND
COMPLETE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED ENVELOPE, WHICH
REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
- --------------------------------------------------------------------------------
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME.
<PAGE>
PROSPECTUS/PROXY STATEMENT
----------------------------------------
COMMERCIAL FEDERAL CORPORATION
Prospectus
Up to 4,015,561 Shares of Common Stock
par value $0.01 per share
----------------------------------------
----------------------------------------
LIBERTY FINANCIAL CORPORATION
Proxy Statement
For Special Meeting of Stockholders
To be held on ____________________, 1998
----------------------------------------
This Prospectus/Proxy Statement is being furnished to the holders of
the common stock, par value $1.00 per share ("Liberty Common Stock"), of Liberty
Financial Corporation ("Liberty") in connection with the solicitation of proxies
by Liberty's Board of Directors for use at a special meeting of stockholders
(the "Special Meeting") to be held at ________________________________,
__________________, __________, ________________, _____, on ________,
_____________, 1998 at __:__ __.m., local time.
The purposes of the Special Meeting and the matters to be acted upon
are: (i) to consider and vote upon the proposed merger of Liberty into
Commercial Federal Corporation ("Commercial"), with Commercial as the surviving
corporation (the "Acquisition Merger"), in accordance with a Reorganization and
Merger Agreement by and between Commercial and Liberty, dated as of August 18,
1997 (the "Merger Agreement"), which sets forth the terms and conditions of the
Acquisition Merger and also provides for the subsequent merger of Liberty's
banking subsidiaries (the "Liberty Banks") with and into the Bank; and (ii) to
consider and vote upon such other business as may properly come before the
Special Meeting or any adjournments thereof.
Pursuant to the Merger Agreement, each share of Liberty Common Stock
outstanding at the time of the Acquisition Merger (except for (i) shares held by
Liberty stockholders who have properly perfected dissenters' rights of appraisal
("Dissenting Shares"); and (ii) shares held by Liberty or any of its
subsidiaries, other than shares held in any 401(k) plan or in a fiduciary
capacity) will be converted into the right to receive 0.459 shares of common
stock, par value $0.01 per share (the "Commercial Common Stock"), of Commercial
(such number of shares referred to as the "Exchange Ratio"). The shares of
Commercial Common Stock and cash paid in lieu of fractional shares to be
received by holders of Liberty Common Stock pursuant to the Merger Agreement are
referred to herein as the "Merger Consideration."
The Exchange Ratio and all per share data included herein with respect
to Commercial have been adjusted to reflect a three-for-two stock split effected
in the form of a 50% stock dividend declared by Commercial on November 17, 1997
and distributed on December 15, 1997 to stockholders of record as of November
28, 1997. Fractional shares resulting from the stock split were paid in cash.
Commercial has filed a registration statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Commercial Common Stock to be
issued upon consummation of the Acquisition Merger. See "Available Information."
This Prospectus/Proxy Statement constitutes a prospectus of Commercial with
respect to the issuance of shares of Commercial Common Stock to the stockholders
of Liberty upon consummation of the Acquisition Merger.
THE BOARD OF DIRECTORS OF LIBERTY BELIEVES THAT THE ACQUISITION MERGER
IS IN THE BEST INTERESTS OF LIBERTY'S STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS
THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE ACQUISITION MERGER, INCLUDING THE
MERGER AGREEMENT.
<PAGE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, THE OFFICE OF THRIFT SUPERVISION, THE
FEDERAL RESERVE, THE OFFICE OF THE COMPTROLLER OF THE CURRENCY, THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY STATE AGENCY, NOR HAS SUCH COMMISSION,
OFFICE, CORPORATION OR AGENCY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE
NOT INSURED BY THE SAVINGS ASSOCIATION INSURANCE FUND, THE FEDERAL DEPOSIT
INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY.
This Prospectus/Proxy Statement and the accompanying proxy card are
first being sent to the stockholders of Liberty on or about ____________, 1997.
This Prospectus/Proxy Statement does not cover any resales of the
Commercial Common Stock offered hereby to be received by the stockholders deemed
to be affiliates of Commercial or Liberty upon consummation of the Merger. No
person is authorized to make use of this Prospectus/Proxy Statement in
connection with such resales, although such securities may be traded without the
use of this Prospectus/Proxy Statement by those stockholders of Liberty not
deemed to be affiliates of Commercial or Liberty.
The date of this Prospectus/Proxy Statement is ____________, 1997.
<PAGE>
PROSPECTUS/PROXY STATEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVAILABLE INFORMATION...........................................................
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.................................
SUMMARY.........................................................................
The Special Meeting of Liberty Stockholders.....................................
The Parties to the Merger.......................................................
The Merger......................................................................
Comparison of Stockholder Rights................................................
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF
COMMERCIAL FEDERAL CORPORATION..................................................
Financial Condition Data and Capital Ratios.....................................
Operating Data..................................................................
Operating Ratios and Other Data.................................................
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF
LIBERTY FINANCIAL CORPORATION...................................................
Financial Condition and Capital Ratios..........................................
Operating Data and Other Ratios.................................................
UNAUDITED PRO FORMA COMBINED PER SHARE DATA.....................................
INFORMATION CONCERNING THE SPECIAL MEETING......................................
General.........................................................................
Solicitation, Voting and Revocability of Proxies................................
THE MERGER......................................................................
General.........................................................................
Background of the Merger........................................................
Reasons for the Merger and Recommendation of the Liberty Board of Directors.....
Financial Advisor...............................................................
Conversion of Liberty Common Stock..............................................
Dissenters' Rights of Appraisal.................................................
Voting Agreements...............................................................
The Bank Mergers................................................................
Representations and Warranties..................................................
Covenants Pending the Acquisition Merger........................................
No Solicitation.................................................................
Conditions to Consummation of the Merger........................................
Amendment and Termination of the Merger Agreement...............................
Termination Fee.................................................................
Required Regulatory Approvals...................................................
Expenses........................................................................
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS (continued) Page
----
<S> <C>
Closing; Merger Effective Times................................................
Employee Benefits after the Merger.............................................
Interests of Certain Persons in the Merger.....................................
Federal Income Tax Consequences................................................
Accounting Treatment...........................................................
Resale of Commercial Common Stock; Restrictions on Transfer....................
New York Stock Exchange Listing................................................
Vote Required..................................................................
COMMERCIAL FEDERAL CORPORATION.................................................
LIBERTY FINANCIAL CORPORATION..................................................
BUSINESS OF LIBERTY FINANCIAL CORPORATION......................................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................................
REGULATION.....................................................................
BENEFICIAL OWNERSHIP OF LIBERTY COMMON STOCK...................................
COMMON STOCK PRICES AND DIVIDENDS..............................................
COMPARISON OF STOCKHOLDER RIGHTS...............................................
LEGAL MATTERS..................................................................
EXPERTS........................................................................
INDEPENDENT ACCOUNTANTS........................................................
OTHER MATTERS..................................................................
INDEX TO FINANCIAL STATEMENTS
OF LIBERTY FINANCIAL CORPORATION...............................................
ANNEX:
Annex A -- Reorganization and Merger Agreement (excluding exhibits).....A-1
Annex B -- Division XIII of the Iowa Business Corporation Act...........B-1
</TABLE>
ii
<PAGE>
No person is authorized to give any information or make any
representation other than as contained or incorporated in this Prospectus/Proxy
Statement, and, if given or made, such information or representation should not
be relied upon as having been authorized. This Prospectus/Proxy Statement does
not constitute an offer to exchange or sell, or a solicitation of an offer to
exchange or purchase, the securities offered by this Prospectus/Proxy Statement,
or the solicitation of a proxy, in any jurisdiction in which such offer or
solicitation is not authorized or to or from any person to whom it is unlawful
to make such offer or solicitation. The information contained in this
Prospectus/Proxy Statement speaks as of the date hereof unless otherwise
specifically indicated. Information contained in this Prospectus/Proxy Statement
regarding Commercial has been furnished by Commercial, and information herein
regarding Liberty has been furnished by Liberty. Neither Commercial nor Liberty
warrants the accuracy or completeness of information relating to the other
party.
AVAILABLE INFORMATION
Commercial has filed with the Commission the Registration Statement
under the Securities Act relating to the shares of Commercial Common Stock to be
issued in connection with the Acquisition Merger. This Prospectus/Proxy
Statement does not contain all the information set forth in the Registration
Statement, certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. The information omitted may be obtained from the
public reference facilities of the Commission or inspected and copied at the
principal or regional offices of the Commission at the addresses listed below.
Commercial is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and, in
accordance therewith, files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at its regional offices at Northwestern Atrium Center, 500 West
Madison, Suite 1400, Chicago, Illinois 60601, and World Trade Center, 13th
Floor, New York, New York 10048. Copies of such materials also can be obtained
from the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Reports, proxy statements and other
information that have been filed electronically with the Commission may also be
obtained from the Commission's Website, the address of which is
http://www.sec.gov. In addition, Commercial's Common Stock is listed and traded
on the New York Stock Exchange. Reports, proxy statements and other information
regarding Commercial may be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10005.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed with the Commission by
Commercial (File No. 1-11515) are hereby incorporated by reference in this
Prospectus/Proxy Statement:
(i) Commercial's Annual Report on Form 10-K for the fiscal year
ended June 30, 1997;
(ii) Commercial's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997;
(iii) Commercial's Current Reports on Form 8-K dated August 18, 1997,
September 2, 1997, September 11, 1997, November 18, 1997 and
December 8, 1997; and
(iv) the description of the Commercial Common Stock set forth at Item
1 of Commercial's registration statement on Form 8-A dated July
17, 1995.
1
<PAGE>
All documents subsequently filed by Commercial with the Commission
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to
the date of this Prospectus/Proxy Statement and prior to the date of the Special
Meeting shall be deemed to be incorporated by reference in this Prospectus/Proxy
Statement and to be part hereof from the date of filing of such documents.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus/Proxy Statement to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed to constitute a part of
this Prospectus/Proxy Statement, except as so modified or superseded.
This Prospectus/Proxy Statement incorporates documents by reference
relating to Commercial which are not presented herein or delivered herewith.
These documents are available, without charge, upon request directed to Mr. Gary
L. Matter, Commercial's Corporate Secretary, 2120 South 72nd Street, Omaha,
Nebraska 68124, telephone (402) 390-5176. In order to ensure timely delivery of
any requested documents, the request should be made no later than the close of
business on January __, 1998.
2
<PAGE>
SUMMARY
This summary does not purport to be complete and is qualified in its
entirety by the more detailed information and definitions appearing elsewhere
herein, the annexes hereto and documents incorporated by reference herein and
the consolidated financial statements of Liberty, including the notes thereto,
included in this Prospectus/Proxy Statement.
The Special Meeting of Liberty Stockholders
The Special Meeting will be held on ______________, ____________, 1998
at __:__ __.m. at ________________________, ________________________,
_____________, Iowa. At the Special Meeting, stockholders of Liberty will
consider and vote upon proposals (1) to approve the Acquisition Merger and the
Merger Agreement; (2) to vote upon any other business which may be properly
brought before the Special Meeting. Stockholders of record at the close of
business on ____________, 1997 (the "Record Date") will be entitled to one vote
for each share then so held. The presence, in person or by proxy, of a majority
of the total number of outstanding shares of Liberty Common Stock entitled to
vote at the Special Meeting is necessary to constitute a quorum at the Special
Meeting. The affirmative vote of the holders of at least a majority of the
issued and outstanding shares of Liberty Common Stock is required to approve the
Acquisition Merger and the Merger Agreement. The affirmative vote of a majority
of the shares of Liberty Common Stock represented and voting at the Special
Meeting is required to approve an adjournment of the Special Meeting. Liberty's
directors have entered into Voting Agreements with Commercial and have agreed to
vote all of the 8,657,114 shares of Liberty Common Stock beneficially owned by
them as of the Record Date for approval of the Acquisition Merger and the Merger
Agreement. See "The Merger --Voting Agreements."
For additional information, see "Information Concerning the Special
Meeting" herein.
The Parties to the Merger
Commercial Federal Corporation. Commercial is a unitary non-diversified
savings and loan holding company whose primary asset is the Bank, which is one
of the largest depository institutions in the Midwest. At September 30, 1997,
Commercial had total assets of $7.2 billion and total stockholders' equity of
$444.3 million. Based upon total assets at that date, Commercial was the 13th
largest publicly held thrift holding company in the United States. Commercial is
a consumer-oriented financial institution that emphasizes single-family
residential and construction real estate lending, consumer lending, commercial
real estate lending, retail deposit activities, including demand deposit
accounts, and mortgage banking. At November 30, 1997, Commercial operated 34
branch offices in Nebraska, 21 branch offices in greater metropolitan Denver,
Colorado, 19 branch offices in Oklahoma, 27 branch offices in Kansas and seven
branch offices in Iowa. Throughout its 110 year history, Commercial has
emphasized customer service. To serve its customers, Commercial conducts loan
origination activities through its 108 branch office network, loan offices of
its wholly-owned mortgage banking subsidiary and a nationwide correspondent
network of mortgage loan originators. Commercial also provides insurance and
securities brokerage and other retail financial services.
Commercial's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family mortgage and consumer loans), community
banking, and providing customers with a full array of financial products and a
high level of customer service. As part of its long-term strategic plan,
Commercial intends to expand its operations within its market areas either
through direct marketing efforts aimed at increasing market share, branch
expansions, or opening additional branches. Commercial's retail strategy will
continue to be centered on attracting new customers and selling both new and
existing customers multiple products and services. Additionally, Commercial will
continue to build and leverage an infrastructure designed to increase fee and
other income.
3
<PAGE>
Complementing its strategy of internal growth, Commercial continues to
grow its present five-state franchise through an ongoing program of selective
acquisitions of other financial institutions. Future acquisition candidates will
be selected based on the extent to which the candidates can enhance Commercial's
retail presence in new or underserved markets and complement Commercial's
existing retail network.
Commercial's principal executive offices are located at 2120 South 72nd
Street, Omaha, Nebraska 68124, and its telephone number is (402) 554-9200.
For additional information, see "Commercial Federal Corporation"
herein.
Liberty Financial Corporation. Liberty is a multi-bank holding company
registered under the Bank Holding Company Act of 1956, as amended (the "BHCA")
with its principal place of business at 4201 Westown Parkway, Suite 320, West
Des Moines, Iowa 50266. As currently structured, Liberty was formed as the
result of the merger and consolidation of eight bank holding companies (each
owning a subsidiary bank listed below) effective December 31, 1996. Liberty
currently owns seven bank subsidiaries and one savings and loan subsidiary
(Liberty Bank & Trust, Johnston, Iowa), described below, each of which is
wholly-owned with the exception of Liberty Bank & Trust, N.A., Pocahontas, which
is 99.33 percent owned by Liberty. The following describes the bank subsidiaries
of Liberty:
<TABLE>
<CAPTION>
Name and Location Number of Branches
----------------- ------------------
<S> <C>
Liberty Bank & Trust, 3
Bloomfield, Iowa
Liberty Bank & Trust, 4
Forest City, Iowa
Liberty Bank & Trust, 13
Johnston, Iowa
Liberty Bank & Trust, 1
Lake Mills, Iowa
Liberty Bank & Trust, 8
Mason City, Iowa
Liberty Bank & Trust, 4
N.A., Pocahontas, Iowa
Liberty Bank & Trust, 6
Tuscon, Arizona
Liberty Bank & Trust, 3
Woodbine, Iowa
</TABLE>
All bank subsidiaries are state banks, except for Liberty Bank & Trust,
N.A., Pocahontas, which is a national bank. Liberty Bank & Trust, Johnston, Iowa
is a federal savings bank.
4
<PAGE>
Liberty and its predecessor holding companies have grown by purchasing
banks as well as by opening de novo locations. Liberty's 42 current branches
consist of 20 de novo locations and 22 purchased locations. At September 30,
1997, Liberty and its consolidated subsidiaries had consolidated assets of
approximately $644 million, consolidated deposits of approximately $557 million,
and shareholders' equity of approximately $50 million.
Through its 36 Iowa locations and six Arizona locations, Liberty's
community-based branch network provides a broad range of commercial bank
financial services to its business customers and a variety of consumer banking
services to individual customers. The commercial bank financial services offered
include line of credit facilities, accounts receivable, inventory and other
working capital financing, sales and equipment financing, real estate and
interim construction financing and cash management services. Liberty serves its
many agricultural customers by providing loans to farmers and agricultural
businesses for crop production, equipment, and cattle feeding programs. Liberty
also offers a full range of consumer services, including mortgage, installment
and home improvement loans, checking accounts, various savings account and
certificate of deposit programs, trust services, safe deposit facilities, credit
card accounts, and additionally offers customers a variety of fiduciary
services.
Liberty's principal executive offices are located at 4201 Westown
Parkway, Suite 320, West Des Moines, Iowa 50266-6744, and its telephone number
at that address is (515) 226-0500.
For additional information, see "Liberty Financial Corporation,"
"Business of Liberty Financial Corporation" and the Consolidated Financial
Statements of Liberty included elsewhere herein.
The Merger
General. The Merger Agreement provides for the acquisition of Liberty
by Commercial, and the subsequent merger of the Liberty Banks with and into the
Bank, as follows: (i) Liberty will merge into Commercial, with Commercial as the
surviving corporation, pursuant to which the outstanding shares of Liberty
Common Stock (except for (a) Dissenting Shares and (b) shares of Liberty Common
Stock held by Liberty or any of its subsidiaries (other than shares held in any
401(k) plan or in a fiduciary capacity)) will be converted into .459 shares of
Commercial Common Stock (subject to possible adjustment in the event of stock
splits, stock dividends or similar transaction) (the "Exchange Ratio"); and (ii)
the Liberty Banks will, following the Acquisition Merger, merge into the Bank,
with the Bank as the surviving institution (the "Bank Mergers") (collectively
with the Acquisition Merger, the "Merger").
The Exchange Ratio and all per share data included herein with respect
to Commercial have been adjusted to reflect a three-for-two stock split effected
in the form of a 50% stock dividend declared by Commercial on November 17, 1997
and distributed on December 15, 1997 to stockholders of record as of November
28, 1997. Fractional shares resulting from the stock split were paid in cash.
Recommendation of the Board of Directors; Reasons for the Merger. At a
meeting held on August 14, 1997, the Board of Directors of Liberty (the "Liberty
Board") unanimously adopted the Merger Agreement and approved the transactions
contemplated thereby. The Liberty Board considered the Merger and the terms of
the Merger Agreement, including the Merger Consideration, in light of economic,
financial, legal, market and other factors and concluded that the Merger is in
the best interests of Liberty and its stockholders.
The Liberty Board believes that the Merger is in the best interests of
Liberty and its stockholders and recommends that Liberty's stockholders vote FOR
approval of the Merger Agreement and the Acquisition Merger. For additional
information, see "The Merger -- General," "-- Background of the Merger" and "--
Reasons for the Merger and Recommendation of the Liberty Board of Directors"
herein and the Merger Agreement attached as Annex A hereto.
5
<PAGE>
Exchange of Stock Certificates. Prior to the Acquisition Merger
Effective Time, Commercial will appoint an exchange agent (the "Exchange Agent")
to effect the exchange of stock certificates in connection with the Acquisition
Merger. As soon as practicable after the Acquisition Merger Effective Time, the
Exchange Agent will send a notice and letter of transmittal to each Liberty
stockholder of record at such date advising such stockholder of the
effectiveness of the Acquisition Merger and the procedure for surrendering to
the Exchange Agent outstanding certificates formerly evidencing Liberty Common
Stock in exchange for new certificates of Commercial Common Stock and cash in
lieu of fractional shares. Promptly following receipt of such notice and
transmittal form, holders of Liberty Common Stock certificates should surrender
their certificates in accordance with the specified procedures. Upon surrender,
each Liberty Common Stock certificate will be canceled. See "The Merger --
Conversion of Liberty Common Stock -- Exchange of Liberty Stock Certificates."
Dissenters' Appraisal Rights. Under the provisions of Iowa law,
stockholders of Liberty who object to the Acquisition Merger have the statutory
right to demand payment of the "fair value" of their Liberty Common Stock in
cash. To perfect this right, a Liberty stockholder must (i) not vote his or her
shares in favor of the Merger Agreement and the Acquisition Merger at the
Special Meeting and (ii) must take such action as is required by the provisions
of Part B of Division XIII of the Iowa Business Corporation Act ("IBCA"),
including delivering written notice of objection to Liberty prior to the vote on
the Merger Agreement and the Acquisition Merger at the Special Meeting.
Commercial has conditioned its obligation to consummate the Acquisition Merger
on, among other items, no Liberty stockholders having elected their dissenter
and appraisal rights. See "The Merger -- Dissenters' Rights of Appraisal" and
Annex B hereto.
Voting Agreements. Concurrent with the execution of the Merger
Agreement, the directors of Liberty entered into agreements with Commercial (the
"Voting Agreements") to vote their shares of Liberty Common Stock in favor of
the Merger Agreement and the Acquisition Merger. Such Voting Agreements cover
the shares of Liberty Common Stock beneficially owned by the directors of
Liberty as of August 18, 1997 as well as any shares subsequently acquired. A
total of 8,657,114 shares of Liberty Common Stock (a total of 98.96% of the
shares outstanding as of the Record Date) are covered by the Voting Agreements.
See "The Merger -- Voting Agreements."
Required Regulatory Approvals. The Merger is subject to the approval of
the Office of Thrift Supervision (the "OTS"), the Office of the Comptroller of
the Currency (the "OCC"), the Superintendent of Banking of Iowa and the
Superintendent of Banking of Arizona. Following such approvals of the Merger,
the U.S. Department of Justice (the "DOJ") may review the Merger and raise
objections on antitrust grounds, though objections on such grounds are not
expected. Receipt of all requisite regulatory approvals is a condition to the
obligations of the Parties to effect the Acquisition Merger. For additional
information, see "The Merger -- Required Regulatory Approvals" herein.
Conditions to the Merger. The obligations of Commercial and Liberty to
effect the Acquisition Merger are jointly subject to a number of conditions
including, among other things, the receipt of Liberty stockholder and regulatory
approval of the Acquisition Merger and the Bank Mergers and receipt of an
opinion with respect to the tax effects of the Merger. For additional
information, see "The Merger -- Conditions to Consummation of the Merger"
herein.
Termination of the Merger. The Merger Agreement may be terminated at
any time before the Acquisition Merger Effective Time, whether before or after
approval by Liberty stockholders, in a number of circumstances, including: (i)
by mutual consent of the parties; (ii) at the election of either party, if the
closing of the Merger shall not have occurred on or before May 31, 1998; (iii)
by either party upon the occurrence of an event which renders satisfaction of
one or more of the conditions to the obligations of the other party impossible;
(iv) by Liberty at any time during the three business days immediately following
the end of the Determination Period (as defined below) if the "Average NYSE
Closing Price" (as defined herein) is below certain levels as described herein.
In the event the Merger Agreement is terminated by Liberty and, prior to such
termination, a "Termination Event" (as such term is defined herein) has occurred
(except if such termination is due to the noncompliance of Commercial or the
Bank with their conditions under the Merger Agreement), Liberty will be
obligated to pay a termination fee in the amount of $3.0
6
<PAGE>
million. For additional information, see "The Merger -- Amendment or Termination
of the Merger Agreement" and " -- Termination Fee".
No Solicitation. The Merger Agreement provides that Liberty will not
authorize or permit any representative of Liberty or any subsidiary to initiate
contact with any person or entity in an effort to solicit, initiate or encourage
any "takeover proposal" (generally, any bona fide proposal other than as
contemplated by the Merger Agreement, for a merger or other business combination
involving Liberty or any Liberty Bank, for the acquisition of a 10.0% or greater
equity interest in Liberty or any Liberty Bank or for the acquisition of a
substantial portion of the assets of Liberty or any Liberty Bank). In addition,
Liberty may not (or authorize any representative to): (i) cooperate with, or
furnish, or cause to be furnished, any non-public information concerning
Liberty's business, properties or assets to any person or entity in connection
with any takeover proposal; (ii) negotiate any takeover proposal with any person
or entity; or (iii) enter into any agreement, letter of intent or agreement in
principle as to any takeover proposal.
Interests of Certain Persons in the Merger. Certain members of
Liberty's management and Board of Directors have interests in the Acquisition
Merger in addition to their interests as stockholders of Liberty generally.
Those interests relate to, among other things, a seat on Commercial's Board of
Directors and provisions in the Merger Agreement regarding indemnification and
director and officer insurance information.
For additional information, see "The Merger -- Interests of Certain
Persons in the Merger" herein.
Federal Income Tax Consequences. Commercial and Liberty will rely upon
an opinion of Deloitte & Touche LLP , tax advisor to Commercial, to the effect
that, among other things, (i) the Acquisition Merger should be treated for
federal income tax purposes as a tax-free reorganization under Section 368(a) of
the Internal Revenue Code of 1986, as amended (the "Code"); (ii) the gain, if
any, to be realized by a Liberty stockholder who receives Commercial Common
Stock and cash in lieu of fractional shares in exchange for Liberty Common Stock
should be recognized, but not in excess of the amount of cash received. For
additional information, see "The Merger -- Federal Income Tax Consequences"
herein.
Accounting Treatment. Commercial expects the Merger to be accounted for
as a pooling of interests, under which the recorded assets and liabilities of
Commercial and Liberty would be carried forward to the surviving corporation in
the Merger (Commercial) at their recorded amounts; income of the surviving
corporation would include income of Commercial and Liberty for the entire fiscal
year in which the Merger occurs; and the reported income of Commercial and
Liberty for prior periods would be combined and restated as retained earnings of
the surviving corporation (Commercial). See "The Merger --Accounting Treatment."
Comparison of Stockholder Rights
Upon consummation of the Acquisition Merger, holders of Liberty Common
Stock, whose rights are presently governed by Iowa law and Liberty's Articles of
Incorporation and Bylaws, will become stockholders of Commercial, a Nebraska
corporation. Accordingly, their rights will be governed by Nebraska law and by
the Articles of Incorporation and Bylaws of Commercial. Certain differences
arise from the differences between Iowa and Nebraska corporate law, between the
Articles of Incorporation and Bylaws of Liberty and the Articles of
Incorporation and Bylaws of Commercial, including, among other things, the
number of authorized shares of common stock, the calling of special meetings of
stockholders, cumulative voting in the election of directors, the number and
term of directors, advance notice requirements for nominations of directors and
presentation of new business at annual or special meetings of stockholders,
limitations on acquisitions of common stock, approval requirements for mergers,
consolidations, sales of substantially all assets and dissolutions, limitations
on directors' liability and amendment of corporate governing documents. In
addition, Commercial has in effect a shareholder rights plan. For additional
information, see "Comparison of Stockholder Rights" herein.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION OF
COMMERCIAL FEDERAL CORPORATION
The following summary consolidated financial data of Commercial is as
of and for the years ended June 30, 1997, 1996, 1995, 1994 and 1993. This
information has been derived from and should be read in conjunction with
Commercial's Consolidated Financial Statements and the Notes thereto, as well as
the information under the caption "Selected Consolidated Financial Data"
contained in Commercial's Annual Report on Form 10-K for the fiscal year ended
June 30, 1997, which is incorporated herein by reference. The following summary
consolidated interim financial data for the three months ended September 30,
1997 and 1996 has been derived from unaudited consolidated interim financial
statements which, in the opinion of management, include all adjustments
(consisting of normal recurring adjustments), considered necessary for a fair
presentation. The summary consolidated financial data for the three months ended
September 30, 1997 and 1996 should be read in conjunction with Commercial's
unaudited Consolidated Financial Statements and the Notes thereto for the three
months ended September 30, 1997 and 1996 included in Commercial's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, which is
incorporated herein by reference. The consolidated financial data for the three
months ended September 30, 1997 is not necessarily indicative of the operating
results to be expected for the entire fiscal year. On November 17, 1997, the
Board of Directors of Commercial authorized a three-for-two stock split to be
effected in the form of a 50 percent stock dividend to stockholders of record on
November 28, 1997. Par value remained at $.01 per share. The stock dividend was
distributed on December 15, 1997. Fractional shares resulting from the stock
split were paid in cash. All per share data and stock prices for all periods
presented in this Prospectus/Proxy Statement have been adjusted on a retroactive
basis to reflect the effect of this three-for-two stock split.
Financial Condition Data and Capital Ratios:
<TABLE>
<CAPTION>
At At June 30,
September 30, ---------------------------------
1997 1997 1996
-------------- ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Total assets..................................... $ 7,207,143 $ 7,096,665 $ 6,607,670
Investment securities (1)........................ 472,164 399,057 253,043
Mortgage-backed securities (2)................... 1,034,615 1,025,763 1,180,046
Loans receivable, net (3)........................ 5,291,820 5,258,739 4,813,164
Goodwill and core value of deposits.............. 46,631 48,178 40,734
Deposits......................................... 4,258,902 4,378,919 4,304,576
Advances from Federal Home Loan Bank............. 1,715,312 1,415,506 1,350,290
Securities sold under agreements to repurchase... 564,294 639,294 380,755
Other borrowings................................. 103,900 128,982 58,546
Stockholders' equity............................. 444,273 426,106 413,277
Book value per common share (4).................. 13.72 13.18 12.17
Tangible book value per common share(4)(5)....... 12.28 11.69 10.97
Regulatory capital ratios of the Bank:
Tangible capital............................... 6.44% 6.31% 6.18%
Core capital (Tier 1 capital).................. 6.59% 6.47% 6.41%
Risk-based capital:
Tier 1 capital............................. 12.91% 12.79% 12.56%
Total capital.............................. 13.92% 13.81% 13.62%
<CAPTION>
At June 30,
-----------------------------------------------------
1995 1994 1993
------ ------ -----
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Total assets..................................... $ 6,569,579 $ 5,982,307 $ 5,262,336
Investment securities (1)........................ 300,481 290,807 254,889
Mortgage-backed securities (2)................... 1,364,907 1,350,402 952,539
Loans receivable, net (3)........................ 4,540,692 3,970,626 3,655,740
Goodwill and core value of deposits.............. 37,263 67,661 87,946
Deposits......................................... 4,011,323 3,675,825 2,731,127
Advances from Federal Home Loan Bank............. 1,787,352 1,625,456 1,868,779
Securities sold under agreements to repurchase... 208,373 157,432 154,862
Other borrowings................................. 65,303 66,640 76,966
Stockholders' equity............................. 337,614 304,568 297,848
Book value per common share (4).................. 10.51 9.56 9.46
Tangible book value per common share(4)(5)....... 9.35 7.44 6.66
Regulatory capital ratios of the Bank:
Tangible capital............................... 5.16% 4.69% 4.62%
Core capital (Tier 1 capital).................. 5.47% 5.53% 5.93%
Risk-based capital:
Tier 1 capital............................. 12.02% 12.18% 11.93%
Total capital.............................. 13.12% 13.16% 12.81%
</TABLE>
- -------------------
(1) Includes investment securities available for sale totaling $98.4 million,
$19.9 million, $9.9 million, $3.0 million, $5.4 million and $1.3 million,
respectively at September 30, 1997 and June 30, 1997, 1996, 1995, 1994 and
1993.
(2) Includes mortgage-backed securities available for sale totaling $231.5
million, $195.8 million, $263.2 million, $37.0 million, $45.0 million and
$41.3 million, respectively, at September 30, 1997 and June 30, 1997, 1996,
1995, 1994 and 1993.
(3) Includes loans held for sale totaling $92.0 million, $68.7 million, $89.4
million, $113.4 million, $187.7 million and $171.8 million, respectively,
at September 30, 1997 and June 30, 1997, 1996, 1995, 1994 and 1993.
(4) On November 17, 1997, the Board of Directors of Commercial authorized a
three-for-two stock split to be effected in the form of a 50 percent stock
dividend to stockholders of record on November 28, 1997. Par value remained
at $.01 per share. The stock dividend was distributed on December 15, 1997.
Fractional shares resulting from the stock split were paid in cash. All per
share data and stock prices for all periods presented have been adjusted on
a retroactive basis to reflect the effect of this three-for-two stock
split.
(5) Calculated by dividing stockholders' equity, reduced by the amount of
goodwill and core value of deposits, by the number of shares of common
stock outstanding at the respective dates.
8
<PAGE>
COMMERCIAL FEDERAL CORPORATION
Operating Data:
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------------------------ ----------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income............................. $ 132,352 $ 122,786 $ 505,050 $ 491,092 $ 454,368 $ 393,854 $ 404,628
Interest expense............................ 89,350 82,494 337,047 328,317 304,526 256,102 276,584
---------- ---------- ---------- --------- ---------- --------- ----------
Net interest income......................... 43,002 40,292 168,003 162,775 149,842 137,752 128,044
Provision for loan losses................... (2,100) (1,658) (8,121) (6,107) (6,408) (6,248) (6,185)
Loan servicing fees......................... 7,772 7,327 30,350 27,891 24,731 22,227 18,776
Retail fees and charges..................... 4,367 3,923 16,114 12,747 9,547 9,155 7,874
Real estate operations...................... (174) 216 1,016 172 1,490 (1,449) (5,243)
Gain (loss) on sales of loans............... 232 105 386 164 (1,695) 1,433 1,194
Gain (loss) on sales of investment
securities, net........................... -- -- 390 253 (41) 220 (231)
Gain on sale of loan servicing rights....... 355 -- -- 452 3,519 5,929 6,903
Other operating income...................... 3,566 2,032 10,223 7,967 7,515 7,178 5,169
General and administrative expenses......... 29,105 29,322 112,931 114,517 102,554 94,115 89,560
Federal deposit insurance special
assessment................................ -- 27,062 27,062 -- -- -- --
Amortization of goodwill and core value of
deposits.................................. 1,547 2,385 9,855 9,529 10,262 14,131 10,544
Valuation adjustment and accelerated
amortization of goodwill.................. -- -- -- -- 21,357 52,703 --
---------- ---------- ---------- --------- ---------- ---------- ----------
Income (loss) before income taxes,
extraordinary items and cumulative effects
of changes in accounting principles....... 26,368 (6,532) 68,513 82,268 54,327 15,248 56,197
Provision (benefit) for income taxes........ 9,260 (2,482) 23,836 26,962 23,146 16,875 22,081
---------- ----------- ---------- --------- ---------- ---------- ----------
Income (loss) before extraordinary items
and cumulative effects of changes
in accounting principles.................. 17,108 (4,050) 44,677 55,306 31,181 (1,627) 34,116
Extraordinary items (1)..................... -- -- (583) -- -- -- --
Cumulative effects of changes in
accounting principles (2)................. -- -- -- -- -- 6,597 --
---------- ---------- ---------- --------- ---------- ---------- ----------
Net income (loss)........................... $ 17,108 $ (4,050) $ 44,094 $ 55,306 $ 31,181 $ 4,970 $ 34,116
========== =========== ========== ========= ========== ========== ==========
Earnings per share (fully diluted) (3):
Income (loss) before extraordinary
items and cumulative effects of
changes in accounting principles........ $ .52 $ (.12) $ 1.36 $ 1.65 $ .96 $ (.05) $ 1.08
Extraordinary items (1)................... -- -- (.02) -- -- -- --
Cumulative effects of changes in
accounting principles (2).............. -- -- -- -- -- .20 --
---------- ---------- ---------- --------- ---------- ---------- ----------
Net income (loss)......................... $ .52 $ (.12) $ 1.34 $ 1.65 $ .96 $ .15 $ 1.08
========== =========== ========== ========= ========== ========== ==========
Dividends declared per common share (3)..... $ .047 $ .045 $ .185 $ .178 $ -- $ -- $ --
========== ========== ========== ========= ========== ========== ==========
Weighted average common shares outstanding
(fully diluted) (3)....................... 32,997,937 33,214,825 32,881,971 33,417,702 32,437,468 32,262,850 31,684,542
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(Table continued on following page)
9
<PAGE>
COMMERCIAL FEDERAL CORPORATION
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
-------------------- ------------------------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- -------- -------- ------- -------- -------- ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Ratios and Other Data:
Net interest rate spread during period..... 2.36% 2.40% 2.39% 2.34% 2.26% 2.43% 2.57%
Net yield on interest-earning assets....... 2.52% 2.54% 2.57% 2.58% 2.46% 2.59% 2.65%
Return on average assets (4)............... .96% NM .65% .84% .49% .09% .67%
Return on average equity (4)............... 15.83% NM 11.04% 14.74% 9.98% 1.54% 12.39%
Dividend payout ratio (5) ............... 8.97% NM 13.78% 10.75% -- -- --
Total number of branches at end of period.. 107 98 107 98 89 73 55
</TABLE>
- ---------------
(1) Represents the loss on early retirement of debt, net of income tax
benefits.
(2) Represents the cumulative effect of the change in the method of
accounting for income taxes less the cumulative effect of the changes
in accounting for postretirement benefits, net of income tax benefit.
(3) On November 17, 1997, the Board of Directors of Commercial authorized a
three-for-two stock split to be effected in the form of a 50 percent
stock dividend to stockholders of record on November 28, 1997. Par
value remained at $.01 per share. The stock dividend was distributed on
December 15, 1997. Fractional shares resulting from the stock split
were paid in cash. All per share data and stock prices for all periods
presented have been adjusted on a retroactive basis to reflect the
effect of this three-for-two stock split.
(4) Based on the average daily balances during the three month periods
ended September 30, 1997 and 1996 and fiscal years 1997, 1996, 1995 and
1994 and on average monthly balances for fiscal year 1993. Return on
average assets (ROA) and return on average equity (ROE) for the three
months ended September 30, 1996 are .90% and 15.23%, respectively,
excluding the after-tax effect of the nonrecurring expenses totaling
$17.3 million, $1.5 million and $103,000 associated with the Savings
Association Insurance Fund special assessment, the repurchase of
2,812,725 shares of Commercial's common stock and the change in income
taxes for tax bad debt reserves, respectively. ROA and ROE for fiscal
year 1997 are .93% and 15.91%, respectively, excluding the after-tax
effect of the nonrecurring expenses totaling $17.3 million, $1.5
million, $583,000 and $103,000, associated with the Savings Association
Insurance Fund special assessment, the repurchase of 2,812,725 shares
of Commercial's common stock, the loss on early retirement of debt and
the change in income taxes for tax bad debt reserves, respectively. ROA
and ROE for fiscal year 1996 are .90% and 15.68%, respectively,
excluding the after-tax of the nonrecurring expenses totaling $2.9
million and $585,000 associated with Railroad Financial Corporation
merger and the Corporation's 1995 proxy contest, respectively. ROA and
ROE for fiscal year 1995 are .83% and 16.82%, respectively, excluding
the accelerated amortization of goodwill totaling $21.4 million. ROA
and ROE for fiscal year 1994 are .75% and 13.11%, respectively,
excluding the after-tax effect of the intangible assets valuation
adjustment and the cumulative effects of changes in accounting
principles totaling $43.9 million and $6.6 million, respectively.
(5) Represents dividends declared per share divided by net income per
share. Commercial established a quarterly common stock cash dividend
policy on October 4, 1995, and paid its first dividend on October 31,
1995.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
OF LIBERTY FINANCIAL CORPORATION
The following summary consolidated financial data of Liberty is at
and for the dates indicated. This information has been derived from and should
be read in conjunction with Liberty's Consolidated Financial Statements and the
Notes thereto included elsewhere in this Prospectus/Proxy Statement. Results of
operations for the nine months ended September 30, 1997 are not necessarily
indicative of the results of operations for calendar year 1997.
<TABLE>
<CAPTION>
At At December 31,
September 30, -----------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- ------ ------ ------ ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Financial Condition Data
and Capital Ratios
Securities........................ $ 74,494 $ 97,479 $ 119,248 $ 101,411 $ 114,346 $ 88,146
Loans and leases.................. 511,854 437,132 350,763 317,075 270,791 188,581
Deposits.......................... 557,270 512,779 443,765 406,363 365,584 276,708
Stockholders' equity.............. 49,815 43,039 32,054 24,578 20,214 16,591
Total assets...................... 644,270 598,205 516,561 452,735 414,704 308,494
- ---------------------------------------------------------------------------------------------------------------------------
Average Balances
Securities........................ $ 87,479 $108,836 $ 105,643 $ 102,469 $ 116,761 $ 95,760
Loans and leases.................. 467,278 392,961 342,069 297,748 215,701 162,577
Deposits.......................... 463,751 413,791 370,026 335,472 280,884 227,260
Stockholders' equity.............. 43,245 37,560 29,083 23,082 18,403 15,106
Total assets...................... 614,494 542,496 482,900 425,032 361,599 278,744
- ---------------------------------------------------------------------------------------------------------------------------
Average stockholders' equity to
average total assets............ 7.04% 6.92% 6.02% 5.43% 5.09% 5.42%
Leverage capital ratio............ 6.70 6.00 6.06 4.93 4.18 4.66
Book value........................ $ 5.69 $ 4.92 $ 3.66 $ 2.81 $ 2.31 $ 1.90
</TABLE>
11
<PAGE>
LIBERTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
---------------------- --------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------ ------ ------ ------ ------ ------ ------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data and Ratios
Interest income....................... $ 41,402 $ 34,422 $ 47,521 $ 40,868 $ 32,580 $ 26,175 $ 22,552
Interest expense...................... 18,150 16,007 21,846 19,929 13,364 11,304 11,259
Net interest income................... 23,252 18,415 25,675 20,939 19,216 14,871 11,293
Net interest income - taxable -
equivalent......................... 23,749 18,923 26,351 21,682 19,965 15,613 11,763
Provision for loan and lease losses... 2,351 659 1,462 819 894 402 310
Noninterest income.................... 4,970 3,791 4,839 5,473 3,825 3,215 2,403
Noninterest expenses.................. 16,606 14,362 20,968 16,347 14,628 12,288 9,161
Income before income taxes............ 9,265 7,185 8,084 9,246 7,519 4,396 4,225
Provision for income tax.............. 2,962 2,653 3,249 2,977 2,508 1,698 1,359
Net income............................ 6,303 4,532 4,835 6,269 5,011 3,698 2,866
Cash dividends........................ -- 479 479 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Per Share Data
Weighted average number of shares
outstanding........................ 8,748,500 8,748,500 8,748,500 8,748,500 8,748,500 8,748,500 8,748,500
Net income............................ $ 0.72 $ 0.52 $ 0.55 $ 0.72 $ 0.57 $ 0.42 $ 0.33
Cash dividends........................ $ -- $ 0.05 $ 0.05 $ -- $ -- $ -- $ --
Financial Ratios
Return on average total assets........ 1.37% 1.04% 0.89% 1.30% 1.18% 1.02% 1.03%
Return on average stockholders'
equity............................ 19.43% 14.96% 12.87% 21.56% 21.71% 20.10% 18.97%
Efficiency ratio (1).................. 56.15% 61.15% 62.25% 57.92% 57.52% 60.59% 60.50%
</TABLE>
- ----------------
(1) Operating expenses (excluding other real estate owned expense and
amortization of intangibles) as a percentage of net interest income, on
a fully taxable-equivalent basis, and noninterest income (excluding
gains or losses on securities transactions).
12
<PAGE>
UNAUDITED PRO FORMA COMBINED PER SHARE DATA
The following table presents selected per share data for Commercial and
Liberty on a historical and pro forma combined basis as if the Acquisition
Merger had been effective as of the dates or the beginning of the periods
indicated.
The Acquisition Merger is expected to be accounted for under the
pooling of interests method, and pro forma data is derived in accordance with
such method. Such pro forma equivalent per share amounts as to net income (loss)
from continuing operations, dividends and book value are computed by multiplying
the pro forma combined amounts by the Exchange Ratio of .459.
Historical information for Commercial and Liberty is derived from the
respective consolidated financial statements incorporated by reference herein or
included elsewhere herein. The pro forma results might not be indicative of the
results that would have occurred if the Acquisition Merger had occurred at the
beginning of the periods indicated or which may be obtained in the future. The
information below should be read in conjunction with such historical
consolidated financial statements of Commercial and Liberty.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
---------------------------- ----------------------------------
1997 1996 1997 1996 1995
-------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) per common share:
Commercial historical................. $ .52 $(.12) $1.34 $1.65 $.96
Liberty historical.................... .26 .16 .66 .72 .57
Pro forma combined (1)................ .52 (.07) 1.35 1.65 .99
Liberty pro forma equivalent.......... .24 (.03) .62 .76 .45
Dividends declared per common share:
Commercial historical................. .047 .045 .185 .178 ---
Liberty historical.................... --- --- --- --- ---
Pro forma combined (1)................ .042 .040 .162 .156 ---
Liberty pro forma equivalent.......... .020 .02 .070 .070 ---
</TABLE>
<TABLE>
<CAPTION>
At At
September 30, June 30,
1997 1997
------ ------
<S> <C> <C>
Book value per common share:
Commercial historical................. 13.72 13.18
Liberty historical.................... 5.69 4.70
Pro forma combined (2)................ 13.58 12.85
Liberty pro forma equivalent.......... 6.23 5.90
</TABLE>
(1) Per share data presented in the above table is based upon an Exchange Ratio
of .459 and the issuance of 4,015,561 shares of Commercial Common Stock for
the three month periods ended September 30, 1997 and 1996, and for the years
ended June 30, 1997, 1996 and 1995.
(2) Pro forma combined book value per common share presented in the above table
is based upon an Exchange Ratio of .459 and the issuance of 4,015,561 shares
of Commercial Common Stock for the three month period ended September 30,
1997 and for the year ended June 30, 1997.
13
<PAGE>
INFORMATION CONCERNING THE SPECIAL MEETING
General
This Prospectus/Proxy Statement is being furnished as part of the
solicitation of proxies by the Board of Directors of Liberty from holders of the
outstanding shares of Liberty Common Stock as of the Record Date for use at the
Special Meeting to be held on ____________, 1998, and any adjournments thereof.
This Prospectus/Proxy Statement, and the accompanying proxy card, are first
being mailed to stockholders of Liberty on or about December ___, 1997.
The principal purpose of the Special Meeting is to consider and vote
upon the approval of the Acquisition Merger, pursuant to which Liberty will
merge into Commercial, and the Merger Agreement among Commercial and Liberty,
which sets forth the terms and conditions of the Acquisition Merger and also
provides for the Bank Merger. See "The Merger -- Conversion of Liberty Common
Stock." The Merger is subject to certain conditions, including regulatory
approval of the OTS.
In addition to approval of the Acquisition Merger and the Merger
Agreement, the stockholders of Liberty may be asked to approve a proposal to
adjourn the Special Meeting if necessary to permit further solicitation of
proxies in the event that there are not sufficient votes at the time of the
Special Meeting to approve the Acquisition Merger and the Merger Agreement.
In this Prospectus/Proxy Statement, the terms "Commercial" and
"Liberty" refer to the parent corporation only or to both the parent corporation
and its subsidiaries, depending on the context.
Solicitation, Voting and Revocability of Proxies
The Board of Directors of Liberty has fixed the close of business on
the Record Date for the determination of the Liberty stockholders entitled to
notice of and to vote at the Special Meeting. Accordingly, only holders of
record of shares of Liberty Common Stock at the close of business on the Record
Date will be entitled to vote at the Special Meeting, with each such share
entitling its owner to one vote on all matters properly presented at the Special
Meeting. On the Record Date, there were approximately 18 holders of record of
the 8,748,501 shares of Liberty Common Stock then outstanding. The presence, in
person or by proxy, of a majority of the total number of outstanding shares of
Liberty Common Stock entitled to vote at the Special Meeting is necessary to
constitute a quorum at the Special Meeting. Abstentions and broker non-votes
will be treated as shares present at the Special Meeting for purposes of
determining the presence of a quorum. The affirmative vote of at least a
majority of the outstanding shares of Liberty Common Stock is required to
approve the Acquisition Merger and the Merger Agreement. The affirmative vote of
a majority of the shares of Liberty Common Stock represented and voting at the
Special Meeting is required to approve an adjournment of the Special Meeting.
All of the directors of Liberty have entered into Voting Agreements with
Commercial in which they agreed to vote all of the 8,657,114 shares of
outstanding Liberty Common Stock beneficially owned by them as of the Record
Date voted FOR approval of the Acquisition Merger and the Merger Agreement. See
also "The Merger -- Voting Agreements."
If the accompanying proxy card is properly executed and returned to
Liberty in time to be voted at the Special Meeting, the shares represented
thereby will be voted in accordance with the instructions marked thereon.
Executed but unmarked proxies will be voted FOR approval of the Acquisition
Merger and the Merger Agreement. Except for procedural matters incident to the
conduct of the Special Meeting, the Board of Directors of Liberty does not know
of any matters other than those described in the Notice of Special Meeting that
are to come before the Special Meeting. If any other matters are properly
brought before the Special Meeting, the persons named in the Liberty proxy will
vote the shares represented by such proxy on such matters as determined by a
majority of Liberty's Board of Directors. Abstentions and broker non-votes will
not be voted and, therefore, with respect to the proposal to approve the
Acquisition Merger and the Merger Agreement, abstentions and broker non-votes
will have the same effect as votes against approval of that proposal.
14
<PAGE>
The presence of a stockholder at the Special Meeting will not
automatically revoke such stockholder's proxy. A stockholder may, however,
revoke a proxy at any time prior to its exercise by filing a written notice of
revocation with, or by delivering a duly executed proxy bearing a later date to,
the Corporate Secretary of Liberty at its headquarters address or by attending
the Special Meeting and voting in person.
The cost of soliciting proxies for the Special Meeting will be borne by
Liberty. In addition to use of the postal system, proxies may be solicited
personally or by telephone or telecopy by directors, officers and employees of
Liberty, who will not be specially compensated for such activities. Liberty will
also request persons, firms and companies holding shares in their names or in
the name of their nominees, which are beneficially owned by others, to send
proxy materials to and obtain proxies from such beneficial owners and will
reimburse such holders for their reasonable expenses incurred in that
connection.
THE MERGER
(Proposal 1 -- Approval of the Acquisition Merger and Merger Agreement)
The following information with respect to the Merger, insofar as it
relates to matters contained in the Merger Agreement, including the exhibits
thereto, is qualified in its entirety by reference to the full text of such
Merger Agreement, which is attached as Annex A to this Prospectus/Proxy
Statement and is incorporated by reference herein.
General
The Merger Agreement provides for the acquisition of Liberty by
Commercial, and the subsequent merger of the Liberty Banks into the Bank, as
follows: (i) Liberty will merge into Commercial, with Commercial as the
surviving corporation, pursuant to which each outstanding Share of Liberty
Common Stock would be converted into shares of Commercial Common Stock as set
forth below (the "Acquisition Merger"); and (ii) the Liberty Banks will then
merge into the Bank, with the Bank as the surviving institution (the "Bank
Mergers") (collectively with the Acquisition Merger, the "Merger"). At the
Acquisition Merger Effective Time, Liberty will have merged into Commercial. At
the Bank Merger Effective Time, each of the Liberty Banks will have merged into
the Bank, Commercial will be the resulting savings institution holding company,
and the Bank will be the resulting subsidiary savings institution. It is
anticipated that the Bank Merger Effective Time will occur immediately following
the Acquisition Merger Effective Time. For additional information regarding the
Merger, see the Merger Agreement, which is attached as Annex A hereto.
Background of the Merger
Over the past several years Liberty has pursued its strategy as an
independent financial services holding company. In response to a request from
Liberty's Board of Directors, representatives of Donaldson, Lufkin, Jenrette
Securities Corporation ("DLJ") made a presentation to the Liberty Board on
February 25, 1997. In its presentation, DLJ reviewed Liberty's present position
in the banking industry, the current merger and acquisition environment and an
analysis of strategic alternatives available to Liberty, including remaining
independent or pursuing a business combination at that time or in the future. At
that meeting, the Liberty Board approved in concept a retainer agreement between
Liberty and DLJ. Such an agreement was entered into March 6, 1997, engaging DLJ
as Liberty's exclusive financial advisor to pursue the process of exploring
potential strategic business combinations for Liberty.
Commencing in early March 1997, DLJ contacted two bank holding
companies to determine whether they had any preliminary interest in pursuing a
merger with Liberty. During these discussions, Liberty made a limited amount of
confidential information available to these companies. Neither of these bank
holding companies submitted preliminary or nonbinding indications of interest to
acquire Liberty.
15
<PAGE>
In early April, DLJ reported to Liberty on the status of the early
discussions. At this meeting, DLJ discussed its strategy to more formally market
Liberty through a Confidential Information Memorandum ("CIM"). The Board
authorized DLJ to proceed in this effort and to expand the marketing process to
a larger group. In the weeks following this informal board meeting, DLJ drafted
a CIM.
Commencing in late May, DLJ delivered the CIM to Commercial and other
selected financial institutions, identified by Liberty and DLJ as potential
strategic merger partners. Each institution was asked to submit an indication of
interest regarding a potential strategic merger with Liberty. In response to
Commercial's submission of an indication of interest to Liberty, during the week
of July 21, 1997, officers and representatives of Commercial conducted due
diligence of business and operations of Liberty at an off-site location in West
Des Moines, Iowa. At the end of that week Liberty received from Commercial
another preliminary indication of interest indicating a range of prices at which
Commercial would be interested in acquiring Liberty. On August 7, 1997, officers
and representatives of Liberty conducted due diligence of business and
operations of Commercial at its headquarters location in Omaha, Nebraska. During
the week of August 11, 1997, officers and representatives of Liberty and
Commercial negotiated the terms and conditions of the definitive Merger
Agreement and Voting Agreements with the four directors.
On August 14, 1997, the Liberty Board again met with its financial and
legal advisors. All board members were present in person. Members of management
of Liberty reviewed with the board the results of Liberty's due diligence review
of Commercial, and Liberty's legal counsel reviewed the terms of the Merger
Agreement, and Voting Agreements. DLJ reviewed with the board the financial
terms of the Merger Agreement. Following discussion, the Liberty Board concluded
that the Merger Agreement was in the best interests of Liberty and its
shareholders, and by unanimous vote of the directors, the Liberty Board approved
the Merger Agreement.
On August 18, 1997, Liberty and Commercial executed the Merger
Agreement and the directors of Liberty executed and delivered the Voting
Agreements and the Merger was publicly announced.
Reasons for the Merger and Recommendation of the Liberty Board of Directors
In reaching its conclusion that the Merger Agreement is in the best
interests of Liberty and its shareholders, the Liberty Board of Directors
carefully considered a variety of factors. Among the factors considered were
those described above and the following:
(i) the financial terms of the proposed Merger, including the
expectation that the Merger will be tax-free to Liberty stockholders, who will
receive Commercial Common Stock which is traded on the NYSE;
(ii) a comparison of the terms of the proposed Merger with
comparable transactions in Iowa, the Midwest and nationwide;
(iii) a review of the current operating environment for
financial institutions, including, but not limited to the continued
consolidation and increasing competition in the banking and financial services
industries, the prospect for further changes in such industries and the
importance of operational scale and financing resources to remain competitive in
the long term to capitalize on the developing opportunities in these industries;
(iv) an assessment that the combined company resulting from
the Merger would better serve the convenience and needs of its customers and the
communities it serves as a result of being a part of Commercial, thereby
affording access to greater financial, managerial and technological resources
and ability to offer an expanded range of potential products and services;
(v) an assessment of the business, financial condition, cash
flow, results of operations, as well as the business and operating philosophy of
Commercial, and its future prospects;
16
<PAGE>
(vi) the review by the Liberty Board with its legal and
financial advisors of the provisions of the Merger Agreement and the financial
advice rendered by DLJ to the Liberty Board; and
(vii) the effect of the Merger on Liberty's senior management
and employees and communities served by Liberty, the compatibility of the
management philosophies of Liberty and Commercial, and the ability to enhance
operating efficiencies and revenue opportunities available to the combined
institutions.
While each member of the Liberty Board individually considered the
foregoing and other factors, the Liberty Board did not collectively assign any
specific or relative weights to the factors considered and did not make any
determination with respect to any individual factor. The Liberty Board
collectively made its determination with respect to the Merger based on the
unanimous conclusions reached by its members, in light of the factors that each
of them considered as appropriate, that the Merger is in the best interests of
the Liberty stockholders.
FOR THE REASONS SET FORTH ABOVE, THE LIBERTY BOARD HAS UNANIMOUSLY
APPROVED THE MERGER AGREEMENT AS ADVISABLE AND IN THE BEST INTERESTS OF LIBERTY
AND LIBERTY STOCKHOLDERS AND RECOMMENDS THAT THE STOCKHOLDERS OF LIBERTY VOTE
FOR THE APPROVAL OF THE MERGER AGREEMENT.
- ---
Financial Advisor
Liberty engaged DLJ as its financial advisor in connection with the
Merger. Pursuant to the terms of a letter agreement dated March 6, 1997 (the
"Engagement Letter"), for DLJ's services in connection with the Merger, Liberty
(i) has paid DLJ $100,000, and (ii) has agreed to pay DLJ an amount equal to
1.50% of the aggregate amount of consideration received by Liberty and/or its
stockholders (treating any shares issuable upon exercise of options, warrants or
other rights of conversion as outstanding), less the amount paid by Liberty
pursuant to clause (i) above. Because the aggregate consideration to be received
by the holders of Liberty Common Stock is to be paid in the form of securities,
the Engagement Letter provides that the value of such securities, for the
purposes of calculating the fee payable to DLJ, will be determined by the last
sale price for such securities on the last trading day thereof prior to
consummation of the Merger. Such fee shall be payable in cash upon consummation
of the Merger. Liberty has also agreed under the Engagement Letter to reimburse
DLJ for all reasonable out-of-pocket expenses, including reasonable fees and
expenses of legal counsel, and has agreed to indemnify DLJ against certain
expenses and liabilities incurred in connection with its engagement, including
liabilities under federal securities law.
DLJ may, in the ordinary course of its business, actively trade
securities of Commercial for its own account or for the accounts of customers
and thus may hold long or short positions in such securities at any time.
Conversion of Liberty Common Stock
Exchange Ratio. Each share of Liberty Common Stock issued and
outstanding at the Acquisition Merger Effective Time (other than Dissenting
Shares or shares owned or held by Liberty or its subsidiaries (excluding those
shares in a 401(k) plan or held in a fiduciary capacity)) will be converted into
and represent solely the right to receive .459 of a share of Commercial Common
Stock, subject to adjustment if the holders of Commercial Common Stock will have
or will become entitled to receive, without payment, during the period
commencing on the date hereof and ending with the Acquisition Merger Effective
Time, additional shares of common stock or other securities for their stock by
way of a stock split, stock dividend, reclassification, combination of shares or
similar corporate rearrangement, then the Exchange Ratio will be proportionally
adjusted. In addition, the Average NYSE Closing Price, as defined below, will be
proportionately adjusted to compensate for any such stock adjustment. The term
"Average NYSE Closing Price" means the arithmetic mean of the closing price per
share of Commercial Common Stock as reported on the NYSE for the 20 day period
preceding the business day prior to the later of (a) the receipt of all federal
and state approvals required to consummate the Merger, or (b) the date Liberty's
stockholders approve the Acquisition Merger (the "Determination Period").
17
<PAGE>
Under certain circumstances, the Exchange Ratio could be adjusted
upward pursuant to certain provisions of the Merger Agreement. The Merger
Agreement provides that Liberty may elect to terminate the Merger Agreement
during the three business day period commencing after the end of the
Determination Period if both of the following conditions are met: (i) the
Average NYSE Closing Price is less than $21.02; and (ii) the quotient obtained
by dividing the Average NYSE Closing Price by the Starting Price is less than
the Index Trigger (as defined below). If Liberty elects to exercise its right to
terminate the Merger Agreement, it must give written notice of its intention no
later than the end of the aforementioned three day period. During the two
business day period immediately after Commercial's receipt of such notice,
Commercial shall have the right to adust the Exchange Ratio to equal the
quotient obtained by dividing (A) the product of $21.02 and the Exchange Ratio
(as then in effect) by (B) the Average NYSE Closing Price. If Commercial so
elects, it must give notice to Liberty and no termination of the Merger
Agreement will be deemed to have occurred.
For purposes of this provision, the term "Index Trigger" is defined as
the quotient obtained by dividing the Index Price (as defined below) on the last
day of the Determination Period by the Index Price on August 17, 1997 (the date
immediately preceding the date of public announcement of the Merger Agreement)
and subtracting .15 from the quotient. The "Starting Price" is defined as
$26.27. "Index Price" is defined as the weighted average of the closing prices
on the specified date of the common stocks of certain financial institutions
specified in the Merger Agreement (the "Index Group").
No Fractional Shares. No fractional shares of Commercial Common Stock
will be issued in the Acquisition Merger. Instead, cash will be paid in lieu of
any fractional share interests of Commercial Common Stock resulting from the
Merger. No dividend or distribution with respect to Commercial Common Stock will
be payable on or with respect to any fractional share interests, and no
fractional share interest will entitle the owner thereof to vote or to any other
rights of a stockholder of Commercial. The applicable cash value of each
fractional share interest will be equal to the product of such fraction
multiplied by the Average NYSE Closing Price for shares of Commercial Common
Stock.
Exchange of Liberty Stock Certificates. Prior to the Acquisition Merger
Effective Time, Commercial will appoint an exchange agent (the "Exchange Agent")
to effect the exchange of stock certificates in connection with the Acquisition
Merger. As soon as practicable after the Acquisition Merger Effective Time, the
Exchange Agent will send a notice and letter of transmittal to each Liberty
stockholder of record at such date advising such stockholder of the
effectiveness of the Acquisition Merger and the procedure for surrendering to
the Exchange Agent outstanding certificates formerly evidencing Liberty Common
Stock in exchange for new certificates of Commercial Common Stock and cash in
lieu of fractional shares. Promptly following receipt of such notice and
transmittal form, holders of Liberty Common Stock certificates should surrender
their certificates in accordance with the specified procedures. Upon surrender,
each Liberty Common Stock certificate will be canceled.
Until surrendered, each outstanding certificate which, prior to the
Acquisition Merger Effective Time represented outstanding shares of Liberty
Common Stock (other than Dissenting Shares or shares owned or held by Liberty or
its subsidiaries (excluding those shares in a 401(k) plan or held in a fiduciary
capacity)) will be deemed for all corporate purposes to evidence the right to
receive that number of shares of Commercial Common Stock into which such shares
of Liberty Common Stock have been converted and the right to receive cash in
lieu of fractional shares. Until such outstanding certificates representing
Liberty are so surrendered, no dividend payable to holders of Commercial Common
Stock as of any record date subsequent to the Acquisition Merger Effective Time
will be paid to the holders of such certificates. However, upon surrender of
such certificates, there will be paid to the record holder of the certificates
of Commercial Common Stock issued in exchange therefor the amount of dividends
that have become payable with respect to such shares of Commercial Common Stock
along with the amount of cash, if any, payable to the holder in lieu of
fractional shares. No interest will be paid with respect to such dividends or
cash paid in lieu of fractional shares to be received in the Merger. After the
Acquisition Merger Effective Time, there will be no further registration of
transfers on the records of Liberty of outstanding certificates formerly
representing shares of Liberty Common Stock and, if a certificate formerly
representing such shares is presented to Commercial, it shall be forwarded to
the Exchange Agent for cancellation and exchange for certificates representing
shares of Commercial Common Stock as herein provided.
18
<PAGE>
If any new certificate for shares of Commercial Common Stock is to be
issued in a name other than the name in which the surrendered certificate is
registered, it will be a condition of the issuance that the certificate so
surrendered is properly endorsed and otherwise in proper form for transfer and
that the person requesting the issuance of such certificate either pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance of
the new certificate in a name other than the registered holder of the
certificate surrendered, or establish to the satisfaction of the Exchange Agent
that such tax has been paid or is not owed. In the event any certificate for
Liberty Common Stock has been lost, stolen or destroyed, the Exchange Agent will
issue, in exchange for such last, stolen or destroyed certificate, upon the
making of an affidavit of that fact by the holder thereof, the Merger
Consideration; provided, however, that Commercial may in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate to deliver a bond in such sum as it may direct
as indemnity against any claim that may be made against Commercial, Liberty, the
Exchange Agent or any other party.
Holders of Liberty Common Stock should NOT surrender their certificates
until they receive written instructions from the Exchange Agent.
Dissenters' Rights of Appraisal
Under provisions of Division XIII of the IBCA and in accordance with
the procedures set forth in Part B thereof, a copy of which is attached to this
Prospectus/Proxy Statement as Annex B, any holder of record or beneficial holder
of Liberty Common Stock has the right to dissent from the Merger and demand
payment of the fair value of his or her shares in cash. Any stockholder who
wishes to assert dissenters' rights must file a written notice of his or her
intent to demand payment with Liberty, Attention: Russell G. Olson, President,
4201 Westown Parkway, Suite 320, West Des Moines, Iowa 50266-6744, before the
vote on the Merger Agreement is taken at the Special Meeting and must refrain
from voting in favor of the Merger Agreement. A PROXY OR VOTE AGAINST THE MERGER
AGREEMENT WILL NOT, BY ITSELF, BE REGARDED AS A WRITTEN NOTICE OF INTENT TO
DEMAND PAYMENT FOR PURPOSES OF ASSERTING DISSENTERS' RIGHTS. Commercial has
conditioned its obligation to consummate the Acquisition Merger on, among other
items, no Liberty stockholders having elected their dissenter and appraisal
rights.
A record holder of Liberty Common Stock may assert dissenters' rights
as to fewer than all shares registered in that stockholder's name only if the
holder dissents with respect to all shares beneficially owned by any one person
and notifies Liberty in writing of the name and address of each person on whose
behalf the stockholder asserts dissenters' rights.
A beneficial stockholder may assert dissenters' rights as to shares
held on the stockholder's behalf only if, in addition to meeting the other
requirements to dissent, the beneficial stockholder (i) submits to Liberty the
record stockholder's written consent to the dissent not later than the time the
beneficial stockholder asserts dissenters' rights and (ii) asserts dissenters'
rights with respect to all shares of which such stockholder is the beneficial
stockholder or over which that beneficial stockholder has power to direct the
vote.
If the Merger Agreement is approved by the requisite vote of holders of
Liberty Common Stock, Liberty is required to send a notice to all dissenting
stockholders containing a form for demanding payment and payment demand and
certificate surrender information (the "Dissenters' Notice") within 10 days
after such approval. The date (the "Payment Demand Date") specified by Liberty
for receiving payment demand (the "Payment Demand") from dissenting stockholders
will be not less than 30 nor more than 60 days after the date on which the
Dissenters' Notice was sent. Upon receipt of the Dissenters' Notice, each
dissenting stockholder must return his or her Payment Demand and certificates no
later than the Payment Demand Date as provided in the notice and certify whether
he or she acquired beneficial ownership of the shares prior to the first public
announcement of the terms of the Merger on August 18, 1997.
If the Acquisition Merger is effected within 60 days after the Payment
Demand Date, Liberty will pay each dissenting stockholder who properly complied
with the statutory requirements the amount that Liberty estimates to be the fair
value of such dissenting stockholder's shares, plus accrued interest from the
Acquisition Merger Effective Time.
19
<PAGE>
If the Acquisition Merger is not effected within 60 days of the Payment
Demand Date, Liberty will return all deposited certificates to any dissenting
stockholders. If the Acquisition Merger is thereafter effected, Liberty will
send a new Dissenters' Notice within 10 days of effecting the Acquisition Merger
and repeat the payment demand procedures.
If any dissenter is dissatisfied with Liberty's payment or offer, as
the case may be, such dissenting stockholder may notify Liberty in writing of
his or her own estimate of the fair value of his or her shares and the amount of
interest due and demand payment of such amount. This demand must be made by the
dissenting stockholder within 30 days after Liberty made or offered payment for
the dissenter's shares. Liberty may either accept such dissenting stockholder's
estimate of fair value or commence a proceeding in the Iowa District Court of
West Des Moines County to determine the fair value of the shares of all
dissenting stockholders whose own estimates of fair value are not accepted by
Liberty.
In the event any holder of Liberty Common Stock fails to perfect his or
her rights to dissent by failing to comply strictly with the applicable
statutory requirements, the stockholder will be bound by the terms of the Merger
Agreement and will not be entitled to payment for his or her shares under the
IBCA. Any holder of Liberty Common Stock who wishes to object to the transaction
and demand payment in cash for his or her shares should consider consulting his
or her own legal advisor.
Because an executed proxy relating to Liberty Common Stock on which no
voting direction is made will be voted at the Special Meeting in favor of the
Merger Agreement, a dissenting stockholder who wishes to have his or her shares
of Liberty Common Stock represented by proxy at the Special Meeting but preserve
dissenters' rights must, in addition to the foregoing requirements, mark the
proxy card either to vote against the Merger Agreement or to abstain from voting
thereon.
The foregoing, while a summary of all material provisions of Part B of
Division XIII of the IBCA, is qualified in its entirety by reference to the text
of such statutory provisions, which is set forth in Annex B herein.
Voting Agreements
As a condition to Commercial entering into the Merger Agreement, the
four directors of Liberty have entered into Voting Agreements with Commercial.
Each Voting Agreement provides that the respective director will vote all of his
shares of Liberty Common Stock beneficially owned in favor of the Merger
Agreement and the Acquisition Merger, waiving all rights the party may have
under Section 490.1302(1)(a) of the IBCA in connection with the Merger. The
Voting Agreements prohibit the directors from voting their shares in favor of
any merger or sale of all or substantially all of the assets of Liberty to any
party other than Commercial and its affiliates, or from exercising dissenters'
rights under the IBCA. Each Voting Agreement prohibits the sale, assignment or
transfer of shares subject to the Voting Agreement. Each Voting Agreement
provides that it will terminate upon the earlier of (i) the Acquisition Merger
Effective Time, and (ii) the termination of the Merger Agreement.
The total number of shares of Liberty Common Stock subject to the
Voting Agreements is 8,657,114, or 98.96% of the total shares outstanding as of
the Record Date and entitled to vote at the Special Meeting.
The Bank Mergers
Following the Acquisition Merger, Liberty Banks will merge into the
Bank, as a result of which the Bank will be the surviving institution. The Bank
Mergers will be undertaken subject to and upon the terms and conditions
contained in the Merger Agreement and in the Bank Plans of Merger between each
of the Liberty Banks and the Bank. At the Bank Merger Effective Time, the shares
of Liberty Banks' common stock issued and outstanding immediately prior thereto
will be canceled and the shares of the common stock of the Bank outstanding
immediately prior thereto will constitute the only outstanding shares of the
common stock of the Bank following consummation of the Bank Merger, the Charter
and Bylaws of the Bank in effect immediately before the Bank Mergers will be the
Charter and Bylaws of the Bank immediately after the Bank Mergers, the current
home office of the Bank will continue to be the home office of the Bank, and the
former home office of Liberty Banks and all branch offices of the Bank and
former
20
<PAGE>
branch offices of Liberty Banks will be branch offices of the Bank. Following
the Bank Mergers, the Bank will continue to operate under the name "Commercial
Federal Bank, a Federal Savings Bank." For additional information, see " --
Employee Benefits after the Merger" and " -- Interests of Certain Persons in the
Merger."
Representations and Warranties
Commercial and Liberty have given certain representations and
warranties to each other in the Merger Agreement relating to, among other
things, the following: the validity of their respective organizations and
subsidiaries; capitalization; ownership of their subsidiaries; financial
statements and other reports; the absence of any undisclosed material adverse
change in their respective businesses, the accuracy, compliance and completeness
of information contained in this Prospectus/Proxy Statement; brokers' and
finders' fees; the absence of undisclosed material pending or threatened
litigation; their compliance with applicable state and federal law; their
authority with respect to the Merger Agreement and related matters; absence of
any violation of a provision of their governing documents, regulation or
material agreement as a result of the Merger Agreement and the transactions
contemplated thereby; the veracity of the information furnished to each other;
and certain agreements and instruments. Liberty has made additional
representations to Commercial as to employment agreements and arrangements;
employee benefits; its properties and assets; absence of any material contract
defaults; tax matters; certain environmental matters; the loan portfolio and
portfolio management; real estate loans and investments; derivatives contracts;
insurance; and the Stockholder Agreement, dated August 6, 1996 by and among
Liberty and its stockholders.
Covenants Pending the Acquisition Merger
In the Merger Agreement, Commercial and Liberty have each agreed to use
their respective best efforts, and to take all actions necessary or appropriate,
to consummate the transactions contemplated by the Merger Agreement. Each party
has also agreed to give to the other party and its respective representatives
and agents full access (to the extent lawful) to all of the premises, books,
records and employees of it and its subsidiaries at all reasonable times, and to
furnish and cause their respective subsidiaries to furnish to the other party
and its respective agents or representatives access to and true and complete
copies of such financial and operating data and all documents with respect to
matters to which reference is made in the Merger Agreement, provided that any
such inspection must be conducted in such manner as not to interfere
unreasonably with the operation of the business of the entity being inspected
and does not affect any of the representations and warranties under the Merger
Agreement. Both parties have also agreed to give prompt written notice to the
other party of any event or development which, had it existed or been known on
the date of the Merger Agreement, would have been required to be disclosed under
the Merger Agreement, which would cause any of its representations and
warranties contained therein to be inaccurate or otherwise materially
misleading, or which materially relates to the satisfaction of the conditions
set forth in the Merger Agreement.
Pursuant to the Merger Agreement, Liberty has agreed that it and its
subsidiaries, including the Liberty Banks, will conduct their business only in
the ordinary course, and maintain their books and records in accordance with
past practices and will refrain from taking any action that would (i) adversely
affect the ability to obtain the Governmental Approvals or (ii) adversely affect
Liberty's ability to perform its obligations under the Merger Agreement.
Further, Liberty has agreed that it will not, without the prior written consent
of Commercial: (i) declare, set aside or pay any dividend or make any other
distribution with respect to the Liberty Common Stock; (ii) reacquire any shares
of Liberty Common Stock; (iii) issue, sell or buy any shares of Liberty Common
Stock or permit any of its subsidiaries to do so; (iv) effect any stock split,
stock dividend or other reclassification of Liberty Common Stock; or (v) grant
any options or issue any warrants exercisable for, or securities convertible or
exchangeable into, common stock of Liberty or any Liberty subsidiary or grant
any stock appreciation or other rights with respect to shares of common stock of
Liberty or any of its subsidiaries; or (vi) make any additional awards after the
date of the Merger Agreement pursuant to any phantom stock agreement.
In addition, except as otherwise permitted by the Merger Agreement,
neither Liberty nor any of its subsidiaries will, without the prior written
consent of Commercial:
21
<PAGE>
(i) sell or dispose of any significant assets of Liberty or any of
its subsidiaries other than in the ordinary course of business consistent with
past practices;
(ii) merge or consolidate Liberty or any of its subsidiaries with, or
otherwise acquire any other entity, or file any application or make any contract
with respect to branching by any Liberty subsidiary (whether de novo, purchase,
sale or relocation) or acquire or construct, or enter into any agreement to
acquire or construct, any interest in real property (other than with respect to
security interests in properties securing loans and properties acquired in
settlement of loans in the ordinary course) or improvements to real property;
(iii) change the articles of incorporation, charter documents or other
governing instruments of Liberty or any of its subsidiaries, except as provided
in the Merger Agreement;
(iv) grant to any executive officer, director or employee of Liberty
or any of its subsidiaries (a) any increase in annual compensation, except in a
manner and amount consistent with past practice, or (b) any bonus type payment;
(v) adopt any new or amend or terminate any existing employee
benefit plan or benefit arrangements of any type, except as specifically
contemplated in the Merger Agreement;
(vi) authorize severance pay or other benefits for any officer,
director or employee of Liberty or any of its subsidiaries, except in a manner
and amount consistent with past practices as previously disclosed to Commercial;
(vii) incur any material indebtedness or obligation or enter into or
extend any material agreement or lease, except in the ordinary course of
business consistent with past practices;
(viii) engage in any lending activities other than in the ordinary
course of business consistent with past practices;
(ix) form any new subsidiary or cause or permit a material change in
the activities presently conducted by any Liberty subsidiary or make additional
investments in any subsidiary;
(x) purchase any debt securities or derivative securities, including
collateralized mortgage obligations ("CMOs") or real estate mortgage investment
conduits products ("REMICs"), that are defined as "high risk mortgage
securities" under OTS Thrift Bulletin No. 52 dated January 10, 1992, as revised,
or purchase any derivatives contracts or structured notes;
(xi) purchase any equity securities;
(xii) make any investment which would cause Liberty Bank & Trust,
Johnston, Iowa to not be a qualified thrift lender under Section 10(m) of the
Home Owners' Loan Act ("HOLA") or not to be a "domestic building and loan
association" as defined in Section 7701(a)(19) of the Code;
(xiii) make any loan with a principal balance in excess of $1,000,000
or not in the ordinary course of business (even if less than $1,000,000
principal balance);
(xiv) authorize capital expenditures other than in the ordinary course
of business;
(xv) adopt or implement any change in its accounting principles,
practices or methods other than as may be required by generally accepted
accounting principles ("GAAP"), or adopt or implement any change in its methods
of accounting for federal income tax purposes;
22
<PAGE>
(xvi) make any loan in which participation interests therein are to be
sold to other persons or entities other than to Liberty or any Liberty
subsidiary or acquire a participation interest in a loan originated by another
person or entity other than to Liberty or a Liberty subsidiary; or
(xvii) commit to do any of the above.
Liberty has further undertaken (i) to obtain approval of its
shareholders of the Merger Agreement and the Acquisition Merger and related
matters as soon as practicable, but in no event later than 45 days after the
Registration Statement becomes effective; (ii) to recommend to its stockholders
approval of the Acquisition Merger; (iii) to use its best efforts to obtain such
approval; (iv) to use their best efforts to obtain the consent or approval of
each person whose consent or approval will be required in order to permit
Liberty and its subsidiaries to consummate the Acquisition Merger; (v) to use
its best efforts to cause to be delivered to Commercial from each person who may
be deemed to be an "affiliate" of Liberty within the meaning of Rule 145, a
written letter agreement regarding the restrictions on resale of the shares of
Commercial Common Stock to be received by such persons in the Acquisition Merger
to ensure compliance with the applicable resale restrictions imposed under the
federal securities laws and pooling of interests accounting requirements; (vi)
to refrain from taking any action that would materially impede or delay
consummation of the Acquisition Merger or the receipt of any regulatory approval
from any governmental authority;: (vii) to refrain from taking any action that
would prevent the Acquisition Merger from qualifying as a reorganization within
the meaning of Section 368 of the Internal Revenue Code, or as a pooling of
interests for accounting purposes; (viii) to refrain, without prior approval of
Commercial, from making any press release, disclosure or statement to the press
or any third party with respect to the transactions contemplated by the Merger
Agreement, except as required by law; (ix) to cooperate when issuing or making
any press release, disclosure or statement with respect to the transactions
contemplated by the Merger Agreement, except as required by law; (x) to take all
actions necessary or appropriate to consummate the Acquisition Merger and the
other transactions contemplated the Merger Agreement at the earliest practicable
date; (xi) to furnish to Commercial, as soon as reasonably practicable after
they become publicly available, its statements of financial condition and
related statements of operations for all periods prior to the closing of the
Acquisition Merger, such statements to be prepared in accordance with GAAP
applied on a consistent basis and present fairly the financial condition and
results of operations of Liberty (subject in the case of unaudited financial
statements, to (A) normal year-end adjustments, (B) any other adjustments
described therein, and (C) the absence of notes which, if presented, would not
differ materially from those included in its most recent consolidated balance
sheet); (xii) to establish at the request of Commercial, prior to the
Acquisition Merger Effective Time and in an amount specified by Commercial, such
additional accruals and reserves ("Conforming Adjustments") as may be necessary
in the sole determination of Commercial to conform Liberty's and its
subsidiaries' accounting practices and policies as well as to conform their
interest rate risk position to those of Commercial (as such accounting practices
and policies are to be applied to Liberty and its subsidiaries from and after
the Acquisition Merger Effective Time); provided, however, that Liberty and its
subsidiaries will not be required to take such action until: (A) Liberty
provides to Commercial a written statement dated the date of Closing certified
by the Chairman of the Board, the President, and the Chief Financial Officer of
Liberty, that the conditions to be satisfied by Liberty or its subsidiaries or
both of them have been satisfied or, alternatively, setting forth in detail the
circumstances that have prevented such conditions from being satisfied (the
"Reliance Certificate") and Commercial provides to Liberty a Reliance
Certificate relating to their performance of the conditions, (B) Commercial,
after reviewing the Reliance Certificate, provides Liberty a written waiver of
any right it may have to terminate the Merger Agreement which waiver shall
contain an express condition precedent that Liberty and its subsidiaries have
established such additional Conforming Adjustments as requested by Commercial;
(xiii) until the Acquisition Merger Effective Time, to promptly, but not less
frequently than monthly, update the schedules provided to Commercial in
connection with the execution of the Merger Agreement, to reflect any matters
which have occurred from and after the date of the Merger Agreement which, if
existing on the date Merger Agreement, would have been required to be described
therein and which, in the case of all such updates other than the last such
update prior to the Acquisition Merger Effective Time, reflect a material change
from the information provided in the schedule as of the date of the Merger
Agreement; provided, however, that no such update shall affect the conditions to
the obligation of Liberty to consummate the transactions contemplated hereby,
and any and all changes reflected in any such update shall be considered in
determining whether such conditions have been satisfied; (xiv) immediately prior
to the Acquisition Merger Effective Time, to terminate the Phantom Stock
Agreements between Liberty and various other officers of
23
<PAGE>
Liberty and Liberty Subsidiaries, and then pay all vested amounts due the
officers in a lump sum payment; and (xv) to use its best efforts to purchase the
35 shares of common stock of Liberty Bank & Trust, N.A., Pocahontas which it
presently does not own (prior to purchasing such shares, Liberty shall consult
with Commercial as to the amount to be paid for such shares, the timing of the
purchases and such other matters as are pertinent.)
Commercial has further undertaken (i) to use best efforts to obtain
stockholder approval of an amendment to its Articles of Incorporation to
increase the number of authorized shares of Commercial Common Stock (such
approval has been obtained); (ii) to use its best efforts to promptly prepare,
submit and file such required regulatory applications for acquisition of control
of Liberty and any other applications required to be filed with any regulatory
authorities in connection with the transactions contemplated by the Merger
Agreement, including the Bank Mergers; (iii) to refrain from any action which
would materially impede or delay consummation of the Acquisition Merger or
receipt of regulatory approval with any governmental authority: (iv) to refrain
from any action that would prevent the Acquisition Merger from qualifying as a
reorganization within the meaning of Section 368 of the Internal Revenue Code,
or as a pooling of interests for accounting purposes; (v) to refrain, without
prior approval of Liberty, from making any press release, disclosure or
statement to the press or any third party with respect to the transactions
contemplated by the Merger Agreement, except as required by law; (vi) to
cooperate when issuing or making any press release, disclosure or statement with
respect to the transactions contemplated by the Merger Agreement, except as
required by law; (vii) to furnish to Liberty, as soon as reasonably practicable
after they become publicly available, its statements of financial condition and
related statements of operations for all periods prior to the closing of the
Acquisition Merger, such statements to be prepared in accordance with generally
accepted accounting principles applied on a consistent basis and present fairly
the financial condition and results of operations of Commercial (subject in the
case of unaudited financial statements, to (A) normal year-end adjustments, (B)
any other adjustments described therein, and (C) the absence of notes which, if
presented, would not differ materially from those included in its most recent
consolidated balance sheet); and (viii) to use all reasonable efforts to cause
to be listed on the New York Stock Exchange, subject to official notice of
issuance, the shares of Commercial Common Stock to be issued in the Acquisition
Merger.
No Solicitation
The Merger Agreement provides that Liberty will not authorize or permit
any representative of Liberty or any subsidiary, directly or indirectly, to
initiate contact with any person or entity in an effort to solicit, initiate or
encourage any "takeover proposal" (generally, any bona fide proposal other than
as contemplated by the Merger Agreement, for a merger or other business
combination involving Liberty or any of the Liberty Banks, for the acquisition
of a 10% or greater equity interest in Liberty or any of the Liberty Banks or
for the acquisition of a substantial portion of the assets of Liberty or any of
the Liberty Banks). In addition, Liberty will not authorize any representative
of Liberty or its subsidiary, directly or indirectly, (i) to cooperate with, or
furnish, or cause to be furnished, any non-public information concerning
Liberty's business, properties or assets to any person or entity in connection
with any takeover proposal; (ii) to negotiate any takeover proposal with any
person or entity; or (iii) to enter into any agreement, letter of intent or
agreement in principle as to any takeover proposal. Further, Liberty has agreed
to give prompt written notice to Commercial upon becoming aware of any takeover
proposal, such notice to contain, at a minimum, the identity of the persons
submitting the takeover proposal, a copy of any written inquiry or other
communication, the terms of the takeover proposal, any information requested or
discussions sought to be initiated and the status of any requests, negotiations
or expressions of interest.
Conditions to Consummation of the Merger
The obligations of Commercial and Liberty to effect the Acquisition
Merger and the Bank Mergers are subject to the following conditions:
(i) holders of the outstanding shares of Liberty Common Stock shall
have approved the Merger Agreement and the Acquisition Merger;
24
<PAGE>
(ii) no order shall have been entered and remain in force restraining
or prohibiting the Merger in any legal, administrative, arbitration,
investigatory or other proceedings by any governmental or judicial or other
authority;
(iii) to the extent required by applicable law or regulation, all
approvals of or filings with any governmental authority, including without
limitation those of the Board of Governors of the Federal Reserve Board ("FRB"),
the OCC, the OTS, the FDIC, the Superintendent of Banking of Iowa, the
Superintendent of Banking of Arizona, the Federal Trade Commission, the DOJ, the
Commission, and any state securities or blue sky authorities, shall have been
obtained or made and any waiting periods shall have expired in connection with
the consummation of the Merger and the Bank Mergers and all other statutory or
regulatory requirements for the valid consummation of the Merger and related
transactions shall have been satisfied;
(iv) the Registration Statement of which this Prospectus/Proxy
Statement is a part shall have been declared effective and shall not be subject
to any stop order of the Commission of any applicable state securities
commissioner; and
(v) receipt of an opinion of Deloitte & Touche LLP, in form and
content reasonably satisfactory to Commercial and Liberty, to the effect that
(i) the Acquisition Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code, (ii) the exchange in the Acquisition Merger of
Liberty Common Stock for Commercial Common Stock will not give rise to gain or
loss to shareholders of Liberty with respect to such exchange (except to the
extent of any cash received), and (iii) neither Liberty nor Commercial will
recognize gain or loss as a consequence of the Acquisition Merger or the Bank
Mergers.
The obligation of Commercial to effect the Acquisition Merger and the
transactions contemplated in the Merger Agreement is subject to the following
additional conditions: (i) Commercial shall have received from Liberty's counsel
an opinion dated as of the closing date of the Merger covering certain matters;
(ii) in addition to government approvals, Liberty and Liberty Banks shall have
obtained all necessary third party consents or approvals in connection with the
Merger, the absence of which would materially and adversely affect Liberty and
its subsidiaries, taken as a whole including, in this connection, Liberty and
its subsidiaries shall obtain the consents from all lessors to their respective
real estate leases that may be required for the consummation of the Merger;
(iii) Commercial shall have received from Deloitte & Touche LLP, letters
regarding certain financial information included in this Prospectus/Proxy
Statement and other matters; (iv) between the date of the Merger Agreement and
the closing date of the Merger, there shall not have occurred any material
adverse change in the financial condition, business or results of operations of
Liberty and any Liberty subsidiaries, taken as a whole, other than any such
change attributable to or resulting from any change in law, regulation or
generally accepted accounting principles, which impair both Liberty and
Commercial in a substantially similar manner; (v) the representations and
warranties of Liberty shall be true in all material respects at the Acquisition
Merger Effective Time with the same effect as though made at the Acquisition
Merger Effective Time (or on the date when made in the case of any
representation or warranty that specifically relates to an earlier date);
Liberty shall have performed all obligations and complied with each covenant, in
all material respects, and all conditions under the Merger Agreement on its part
to be performed or complied with at or prior to the Acquisition Merger Effective
Time; and Liberty shall have delivered to Commercial a certificate, dated the
Acquisition Merger Effective Time and signed by its chief executive officer and
chief financial officer, to that effect; (vi) all governmental approvals
required by the Merger Agreement to consummate the transactions contemplated
thereby shall have been obtained without the imposition of any conditions which
Commercial reasonably and in good faith determines to be unduly burdensome upon
the conduct of the business of Commercial or the Bank; (vii) neither Liberty nor
any of its subsidiaries shall be a party to any pending litigation, reasonably
probable of being determined adversely to Liberty or any subsidiary, which would
have a material adverse effect on the business, financial condition or results
of operations of Liberty or its subsidiaries, taken as a whole; (viii) the form
and substance of all legal matters contemplated by the Merger Agreement and all
papers delivered thereunder shall be reasonably acceptable to Housley Kantarian
& Bronstein, P.C., special counsel to Commercial and the Bank; (ix) Commercial
shall have received the resale letter agreements from all affiliates of Liberty;
(x) Commercial shall have received, prior to mailing the Prospectus/Proxy
Statement, an updated written opinion from Merrill Lynch & Co. to the effect
that the Merger Consideration is fair to Commercial from a financial point of
view; (xi) Commercial shall receive shareholder approval to amend its Articles
of Incorporation to increase the number of
25
<PAGE>
authorized shares of common stock; (xii) Commercial shall have received a Phase
I Environmental Risk Report (as contemplated in OTS Thrift Bulletin No. 16) on
(a) all commercial real estate owned of , (b) all offices and premises used as
facilities by, and (c) all properties which serve as security for any commercial
real estate loan having an original principal balance of $1,000,000 or more of,
the Liberty or any subsidiaries, such reports or other reports derived therefrom
or supplemental thereto to be satisfactory to Commercial (the right to terminate
the Merger Agreement if this condition is not satisfied will only be applicable
if the costs to cleanup, remove, remediate, or take any other action to bring
such property or properties into material compliance with environmental laws
exceed $250,000 in the aggregate and shall expire if not exercised prior to
three months from the date of the Merger Agreement); (xiii) none of the
shareholders of Liberty shall have elected their dissenter and appraisal rights
under the ICBA.
The obligations of Liberty to effect the Acquisition Merger and the
transactions contemplated by the Merger Agreement are subject to the following
additional conditions: (i) Liberty shall have received from counsel to
Commercial an opinion dated as of the closing date of the Merger covering
certain matters; (ii) the representations and warranties of Commercial shall be
true in all material respects at the Acquisition Merger Effective Time with the
same effect as though made at the Acquisition Merger Effective Time (or on the
date when made in the case of any representation or warranty which specifically
relates to an earlier date); Commercial shall have performed all obligations and
complied with each covenant, in all material respects, and all conditions under
the Merger Agreement on their parts to be performed or complied with at or prior
to the Acquisition Merger Effective Time; and Commercial shall have delivered to
Liberty a certificate, dated the Acquisition Merger Effective Time and signed by
its chief executive officer and chief financial officer, to that effect; (iii) a
certificate for the required number of whole shares of Commercial Common Stock,
as determined in accordance with the Merger Agreement and cash for the
fractional share interests, as so determined, shall have been delivered to the
Exchange Agent; (iv) in addition to the required governmental approvals,
Commercial shall have obtained all necessary third party consents or approvals
in connection with the Merger, the absence of which would materially and
adversely affect Commercial and its subsidiaries, taken as a whole; (v) the form
and substance of all legal matters contemplated by the Merger Agreement and all
papers delivered thereunder shall be reasonably acceptable to counsel to
Liberty; and (vi) the shares of Commercial Common Stock issuable pursuant to the
Merger Agreement shall have been approved for listing on the NYSE, subject to
official notice of issuance.
There can be no assurance that the conditions to consummation of the
Acquisition Merger will be satisfied or waived. In the event the conditions to
either party's obligations become impossible to satisfy in any material respect,
the other party may elect to terminate the Merger Agreement. See " -- Amendment
or Termination of the Merger Agreement."
Amendment and Termination of the Merger Agreement
The Merger Agreement may be amended, whether before or after approval
by stockholders of Liberty, by an agreement in writing executed in the same
manner as the Merger Agreement and authorized or ratified by the Boards of
Directors of Liberty and Commercial, except that after approval of the Merger
Agreement by Liberty's stockholders, no such amendment without further approval
by Liberty's stockholders may change the amount or form of the consideration to
be received by Liberty's stockholders in the Merger.
The Merger Agreement may be terminated at any time before the
Acquisition Merger Effective Time, whether before or after approval by Liberty
stockholders: (i) by mutual written consent of the parties; (ii) at the election
of either party, evidenced by written notice, if the closing of the Merger shall
not have occurred on or before May 31, 1998 or such later date as may be agreed
to in writing by the parties, provided that the right to terminate under this
provision shall not be available to any party whose failure to perform an
obligation has been the cause of, or has resulted in, the failure of the closing
to occur on or before such date; (iii) by Commercial upon delivery of written
notice of termination to Liberty if any event occurs which renders impossible
the satisfaction in any material respect of one or more of the conditions to the
obligations of Commercial to effect the Merger as set forth in the Merger
Agreement and noncompliance is not waived by Commercial; (iv) by Liberty upon
delivery of written notice of termination to Commercial if any event occurs
which renders impossible the satisfaction in any material respect of one or more
of the conditions to the obligations of Liberty to effect the Merger set forth
in the Merger Agreement and noncompliance is
26
<PAGE>
not waived by Liberty; (v) by Liberty at any time during the three business days
commencing on the business day immediately following the end of the
Determination Period, if both of the following conditions are met: (1) the
Average NYSE Closing Price shall be less than $21.02; and (2) the quotient
obtained by dividing the Average NYSE Closing Price by the Starting Price
($26.27) shall be less than the Index Trigger (the quotient obtained by dividing
the weighted average of closing prices on the last day of the Determination
Period by the weighted average on August 17, 1997 (or if no trades of Commercial
Common Stock occurred on that day, the date preceding August 17, 1997 on which a
trade occurred) and subtracting 0.15); subject to the following: (a) written
notice to Commercial no later than the end of the three business day period; (b)
Commercial shall have the option to inform Liberty in writing during the two day
period following the receipt of Liberty's written notice to increase the
consideration to be received by the holders of Liberty Common Stock, by
adjusting the Exchange Ratio to equal the quotient obtained by dividing the
product of $21.02 and the Exchange Ratio (as then in effect) by the Average NYSE
Closing Price, whereupon no termination shall have occurred and the Merger
Agreement remains in effect with its terms (except as the Exchange Ratio shall
have been modified).
In the event the Merger Agreement is terminated, the Merger Agreement
becomes void and will have no further effect with the exception that the
provisions regarding (i) brokers and finders fees; (ii) publicity regarding the
Merger Agreement; (iii) payment of expenses; and (iv) confidentiality will
survive any such termination and abandonment. In addition, in the event of a
termination due to the inability of one of the parties to satisfy one or more of
the conditions to its obligation to effect the Merger, the termination of the
Merger Agreement will not relieve the breaching party from liability for an
uncured, intentional and willful breach of a representation, warranty, covenant
or agreement giving rise to such termination.
The representations, warranties and agreements of the parties set forth
in the Merger Agreement shall not survive the Acquisition Merger Effective Time,
and shall be terminated and extinguished at the Acquisition Merger Effective
Time, and from and after the Acquisition Merger Effective Time none of the
parties shall have any liability to the other on account of any breach or
failure of any of those representations, warranties and agreements; with the
exception of (i) those agreements of the parties which by their terms are
intended to be performed after the Acquisition Merger Effective Time; and (ii)
conduct of any party constituting fraud, deception or intentional
misrepresentation.
Termination Fee
The Merger Agreement further provides that in the event the Merger
Agreement is terminated by either Commercial or Liberty in accordance with the
Merger Agreement (other than if terminated by Liberty as a result of
Commercial's or the Bank's noncompliance with the conditions set forth in
Section 5.3(b) of the Merger Agreement) and, prior to such termination a
"Termination Event" (as defined below) shall have occurred, or a "Preliminary
Termination Event" (as defined below) shall have occurred, then in either event
Liberty will pay on demand Three Million Dollars ($3,000,000) (the "Termination
Fee") and an additional amount equal to the reasonable expenses. A "Termination
Event" is defined in the Merger Agreement to mean either of the following: (i)
Liberty or any Liberty Subsidiary or any shareholder of Liberty shall have
entered into an agreement to engage in an Acquisition Transaction (as defined
below) with any person (the term "person" for purposes of this Agreement having
the meaning assigned thereto in Section 3(a)(9) and 13(d)(3) of the Exchange
Act, and the rules and regulations thereunder) other than Commercial or any
affiliate of Commercial (the term "affiliate" for purposes of the Merger
Agreement having the meaning assigned thereto in Rule 405 under the Securities
Act of 1933); or (ii) the shareholders of Liberty shall not have approved the
Acquisition Merger at the meeting held for that purpose or any adjournment
thereof (or through solicitation of consents) or such meeting shall not have
been held or shall have been canceled prior to termination of the Merger
Agreement (unless consents shall have been solicited and received in lieu of
such meeting) or no consents solicited or the Board of Directors of Liberty
shall have recommended that the shareholders of Liberty approve or accept any
Acquisition Transaction with any person other than Commercial or any affiliate
of Commercial.
A "Preliminary Termination Event" is defined in the Merger Agreement to
mean the making of a proposal by any person other than Commercial or any
affiliate of Commercial to Liberty or any of its shareholders to engage in an
Acquisition Transaction.
27
<PAGE>
For purposes of the Merger Agreement, the term "Acquisition
Transaction" is defined to mean: (i) a merger or consolidation or any similar
transaction involving Liberty or any subsidiary of Liberty; (ii) a purchase,
lease or other acquisition of all or substantially all of the assets of Liberty
or any Liberty subsidiary; or (iii) a purchase or other acquisition (including
by way of merger, consolidation, share exchange or otherwise) of securities
representing 10% or more of the equity securities of Liberty or any Liberty
subsidiary.
Required Regulatory Approvals
The Merger is subject to the approval of the OTS. Commercial has filed
an application with the OTS for approval of the Merger. As of the date of this
Prospectus/Proxy Statement, the approval of the OTS has not been received. There
can be no assurance as to the timing of such approval, if given, or as to the
conditions, if any, on which approval will be given. In addition, the approval,
if and when granted, may contain conditions which Commercial may find unduly
burdensome. It is a condition to Commercial and the Bank's obligations to effect
the Merger that such approval does not contain any conditions which Commercial
reasonably and in good faith determines to be unduly burdensome upon the conduct
of the business of Commercial or the Bank. When such approval is received,
material changes to the Merger Agreement, material conditions, or other changes
of a material nature may be imposed by regulatory authorities in connection
therewith which could require a resolicitation of Liberty's stockholders for
approval. Following OTS approval of the Merger, the U.S. Department of Justice
may review the Merger and raise objections on antitrust grounds, though
objections on such grounds are not expected. If the required regulatory
approvals are not obtained, the Merger Agreement will be terminated, and the
Merger will not occur.
Expenses
Pursuant to the Merger Agreement, each of the parties shall bear and
pay all costs and expenses incurred by it or on its behalf in connection with
the transactions contemplated thereunder.
Closing; Merger Effective Times
As promptly as practicable but in any event no more than 30 days after
the satisfaction or waiver of all conditions and/or obligations of the parties
contained in the Merger Agreement, a closing shall take place at which the
parties thereto will exchange documents required by the Merger Agreement. The
Acquisition Merger Effective Time will be at the time and date which is the
later of the time at which (i) the Nebraska articles of merger are filed with
the appropriate authorities in Nebraska and (ii) the Iowa articles of merger are
filed with the appropriate authorities of Iowa. Following the Acquisition
Merger, the Bank Merger Effective Time shall be at the time the articles of
combination for such merger are endorsed by the OTS.
Employee Benefits after the Merger
The employees of Liberty who become employees of Commercial and/or the
Bank shall be eligible to participate in all benefit plans sponsored by
Commercial or the Bank to the same extent as other similarly situated Commercial
and the Bank employees with full credit for prior service with Liberty or
Liberty Banks for purposes of vesting and eligibility for participation and
co-payments and deductibles. Commercial shall honor all accrued vacation leave
for the employees of Liberty and its Subsidiaries following the Merger
Acquisition Effective Time.
Interests of Certain Persons in the Merger
Certain members of Liberty's management and its Board of Directors may
be deemed to have certain interests in the Acquisition Merger in addition to
their interests as stockholders of Liberty generally. Liberty's Board of
Directors was aware of these interests and considered them, among other matters,
in unanimously approving (with all directors voting) the Merger Agreement and
the Acquisition Merger.
Board Membership. At or promptly after the Acquisition Merger Effective
Time, Commercial has agreed to appoint Mr. William A. Krause as a director of
Commercial for a term to expire at the 1998 Annual Meeting of
28
<PAGE>
Stockholders of Commercial. Commercial has also agreed to cause him to be
nominated at the 1998 Annual Meeting for an additional three-year term and will
use its best efforts to secure his re-election.
Employment and Severance Agreements. Immediately prior to the
Acquisition Merger Effective Time, the existing employment agreement between
Russell G. Olson, President of Liberty and Liberty will be terminated and Mr.
Olson and Commercial will enter into a new employment agreement.
As a severance arrangement between Liberty and W. A. Krause in
connection with the Merger, W. A. Krause is entitled to receive at the time of
the Merger five automobiles currently owned or leased by Liberty subsidiaries
having an aggregate estimated fair market value of $160,000.
Advisory Board. Commercial has also agreed to offer compensated
advisory director status to all members of the boards of directors of the
Liberty Banks.
Phantom Stock Agreements. Immediately prior to the Acquisition Merger
Effective Time, the phantom stock agreements between Liberty and various of its
and its subsidiaries' officers will be terminated and the officers will each
receive a lump sum payment of all vested amounts due under the agreements.
Indemnification of Liberty Management; Directors' and Officers'
Insurance Coverage. Commercial has also agreed to indemnify the employees,
agents, directors and officers of Liberty and its subsidiaries to the same
extent they are indemnified under Liberty's Articles of Incorporation or Bylaws
in effect at the date of the Merger Agreement or arising by operation of law for
a period of three years following the Acquisition Merger Effective Time. In
addition, with respect to persons serving as officers or directors of Liberty or
of the Liberty Banks immediately prior to the Acquisition Merger Effective Time,
Commercial has further agreed to continue coverage under Liberty's existing
directors' and officers' liability insurance policy for a period of 18 months
with respect to acts or omissions occurring prior to the Acquisition Merger
Effective Time, provided that Commercial is not obligated to expend more than
150% of the current premium for such coverage.
Federal Income Tax Consequences
Commercial and Liberty will rely upon an opinion of Deloitte & Touche
LLP, tax advisor to Commercial, to the following effect:
. the Acquisition Merger should qualify as a reorganization
within the meaning of Section 368(a)(1)(A) of the Code.
Liberty and Commercial should each be a "party to a
reorganization" within the meaning of Section 368(b) of the
Code.
. Liberty should recognize no gain or loss on the transfer of
its assets to Commercial in exchange for the Commercial Common
Stock, cash and the assumption of its liabilities by
Commercial, by reason of the application of Sections 361(a),
361(b) and 357(a) of the Code.
. no gain or loss should be recognized by Liberty upon the
distribution of the Commercial Common Stock to the Liberty
stockholders, by reason of the application of Section
361(c)(1) of the Code.
. no gain or loss should be recognized by Commercial on the
receipt of Liberty's assets in exchange for Commercial Common
Stock, and the assumption by Commercial of Liberty's
liabilities, by reason of the application of Section 1032(a)
of the Code.
. the basis of the assets of Liberty in the hands of Commercial
should be the same as the basis of such assets in the hands of
Liberty immediately prior to the Merger, by reason of the
application of Section 362(b) of the Code.
. the holding period of the property acquired by Commercial from
Liberty should include the holding period of such property in
the hands of Liberty immediately prior to the Merger, by
reason of the application of Section 1223(2) of the Code.
. no gain or loss should be recognized by the former Liberty
stockholders upon the exchange of their shares of Liberty
Common Stock for Commercial Common Stock (including fractional
share interests
29
<PAGE>
a Liberty stockholder would otherwise be entitled to receive),
by reason of the application of Section 354(a) of the Code.
. the basis of the Commercial Common Stock (including fractional
share interests a Liberty stockholder would otherwise be
entitled to receive) to be received by a Liberty stockholder
who exchanges Liberty Common Stock for Commercial Common Stock
and cash should be the same as the basis of the Liberty Common
Stock surrendered in exchange by reason of Section 358(a)(1)
of the Code.
. the holding period of the Commercial Common Stock (including
fractional share interests that they would otherwise be
entitled to receive) to be received by Liberty stockholders
should, in each instance, include the holding period of the
Liberty Common Stock surrendered in the exchange, provided the
Liberty Common Stock was held as a capital asset on the date
of the exchange, by reason of the application of Section
1223(1) of the Code.
. Commercial as the survivor should succeed to and take into
account as of the close of the day of the distribution or
transfer the items of Liberty described in Section 381(c) of
the Code, subject to the conditions and limitations specified
in Sections 381(b) and 381(c) of the Code, by reason of the
application of Section 381(a)(2) of the Code.
. as provided in Section 381(c)(2) of the Code and Regulation
Section 1.381(c)(2)-1, Commercial as the survivor should
succeed to and take into account the earnings and profits, or
deficit in earnings and profits, of Liberty as of the date or
dates of transfer. Any deficit in earnings and profits of
either Commercial or Liberty will be used only to offset
earnings and profits accumulated after the date or dates of
transfer.
. cash received by a stockholder of Liberty otherwise entitled
to receive a fractional share of Commercial Common Stock in
exchange for his Liberty Common Stock should be treated as if
the fractional shares were distributed as part of the Merger
and then were redeemed by Commercial. These cash payments
should be treated as having been received as distributions in
full payment in exchange for the stock redeemed as provided in
Section 302(a) of the Code. This receipt of cash should result
in gain or loss measured by the difference between the basis
of such fractional share interest and the cash received. Such
gain or loss should be a capital gain or loss to the former
Liberty stockholders, provided that the Liberty Common Stock
was a capital asset in such former stockholders' hands and as
such, should be subject to the provisions and limitations of
Subchapter P of Chapter 1 of the Code.
. where cash is received by a dissenting stockholder of Liberty,
such cash will be treated as received by the dissenting
stockholder as a distribution in redemption of the
stockholder's Liberty Common Stock, subject to the provisions
and limitations of Section 302 of the Code.
The opinion of Deloitte & Touche LLP has no binding effect on the IRS. The
opinion of Deloitte & Touche LLP is filed with the Commission as an exhibit to
the Registration Statement of which this Prospectus/Proxy Statement is a part.
See " -- Available Information."
Cash payments made to the holders of Liberty Common Stock upon the
exchange thereof in connection with the Acquisition Merger (other than certain
exempt entities and persons) will be subject to a 31.0% backup withholding tax
under federal income tax law unless certain requirements are met. Generally,
Commercial will be required to deduct and withhold the tax if (i) the
stockholder fails to furnish a taxpayer identification number ("TIN") or fails
to certify under penalty of perjury that such TIN is correct, (ii) the IRS
notifies Commercial that the TIN furnished by the stockholder is incorrect,
(iii) the IRS notifies Commercial that the stockholder has failed to report
interest, dividends or original issue discount in the past, or (iv) there has
been a failure by the stockholder to certify under penalty of perjury that such
stockholder is not subject to the 31.0% backup withholding tax. Any amounts
withheld in collection of the 31.0% backup withholding tax will reduce the
federal income tax liability of the stockholders from whom such tax was
withheld. The TIN of an individual stockholder is that stockholder's Social
Security number.
30
<PAGE>
THE FOREGOING CONSTITUTES ONLY A GENERAL DESCRIPTION OF THE FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER, WITHOUT CONSIDERATION OF THE PARTICULAR
FACTS AND CIRCUMSTANCES OF EACH LIBERTY STOCKHOLDER'S SITUATION. EACH LIBERTY
STOCKHOLDER IS ENCOURAGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL ADVISORS
AS TO PARTICULAR FACTS AND CIRCUMSTANCES THAT MAY BE UNIQUE TO SUCH STOCKHOLDER
AND NOT COMMON TO STOCKHOLDERS AS A GROUP AND ALSO AS TO ANY ESTATE, GIFT,
STATE, LOCAL OR FOREIGN TAX CONSEQUENCES ARISING OUT OF THE MERGER AND/OR ANY
SALE THEREAFTER OF COMMERCIAL COMMON STOCK RECEIVED IN THE MERGER.
Accounting Treatment
The Merger is expected to be accounted for as a pooling of interests,
under which the recorded assets and liabilities of Commercial and Liberty would
be carried forward to the surviving corporation in the Merger (Commercial) at
their recorded amounts; income of the surviving corporation would include income
of Commercial and Liberty for the entire fiscal year in which the Merger occurs;
and the reported income of Commercial and Liberty for prior periods would be
combined and restated as retained earnings of the surviving corporation
(Commercial).
Resale of Commercial Common Stock; Restrictions on Transfer
The shares of Commercial Common Stock to be issued in the Acquisition
Merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares issued to any
stockholder who may be deemed to be an "affiliate" of Liberty or Commercial for
purposes of Rule 145 under the Securities Act (generally, individuals or
entities that control, are controlled by or are under common control with
Liberty or Commercial). Affiliates may not sell their shares of Commercial
Common Stock acquired in connection with the Acquisition Merger except pursuant
to an effective registration statement under the Securities Act covering such
shares or in compliance with Rule 145 or another applicable exemption from the
registration requirements of the Securities Act.
New York Stock Exchange Listing
Commercial Common Stock is traded on the NYSE under the symbol "CFB".
It is expected that Commercial Common Stock will continue to be quoted on the
NYSE under the symbol "CFB" following the Merger.
Vote Required
The affirmative vote of at least a majority of the outstanding Liberty
Common Stock is required for Liberty's stockholders to approve the Merger
Agreement and the Acquisition Merger. Each share of Liberty Common Stock
outstanding at the close of business on the Record Date is entitled to one vote
on each matter to be considered at such meeting. All of Liberty's directors have
executed Voting Agreements which require such individuals to vote all of the
8,657,114 shares (98.96%) of Liberty Common Stock, beneficially owned by them as
of the Record Date for approval of the Acquisition Merger and the Merger
Agreement.
COMMERCIAL FEDERAL CORPORATION
Commercial is a unitary non-diversified savings and loan holding
company whose primary asset is the Bank, which is one of the largest depository
institutions in the Midwest. At September 30, 1997, Commercial had total assets
of $7.2 billion and total stockholders' equity of $444.3 million. Based upon
total assets at that date, Commercial was the 13th largest publicly held thrift
holding company in the United States. Commercial is a consumer-oriented
financial institution that emphasizes single-family residential and construction
real estate lending, consumer lending, commercial real estate lending, retail
deposit activities, including demand deposit accounts, and mortgage banking. At
November 30, 1997, Commercial operated 34 branch offices in Nebraska, 21 branch
offices in greater metropolitan Denver, Colorado, 19 branch offices in Oklahoma,
27 branch offices in Kansas and seven branch offices in Iowa. Throughout
31
<PAGE>
its 110 year history, Commercial has emphasized customer service. To serve its
customers, Commercial conducts loan origination activities through its 108
branch office network, loan offices of its wholly-owned mortgage banking
subsidiary and a nationwide correspondent network of mortgage loan originators.
Commercial also provides insurance and securities brokerage and other retail
financial services.
Commercial's strategy for growth emphasizes both internal and external
growth. Operations focus on increasing deposits, including demand accounts,
making loans (primarily single-family mortgage and consumer loans), community
banking, and providing customers with a full array of financial products and a
high level of customer service. As part of its long-term strategic plan,
Commercial intends to expand its operations within its market areas either
through direct marketing efforts aimed at increasing market share, branch
expansions, or opening additional branches. Commercial's retail strategy will
continue to be centered on attracting new customers and selling both new and
existing customers multiple products and services. Additionally, Commercial will
continue to build and leverage an infrastructure designed to increase fee and
other income.
Complementing its strategy of internal growth, Commercial continues to
grow its present five-state franchise through an ongoing program of selective
acquisitions of other financial institutions.
Pending Acquisitions. In addition to the Merger, Commercial has entered
into definitive agreements to acquire two other financial institution holding
companies: Mid Continent Bancshares, Inc., a thrift holding company; and First
National Bank Shares, LTD, a bank holding company. Together with Liberty, these
three pending acquisitions will add 59 branches to Commercial's existing network
and approximately $1.2 billion in total assets, approximately $924.0 million in
deposits and approximately $1.3 billion in loans serviced for others. Mid
Continent Bancshares, Inc., headquartered in El Dorado, Kansas, has ten branch
locations in Kansas. First National Bank Shares, LTD, headquartered in Great
Bend, Kansas, operates seven branch offices in Kansas. Future acquisition
candidates will be selected based on the extent to which the candidates can
enhance Commercial's retail presence in new or underserved markets and
complement Commercial's existing retail network.
On December 15, 1997, the Company entered into a definitive agreement
to acquire Perpetual Midwest Financial, Inc. ("Perpetual"), the holding company
of Perpetual Savings Bank, FSB ("Perpetual Savings"), headquartered in Cedar
Rapids, Iowa. In this transaction the Company will acquire through a tax-free
exchange all 1,872,925 shares of Perpetual's common stock. Perpetual
shareholders will receive 0.8636 shares of the Company's common stock for each
outstanding share of Perpetual common stock. Following the merger of Perpetual
into the Company, Perpetual Savings will be merged into the Bank. Perpetual
Savings currently operates four branch locations in Cedar Rapids, Iowa and one
branch in Iowa City, Iowa. At September 30, 1997, Perpetual had assets of
approximately $401.7 million, deposits of approximately $310.1 million and
stockholders' equity of approximately $34.2 million. The acquisition is subject
to regulatory approvals, approval by Perpetual's shareholders and other
conditions. It is expected to be completed late in the second quarter of 1998.
Recent Events. On November 18, 1997, Commercial announced at its 1997
Annual Meeting that stockholders had approved proposals to amend Commercial's
Articles of Incorporation to (i) increase the number of authorized shares of
Commercial Common Stock from 25,000,000 shares to 50,000,000 shares, and (ii)
establish a variable range for the number of members of the Board of Directors
of from nine to 12 members.
In addition, Commercial announced that its Board of Directors had
authorized a three-for-two stock split to be effected in the form of a 50
percent stock dividend. Par value remained at $.01 per share. Fractional shares
were paid in cash. The Board also declared a quarterly cash dividend of $.055
per share of Commercial Common Stock which represents an increase of 17.9% from
the September 30, 1997 quarter when Commercial paid a cash dividend of $.0467
per shares, after adjusting for the three-for-two stock split. The stock
dividend was distributed on December 15, 1997 to stockholders of record as of
November 28, 1997. The cash dividend for the quarter ended December 31, 1997,
payable to stockholders of record as of December 31, 1997, will be paid on
January 14, 1998. All per share data and stock prices presented in this
Prospectus/Proxy Statement have been adjusted on a retroactive basis to reflect
the effect of this three-for-two stock split.
32
<PAGE>
Commercial's principal executive offices are located at 2120 South 72nd
Street, Omaha, Nebraska 68124, and its telephone number is (402) 554-9200.
For additional information regarding Commercial and the Bank, see
Commercial's Annual Report on Form 10-K for the fiscal year ended June 30, 1997,
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 and the
Current Reports on Form 8-K dated August 18, 1997, September 2, 1997, September
11, 1997, November 18, 1997 and December 8, 1997, all of which are incorporated
by reference herein.
LIBERTY FINANCIAL CORPORATION
Liberty is a multi-bank holding company registered under the Bank
Holding Company Act with its principal place of business at 4201 Westown
Parkway, Suite 320, West Des Moines, Iowa 50266. As currently structured,
Liberty was formed as the result of the merger and consolidation of eight bank
holding companies (each owning a subsidiary bank listed below) effective
December 31, 1996. Liberty currently owns seven bank subsidiaries and one
savings and loan subsidiary (Liberty Bank & Trust, Johnston, Iowa), described
below, each of which is wholly-owned with the exception of Liberty Bank & Trust,
N.A., Pocahontas, which is 99.33 percent owned by Liberty. The following
describes the bank subsidiaries and nonbanking subsidiaries and divisions of
Liberty:
<TABLE>
<CAPTION>
Assets (as of
Name and Location Number of Branches September 30, 1997)
- ----------------- ------------------ -------------------
<S> <C> <C>
Liberty Bank & Trust, 3 $60 million
Bloomfield, Iowa
Liberty Bank & Trust, 4 $60 million
Forest City, Iowa
Liberty Bank & Trust, 13 $105 million
Johnston, Iowa
Liberty Bank & Trust, 1 $36 million
Lake Mills, Iowa
Liberty Bank & Trust, 8 $107 million
Mason City, Iowa
Liberty Bank & Trust, 4 $55 million
N.A., Pocahontas, Iowa
Liberty Bank & Trust, 6 $143 million
Tuscon, Arizona
Liberty Bank & Trust, 3 $49 million
Woodbine, Iowa
</TABLE>
All bank subsidiaries are state banks, except for Liberty Bank & Trust,
N.A., Pocahontas, which is a national bank. Liberty Bank & Trust, Johnston, Iowa
is a federal savings bank.
33
<PAGE>
Liberty Nonbanking Subsidiaries And Divisions
<TABLE>
<CAPTION>
Name Description of Business
---- -----------------------
<S> <C>
Liberty Leasing Company, an Iowa corporation Originates leases for commercial equipment
Liberty Services, Inc., an Iowa corporation Provides accounting and check processing for the eight Liberty
Bank subsidiaries
Liberty Loan Store, Inc., an Iowa corporation Originates auto loans through auto dealers
Liberty Mortgage Store, Inc., an Iowa
corporation Processes 1-4 family loans for the eight Liberty bank subsidiaries
Liberty Insurance, Inc., a subsidiary of
Liberty Bank & Trust, Forest City General Insurance Agency
Liberty BankCard, a division of Liberty
Services, Inc. Services the credit card portfolio for eight Liberty Banks
</TABLE>
Liberty and its predecessor holding companies have grown by purchasing
banks as well as by opening de novo locations. Liberty's 42 current branches
consist of 20 de novo locations and 22 purchased locations. At September 30,
1997, Liberty and its consolidated subsidiaries had consolidated assets of
approximately $644 million, consolidated deposits of approximately $557 million,
and shareholders' equity of approximately $50 million.
Through its 36 Iowa locations and six Arizona locations, Liberty's
community-based branch network provides a broad range of commercial bank
financial services to its business customers and a variety of consumer banking
services to individual customers. The commercial bank financial services offered
include line of credit facilities, accounts receivable, inventory and other
working capital financing, sales and equipment financing, real estate and
interim construction financing and cash management services. Liberty serves its
many agricultural customers for providing loans to farmers and agricultural
businesses for crop production, equipment, and cattle feeding programs. Liberty
also offers a full range of consumer services, including mortgage, installment
and home improvement loans, checking accounts, various savings account and
certificate of deposit programs, trust services, safe deposit facilities, credit
card accounts, and additionally offers customers a variety of fiduciary
services.
BUSINESS OF LIBERTY FINANCIAL CORPORATION
Lending Activities
General. Liberty's principal lending activity is typical commercial
banking activity, including commercial loans, agricultural loans, real estate
construction loans, consumer real estate loans, home equity loans, commercial
equipment leases, and credit card loans.
34
<PAGE>
Loans and Leases by Type. Set forth below is selected data relating to
the composition of the loans and leases total portfolio by type of loans, with
leases stated in the aggregate, on the dates indicated:
<TABLE>
<CAPTION>
At At December 31,
September 30, ----------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- ------ ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Leases........................... $ 44,217 $ 44,920 $ 33,236 $ 35,902 $ 11,692 $ 609
Agricultural loans............... 58,508 50,285 47,111 44,903 47,624 33,944
Commercial loans................. 132,174 114,389 84,018 71,745 74,870 46,802
Real Estate loans................ 182,334 156,970 141,781 130,035 112,339 84,445
Installment loans................ 65,308 46,192 27,381 17,476 16,475 10,953
Credit card loans................ 16,522 14,513 9,274 8,839 4,877 3,112
All other loans.................. 12,791 9,863 7,962 8,175 2,914 8,716
-------- --------- --------- --------- --------- --------
Total....................... $511,854 $ 437,132 $ 350,763 $ 317,075 $ 270,791 $188,581
======== ========= ========= ========= ========= ========
</TABLE>
Loan and Lease Maturities and Interest Rate Sensitivity. The following
table sets forth certain information at December 31, 1996, regarding the amount
of loans and leases maturing in Liberty's portfolio based on their contractual
terms to maturity. Loans and lease balances do not include the allowance for
loan and lease losses or deferred fees.
<TABLE>
<CAPTION>
Due After December 31, 1996
------------------------------------------------------------------------------
After Three After One After
Within Through Twelve Year Through Five
Three Months Months Five Years Years Total
------------ -------------- ------------ ----- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Fixed rate loans and leases..... $ 46,323 $ 53,913 $ 127,725 $ 11,343 $ 239,304
Variable rate loans and
leases........................ 123,298 44,406 30,124 -- 197,828
----------- ------------- ----------- --------- ----------
Total loans and leases.......... $ 169,621 $ 98,319 $ 157,849 $ 11,343 $ 437,132
=========== ============= =========== ========= ==========
</TABLE>
Nonperforming Assets and Restructured Loans. The following table sets
forth information with respect to Liberty's nonperforming assets for the periods
indicated.
<TABLE>
<CAPTION>
At At December 31,
September 30, --------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------------- ------ ------ ------ ------ -----
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Loans past due 90 days or more... $ 1,305 $ 278 $ 147 $ 109 $ 333 $ 110
Nonaccrual Loans................. 2,172 1,159 500 566 707 656
Foreclosed real estate property.. 1,675 1,129 623 477 236 928
-------- --------- --------- --------- --------- --------
Total nonperforming assets....... $ 5,152 $ 2,566 $ 1,270 $ 1,152 $ 1,276 $ 1,694
======== ========= ========= ========= ========= ========
Total nonperforming assets as a
percentage of total loans and
foreclosed property........... 1.00% 0.59% 0.36% 0.36% 0.47% 0.89%
======== ========= ========= ========= ========= ========
Restructured Loans............... $ 115 $ 160 $ 350 $ 930 $ 1,177 $ 1,386
======== ========= ========= ========= ========= ========
</TABLE>
Liberty experienced an increase in non accrual assets and foreclosed
property for the year ended December 31, 1996 and the nine month period ending
September 30, 1997. Also during the latter period, Liberty experienced an
increase in loans 90 days or more past due.
35
<PAGE>
The increase in nonaccrual loans during 1996 was solely limited to bank
loans. Five loans totaling $825,000, or 71% of the total, were nonearning assets
as of December 31, 1996 and made the most significant contribution to the
increased nonaccrual volume. Seven loans and leases totaling $1,183,000 made up
54% of the nonaccrual total as of September 30, 1997. Leases totaling $669,000
were on nonaccrual status which caused much of the increase since year end 1996.
The foreclosed property total as of December 31, 1996 almost
exclusively consisted of two pieces of real estate assets and repossessed lease
equipment inventory. During 1997, lease inventory increased to over $800,000.
This inventory, along with a single OREO asset valued at $830,000, constituted
the majority of the Foreclosed Property total as of September 30, 1997.
The increase in loans past due 90 days or more for the nine month
period ending September 30, 1997, was primarily due to indirect auto installment
loans.
Analysis of Allowance for Loan and Lease Losses. The following table
sets forth an analysis of Liberty's allowance for possible loan and lease losses
for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended Years Ended December 31,
September 30, --------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------- ------ ------ ------ ------ -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of the year.......... $ 4,446 $ 4,282 $ 4,203 $ 3,387 $ 2,553 $ 2,166
--------- --------- -------- --------- --------- ---------
Provision for loan and lease losses....... $ 2,351 $ 1,462 $ 819 $ 894 $ 402 $ 310
--------- --------- -------- --------- --------- ---------
Commercial, financial and agricultural.... 206 226 110 50 202 197
Commercial real estate.................... 28 3 4 -- 6 --
Agricultural real estate.................. -- 8 3 -- -- --
Residential real estate................... 27 114 27 3 39 28
Consumer.................................. 611 754 76 66 39 34
Credit cards.............................. 249 320 287 140 83 102
Leases.................................... 685 732 403 66 -- --
--------- --------- -------- --------- --------- ---------
Total charge-offs............... 1,806 2,157 910 325 369 361
--------- --------- -------- --------- --------- ---------
Commercial, financial and agricultural.... 71 32 32 233 49 186
Commercial real estate.................... -- -- 10 -- -- 7
Agricultural real estate.................. -- 4 -- 8 -- --
Residential real estate................... 19 1 -- 20 1 5
Consumer.................................. 84 224 21 19 12 17
Credit cards.............................. 36 44 35 29 25 22
Leases.................................... 152 28 63 28 -- --
--------- --------- -------- --------- --------- ---------
Total recoveries................. 362 333 161 337 87 237
--------- --------- -------- --------- --------- ---------
Net charge-offs................. 1,444 1,824 749 (12) 282 124
--------- --------- -------- --------- --------- ---------
Allowance of purchased institution........ -- 514 -- (103) 652 150
--------- --------- -------- --------- --------- ---------
Other adjustments......................... 70 12 9 13 62 51
--------- --------- -------- --------- --------- ---------
Balance at end of the period.............. $ 5,423 $ 4,446 $ 4,282 $ 4,203 $ 3,387 $ 2,553
========= ========= ======== ========= ========= =========
Average loans............................. $ 467,278 $ 392,961 $342,069 $ 297,748 $ 215,701 $ 162,577
Total loans............................... $ 511,854 $ 437,132 $350,763 $ 317,075 $ 270,791 $ 188,581
Recoveries as a % of total charge offs.... 20.04% 15.44% 17.69% 103.69% 23.58% 65.65%
Net charge offs as a percentage of
average loans......................... 0.31% 0.46% 0.22% 0.00% 0.13% 0.08%
Allowance for loan losses as a percentage
of total loans.......................... 1.06% 1.02% 1.22% 1.33% 1.25% 1.35%
</TABLE>
36
<PAGE>
Allocation of Allowance for Loan and Lease Losses. The following table
sets forth the components of the allowance for loan and lease losses by category
for the periods indicated. Management believes that the allowance can be
allocated by category only on an approximate basis and that such allocation is
not necessarily indicative of further losses nor restricts the use of the
allowance to absorb losses in any loan category.
<TABLE>
<CAPTION>
At September 30, At December 31,
---------------------- -----------------------------------------------
1997 1996 1995
---------------------- --------------------- ---------------------
Ratio of Ratio of Ratio of
Allocation Allocation Allocation
Amount to Total Amount to Total Amount to Total
------- ---------- ------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leases........................... $ 1,161 21% $ 705 16% $ 448 10%
Agricultural loans............... 377 7 272 6 412 10
Commercial loans................. 720 13 598 13 719 17
Real estate loans................ 780 14 636 14 981 23
Installment loans................ 793 15 709 16 356 8
Credit card loans................ 312 6 290 7 228 5
All other loans.................. 63 1 84 2 150 4
Potential problem loans.......... 1,217 23 1,152 26 988 23
------- ---- ------- ----- ------- -----
Total...................... $ 5,423 100% $ 4,446 100% $ 4,282 100%
======= ==== ======= ===== ======= =====
<CAPTION>
At December 31,
---------------------------------------------------------------------------
1994 1993 1992
---------------------- --------------------- ----------------------
Ratio of Ratio of Ratio of
Allocation Allocation Allocation
Amount to Total Amount to Total Amount to Total
------- ---------- ------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leases........................... $ 395 9% $ 136 4% $ -- --%
Agricultural loans............... 428 10 464 14 349 14
Commercial loans................. 710 17 467 14 384 15
Real estate loans................ 1,282 31 1,358 40 952 37
Installment loans................ 173 4 150 4 106 4
Credit card loans................ 87 2 52 2 30 1
All other loans.................. 130 3 58 2 95 4
Potential problem loans.......... 999 24 702 20 637 25
-------- ----- -------- ------ -------- ------
Total...................... $ 4,203 100% $ 3,387 100% $ 2,553 100%
======== ===== ======== ====== ======== ======
</TABLE>
37
<PAGE>
Investment Securities
Securities by Type. The following table sets forth the carrying value
of Liberty's securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
At At December 31,
September 30, ---------------------------------------
1997 1996 1995 1994
------------- ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury Notes................................. $ 18,046 $ 14,560 $ 22,472 $ 32,134
U.S. Government Agencies............................ 3,168 8,541 19,104 16,754
U.S. Government Mortgage Backed..................... 32,105 43,402 33,240 15,035
States and Political Subdivisions................... 13,761 20,342 25,850 26,923
Corporate........................................... 2,204 3,168 4,849 4,916
Other............................................... 5,210 7,466 13,733 5,649
--------- --------- ---------- ----------
Total......................................... $ 74,494 $ 97,479 $ 119,248 $ 101,411
========= ========= ========== ==========
</TABLE>
38
<PAGE>
Maturities/Average Yields of Securities. The following table sets forth
the scheduled maturities, market values and average yields for Liberty's
securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
After One After Five
Within One Year Through Five Years Through Ten Years
----------------- ------------------ -----------------
Value Yield Value Yield Value Yield
----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Notes................... $ 6,056 6.17% $ 11,990 6.26% $ -- --%
U.S. Government Agencies.............. 2,406 6.19 762 6.61 -- --
U.S. Government Mortgage-Backed....... -- -- -- -- 32,105 6.45
States and Political Subdivisions..... 4,287 6.62 8,900 7.07 354 7.90
Corporate............................. 1,807 6.50 397 6.74 -- --
Other................................. -- -- 267 5.83 -- --
--------- --------- --------
Total................................. $ 14,556 6.35 $ 22,316 6.60 $ 32,459 6.47%
========= ========= ========
<CAPTION>
After Ten Years
------------------ Yield
Value Yield Total Yield
----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
U.S. Treasury Notes................... $ -- --% $ 18,046 6.23%
U.S. Government Agencies.............. -- -- 3,168 6.29
U.S. Government Mortgage-Backed....... -- -- 32,105 6.45
States and Political Subdivisions..... 220 10.60 13,761 7.01
Corporate............................. -- -- 2,204 6.54
Other................................. 4,943 6.65% 5,210 6.61
-------- ---------
Total................................. $ 5,163 6.82% $ 74,494 6.51%
======== =========
</TABLE>
39
<PAGE>
Competition
Liberty faces strong competition in attraction of consumer and
commercial deposits (its primary source of lendable funds) and in the
origination of consumer and commercial loans. The most direct competition for
deposits has historically come from other commercial banks and thrifts
institutions located in their primary market areas. Liberty also faces strong
competition for investors' funds from mutual funds companies and other corporate
and government securities' brokers. Competition for loans comes principally from
other commercial banks, thrifts, mortgage banking companies, insurance companies
and other institutional lenders.
Personnel
At September 30, 1997, Liberty had 293 full-time equivalents,
consisting mostly of full-time employees. Liberty employees are not represented
by a collective bargaining agreement. Liberty believes its employee relations
are good.
Properties
At December 31, 1996, Liberty conducted business through 36 offices in
Iowa and 6 offices in Arizona. At December 31, 1996, Liberty owned the buildings
for 23 of its branch offices and leased the remaining 19 under leases expiring
(not assuming exercise of renewal options) between December 1997 and March 2006.
At December 31, 1996, the total net book value of land, office properties and
equipment owned by Liberty was $6.4 million. Management believes that Liberty's
premises are suitable for its present and anticipated needs.
Krause Gentle Corporation, a corporation in which W.A. Krause owns a
controlling interest and is its President, has leased branch banking locations
to Liberty Bank subsidiaries at the following ten locations: Iowa Falls, Polk
City, Cresco, Waukee, Boone, Britt, Ackley, Grundy Center, Lamoni, and West Des
Moines. Such leases were negotiated in arm's length transactions, and in the
opinion of Liberty management, the provisions of such leases, including the
provisions for rent, are comparable with those of leases between unassociated
parties with like property similarly situated.
Legal Proceedings
Although Liberty is, from time to time, involved in various legal
proceedings in the normal course of business, there are no material legal
proceedings to which Liberty is a party or to which any of its properties are
subject.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
Management's Discussion and Analysis of Financial Condition and Results
of Operations is intended to assist in understanding the financial condition and
results of operations of Liberty. The information contained in this section
should be read in conjunction with the financial statements of Liberty as of
December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and
1994, and with the condensed financial statements as of September 30, 1997 and
for the nine months ended September 30, 1997 and 1996 and the accompanying notes
for such periods, as applicable, which are included elsewhere in this
Prospectus/Proxy Statement.
40
<PAGE>
Average Balance Sheets and Analysis of Net Interest Margin
(Taxable-equivalent basis)
<TABLE>
<CAPTION>
September 30,
---------------------------------------------------------------------------
1997 1996
--------------------------------- -----------------------------------
Total Average Total Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ---- ------- -------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold.......................... $ 13,173 $ 522 5.28% $ 10,772 $ 437 5.41%
Taxable securities.......................... 72,022 3,461 6.41 91,269 3,948 5.77
Tax-exempt securities....................... 15,457 807 6.96 20,937 1,076 6.85
Taxable loans and leases.................... 457,695 36,452 10.62 370,704 29,044 10.45
Tax exempt loans............................ 9,583 657 9.14 5,890 425 9.62
-------- --------- ------ --------- ---------- ------
Total....................................... 567,930 $ 41,899 9.84% 499,572 $ 34,930 9.32%
========= ====== ========== ======
Noninterest earning assets.................. 51,585 36,132
Allowance for loan and lease losses........ (5,021) (4,618)
-------- ---------
Total assets................................ $614,494 $ 531,086
======== =========
Liabilities:
Interest-bearing demand deposits............ $ 69,807 $ 1,211 2.31% $ 64,781 $ 1,086 2.24%
Money market deposits....................... 66,712 1,892 3.78 50,758 1,358 3.57
Savings deposits............................ 32,736 578 2.35 31,011 566 2.43
Time deposits............................... 294,496 12,673 5.74 258,353 11,091 5.72
Federal funds purchased..................... 1,735 79 6.07 2,885 128 5.92
Other short-term borrowings................. 2,412 83 4.59 2,245 77 4.57
Long-term borrowings........................ 26,293 1,634 8.29 27,669 1,701 8.20
-------- --------- ------ --------- ---------- ------
Total....................................... 494,191 $ 18,150 4.90 437,702 $ 16,007 4.88%
========= ====== ========== ======
Noninterest-bearing liabilities
Demand deposits........................... 63,941 50,291
Accrued expense and other liabilities.... 13,117 9,436
-------- ---------
Total liabilities........................... 571,249 497,429
Stockholders' Equity........................ 43,245 33,657
-------- ---------
Total liabilities and equity................ $614,494 $ 531,086
======== =========
Net interest income......................... $ 23,749 $ 18,923
========= ==========
Net interest spread......................... 4.94% 4.44%
====== ======
Net interest margin......................... 5.58% 5.05%
====== ======
</TABLE>
Notes: Interest income for tax-exempt securities and loans is shown on a fully
taxable-equivalent basis. The adjustments for the nine months ended September
30, 1997 and 1996 were $498,000 and $508,000, respectively.
41
<PAGE>
Average Balance Sheets and Analysis of Net Interest Margin
(Taxable-equivalent basis)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------------------------
1996 1995 1994
------------------------------- ----------------------------- ---------------------------------
Average Total Average Average Total Average Average Total Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- ------- ------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Federal funds sold............. $ 10,889 $ 586 5.38% $ 11,153 $ 659 5.91% $ 4,195 $ 163 3.89%
Taxable securities............. 88,428 5,627 6.36 79,686 4,738 5.95 75,226 3,835 5.10
Tax-exempt securities.......... 20,408 1,400 6.86 25,957 1,807 6.96 26,983 1,877 6.96
Taxable loans and leases....... 386,790 39,995 10.34 338,480 34,028 10.05 294,816 27,129 9.20
Tax exempt loans............... 6,171 589 9.54 3,589 379 10.56 3,192 325 10.18
-------- -------- -------- ------- -------- ------- -------- -------- -----
Total.......................... 512,686 $ 48,197 9.40% 458,865 $ 41,611 9.07% 404,412 $ 33,329 8.24%
======== ======== ======== ======= ========== =====
Noninterest earning assets..... 34,276 28,247 24,441
Allowance for loan and lease
losses...................... (4,466) (4,212) (3,821)
-------- --------- ---------
Total assets................... $542,496 $ 482,900 $ 425,032
======== ========= =========
Liabilities:
Interest-bearing demand
deposits.................... $ 65,480 $ 1,480 2.26% $ 58,303 $ 1,241 2.13% $ 59,060 $ 1,188 2.01%
Money market deposits.......... 52,981 1,922 3.63 45,022 1,692 3.76 47,244 1,422 3.01
Savings deposits............... 31,134 759 2.44 31,725 809 2.55 33,885 819 2.42
Time deposits.................. 263,926 15,190 5.76 234,976 13,346 5.68 195,283 8,587 4.40
Federal funds purchased........ 7,800 468 6.00 6,819 401 5.88 10,316 523 5.07
Long-term borrowings........... 24,275 2,027 8.35 25,154 2,440 9.70 10,921 825 7.55
-------- -------- ------- --------- -------- ------- --------- ---------- -----
Total.......................... 445,596 $ 21,846 4.90% 401,999 $ 19,929 4.96% 356,709 $ 13,364 3.75%
======== ======= ======== ======= ========== =====
Noninterest-bearing liabilities
Demand deposits.............. 52,669 44,418 56,142
Accrued expenses and other
liabilities............... 8,269 7,400 (10,285)
-------- --------- ---------
Total liabilities.............. 506,534 453,817 402,566
Stockholders' equity........... 37,560 29,083 23,082
-------- --------- ---------
Total liabilities and equity... $542,496 $ 482,900 $ 425,032
======== ========= =========
Net interest income............ $ 26,351 $ 21,682 $ 19,965
======== ======== =========
Net interest spread............ 4.50% 4.11% 4.49%
======= ======= =====
Net interest margin............ 5.14% 4.73% 4.94%
======= ======= =====
</TABLE>
Notes: Interest income for tax-exempt securities and loans is shown on a fully
taxable-equivalent basis. The adjustments for 1996, 1995 and 1994 were $676,000,
$743,000 and $749,000, respectively, based on a marginal income tax rate of 34%.
42
<PAGE>
Changes in Net Interest Income
(Taxable-equivalent basis)
<TABLE>
<CAPTION>
September 30, Year Ended December 31,
---------------------------- -------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995 1995 vs. 1994
---------------------------- -------------------------------------------------------------
Change Due to Change Due to Change Due to
---------------------------- -------------------------------------------------------------
Rate Volume Net Rate Volume Net Rate Volume Net
---- ------ --- ---- ------ --- ---- ------ ---
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (decrease) in interest
income
Federal funds sold................. $ (12) $ 97 $ 85 $ (57) $ (16) $ (73) $ 226 $ 270 $ 496
Taxable securities................. 346 (833) (487) 369 520 889 677 226 903
Tax-exempt securities.............. 13 (282) (269) (21) (386) (407) 1 (71) (70)
Taxable loans and leases........... 592 6,816 7,408 1,110 4,857 5,967 2,881 4,018 6,899
Tax exempt loans................... (34) 266 232 (63) 273 210 14 40 54
-------- ------- ------- ------- --------- ------ ------ -------- -------
Change in interest income.......... 905 6,064 6,969 1,338 5,248 6,586 3,799 4,483 8,282
-------- ------- ------- ------- --------- ------ ------ -------- -------
Increase (decrease) in interest
expense
Interest-bearing demand deposits... 41 84 125 86 153 239 68 (15) 53
Money market deposits.............. 107 427 534 (69) 299 230 337 (67) 270
Savings deposits................... (19) 31 12 (35) (15) (50) 42 (52) (10)
Time deposits...................... 30 1,552 1,582 199 1,645 1,844 3,014 1,745 4,759
Federal funds purchased............ 2 (51) (49) 9 58 67 55 (177) (122)
Other short-term borrowings........ -- 5 5 -- -- -- -- -- --
Long-term borrowings............... 18 (85) (67) (328) (85) (413) 540 1,075 1,615
-------- ------- ------- ------- --------- ------ ------ -------- -------
Change in interest expense......... 179 1,963 2,142 (138) 2,055 1,917 4,056 2,509 6,565
-------- ------- ------- ------- --------- ------ ------ -------- -------
Change in net interest income...... $ 726 $ 4,101 $ 4,827 $ 1,476 $ 3,193 $4,669 $ (257) $ 1,974 $ 1,717
======== ======= ======= ======= ========= ====== ====== ======== =======
</TABLE>
Notes: Interest income for tax-exempt securities and loans is shown on a
fully taxable-equivalent basis. The adjustments for the nine months
ended September 30, 1997 and 1996 and for the years ended December 31,
1996, 1995 and 1994 were $498,000, $508,000, $676,000, $743,000 and
$749,000, respectively, based on a marginal income tax rate of 34%.
Rate change is computed as the difference in the rate between the
current and prior year times the volume of the current year, while the
volume change is computed as the difference in volume between the
current and prior year times the prior year's rate. The rate/volume
variance is allocated entirely to rate change.
43
<PAGE>
Earnings Analysis
Performance Summary. Liberty's net income for the nine months ended
September 30, 1997 was $6.3 million, which is a 39% increase from the same
period last year. This increase is primarily due to an increase in net interest
income caused by a 16% increase in deposits and a 23% increase in loans.
The nine month period ended September 30, 1997 benefitted from a 26%
increase in net interest income, but was offset by an increase in loan loss
provision, due to an increase in total loans, and an increase in non-interest
expenses, due to the start up expenses of opening eight de novo branch offices.
The increase in net interest income was due to a 23% increase in average loans
and a 52 basis point increase in net interest income divided by averaging
assets.
Liberty reported consolidated net earnings for the year ended December
31, 1996 of $4.8 million, a decrease of $1.4 million from 1995 net earnings of
$6.3 million. The decrease was attributable to one time merger expenses of $1.2
million. These one time expenses consisted of an expense for a deferred
compensation agreement for W. A. Krause, stockholder and director, for $1.1
million, and professional fees to accountants and attorneys for $100,000.
Earnings for the year ended December 31, 1996 benefitted from increase
in net interest income but were partially offset by higher loan loss provision
and noninterest expenses. Increases in net interest income and non-interest
income benefitted 1995 earnings compared to 1994, as well as a reduction in the
loan loss provision for that year.
Components of Net Income
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------------- ----------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Net interest income..................... $ 23,252 $ 18,415 $ 25,675 $ 20,939 $ 19,216
Provisions for loan and lease losses.... 2,351 659 1,462 819 894
Noninterest income...................... 4,970 3,791 4,839 5,473 3,825
Noninterest expense..................... 16,606 14,362 20,968 16,347 14,628
---------- --------- -------- ---------- ---------
Income before income taxes.............. 9,265 7,185 8,084 9,246 7,519
Provision for income taxes.............. 2,962 2,653 3,249 2,977 2,508
---------- --------- -------- ---------- ---------
Net income......................... $ 6,303 $ 4,532 $ 4,835 $ 6,269 $ 5,011
========== ========= ======== ========== =========
</TABLE>
44
<PAGE>
Return on Average Assets and Equity (Taxable Equivalent Basis)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------- -----------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
(Percentage of Average Assets)
Net interest income..................... 5.15% 4.63% 4.86% 4.49% 4.70%
Provision for loan and lease losses..... 0.51 0.17 0.27 0.17 0.21
Noninterest income...................... 1.08 0.95 0.89 1.13 0.90
Noninterest expenses.................... 3.60 3.60 3.87 3.39 3.44
Provision for income taxes.............. 0.64 0.67 0.60 0.62 0.59
Return on average assets................ 1.37 1.14 0.89 1.30 1.18
Average assets to average equity........ 14.21 15.75 14.44 16.60 18.41
Return on average equity................ 19.47 17.95 12.85 21.58 21.72
</TABLE>
Liberty's return on average assets ("ROA") increased from 1.14% to
1.37% comparing the nine month periods ending September 1997 to September 1996.
Most significant to this increase is a 52 basis point increase in Liberty's
earning asset yield combined with a 14% increase in average earning assets.
Liberty's return on average assets was .89% for the year ended December
31, 1996, compared to 1.30% and 1.18% for 1995 and 1994, respectively.
Contributing to the decline in ROA in 1996 were one time expenses amounting to
.35% of average assets and 5.06% of stockholders' equity.
Net Interest Income
For the nine months ended September 30, 1997 and 1996, respectively,
the net interest income was $23.3 million and $18.4 million, respectively.
Taxable-equivalent net interest income was $23.7 million and $18.9 million.
Comparing the nine months ended September 30, 1997 to September 30, 1996,
interest earning assets grow 13.7%, while the net interest margin increased 53
basis points or a 10.5% increase.
Net interest income is the excess of the interest and fees received on
interest earning assets over the interest expense paid on interest-bearing
liabilities, while the taxable-equivalent net interest income includes an
adjustment to ensure that interest income on taxable and nontaxable assets is
comparable. Net interest income totaled $25.7 million for the year ended
December 31, 1996, $20.9 million for the year ended December 31, 1995 and $19.2
million for the year ended December 31, 1994. Taxable-equivalent net interest
income was $26.4 million in 1996, $21.7 million in 1995 and $20.0 million in
1994.
Liberty has experienced significant growth in net interest income due
primarily to an increase from internal earning asset growth and effective
management of overall interest rate sensitivity and liquidity. During 1996, a
11.7% growth in average earning assets and a 41 basis point increase in net
interest margin resulted in a 8.7% increase in net interest margin.
45
<PAGE>
Net Interest Spread and Margin
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------------- ----------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
(Taxable Equivalent Basis)
------------------------
Yield on interest earning assets........ 9.84% 9.32% 9.40% 9.07% 8.24%
Rate on interest-bearing liabilities.... 4.90 4.88 4.90 4.96 3.75
---- ---- ---- ---- ----
Net interest spread................ 4.94 4.44 4.50 4.11 4.49
Noninterest-bearing funds contribution.. 0.64 0.61 0.64 0.62 0.45
---- ---- ---- ---- ----
Net interest margin................ 5.58% 5.05% 5.14% 4.73% 4.94%
==== ==== ==== ==== ====
</TABLE>
Net interest spread is the difference between the yield on interest
earning assets and the rate paid on interest-bearing liabilities, while net
interest margin includes the benefit of noninterest-bearing funds. Management
attempts to maintain an appropriate mixture of interest sensitive assets and
liabilities to stabilize net interest income in times of volatile market
interest rates.
The net interest margin increased from 5.05% to 5.58% from September
30, 1996 to 1997. Comparing the September 1997 to 1996 time periods, net
interest income increased $4.8 million due to a rate variance of $726,000 and a
volume variance of $4.1 million.
Short-term interest rates increased during 1994 as much as 300 basis
points, and then beginning early in 1995 began to ease back, until by the end of
1995 they had fallen by approximately 100 basis points from their earlier peak.
During 1996 short-term rates again increased over 100 basis points before
declining 50 basis points during the last half of 1996. Liberty's net interest
margin was 4.94% in 1994, declined to 4.73% in 1995 and increased to 5.14% in
1996. The fluctuation in net interest margin from 1994 to 1995 consisted of a
negative rate variance of $257,000 and a positive volume variance of $2.0
million for a total variance of a positive $1.7 million. The change from 1995 to
1996 consisted of a positive rate variance of $1.5 million and a positive volume
variance of $3.2 million for a total positive variance of $4.7 million.
Noninterest Income
<TABLE>
<CAPTION>
Nine Months Ended For the
September 30, Year Ended December 31,
---------------------------- --------------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Service charges and fees............... $ 1,764 $ 1,456 $ 2,009 $ 1,828 $ 1,772
Insurance commissions.................. 482 487 704 674 550
Gain on sale of bank branch............ -- -- -- 1,108 --
Gain (loss) on sale of securities...... 80 10 47 (4) 11
Other.................................. 2,644 1,838 2,079 1,867 1,492
---------- --------- -------- ---------- ---------
Total............................. $ 4,970 $ 3,791 $ 4,839 $ 5,473 $ 3,825
========== ========= ======== ========== =========
</TABLE>
During the nine months ended September 30, 1997 and 1996, noninterest
income increased 31% or $1.2 million due to the increase in deposit account
service charges and other noninterest income. Comparing the September periods,
other noninterest income increased by $806,000 or 44%, primarily due to an
increase in other income.
46
<PAGE>
Management's ability to provide diversified financial services to its
customers has created steady growth in noninterest income. Total noninterest
income increased by 11% in 1996 to $4.8 million, excluding the gain on sale of
branch bank of $1.1 million in 1995. During 1995, noninterest income, excluding
the $1.1 million gain on sale of a branch office, showed an increase of $540,000
or 14% over 1994.
Deposit account service charge income increased during 1996 and 1995 by
$181,000 and $56,000, respectively due to an increase in the number of accounts.
Similarly, 1995 other noninterest income totaled $1.9 million, increasing from
$1.5 milion in 1994 which was primarily due to increased miscellaneous income
and an increase in credit card noninterest income.
Noninterest Expense
<TABLE>
<CAPTION>
Nine Months Ended For the
September 30, Year Ended December 31,
------------------------- --------------------------------------
1997 1996 1996 1995 1994
------ ------ ------ ------ -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Personnel.............................. $ 8,511 $ 6,906 $ 10,923 $ 7,897 $ 6,721
Occupancy.............................. 2,021 1,548 2,158 1,927 1,762
Data processing........................ 586 525 712 613 316
Advertising and promotion.............. 545 452 663 428 284
Professional fees...................... 530 345 548 363 185
FDIC insurance......................... 69 657 678 536 837
Amortization of intangible assets...... 479 552 747 620 945
Other.................................. 3,865 3,377 4,539 3,963 3,578
---------- --------- -------- ---------- ---------
$ 16,606 $ 14,362 $ 20,968 $ 16,347 $ 14,628
========== ========= ======== ========== =========
</TABLE>
Comparing nine month periods ending September 30, non-interest expense
increased to $16.6 million from $14.4 million, however as a percentage of
average assets non-interest expense remained at 3.60%.
Total noninterest expenses increased by $4.6 million in 1996 compared
to 1995, and $1.7 million in 1995, compared to 1994. Total noninterest expense
as a percentage of average assets increased to 3.87% in 1996 from 3.39% in 1995,
and 3.44% in 1994. The increase in 1996 was primarily due to $1.1 million in
merger related expenses. Also contributing to the increase was additional
personnel and other expenses due to the opening of eight new branch offices.
A significant development during 1995 was the reduction in FDIC deposit
insurance premiums for commercial banks from $.23 per $100 of deposits to $.04
per $100 of deposits effective as of June 1, 1995. This resulted in a $301,000
reduction in Liberty's FDIC insurance expense during 1995. All Liberty's banks
and thrift currently maintain a "well-capitalized" status which qualify them for
the lowest applicable FDIC premium rates. In addition, starting January 1, 1996,
the commercial bank deposit premium was further lowered to .064% of insured
deposits.
In 1996 Federal legislation required the recapitalization of the FDIC's
Savings Association Insurance Fund ("SAIF"). This legislation called for all
financial institutions with deposits insured by the FDIC under the SAIF to pay
an assessment at the rate of $.657 per $100 on SAIF insured deposit levels as of
March 31, 1995. Liberty's assessment was $477,000, net of an income tax benefit
of $181,000, which reduced 1996 net income by $296,000 or $.04 per share.
Excluding the special one-time charge, net income for 1996 was $5,131,000 or
$.59 per share.
47
<PAGE>
Asset-Liability Management
Asset-Liability management encompasses both the maintenance of adequate
liquidity and the management of interest rate sensitivity. Liquidity management
involves planning to meet anticipated funding needs, while interest rate
sensitivity management attempts to provide the optimal level of net interest
income while managing exposure to risks associated with interest rate movements.
Liquidity
Core deposits have historically provided Liberty with a major source of
stable and relatively low cost funding. Secondary sources of liquidity include
federal funds sold, maturing securities and loans, securities available for
sale, and borrowed funds. In the normal course of business, Liberty has
established short-term lines of credit for management of daily liquidity needs.
At December 31, 1996, these unused lines of credit aggregated $61 million.
During 1996, cash and cash equivalents increased to $40.2 million at
year-end compared to $28.6 million at the end of 1995. The $11.6 million
increase was provided by $13.0 million of operating activities, $68.1 million of
financing activities, and a usage of $69.5 million of investing activities.
Interest Rate Sensitivity
Interest rate sensitivity has traditionally been measured by gap
analysis, which represents the difference between assets and liabilities that
reprice in certain time periods. The method, while useful, has a number of
limitations as it is a static point-in-time measurement and does not take into
account the varying degrees of sensitivity to interest rates within the balance
sheet. As shown on the following table, on a static-gap basis, the cumulative
ratio of interest rate sensitive assets to interest sensitive liabilities in a
one-year time frame was 1.02, and as a percentage of assets was 1.27%.
Because of the inherent limitations of gap analysis, Liberty relies on
experienced management who price loans and deposits, as well as post event
margin analysis that compares actual performance to budget. Management monitors
the rate sensitivity and liquidity positions on an ongoing basis and, when
necessary, appropriate action is taken to minimize any adverse effects of rapid
interest rate movements or any unexpected liquidity concerns.
48
<PAGE>
Interest Rate Sensitivity
<TABLE>
<CAPTION>
At December 31, 1996
--------------------------------------------------------------------------
0-30 31-90 91-180 180-365 Over 1
Days Days Days Days Year Total
--------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets:
- ---------------------
Federal funds sold.................. $ 11,968 $ -- $ -- $ -- $ -- $ 11,968
Investment securities............... 3,941 5,112 7,607 10,442 70,377 97,479
Loans/leases........................ 122,118 47,503 43,555 54,764 169,192 437,132
--------- --------- --------- --------- --------- --------
Total rate sensitive assets...... 138,027 52,615 51,162 65,206 239,569 546,579
========= ========= ========= ========= ========= ========
Rate sensitive liabilities:
Now accounts........................ 22,033 -- -- -- 34,044 56,077
Super Now accounts.................. 5,608 -- -- -- 8,683 14,291
Savings accounts.................... 15,422 -- -- -- 16,049 31,471
Money market deposit accounts....... 29,987 -- -- -- 31,841 61,828
IRA accounts........................ 2,674 1,860 2,098 4,121 10,058 20,811
Certificate of deposit accounts..... 21,819 44,681 42,961 84,047 70,891 264,399
Customer REPOs...................... 2,333 -- -- -- -- 2,333
Federal funds purchased............. 8,780 -- -- -- -- 8,780
Other............................... 11,653 -- -- -- 9,926 21,579
--------- --------- --------- --------- --------- --------
Total rate sensitive liabilities. 120,309 46,541 45,059 88,168 181,492 481,569
--------- --------- --------- --------- --------- --------
Demand deposits, net of cash
and due from banks................ -- -- -- -- 35,689 35,689
Other, net.......................... -- -- -- -- 31,047 31,047
--------- --------- --------- --------- --------- --------
Total sources of funds.............. 120,309 46,541 45,059 88,168 248,228 548,305
--------- --------- --------- --------- --------- --------
Interest sensitivity gap............ $ 17,718 $ 6,074 $ 6,103 $ (22,962) $ (8,659) $ (1,726)
========= ========= ========= ========= ========= ========
Ratio............................... 114.73% 113.05% 113.54% 73.96% 96.51% 99.69%
========= ========= ========= ========= ========= ========
Cumulative gap...................... $ 17,718 $ 23,792 $ 29,895 $ 6,933 $ (1,726) $ (1,726)
========= ========= ========= ========= ========= ========
Cumulative gap to total assets...... 4.35% 5.47% 1.27% (0.32)%
========= ========= ========= =========
Ratio Cumulative.................... 114.73% 114.26% 114.11% 102.31% 99.69%
</TABLE>
49
<PAGE>
Capital Resources
<TABLE>
<CAPTION>
1996 Regulatory
At Capital Requirements
September 30, At December 31, -----------------------------
------------------- ---------------------- Well Minimum
1997 1996 1996 1995 Capitalized Requirement
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tier 1 risk-based capital $ 42,708 $ 35,030 $ 35,479 $ 31,236 $ 26,000 $ 17,300
Total risk-based capital 48,131 39,419 39,925 35,518 43,300 34,600
Tier 1 to Average Assets 42,708 35,030 35,479 31,236 27,700 22,200
</TABLE>
Banking is an extensively regulated industry. To maintain the
shareholders' and customers' security, banking regulatory agencies have set
forth capital requirements based upon the relative risk of different assets held
by banks. All of Liberty's banks have always exceeded the "well-capitalized"
regulatory capital requirements. Dividends received from Liberty's subsidiaries
are the primary source of funds available to Liberty for acquisitions, and for
debt repayment. State and federal banking regulations require minimum capital
levels to be maintained and impose certain restrictions on the amount of cash
dividends that subsidiaries can pay to their parent company in any given year.
Liberty had no significant commitments for capital expenditures at
December 31, 1996.
Analysis of Financial Condition
Federal Funds and Securities. Liberty's core deposits have historically
provided adequate funding to satisfy customer loan demand. Any excess funds are
invested in federal funds sold or securities. Also, on a daily basis, Liberty
purchases federal funds from its correspondent banks as a correspondent banking
service.
At September 30, 1997, total securities were $74.5 million compared to
$103.3 million the prior September 1996 period, a decrease of 28%. Liberty
downsized it securities portfolio by utilizing maturing securities to satisfy
increased loan demand. Liberty's securities portfolio had an average maturity of
3.4 years at December 31, 1996, compared to 1.3 years and 3.0 years at December
31, 1995 and 1994, respectively.
Liberty does not engage in any speculative trading with its securities
portfolio. Management feels that while these transactions may offer benefits to
some investors, Liberty's balance sheet is more efficiently managed with
conventional strategies.
Loans. Management's ability to lend money at profitable rates to
attract borrowers is greatly affected by economic conditions. Loan growth during
1996 benefitted from the favorable economic conditions in Liberty's market area.
Total loans grew by 23% comparing the September 30 1997 and 1996 periods
reaching $512 million at September 30, 1997 and by 25% from 1995 to 1996,
reaching $437 million at December 31, 1996. Consumer loans led all loan
categories with an 66% increase, followed by leases with an 35% growth during
1996. Increases in commercial and real estate loans were 25% and 11%,
respectively, from 1995 to 1996.
Deposits and Borrowings. Customer deposits are the principal source of
funds available for lending and investing activities. Deposit levels were up
from $480 million to $557 million comparing September 30, 1997 and 1996 periods
and up from $444 million the previous year to $513 million at December 31, 1996.
Liberty's loan-to-deposit ratio increased from 79% in 1995 to 85% in 1996.
Supplementing the funding provided by customer deposits, Liberty utilizes a
variety of other funding sources including Federal Home Loan Bank borrowings and
federal funds purchased from other banks.
50
<PAGE>
Borrowings. During 1996, Liberty reduced its borrowing costs by
reducing long-term borrowings from $24.0 million in 1995 to $21.6 million in
1996 and $21.0 million at September 30,1997.
Credit Risk Management
Credit Origination, Management, and Review. The management of Liberty
believes that sound lending represents a desirable and profitable means of
employing bank funds. At the same time, management considers asset quality to be
paramount. To balance growth objectives and asset quality requirements, approval
and review controls have been in place for several years.
Credit approval functions consists of four tiers. Loan officers have
individual approval authorities that reflect their expertise and experience.
Loan requests over individual officer authorities must receive loan committee
approval. Each Liberty Bank has its own loan committee with an assigned maximum
approval authority. Loan requests exceeding these loan committee authorities
must be approved by representatives of Liberty. These representatives serve as
the designees of the Liberty Financial Board of Directors. The largest loan
relationships require review and approval by Liberty's Board.
This tiered approval function ensures extensions of credit meet Liberty
policy guidelines and prudent underwriting standards. Also, it ensures proper
documentation is received, analyzed, and processed. Once a credit is extended,
the borrower's financial condition is continually monitored to assess asset
quality. In addition, a holding company loan review process evaluates credit
quality, risk rating accuracy, policy compliance, and the strength of control
functions through annual onsite activities.
A uniform credit risk rating system is utilized by all Liberty
subsidiaries. This allows for consistent risk analysis on a company-wide basis.
Upon identification of increased credit risk, loans are placed in watch list
categories and receive increased attention from senior bank management and
representatives of Liberty. The credit risk rating system drives the process of
determining the adequacy of the allowance for loan losses. And, the results of
the allowance adequacy analysis prompts decisions for expensing provisions for
loan losses.
Allowance for Loan and Lease Losses. The allowance for loan and lease
losses is a valuation reserve for estimated losses inherent in the loan
portfolio. Actual credit losses, net of recoveries, are deducted from the
allowance for loan and lease losses when the occur. Factors considered in the
evaluation of the allowance level include estimated future losses in the loan
and lease portfolio based on historical loss experience in homogeneous loan and
lease pools. The historical loss ratios are adjusted to consider local and
national economic trends, concentrations of credit, lending staff expertise and
turnover, and trends in portfolio quality, volume, and composition. This
analysis is completed monthly. Adjustments to historical loss ratios are made
quarterly. However, actual losses could differ significantly from the amounts
estimated by management.
SFAS No. 114 "Accounting for Creditors for Impairment of a Loan," and
SFAS No. 118 "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures," was adopted January 1, 1995. Adopting these
standards resulted in no initial increase to either the allowance for loan
losses or the provision for loan losses for Liberty.
The balance in the allowance for loan and lease losses was $4,446,000
at December 31, 1996. This represented 1.02% of total loans and leases and 173%
of nonperforming assets as of that same date. At December 31, 1995, the
allowance stood at $4,282,000 or 1.22% of total loans and leases and 337% of
nonperforming assets. The 1994 loan and lease loss allowance was $4,203,000
representing 1.33% of total loans and leases, and 365% of nonperforming assets
as of December 31, 1994.
51
<PAGE>
The lower allowance-to-loans percentages in 1995 and 1996 reflect not
only a marked increase in total loans, but also the change in allowance for loan
loss analysis. Prior to 1995, Liberty reserved 1% for most loan portfolios and
provided for specific reserves on identified and potential problem loans. During
1995, Liberty adopted practice of identifying homogeneous loan pools and
applying adjusted historical loss ratios, as well as specific reserves for
problem loans, in calculating the adequacy of the allowance. Management ensures
the actual balance of the allowance for loan losses does not materially fall
below the calculated required loan loss reserve amount.
Net charge offs totaled $1.8 million, $740,000, and $77,000 for the
three years ending December 31, 1996, 1995, and 1994, respectively. As a
percentage of average loans, net charge offs were 0.46% for 1996, 0.22% in 1995,
and 0.03% in 1994. Over the last five years Liberty's net charge offs have
averaged 0.22% of average loans. Liberty's provision for loan losses was $1.5
million in 1996, $819,000 in 1995, and $894,000 in 1994.
Risk Element Loans
<TABLE>
<CAPTION>
At December 31,
================================================================================================================
(In thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Loans past due 90 days or more $ 278 $ 147 $ 109
Nonaccrual loans 1159 500 566
------ ------- -------
Total Nonperforming Loans 1437 647 675
Restructured Loans 160 350 930
Potential Problem Loans 3,007 2,214 1,281
- ----------------------------------------------------------------------------------------------------------------
Total Risk Element Loans $ 4,604 $ 3,211 $ 2,886
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
Liberty has experienced considerable loan growth. Total loan volume
grew at rates of 25% for 1996, 11% in 1995, and 17% for 1994. Nonperforming loan
and nonperforming asset volume remained relatively unchanged until 1996.
Nonperforming loan volume increased 122% and nonperforming asset volume
increased 102% in 1996. Much of the increase in nonperforming assets is
attributable to a single large parcel of foreclosed commercial property. Other
significant items contributing to the nonperforming asset total and percentages
include some larger nonaccruing leases and repossessed lease equipment.
Expressed as a percentage of total loans and foreclosed property,
nonperforming assets increased from 0.36% for years ending 1994 and 1995 to
0.59% for December 31, 1996. While the 1996 ratios are within acceptable Liberty
parameters, action has been taken to reduce the ratios. Liberty has maintained a
community-based banking focus and will continue to follow prudent lending
policies.
In addition to nonperforming and restructured loans at December 31,
1996, Liberty management identified loans totaling just over $3 million for
which payments were current, but the borrowers were experiencing financial
difficulties. The potential problem loans included loans identified by the
credit review process as being inadequately protected by the current net worth
and payment capacity of the borrowers, or of the collateral pledged.
Foreclosed property increased to $1,129,000 at December 31, 1996. Foreclosed
property totaled $623,000 and $477,000 for years ending 1995 and 1994,
respectively.
Agricultural loans are the only industry concentration that exceeded
10% of total loans. At December 31, 1996, agricultural production and
intermediate capital loans totaled $50,285,000, or 11.5% of total loans. Such
loans are
52
<PAGE>
collateralized by property located primarily in Iowa. Agricultural real estate
loans totaled $32,297,000, or 7.4% of total loans on December 31, 1996.
Income Tax Expense
Liberty's effective income tax rate was 32.0% and 36.9% for the nine
month periods ending September 30, 1997 and 1996, respectively. Liberty's
effective income tax rate increased to 40.2% in 1996 up from 32.2% in 1995, and
up from 33.4% in 1994. The effective income tax rates differ from the marginal
income tax rate of 35% primarily because of interest income on tax-exempt
securities and loans and intangible amortization. Liberty's reduction of its
investment in tax-exempt obligations, as well as the amortization of intangible
assets, have contributed to the effective rate changes.
53
<PAGE>
REGULATION
Regulation of Liberty
General. Liberty is a bank holding company within the meaning of the
BHCA. As such, it is registered with the Federal Reserve Board and subject to
Federal Reserve Board regulation, examination, supervision and reporting
requirements. As a bank holding company, Liberty is required to furnish to the
Federal Reserve Board annual and quarterly reports of its operations at the end
of each period and to furnish such additional information as the Federal Reserve
Board may require pursuant to the BHCA. Liberty is also subject to regular
examination by the Federal Reserve Board.
Under the BHCA, a bank holding company must obtain the prior approval
of the Federal Reserve Board before (i) acquiring direct or indirect ownership
or control of any voting shares of any bank or bank holding company if, after
such acquisition, the bank holding company would directly or indirectly own or
control more than 5% of such shares; (2) acquiring all or substantially all of
the assets of another bank or bank holding company; or (3) merging or
consolidating with another bank holding company.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
Effective September 29, 1995, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "Riegle-Neal Act") allows the Federal Reserve Board
to approve an application of an adequately capitalized and adequately managed
bank holding company to acquire control of, or acquire all or substantially all
of the assets of, a bank located in a state other than such holding company's
home state, without regard to whether the transaction is prohibited by the laws
of any state. The Federal Reserve Board may not approve the acquisition of bank
that has not been in existence for the minimum time period (not exceeding five
years) specified by the statutory law of the host state. The Riegle-Neal Act
also prohibits the Federal Reserve Board from approving an application if the
applicant (and its depository institution affiliates) controls or would control
more than 10% of the insured deposits in the United States or 30% or more of the
deposits in the target bank's home state or in any state in which the target
bank maintains a branch. The Riegle-Neal Act does not affect the authority of
states to limit the percentage of total insured deposits in the state which may
be held or controlled by a bank or bank holding company to the extent such
limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit contained in the Riegle-Neal Act.
Additionally, beginning June 1, 1997, the federal banking agencies were
authorized to approve interstate merger transactions without regard to whether
such transaction is prohibited by the law of any state, unless the home state of
one of the banks opted out of the Riegle-Neal Act by adopting a law after the
date of enactment of the Riegle- Neal Act and prior to June 1, 1997 which
applied equally to all out-of-state banks and expressly prohibited merger
transactions involving out-of-state banks. Interstate acquisitions of branches
are permitted only if the law of the state in which the branch is located
permits such acquisitions. Interstate mergers and branch acquisitions are also
subject to the nationwide and statewide insured deposit concentration amounts
described above.
The BHCA also prohibits, with certain exceptions, a bank holding
company from acquiring direct or indirect ownership or control of more than 5%
of the voting shares of a company that is not a bank or a bank holding company,
or from engaging directly or indirectly in activities other than those of
banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by Federal Reserve Board regulation or
order, have been identified as activities closely related to the business of
banking or managing or controlling banks. The activities of Liberty are
subject to these legal and regulatory limitations under the BHCA and the Federal
Reserve Board's regulations thereunder. Notwithstanding the Federal Reserve
Board's prior approval of specific nonbanking activities, the Federal Reserve
Board has the power to order a holding company or its subsidiaries to terminate
any activity, or to terminate its ownership or control of any subsidiary, when
it has reasonable cause to believe that the continuation of such activity or
such ownership or control constitutes a serious risk to the financial safety,
soundness or stability of any bank subsidiary of that holding company.
54
<PAGE>
Capital Adequacy. The Federal Reserve Board has adopted guidelines
regarding the capital adequacy of bank holding companies, which require bank
holding companies to maintain specified minimum ratios of capital to total
assets and capital to risk-weighted assets. See "-- Regulation of the Liberty
Banks -- Capital Adequacy."
Dividends and Distributions. The Federal Reserve Board has the power to
prohibit dividends by bank holding companies if their actions constitute unsafe
or unsound practices. The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies, which expresses the
Federal Reserve Board's view that a bank holding company should pay cash
dividends only to the extent that the company's net income for the past year is
sufficient to cover both the cash dividends and a rate of earning retention that
is consistent with the company's capital needs, asset quality, and overall
financial condition.
Bank holding companies are required to give the Federal Reserve Board
notice of any purchase or redemption of their outstanding equity securities if
the gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the bank holding company's
consolidated net worth. The Federal Reserve Board may disapprove such a purchase
or redemption if it determines that the proposal would violate any law,
regulation, Federal Reserve Board order, directive, or any condition imposed by,
or written agreement with, the Federal Reserve Board. Bank holding companies
whose capital ratios exceed the thresholds for "well capitalized" banks on a
consolidated basis are exempt from the foregoing requirement if they were rated
composite 1 or 2 in their most recent inspection and are not the subject of any
unresolved supervisory issues.
Regulation of the Liberty Banks
General. Liberty's eight banking subsidiaries are subject to
supervision and regulation by various state and federal regulatory authorities
depending on their charter. All of the Liberty Banks that are state chartered
banks which are not members of the Federal Reserve System, are subject to
regulation, supervision and examination by the FDIC and the state banking
authorities of the states in which they are located (either Iowa or Arizona).
The one Liberty Bank that is a national bank is subject to regulation,
supervision and examination by the OCC and the FDIC. The one Liberty Bank that
is a federal savings bank is subject to regulation, supervision and examination
by the OTS and the FDIC. These state and federal regulatory authorities have the
power to examine the operations of the Liberty Banks and are authorized to
approve or disapprove mergers, consolidations, the establishment of branches,
and similar corporate actions. The federal and state banking regulators also
have the power to prevent the continuance or development of unsafe and unsound
banking practices or other violations of law.
Capital Adequacy. Liberty and each of the Liberty Banks are required to
comply with the capital adequacy standards established by their appropriate
federal regulator. There are two basic measures of capital adequacy for bank
holding companies that have been promulgated by the Federal Reserve: a
risk-based measure and a leverage measure. All applicable capital standards must
be met for a bank holding company to be considered "well-capitalized."
The risk-based capital rules of the Federal Reserve Board and the OCC
require bank holding companies and national banks to maintain minimum regulatory
capital levels based upon a weighting of their assets and off-balance sheet
obligations according to risk. The risk-based capital rules have two basic
components: a core capital (Tier 1) requirement and a supplementary capital
(Tier 2) requirement. Core capital consists primarily of common stockholders'
equity, certain perpetual preferred stock (which must be noncumulative with
respect to banks), and minority interests in the equity accounts of consolidated
subsidiaries; less all intangible assets, except for certain purchased mortgage
servicing rights and purchased credit card relationships. Supplementary capital
elements include, subject to certain limitations, the allowance for losses on
loans and leases; perpetual preferred stock that does not qualify as Tier 1
capital and long-term preferred stock with an original maturity of at least 20
years from issuance; hybrid capital instruments, including perpetual debt and
mandatory convertible securities; and subordinated debt and intermediate-term
preferred stock.
55
<PAGE>
The risk-based capital regulations assign balance sheet assets and
credit equivalent amounts of off-balance sheet obligations to one of four broad
risk categories based principally on the degree of credit risk associated with
the obligor. The assets and off-balance sheet items in the four risk categories
are weighted at 0%, 20%, 50% and 100%. These computations result in the total
risk-weighted assets. The risk-based capital regulations require all banks and
bank holding companies to maintain a minimum ratio of total capital to total
risk-weighted assets of 8%, with at least 4% as core capital. For the purpose of
calculating these ratios: (i) supplementary capital will be limited to no more
than 100% of core capital; and (ii) the aggregate amount of certain types of
supplementary capital will be limited. In addition, the risk-based capital
regulations limit the allowance for loan losses includable as capital to 1.25%
of total risk-weighted assets.
OCC regulations and guidelines additionally specify that national banks
with significant exposure to declines in the economic value of their capital due
to changes in interest rates may be required to maintain higher risk-based
capital ratios. The federal banking agencies, including the OCC, have proposed a
system for measuring and assessing the exposure of a bank's net economic value
to changes in interest rates. The federal banking agencies, including the OCC,
have stated their intention to propose a rule establishing an explicit capital
charge for interest rate risk based upon the level of a bank's measured interest
rate risk exposure after more experience has been gained with the proposed
measurement process. Federal Reserve Board regulations do not specifically take
into account interest rate risk in measuring the capital adequacy of bank
holding companies.
The OCC has issued final regulations which classify national banks by
capital levels and which provide for the OCC to take various prompt corrective
actions to resolve the problems of any bank that fails to satisfy the capital
standards. Under such regulations, a well-capitalized bank is one that is not
subject to any regulatory order or directive to meet any specific capital level
and that has or exceeds the following capital levels: a total risk-based capital
ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of
5%. An adequately capitalized bank is one that does not qualify as
well-capitalized but meets or exceeds the following capital requirements: a
total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%,
and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest
composite examination rating. A bank not meeting these criteria is treated as
undercapitalized, significantly undercapitalized, or critically undercapitalized
depending on the extent to which the bank's capital levels are below these
standards. A national bank that falls within any of the three undercapitalized
categories established by the prompt corrective action regulation will be
subject to severe regulatory sanctions.
The Liberty Bank that is a federally chartered thrift is subject to
minimum capital adequacy requirements established by the OTS, which are
substantially similar to the requirements of the FRB. Under OTS regulations,
savings associations must maintain "tangible" capital equal to 1.5% of adjusted
total assets (the tangible capital requirement), "core" capital equal to at
least 3% of adjusted total assets (the leverage ratio requirement), and a
combination of core and "supplementary" capital (total or risk-based capital),
equal to 8% of "risk-weighted" assets (the risk-based capital requirement). In
addition, the OTS has recently adopted regulations which impose certain
restrictions on savings associations that have a total risk-based capital ratio
that is less than 8%, a ratio of Tier 1 capital to risk-weighted assets of less
than 4% or a ratio of Tier 1 capital to adjusted assets of less than 4% (or 3%
if the institution is rated Composite 1 under the OTS examination rating
system).
The OTS risk-based capital standards also include an interest rate
component which may require OTS regulated savings associations to maintain
higher levels of capital. The savings associations Interest Risk Rate ("IRR") is
measured by the decline in the institutions' net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of assets calculated pursuant to an OTS
model and guidelines. If a savings association's IRR is greater than 2%, that
institution must deduct an IRR component in calculating its total capital for
purposes of assessing its risk-based capital requirement.
The OTS' determination of risk-based assets under OTS regulations is
similar to that performed under OCC and FRB regulations, except that OTS
regulations employ five risk categories instead of the four used by the OCC and
FRB. Moreover, under OTS capital regulations, tangible capital is defined as
common shareholders equity,
56
<PAGE>
noncumulative perpetual preferred stock and related surplus, minority interests
in the equity accounts of fully consolidated subsidiaries and certain
nonwithdrawable accounts and pledged deposits, less intangible assets, with only
a limited exception for purchased mortgage servicing rights and purchased credit
card relationships. Core or "Tier 1" capital consists of tangible capital plus
restricted amounts of certain grandfathered intangible assets. Regulatory
capital is further reduced by an amount equal to the savings association's debt
and equity investments in subsidiaries engaged in activities not permissible for
national banks, with certain exceptions.
The Iowa Banks and Arizona Bank, as state-chartered institutions, are
subject to capital requirements imposed by the Iowa state banking board and
Arizona state banking department respectively. Iowa statutes provide that the
minimum capital of a state bank existing and operating on July 1, 1995 shall not
be less than the amount required by law prior to that date, which was the amount
required by the FDIC. The minimum capital structure of a state bank incorporated
after July 1, 1995, shall not be less than the amount required by the FDIC, or a
higher amount as established by the superintendent of banking.
Arizona statutes provide that banks which are not members of the
Federal Reserve System shall maintain legal reserves as are from time to time
fixed by rule of the superintendent of banking, not to exceed fourteen percent
of demand deposits or seven percent of time and savings deposits. Current
reserve requirements promulgated by the superintendent are zero percent. In
calculating legal reserves, banks may deduct from its gross deposits such
deposits which are secured and deposit balances due to another bank to the
extent that a reciprocal deposit is due from that bank. Arizona statutes also
limit the form of legal reserves to cash, cash items in process, obligations of
the United States, net deposit balances with each reserve depository inside and
outside the state with some exceptions.
Payment of Dividends. National banks are not permitted to pay dividends
until they have earned a surplus equal to their common capital, and then may
only pay dividends out of net profits. A national bank may not withdraw capital
either in the form of dividends or losses, and stockholders may be assessed for
any capital deficiency. With the approval of the OCC, however, the stockholders
of a national bank may approve a reduction in the bank's capital account, but
not below the amount required by statute to authorize the formation of a
national bank.
Under OTS regulations, a federal savings association may not pay
dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation account established
for the benefit of certain depositors of the savings association. In addition,
savings institution subsidiaries of savings and loan holding companies are
required to give the OTS thirty days' prior notice of any proposed declaration
of dividends to the holding company. In general, a savings institution that has
total capital, both before and, on a pro forma basis, after a proposed
distribution which is equal to or greater than its capital requirements (a "Tier
1 Association"), may, without OTS approval, make capital distributions during a
calender year in the amount equal to the greater of: (i) 75% of its net income
for the previous four quarters; or (ii) up to 100% of its net income to date
during the calender year plus an amount that would reduce by one-half the amount
by which its capital-to-assets ratio exceeded regulatory requirements at the
beginning of that calender year. A savings association with total capital in
excess of current minimum capital ratio requirements (a "Tier 2 Association") is
permitted to make capital distributions without OTS approval of up to 75% of its
net income for the previous four quarters, less dividends already paid for such
period. A savings association that fails to meet minimum capital requirements (a
"Tier 3 Association"), is prohibited from making any capital distributions
without the prior approval of the OTS. OTS regulations also prohibit capital
distributions which would have the effect of reducing an associations total
risk-based capital ratio to less than 8%, or Tier 1 risk-based ratio to less
than 4%, or leverage ratio to less than 4%.
Arizona statutes permit a bank's board of directors, as permitted by
the general laws governing Arizona corporations, to declare and pay dividends.
However, dividends payable other than in the bank's own stock may be paid out of
capital surplus only with the approval of the superintendent of banks. Arizona
banks must also maintain minimum capital adequacy requirements.
57
<PAGE>
Iowa law provides that the board of directors of a state bank may, from
time to time, declare and pay dividends on the bank's outstanding shares subject
to restrictions imposed by banking laws and the bank's articles of
incorporation. Dividends may be paid only out of undivided profits, may be paid
in cash or property, and may not be paid if restricted by the superintendent of
banking. Moreover, Iowa banks must maintain minimum capital adequacy
requirements.
Deposit Insurance. The deposits of the Liberty Banks are insured up to
applicable limits by the FDIC through the Bank Insurance Fund (the "BIF"), with
the exception of the one Liberty Bank that is a thrift. The deposits of all
thrift institutions are insured by the FDIC through the Savings Association
Insurance Fund ("SAIF"). Each of the Liberty Banks is required to pay
semi-annual assessments based on a percentage of its insured deposits to the
FDIC for insurance of its deposits.
Under the risk-based deposit insurance assessment system adopted by the
FDIC, the assessment rate for an insured depository institution depends on the
assessment risk classification assigned to the institution by the FDIC, which is
determined by the institution's capital level and supervisory evaluations. Based
on the data reported to regulators for the date closest to the last day of the
seventh month preceding the semi-annual assessment period, institutions are
assigned to one of three capital groups -- "well capitalized," "adequately
capitalized" or "undercapitalized." Within each capital group, institutions are
assigned to one of three subgroups on the basis of supervisory evaluations by
the institution's primary supervisory authority and such other information as
the FDIC determines to be relevant to the institution's financial condition and
the risk posed to the deposit insurance fund.
Qualified Thrift Lender Test. Liberty's one thrift subsidiary is
required to meet a qualified thrift lender test (the "QTL Test"). Any savings
institution that does not meet the QTL Test must either convert to a bank
charter or comply with the following restrictions on its operations: (i) the
institution may not engage in any new activity or make any new investment,
directly or indirectly, unless such activity or investment is permissible for a
national bank; (ii) the branching powers of the institution shall be restricted
to those of a national bank; (iii) the institution shall not be eligible to
obtain any advances from the FHLB; and (iv) the payment of dividends by the
institution shall be subject to the rules regarding payment of dividends by a
national bank. Upon the expiration of three years from the date the institution
ceases to be a QTL, the institution must cease any activity and not retain any
investment not permissible for a national bank and immediately repay any
outstanding FHLB advances (subject to safety and soundness considerations).
To meet the QTL test, an institution's "Qualified Thrift Investments"
must total at least 65% of "portfolio assets." Under OTS regulations, portfolio
assets are defined as total assets less intangibles, property used by a savings
institution in its business and liquidity investments in an amount not to exceed
20% of assets. Qualified Thrift Investments consist of (i) loans, equity
positions or securities related to domestic, residential real estate or
manufactured housing; (ii) 50% of the dollar amount of residential mortgage
loans subject to sale under certain conditions; and (iii) stock in an FHLB or
the FHLMC or FNMA. In addition, subject to a 20% of portfolio assets limit,
savings institutions are able to treat as Qualified Thrift Investments 200% of
their investments in loans to finance "starter homes" and loans for
construction, development or improvement of housing and community service
facilities or for financing small businesses in "credit-needy" areas.
In order to maintain QTL status, the savings institution also must
maintain a weekly average percentage of Qualified Thrift Investments to
portfolio assets equal to 65.0% on a monthly average basis in nine out of every
12 months. A savings institution that fails to maintain QTL status will be
permitted to requalify once, and if it fails the QTL test a second time, it will
become immediately subject to all penalties as if all time limits on such
penalties had expired.
Prompt Corrective Action. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") established a system of "prompt corrective
action" to resolve the problems of undercapitalized institutions. Under FDICIA,
the federal regulators are required to establish five capital categories (well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized) and to take prompt corrective
action if an institution fails to satisfy certain minimum capital requirements,
including a leverage limit, a risk-based capital requirement, and any other
measure deemed appropriate by the federal banking regulators. All institutions,
regardless
58
<PAGE>
of their capital levels, are restricted from making any capital distribution or
paying any management fees that would cause the institution to become
undercapitalized.
An institution that fails to meet the minimum level for any relevant
capital measure (an "undercapitalized institution") may be: (i) subject to
increased monitoring by the appropriate federal regulator; (ii) required to
submit an acceptable capital restoration plan within 45 days; (iii) subject to
asset growth limits; and (iv) required to obtain prior regulatory approval for
acquisitions, branching and new lines of businesses. The capital restoration
plan must include a guarantee by the institution's holding company that the
institution will comply with the plan until it has been adequately capitalized
on average for four consecutive quarters, under which the holding company would
be liable up to the lessor of 5.0% of the institution's total assets or the
amount necessary to bring the institution into capital compliance as of the date
it failed to comply with its capital restoration plan. A "significantly
undercapitalized" institution, as well as any undercapitalized institution that
does not submit an acceptable capital restoration plan, may be subject to
regulatory demands for recapitalization, broader application of restrictions on
transactions with affiliates, limitations on interest rates paid on deposits,
asset growth and other activities, possible replacement of directors and
officers, and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution could also
be required to divest the institution. The senior executive officers of such an
institution may not receive bonuses or increases in compensation without prior
approval and the institution is prohibited from making payments of principal or
interest on its subordinated debt, with certain exceptions. If an institution's
ratio of tangible capital to total assets falls below the "critical capital
level" established by the appropriate federal banking regulator, the institution
is subject to conservatorship or receivership within 90 days unless periodic
determinations are made that forbearance from such action would better protect
the deposit insurance fund. Unless appropriate findings and certifications are
made by the appropriate federal regulatory agencies, a critically
undercapitalized institution must be placed in receivership if it remains
critically undercapitalized on average during the calender quarter beginning 270
days after the date that it became critically undercapitalized.
Federal banking regulators, including the OTS, OCC, FRB and FDIC, have
adopted regulations implementing the prompt corrective action provisions of
FDICIA. Under these regulations, the federal banking regulators will generally
measure a depository institution's capital adequacy on the basis of the
institution's total risk-based capital ratio (the ratio of its total capital to
risk-weighted assets), Tier 1 risk-based capital ratio (the ratio of its core
capital to risk- weighted assets) and leverage ratio (the ratio of its core
capital to adjusted total assets). Under the regulations, an institution that
(i) is not subject to any written agreement, order, capital directive, or prompt
corrective action directive issued by the appropriate federal agency; (ii) has a
total risk-based capital ratio of 10% or greater; (iii) has a Tier 1 risk- based
capital ratio of 6.0% or greater; and (iv) has a leverage ratio of 5.0% or
greater, is considered "well capitalized." An institution with a (i) a total
risk-based capital ratio of 8.0% or greater; (ii) a Tier 1 risk-based capital
ratio of 4.0% or greater; and (iii) a leverage ratio of 4.0% or greater (or 3.0%
or greater if the savings institution has a composite 1 CAMEL rating), is
considered to be "adequately capitalized." A depository institution that has (i)
a total risk-based capital ratio less than 8.0%; or (ii) a Tier 1 risk-based
capital ratio of less than 4.0%; or (iii) a leverage ratio of less than 4.0% (or
less than 3.0% if the savings institution has a composite 1 CAMEL rating) is
considered "undercapitalized." A depository institution that has (i) a total
risk-based capital ratio of less than 6.0%; or (ii) a Tier 1 risk-based capital
ratio of less than 3.0%; or (iii) a leverage ratio of less than 3.0%, is
considered "significantly undercapitalized." Finally, a depository institution
that has a ratio of "tangible equity" to total assets of less than 2.0% is
considered "critically undercapitalized." Tangible equity is defined as core
capital plus cumulative perpetual preferred stock (and related surplus) less all
intangibles with certain exceptions. A depository institution may be deemed to
be in a capitalization category that is lower than is indicated by its actual
capital position if it receives an unsatisfactory examination rating.
59
<PAGE>
BENEFICIAL OWNERSHIP OF LIBERTY COMMON STOCK
The following tables set forth information with respect to the shares
of Liberty Common Stock beneficially owned by (1) those persons who were
beneficial owners of more than 5.0% of the outstanding shares of Liberty Common
Stock, (2) Liberty's directors and certain executive officers, and (3) all
directors and executive officers of Liberty as a group.
Principal Stockholders
<TABLE>
<CAPTION>
Amount and Nature of Percent of Shares
Beneficial Ownership of Liberty
Name and Address of Liberty Common Common Stock
of Beneficial Owner Stock at the Record Date Outstanding
------------------- ------------------------ -----------
<S> <C> <C>
W. A. Krause (1)
4201 Westown Parkway, Suite 320
West Des Moines, Iowa 50266 4,667,319 shares (2) 53.3%
Richard O. Wikert (1)
340 East Military
Fremont, Nebraska 68025 1,933,532 shares 22.1%
C. Wilson Persinger Revocable Trust (1)
C. Wilson Persinger, Trustee
4420 Hamilton Boulevard
Sioux City, Iowa 51104 1,788,354 shares 20.4%
</TABLE>
- --------------------
(1) All three stockholders are parties to a Stockholder Agreement, dated
August 6, 1996, which has been executed by stockholders representing
over 99% of all outstanding shares of Liberty Common Stock. The
Stockholder Agreement, among other things, prohibits transfer of
Liberty Common Stock except in compliance with the agreement for three
years. The Merger Agreement contains a representation and warranty by
Liberty that nothing in the Stockholder Agreement restricts or
prohibits Liberty from entering into the Merger Agreement or
consummating the Merger, or restricts the four directors from entering
into their Voting Agreements in which they agree to vote to approve the
Merger.
(2) These shares include shares owned by relatives of W. A. Krause and
corporations owned and/or controlled by W. A. Krause, all of which are
parties to the Stockholder Agreement, dated August 6, 1996, in which
they have appointed W. A. Krause as their agent and attorney-in-fact
with respect to certain actions, including offers for the purchase of
shares of Liberty Common Stock. The 4,667,319 shares are held of record
as follows: W. A. Krause Revocable Trust - 3,721,214 shares (42.5%);
Krause Gentle Corporation - 163,600 shares; Chieftan Corp. - 140,220
shares; Solar Transport Company -163,600 shares; Kevin W. Krause -
134,141 shares; Mary M. Krause - 25,417 shares; Kyle J. Krause -134,141
shares; Karolyn S. Krause - 25,419 shares; Katheryn Krause Prange -
134,141 shares and David C. Prange - 25, 417 shares.
60
<PAGE>
Management
<TABLE>
<CAPTION>
Shares of Liberty Percent of Shares
Common Stock of Liberty
Beneficially Owned at Common Stock
Name the Record Date Outstanding
---- --------------------- -----------------
<S> <C> <C>
William A. Krause
Director and Chairman of the Board 4,667,319 shares 53.3%
Richard O. Wikert
Director 1,933,532 shares 22.1%
C. Wilson Persinger
Director 1,788,354 shares 20.4%
Russell G. Olson, Director
President and Chief Executive Officer (1) 267,909 shares 3.1%
All Executive Officers and Directors
as a Group (7 persons) 8,657,114 shares 99.0%
</TABLE>
- --------------------
(1) Russell G. Olson is also a party to the Stockholder Agreement, dated August
6, 1996, referred to above, restricting the transfer of his Liberty shares.
61
<PAGE>
COMMON STOCK PRICES AND DIVIDENDS
The following table sets forth the high and low closing sales prices for
the Commercial Common Stock as reported on the NYSE and dividends declared for
the periods indicated.
There is currently no public market for the Liberty Common Stock nor any
uniformly quoted price. As of the Record Date, there were approximately 18
holders of record of the Liberty Common Stock. Since its formation, Liberty has
not declared or paid any dividends.
<TABLE>
<CAPTION>
Commercial Dividends
Common Stock Declared
----------------- ---------
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C> <C>
Fiscal Year 1996
- ----------------
September 30, 1995............................................. $ 16.45 $ 12.05 $ --
December 31, 1995.............................................. 16.78 14.39 .089
March 31, 1996................................................. 17.28 15.55 .045
June 30, 1996.................................................. 17.28 16.39 .045
Fiscal Year 1997
- ----------------
September 30, 1996............................................. 19.11 16.00 .045
December 31, 1996.............................................. 21.55 18.61 .047
March 31, 1997................................................. 26.00 20.75 .047
June 30, 1997.................................................. 25.08 20.75 .047
Fiscal Year 1998
- ----------------
September 30, 1997............................................. 32.125 25.083 .047
December 31, 1997
(through December __, 1997)................................... .055
</TABLE>
On August 17, 1997, the last trading day preceding the public announcement
of the execution of the Merger Agreement, the reported closing sale price of
Commercial Common Stock was $27.04 per share. On December __, 1997, the closing
sale price for Commercial Common Stock was $_____ per share.
62
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
Introduction. Upon consummation of the Merger, holders of Liberty Common
Stock, whose rights are presently governed by Iowa law and Liberty's Articles of
Incorporation and Bylaws, will become stockholders of Commercial, a Nebraska
corporation. Accordingly, their rights will be governed by Nebraska law and the
Articles of Incorporation (as amended by the stockholders of Commercial on
November 18, 1997) and Bylaws of Commercial. Certain differences arise between
Iowa and Nebraska corporate law and between the Articles of Incorporation and
Bylaws of Liberty and the Articles of Incorporation and Bylaws of Commercial.
The following discussion is not intended to be a complete statement of all
differences affecting the rights of stockholders, but summarizes material
differences and is qualified in its entirety by reference to the Articles of
Incorporation and Bylaws of Commercial and the Articles of Incorporation and
Bylaws of Liberty. See "Available Information."
Issuance of Capital Stock. The Articles of Incorporation of Commercial
authorize the issuance of 50,000,000 shares of Commercial Common Stock and
10,000,000 shares of preferred stock, par value $0.01 per share. The Articles of
Incorporation of Liberty authorize the issuance of 20,000,000 shares of voting
common stock, par value $1.00 per share. At December ___, 1997 _____ and
8,748,501 shares of Commercial Common Stock and Liberty Common Stock,
respectively, were issued and outstanding. Neither Commercial nor Liberty had
any shares of preferred stock outstanding. Under Commercial's Articles of
Incorporation and the Iowa Business Corporation Act, Commercial and Liberty are
authorized to issue additional shares of capital stock up to the amount
authorized without stockholder approval, subject to the rules of the New York
Stock Exchange.
Voting Rights. Holders of the Commercial Common Stock are entitled to
one vote per share on all matters submitted to a vote of stockholders, other
than in the election of directors, where voting rights are cumulative. Holders
of Liberty Common Stock are also entitled to one vote per share on all matters
submitted to a vote of stockholders. Pursuant to Liberty's Articles of
Incorporation, however, Liberty stockholders are not entitled to cumulate their
votes in the election of directors.
Special Meetings of Stockholders. Commercial's Articles of Incorporation
provide that special meetings of stockholders of Commercial may be called by a
majority of the Board of Directors, by the holders of seventy-five percent or
more of the shares entitled to vote at such meeting, or by a duly authorized
committee of the Board of Directors. Special meetings of the holders of
Liberty's stock may be called by the President of Liberty, by the Board of
Directors or by the holders of ten percent (10%) or more of the shares of
Liberty Common Stock entitled to vote at such meeting.
Number and Term of Directors. Commercial's Board of Directors consists
of between nine and twelve persons with the precise number to be specified in
its Bylaws. Action to change the number of directors (outside the range of 9 to
12) must be by the affirmative vote of not less than 75% of all outstanding
shares of Commercial Common Stock. The Board is divided into three classes with
only one class of directors elected at each Annual Meeting. Liberty's Board of
Directors consists of four persons, without separate classes of directors. The
authorized number of Directors of Liberty may only be changed by an amendment to
the Bylaws, which requires Board action. In addition, under Iowa law,
stockholder approval is required to increase or decrease by more than 30% the
number of directors last approved by the stockholders.
Advance Notice Requirements for Nominations of Directors and Presentation
of New Business at Annual Meeting of Stockholders. Commercial's Bylaws provide
that any new business to be taken up at an annual meeting shall be made in
writing and filed with the Secretary of Commercial at least twenty days before
the date of the annual meeting. Liberty's Bylaws do not provide for advance
notice for nominations for the election of directors and proposals for any new
business to be taken up at any annual meeting of stockholders, but notice of a
special meeting must include a description of the purpose or purposes for which
the meeting is called.
63
<PAGE>
Approval of Mergers, Consolidations, Sale of Substantially All Assets and
Dissolutions. Commercial's Articles of Incorporation require that any merger,
reorganization, or consolidation, or any sale, lease, exchange, mortgage,
pledge, transfer, or other disposition of at least 25% of the fair market value
of the total assets of Commercial with any affiliate or any person who
beneficially owns in the aggregate 20% or more of the outstanding shares of
voting stock of Commercial must first be approved by the affirmative vote of the
holders of not less than 75% of the outstanding shares of voting stock and the
affirmative vote of the holders of not less than a majority of the outstanding
shares of voting stock held by shareholders other than a principal shareholder
(a person who owns at least 20% of the outstanding shares of Commercial's voting
stock). Commercial's Articles of Incorporation also require that certain fair
price criteria designed to ensure that Commercial's stockholders receive a fair
price for their shares in a business combination be met, unless a business
combination is first approved by three-quarters of the board of directors who
were directors prior to the time the person became a principal shareholder.
Liberty's Articles of Incorporation do not contain any approval requirements for
mergers or similar corporate action with affiliated parties, other than those
imposed by Iowa law generally.
Limitations on Directors' Liability. The Nebraska Business Corporation Act
does not expressly limit or eliminate the liability of directors. However,
Commercial's Articles of Incorporation provide that an "outside director" shall
not be personally liable to the respective corporation or its stockholders for
monetary damages for breach of his fiduciary duty as a director and authorizes
the respective corporation to indemnify such outside director against monetary
damages for such breach to the full extent permitted by law. This provision does
not limit liability for (i) any act or omission not in good faith which involves
intentional misconduct or a knowing violation of law, (ii) any transaction from
which the outside director derived an improper direct or indirect financial
benefit, (iii) paying a dividend or approving a stock repurchase in violation of
the Nebraska Business Corporation Act or (iv) any act or omission which violates
a declaratory or injunctive order obtained by the respective corporation or its
stockholders. "Outside director" is defined as any member of the Board of
Directors who is not an officer or a person who may control the conduct of the
respective corporation through management agreements, voting trusts,
directorships in related corporations or any other device or relationship.
Liberty's Articles of Incorporation provide that its directors will not be
liable to Liberty or its stockholders for monetary damages for breach of
fiduciary duty as a director with the exceptions of: (i) breaches of a
director's duty of loyalty to Liberty or its stockholders; (ii) acts or
omissions that are not in good faith or that involve intentional misconduct or a
knowing violation of law; (iii) for any transactions from which the director
derives an improper personal benefit; or (iv) due to an unlawful distribution as
described in Section 490.833 of the IBCA.
Preemptive Rights. Neither the holders of Liberty nor the holders of
Commercial Common Stock have any preemptive or preferential right to purchase or
to subscribe for additional shares of Liberty Common Stock or Commercial Common
Stock, respectively, or any other securities that either Liberty or Commercial
may issue.
Amendment of Articles of Incorporation and Bylaws. Commercial's Articles
of Incorporation may be amended upon the approval of two-thirds of Commercial's
shareholders. However, the affirmative vote of 75% of all outstanding shares of
Commercial entitled to vote generally, other than in the election of directors,
and the affirmative vote of the holders of not less than a majority of
outstanding shares entitled to vote generally, other than in the election of
directors other than "principal shareholders" (as defined in Commercial's
articles) are required to alter or amend certain provisions in the Articles,
including provisions which: (i) specify the number of directors; (ii) classify
the board into three classes with staggered terms; (iii) provide that a director
may only be removed upon the affirmative vote of 75% of the shares entitled to
vote; (iv) allow the board of directors to fill vacancies on the board; (v)
require a supermajority vote to approve certain business combinations with a 20%
or greater stockholder; (vi) mandate that certain business combinations comply
with the fair price provisions contained in the Articles; (vii) permit the
stockholders to amend Commercial's bylaws only upon the affirmative vote of 75%
or more of the shares entitled to vote. Commercial's Bylaws may be amended
either by the board of directors or by the affirmative vote of 75% of the
outstanding shares of Commercial's stock. Liberty's Articles of Incorporation do
not contain limitations on amendment. As such, Liberty's Articles of
Incorporation may be amended only in accordance with Iowa law, which requires
that an amendment to the articles by shareholders must first be submitted to the
Board of Directors to adopt a resolution setting forth the proposed
64
<PAGE>
amendment, approved by a majority vote of the stockholders entitled to vote on
the proposed amendment, except for certain immaterial amendments. The board may
amend the articles by a majority vote and without shareholder approval in
certain limited circumstances.
Rights Plan. On December 19, 1988, the Board of Directors of Commercial
adopted a Shareholder Rights Plan (the "Rights Plan") and declared a
distribution of stock purchase rights (the "Rights") payable to shareholders of
record on December 30, 1988. The Rights consist of primary rights (the "Primary
Rights"), which generally entitle the holders thereof to purchase shares of
Commercial Common Stock at 20% of the market price of such shares in the event
any person acquires an interest in 15% or more of Commercial Common Stock
without complying with a procedure intended to ensure fair treatment of all
shareholders of Commercial, and secondary rights (the "Secondary Rights"), which
generally entitle the holders thereof to purchase shares of Series A Junior
Participating Cumulative Preferred Stock of Commercial (the "Preferred Shares")
in the event a person acquires an interest in 25% or more of the outstanding
shares of Commercial Common Stock without complying with such procedural
requirements. The December 30, 1988 distribution consisted of one Primary Right
and One Secondary Right for each share of Commercial Common Stock outstanding on
that date and, subject to adjustment under certain circumstances, unless the
Rights expire or are earlier redeemed, one Primary Right and one Secondary Right
shall be issued with each share of Commercial Common Stock issued following
December 30, 1988 until the Rights become exercisable under the terms of the
Rights Plan.
The Primary Rights will become exercisable, subject to extension, 10
business days following a public announcement that any person (other than
certain entities who beneficially owned more than 15% of Commercial's
outstanding Commercial Common Stock as of the date of adoption of the Rights
Plan and certain persons who acquire their shares directly from Commercial) has
acquired, or has obtained the right to acquire, beneficial ownership of 15% or
more of the outstanding shares of Commercial Common Stock and has not complied
with the procedural requirements set forth in the Rights Plan (such person being
referred to as a "15% Person"). Secondary Rights will become exercisable upon
the earlier of (i) one business day following a public announcement that any
person (other than Commercial or certain related entities) has acquired, or has
obtained the right to acquire, beneficial ownership of 25% or more of the
outstanding shares of Commercial Common Stock, provided that such acquisition is
not deemed a "Fair Offer," as described in the Rights Plan (such person being
known as a "25% Person"), or (ii) one business day following the commencement of
a tender offer, other than a Fair Offer, or exchange offer, the consummation of
which would result in the beneficial ownership of 25% or more of the outstanding
shares of Commercial Common Stock by any person other than Commercial or certain
related entities. A public announcement for this purpose shall be made by
Commercial or, as the case may be, by a 15% Person or a 25% Person.
The number of shares which may be purchased upon exercise of each Primary
Right is determined by dividing (i) that number of shares which equals 50% of
the outstanding shares of Commercial Common Stock, as of the date a person
became a 15% Person, by (ii) the number of Primary Rights outstanding, exclusive
of Primary Rights beneficially owned by the 15% Person, which shall become void.
The per share exercise price of shares issued upon the exercise of a Primary
Right is 20% of the market price of such shares as of the date the 15% Person
became a 15% Person.
Unless the Secondary Rights are earlier redeemed, in the event a person
becomes a 25% Person, each holder of a Secondary Right (other than Secondary
Rights beneficially owned by such 25% Person, which will thereafter become void)
will have the Right to purchase one-hundredth of a share of Preferred Shares at
a price of $42.00 per one-hundredth of a share. Unless the Secondary Rights are
earlier redeemed, in the event that (i) Commercial is the surviving corporation
in a merger with a 25% Person and Commercial Common Stock is not changed or
exchanged in such merger, (ii) a 25% Person engages in one of a number of "self
dealing" transactions, including certain preferential sales, transfers or
exchanges of Commercial assets or securities, (iii) during such time as there is
a 25% Person, there shall be any reclassification of securities or
recapitalization of Commercial or any merger or consolidation of Commercial with
any of its subsidiaries or any other transaction or series of transactions which
has the effect of increasing by more than 1% the proportionate share of the
outstanding shares of any class of equity securities or of securities
exercisable for or convertible into securities of Commercial or any of its
subsidiaries which is beneficially owned by a 25% Person, or (iv) a person
(other than Commercial or certain related entities) becomes the beneficial
65
<PAGE>
owner of 25% or more of the outstanding shares of Commercial Common Stock (other
than pursuant to certain transactions set forth in the Rights Plan), then each
holder of a Secondary Right will have the right to receive, upon exercise and
payment of the Secondary Right exercise price, Commercial Common Stock having a
value equal to two times the then current Secondary Right exercise price.
In the event Commercial is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earnings
power is sold, each holder of a Secondary Right will thereafter have the right
to receive, upon the exercise and payment of the Secondary Right exercise price,
that number of shares of common stock of the acquiring company which at the time
of such transaction has a value equal to two times the then current Secondary
Right exercise price.
A majority of the independent directors of Commercial may authorize the
redemption of either or both of the Primary or Secondary Rights at a price of
$0.01 per Right at any time prior to the close of business on the tenth business
day, subject to extension, following the date of a public announcement that any
person has become a 15% Person, other than pursuant to certain cash tender
offers described in the Rights Plan, and at any time prior to the public
announcement that any person has become a 25% Person, other than pursuant to
such a cash tender offer. Commercial's right of redemption with respect to the
Secondary Rights will be reinstated if each 25% Person reduces its beneficial
ownership to less than 15% of Commercial Common Stock in a transaction not
involving a purchase by Commercial or its subsidiaries. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders thereof will be to receive the redemption price.
The terms of the Rights may be amended by the Board of Directors of
Commercial without the consent of the holders of the Rights, except that
following the date on which the Rights become exercisable, such amendment may
not adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of Commercial (other than rights resulting from such
holder's ownership of Commercial Common Stock), including, without limitation,
the right to vote or to receive dividends.
The Rights have certain anti-takeover effects. The Rights could cause
substantial dilution to a person or group that attempts to acquire Commercial
without conditioning the offer on the Rights being redeemed or substantially all
of the Rights being acquired.
Liberty does not have any similar shareholder rights plan.
LEGAL MATTERS
The legality of the Commercial Common Stock to be issued pursuant to the
Merger Agreement will be passed upon for Commercial by Fitzgerald, Schorr,
Barmettler & Brennan, P.C., Omaha, Nebraska.
Certain other legal matters in connection with the Merger will be passed
upon for Commercial by Housley Kantarian & Bronstein, P.C., Washington, D.C.,
and for Liberty by Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, Omaha,
Nebraska.
EXPERTS
The consolidated financial statements of Commercial as of June 30, 1997 and
1996, and for each of the three years in the period ended June 30, 1997
incorporated in this Prospectus/Proxy Statement by reference from Commercial's
Annual Report on Form 10-K for the fiscal year ended June 30, 1997 have been
audited by Deloitte &
66
<PAGE>
Touche LLP, independent auditors, as stated in their report, which is
incorporated herein by reference (which report expresses an unqualified opinion
and includes an explanatory paragraph referring to a change in the method of
accounting for mortgage servicing rights in fiscal year 1996), and have been so
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The consolidated financial statements of Liberty as of December 31, 1996
and for the year then ended included elsewhere in this Prospectus/Proxy
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report appearing elsewhere herein and elsewhere in the
Registration Statement, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
INDEPENDENT ACCOUNTANTS
Representatives of Deloitte & Touche LLP, Liberty's independent certified
public accountants, are not expected to be present at the Special Meeting to
respond to appropriate questions and as a result will not have an opportunity to
make a statement.
OTHER MATTERS
The Liberty Board of Directors is not aware of any business to come before
the Special Meeting other than those matters described in this Prospectus/Proxy
Statement. However, if any other matter should properly come before the Special
Meeting, it is intended that holders of the proxies will act in accordance with
their best judgment.
67
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OF LIBERTY FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report............................................. F-
Consolidated Statements of Financial Condition as of
December 31, 1996 and 1995............................................. F-
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994....................................... F-_
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1996, 1995 and 1994....................... F-_
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994................................. F-_
Notes to Consolidated Financial Statements............................... F-_
Consolidated Statements of Financial Condition
(Unaudited) as of September 30, 1997 and December 31, 1996............. F-_
Consolidated Statements of Operations (Unaudited)
for the Nine Months Ended September 30, 1997 and 1996.................. F-_
Consolidated Condensed Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 31, 1997 and 1996.................. F-_
Note to Consolidated Financial Statements................................ F-_
</TABLE>
68
<PAGE>
LIBERTY FINANCIAL CORPORATION
Consolidated Financial Statements as of
and for the Year Ended December 31, 1996
and Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Liberty Financial Corporation
Des Moines, Iowa
We have audited the accompanying consolidated statement of financial condition
of Liberty Financial Corporation and subsidiaries (Liberty) as of December 31,
1996, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of Liberty's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Liberty as of December 31, 1996,
and the results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Des Moines, Iowa
November 24, 1997
F-1
<PAGE>
LIBERTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995 (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
ASSETS
CASH AND DUE FROM BANKS $ 28,213 $ 19,886
FEDERAL FUNDS SOLD 11,968 8,746
-------- --------
Total cash and cash equivalents 40,181 28,632
-------- --------
SECURITIES AVAILABLE FOR SALE, at fair value
amortized cost of $97,381 and $118,441 97,479 119,248
-------- --------
LOANS AND LEASES:
Commercial, financial and agricultural 174,537 139,091
Consumer 60,705 36,655
Real estate 156,970 141,781
Lease financing 44,920 33,236
-------- --------
Total loans and leases 437,132 350,763
Allowance for loan and lease losses 4,446 4,282
-------- --------
Net loans and leases 432,686 346,481
-------- --------
PREMISES AND EQUIPMENT, net 6,436 5,282
OTHER ASSETS 13,863 16,239
GOODWILL, net 7,560 679
-------- --------
TOTAL ASSETS $598,205 $516,561
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing demand $ 63,902 $ 55,243
Interest bearing demand 70,368 59,974
Money market 61,828 48,705
Savings 52,282 50,848
Time 264,399 228,995
-------- --------
Total deposits 512,779 443,765
Federal funds purchased 8,780 6,825
Long-term borrowings 21,579 24,001
Accrued expenses and other liabilities 12,028 9,916
-------- --------
Total liabilities 555,166 484,507
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 16)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 20,000,000 shares authorized;
8,748,500 shares issued and outstanding 8,749 8,749
Additional paid in capital 7,055 -
Retained earnings 27,176 22,820
Unrealized holding gain on securities available for sale, net 59 485
-------- --------
Total stockholders' equity 43,039 32,054
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $598,205 $516,561
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
LIBERTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 (UNAUDITED) AND 1994 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995 1994
<S> <C> <C> <C>
INTEREST INCOME:
Loans and leases $ 40,384 $ 34,278 $ 27,338
Taxable securities 5,627 4,738 3,840
Tax-exempt securities 924 1,193 1,239
Federal funds sold 586 659 163
----------- ----------- -----------
Total interest income 47,521 40,868 32,580
----------- ----------- -----------
INTEREST EXPENSE:
Deposits 19,351 17,088 12,016
Federal funds purchased 468 401 523
Long-term borrowings 2,027 2,440 825
----------- ----------- -----------
Total interest expense 21,846 19,929 13,364
----------- ----------- -----------
NET INTEREST INCOME 25,675 20,939 19,216
PROVISIONS FOR LOAN AND LEASE LOSSES 1,462 819 894
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISIONS FOR LOAN AND LEASE LOSSES 24,213 20,120 18,322
----------- ----------- -----------
NONINTEREST INCOME:
Service charges and fees 2,009 1,828 1,772
Insurance commissions 704 674 550
Securities gains (losses) 47 (4) 11
Other 2,079 1,867 1,492
Gain on sale of bank branch - 1,108 -
----------- ----------- -----------
Total noninterest income 4,839 5,473 3,825
----------- ----------- -----------
NONINTEREST EXPENSES:
Personnel 10,923 7,897 6,721
Occupancy 2,158 1,927 1,762
Data processing 712 613 316
Advertising and promotion 663 428 284
Professional fees 548 363 185
Telephone and postage 870 740 608
FDIC insurance 678 536 837
Amortization of goodwill 747 620 945
Other 3,669 3,223 2,970
----------- ----------- -----------
Total noninterest expenses 20,968 16,347 14,628
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 8,084 9,246 7,519
PROVISION FOR INCOME TAX 3,249 2,977 2,508
----------- ----------- -----------
NET INCOME $ 4,835 $ 6,269 $ 5,011
=========== =========== ===========
NET INCOME PER COMMON SHARE $ 0.55 $ 0.72 $ 0.57
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,748,500 8,748,500 8,748,500
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
LIBERTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 (UNAUDITED) AND 1994 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Unrealized
Holding
Gain (Loss)
Additional on Securities
Common Paid In Retained Available
Stock Capital Earnings for Sale, Net Total
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994
(UNAUDITED) $ 8,749 $ - $ 11,540 $ (75) $ 20,214
Net income (UNAUDITED) - - 5,011 - 5,011
Change in unrealized holding loss on
securities available for sale, net (UNAUDITED) - - - (647) (647)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1994
(UNAUDITED) 8,749 - 16,551 (722) 24,578
Net income (UNAUDITED) - - 6,269 - 6,269
Change in unrealized holding gain on
securities available for sale, net (UNAUDITED) - - - 1,207 1,207
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1995
(UNAUDITED) 8,749 - 22,820 485 32,054
Net income - - 4,835 - 4,835
Goodwill related to minority interest - 7,055 - - 7,055
Cash dividends - $.055 per
common share - - (479) - (479)
Change in unrealized holding loss on
securities available for sale, net - - - (426) (426)
-------- -------- -------- -------- --------
BALANCE AT DECEMBER 31, 1996 $ 8,749 $ 7,055 $ 27,176 $ 59 $ 43,039
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
LIBERTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 (UNAUDITED) AND 1994 (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,835 $ 6,269 $ 5,011
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 1,117 1,048 892
Provisions for loan and lease losses 1,462 819 894
Amortization and accretion 416 344 592
Amortization of goodwill 747 620 945
Deferred income taxes (258) 81 (979)
(Gain) loss on sale of available-for-sale securities (47) 4 (11)
Gain on divestiture of branch - (1,108) -
(Increase) decrease in other assets 2,378 (6,603) (2,233)
Increase in accrued expenses and other liabilities 2,370 4,173 1,831
--------- --------- ---------
Net cash provided by operating activities 13,020 5,647 6,942
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Divestiture of branch office, net of cash and cash equivalents - (9,232) -
Cash paid for acquisitions (2,732) - -
Net increase in loans and leases (85,590) (34,272) (46,114)
Purchases of:
Securities available for sale (32,589) (103,234) (28,172)
Premises and equipment (2,191) (692) (1,690)
Proceeds from sales and maturities of:
Securities available for sale 53,563 86,256 39,879
Premises and equipment - 1,000 94
--------- --------- ---------
Net cash used in investing activities (69,539) (60,174) (36,003)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 69,014 48,013 40,779
Net increase (decrease) in federal funds purchased 1,955 3,668 (7,993)
Proceeds from issuance of long-term debt 10,795 16,082 670
Repayment of long-term debt (13,217) (2,919) (1,096)
Cash dividends paid (479) - -
--------- --------- ---------
Net cash provided by financing activities 68,068 64,844 32,360
--------- --------- ---------
CASH AND CASH EQUIVALENTS:
Increase in cash and cash equivalents 11,549 10,317 3,299
Cash and cash equivalents, beginning of year 28,632 18,315 15,016
--------- --------- ---------
Cash and cash equivalents, end of year $ 40,181 $ 28,632 $ 18,315
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
LIBERTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996,1995 (UNAUDITED) AND 1994 (UNAUDITED)
(TABULAR PRESENTATIONS IN THOUSANDS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Liberty Financial Corporation (Liberty) is a
diversified financial services company. Liberty owns and operates seven
commercial banks and one thrift that provide a wide variety of financial
services through a network of 36 locations in Iowa and six locations in
Arizona, a commercial equipment leasing company, an auto finance company and
a general coverage insurance agency.
Use of Estimates - The accounting and financial reporting policies of
Liberty and its subsidiaries conform with generally accepted accounting
principles and prevailing practices within the financial services industry.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation - The consolidated financial statements include
the accounts of Liberty and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated. The
consolidated financial statements at December 31, 1995 and for the two years
then ended have not been audited by independent auditors. However, in the
opinion of management, all adjustments (consisting only of normal recurring
adjustments) considered necessary to fairly present the financial statements
have been included.
Cash and Cash Equivalents - Cash and cash equivalents include amounts due
from banks and federal funds sold. For cash flow statement purposes,
management considers all securities, including those with original
maturities of three months or less, to be part of operating or investing
activities rather than cash equivalents.
Securities - Securities available for sale are reported at fair value, with
the unrealized gains and losses reported as a separate component of
stockholders' equity, net of deferred income taxes. Premiums and discounts
are amortized over the contractual lives of the related securities on the
level yield method. Available for sale securities may be sold for management
of general liquidity needs, response to market interest rate fluctuations,
implementation of asset-liability management strategy, funding increased
loan demand, changes in securities prepayment risk or other similar factors.
Realized gains and losses on sales are computed on a specific identification
basis and are shown separately as a component of noninterest income.
Effective January 1, 1994, Liberty adopted Statement of Financial Accounting
Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," which resulted in a net decrease to stockholders' equity
of $75,000, net of deferred income tax benefit. In November 1995, the
Financial Accounting Standards Board issued implementation guidance for SFAS
No. 115. Accordingly, on December 31, 1995, Liberty reclassified securities
with an amortized cost of $42,062,000 and net unrealized gains of $138,000
from held to maturity to available for sale.
F-6
<PAGE>
Loans and Leases - Loans are stated at the principal amounts outstanding, net of
deferred loan fees and costs, with interest income recognized based upon those
outstanding loan balances. Loans are generally placed on nonaccrual status at
the later of when principal or interest has been in default for a period of 90
days or more, or when collection of the loan principal or the related interest
is otherwise considered doubtful. At the time a loan is placed on nonaccrual
status, accrued interest receivable is reversed against interest income of the
current period. Loans are returned to accrual status when factors indicating
doubtful collectibility no longer exist.
Leases are accounted for as direct financing leases for financial statement
purposes. The total minimum rentals receivable and the residual value of leased
assets under each lease contract are recorded as assets, net of unearned income.
Unearned income is the excess of the total rentals receivable and residual value
over the cost of the leased asset. Unearned income is recognized during the
lease term utilizing the interest method. Direct origination costs are deferred
and recognized over the estimated life of the lease.
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan" and SFAS No.
118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures," were adopted January 1, 1995. Under these statements, loans
considered to be impaired are reduced to the present value of expected future
cash flows or to the fair value of collateral, by allocating a portion of the
allowance for loan losses to such loans. If these allocations cause the
allowance for loan losses to require an increase, such increase is reported as
provision for loan losses. Residential mortgage loans and consumer loans are
excluded from SFAS No. 114 as they are evaluated collectively for impairment
since they are homogeneous and generally carry smaller individual balances. The
carrying values of impaired loans are periodically adjusted to reflect cash
payments, revised estimates of future cash flows and increases in the present
value of expected cash flows due to the passage of time. Cash payments are
reported as reductions in carrying value, while increases or decreases due to
changes in estimates of future payments and due to the passage of time are
reported as provision for loan losses. Adopting these standards resulted in no
initial increase to either the allowance for loan losses or the provision for
loan losses.
Allowance for Loan and Lease Losses - The allowance for loan and lease losses is
a valuation reserve for estimated losses inherent in the respective portfolios.
Actual credit losses, net of recoveries, are deducted from the allowance for
loan and lease losses when they occur. Factors considered in the evaluation of
the allowance level include estimated future losses from loan and lease
agreements and obligations, deterioration in credit concentrations or pledged
collateral, and historical loss experience, as well as trends in portfolio
volume, composition, delinquencies and nonaccruals. Management assesses the
adequacy of the allowance for loan and lease losses every quarter. However,
actual losses could differ significantly from the amounts estimated by
management.
Premises and Equipment - Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is charged to operating expense
primarily on the double declining balance over the estimated useful lives of the
assets, generally 12 to 40 years for buildings and three to seven years for
furniture, fixtures and equipment. Leasehold improvements are amortized on the
straight-line method over the terms of the respective leases. Maintenance and
repairs are expensed as incurred while additions and improvements are
capitalized.
Real Estate - Foreclosed properties consist primarily of real estate acquired as
a result of customer loan defaults that are carried at the lower of the recorded
investments in the defaulted loans or at fair value less estimated selling
costs. Losses arising at the time of acquisition of the properties are charged
to the
F-7
<PAGE>
allowance for loan and lease losses. Gains and losses resulting from the sale or
subsequent write-down of other real estate and income and expenses related to
the operation of other real estate are recorded as current period expenses.
Foreclosed property included in other assets totaled approximately $858,000 and
$163,000 at December 31, 1996 and 1995, respectively.
Goodwill - Goodwill arises from net assets acquired in purchased transactions.
Purchased assets and liabilities are recorded at their estimated fair values on
the acquisition dates. Goodwill is reviewed for possible impairment when events
or changed circumstances may indicate that the carrying amount of the assets may
not be recoverable. Goodwill intangible assets are amortized on a straight-line
basis over their estimated useful lives, not exceeding 15 years. At December
31, 1996 and 1995, accumulated intangible amortization was $5,636,562 and
$4,889,541, respectively.
Effective January 1, 1996, Liberty adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This statement specifies when certain long-lived assets should be reviewed for
impairment and how to measure and report an impairment loss. This statement had
no impact on Liberty's consolidated financial statements.
Accrued Expenses and Other Liabilities - Included in other liabilities are
vendor holdback reserves of approximately $2,400,000 and $1,600,000 in 1996 and
1995, respectively. Vendor holdback reserves are amounts Liberty withholds for
credit enhancement purposes on certain leases.
Income Taxes - Each subsidiary of Liberty files a separate income tax return
upon which current income tax expense is calculated. Deferred tax assets and
liabilities are recorded based on differences between the financial statement
and tax basis of assets and liabilities at income tax rates currently in effect.
Net Income Per Common Share - Net income per common share calculations are based
on the weighted average number of common shares outstanding.
Newly-Issued Accounting Standards - In June 1996, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities" to be
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales, from transfers that are secured borrowings. Management believes that the
effect of the statement on Liberty's consolidated financial statements will not
be material.
In February 1997 FASB issued SFAS No. 128, "Earnings per Share," which will be
adopted by Liberty in calendar 1997. SFAS No. 128 requires companies to compute
net income per share under two different methods, basic and diluted, and to
disclose the methodology used for the calculation. Adoption of the new standard
will not impact Liberty's results of operations or materially change the results
of its earnings per share calculation.
In February 1997, FASB issued SFAS No. 129, "Disclosure of Information about
Capital Structure," which will be adopted by Liberty in calendar 1997. SFAS No.
129 requires companies to disclose, in summary form, within the financial
statements, the pertinent rights and privileges of the various securities
outstanding including dividends and liquidation preferences, participation
rights, call prices and dates, conversion or exercise prices or rates and
pertinent dates, sinking-fund requirements, unusual voting rights, and
significant terms of contracts to issue additional shares. Adoption of the new
standard will not impact Liberty's results of operations.
F-8
<PAGE>
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which will be adopted by Liberty in calendar 1998. SFAS No. 130
requires companies to classify items of other comprehensive income in
financial statements and display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of the consolidated balance sheet.
Adoption of the new standard will not have a material impact on Liberty's
results of operations.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which will be adopted by Liberty
in calendar 1998. SFAS No. 131 requires companies to report a measure of
segment profit or loss, certain specific revenue and expense items, and
segment assets for its reportable operating segments. Adoption of the new
standard will not impact Liberty's results of operations.
2. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995 1994
<S> <C> <C> <C>
Cash paid:
Interest $ 21,514 $ 18,868 $ 12,953
Income taxes 3,688 4,335 3,190
Noncash investing and financing activities:
Loans transferred to foreclosed property 695 156 248
Issuance of common stock in exchange for the
minority interest in common stock of consolidating
entities, net 7,055 - -
</TABLE>
3. MERGER AND FORMATION OF LIBERTY FINANCIAL CORPORATION
Liberty was formed on December 31, 1996 through the merger of seven bank
holding companies, one thrift holding company and a leasing company for
which the majority interest was under common ownership and control. The
merger was effected through the exchange of Liberty common stock for that
of the consolidating entities. The merger of the majority interests has
been accounted for in a manner similar to a pooling-of-interests
combination for entities under common control. The merger of the minority
interests has been accounted for using the purchase method of accounting,
with resulting goodwill of $7,054,835 being amortized on a straight line
basis over 15 years. This cost was allocated entirely to goodwill for the
following reasons: Liberty's basis in its assets and liabilities is
approximately equal to its book value; the carrying value of financial
instruments is at fair value in all material respects; premises and
equipment is comprised largely of furniture, equipment and improvements
which have a relatively short life span of seven years or less and land
and buildings, which are primarily located in relatively small communities
in Iowa, are carried at values which management believes approximate their
fair value.
F-9
<PAGE>
4. SECURITIES AVAILABLE FOR SALE
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
1996 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 14,496 $ 70 $ 6 $ 14,560
U.S. government agencies 8,512 40 11 8,541
U.S. government mortgage-backed 43,578 118 294 43,402
States and political subdivisions 20,288 128 74 20,342
Corporate 3,150 25 7 3,168
Other 7,357 109 - 7,466
-------- -------- -------- --------
Balance at December 31, 1996 $ 97,381 $ 490 $ 392 $ 97,479
======== ======== ======== ========
Weighted average interest rate 6.59 %
<CAPTION>
Amortized Unrealized Unrealized Fair
1995 (Unaudited) Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. Treasury notes $ 22,267 $ 223 $ 18 $ 22,472
U.S. government agencies 18,939 189 24 19,104
U.S. government mortgage-backed 33,014 368 142 33,240
States and political subdivisions 25,734 208 92 25,850
Corporate 4,847 48 46 4,849
Other 13,640 93 - 13,733
-------- -------- -------- --------
Balance at December 31, 1995 $118,441 $ 1,129 $ 322 $119,248
======== ======== ======== ========
Weighted average interest rate 6.50 %
<CAPTION>
(Unaudited) (Unaudited)
Realized Gains (Losses) 1996 1995 1994
<S> <C> <C> <C>
Gross realized gains $ 54 $ - $ 11
Gross realized losses (7) (4) -
-------- -------- --------
Total realized gains (losses) $ 47 $ (4) $ 11
======== ======== ========
</TABLE>
Proceeds from sales and maturities of securities available for sale was
$53,563, $86,256 and $39,879 for the years ended December 31, 1996, 1995
and 1994, respectively.
F-10
<PAGE>
The amortized cost and fair value of securities at December 31, 1996, are
shown below by expected maturity. Expected maturities differ from
contractual maturities because issuers may have the right to call or prepay
obligations. Expected maturities for mortgage-backed securities are
determined by using industry derived prepayment assumptions.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Within one year $ 27,748 $ 27,810
After one through five years 30,047 30,075
After five through ten years 35,882 35,851
After ten years 3,743 3,743
--------- ---------
Total $ 97,420 $ 97,479
========= =========
</TABLE>
At December 31, 1996 and 1995 securities with amortized cost of $6,259,000
and $4,247,000, respectively, were pledged to secure public deposits and
for other purposes as required or permitted by law.
5. LOANS AND LEASES
Allowance for Loan and Lease Losses
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 4,282 $ 4,203 $ 3,489
Allowance of purchased/sold financial institution 514 - (103)
Provisions for loan and lease losses 1,462 819 894
Loan and lease loss recoveries 345 170 248
Loans and leases charged off (2,157) (910) (325)
------- ------- -------
Balance at end of year $ 4,446 $ 4,282 $ 4,203
======= ======= =======
</TABLE>
No impaired loans, as defined by SFAS Nos. 114 and 118, were recorded as of
December 31, 1996 and 1995. No interest income was recognized on impaired
loans during 1996, 1995, or 1994.
Credit Risk - At December 31, 1996 and 1995, Liberty had nonaccrual loans
of $1,159,000 and $500,000, respectively (including nonaccrual leases of
$6,000 and $41,000, respectively). Total interest income that would have
been recorded under the original term of these loans was $87,000 and
$59,000 for the years ended December 31, 1996 and 1995, respectively.
Actual interest income recorded from these loans was zero in 1996 and 1995.
No material commitments to lend additional funds to customers whose loans
were classified as nonaccrual or restructured were outstanding on December
31, 1996 or 1995.
Significant portions of Liberty's loan and lease portfolios consisted of
real estate loans, agricultural related loans, commercial loans, commercial
leases, and installment/consumer loans. Real estate loans consist of
consumer real estate, agricultural real estate, commercial real estate, and
construction loans. The volume of agricultural related loans reflects the
primary industry of Liberty's Iowa market. The commercial loan portfolio is
well diversified with no individual industry constituting a concentration.
F-11
<PAGE>
The lease portfolio includes contracts to lessees located throughout the
nation and involved in various industries. The installment/consumer loan
portfolio is largely made up of direct consumer loans.
Lease Servicing - Leases serviced for others are not included in the
accompanying consolidated financial statements. The outstanding principal
balance of these leases at December 31, 1996 and 1995, was approximately
$22,346,000 and $32,942,000, respectively. At December 31, 1996 and 1995
approximately $952,000 and $948,000, respectively, of the leases serviced
for others were sold with recourse. The remaining leases, which were sold
without recourse, were being serviced for investee entities.
Lease Arrangements
Following are the components of lease financing receivables at December
31, 1996 and 1995:
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
Minimum lease payments receivable $ 53,623 $ 40,851
Estimated unguaranteed residual values of leased property 382 304
---------- ----------
Gross lease financing receivables 54,005 41,155
Less:
Unearned income 9,085 7,919
---------- ----------
Net investment in direct financing leases $ 44,920 $ 33,236
========== ==========
</TABLE>
Minimum lease payments receivable were due as follows:
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
1996 $ - $ 13,186
1997 16,997 10,831
1998 14,892 9,060
1999 11,188 5,688
2000 7,086 1,849
2001 3,140 -
Thereafter 320 237
---------- ----------
$ 53,623 $ 40,851
========== ==========
</TABLE>
F-12
<PAGE>
Loans and Lease Transactions with Directors and Officers
Certain directors and executive officers of Liberty and its subsidiaries
are customers of Liberty banks in the ordinary course of business.
Activity of aggregate loans and leases to such directors, executive
officers and their business interests during 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
Balance at beginning of year $ 6,636 $ 4,510
New loans 10,118 4,082
Repayments (10,249) (1,956)
-------- --------
Balance at end of year $ 6,505 $ 6,636
======== ========
</TABLE>
6. PREMISES AND EQUIPMENT
<TABLE>
<CAPTION>
December 31,
-------------------------------
(Unaudited)
1996 1995
<S> <C> <C>
Land $ 475 $ 475
Buildings and improvements 4,466 3,933
Furniture and equipment 7,207 5,694
-------- --------
Total cost 12,148 10,102
Accumulated depreciation and amortization (5,712) (4,820)
-------- --------
Total $ 6,436 $ 5,282
======== ========
</TABLE>
Depreciation and amortization expense on premises and equipment was
approximately $1,117,000, $1,048,000 and $892,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Liberty has noncancelable operating leases covering certain premises and
equipment. Total rent expense was $503,000 in 1996, $360,000 in 1995, and
$213,000 in 1994. Minimum future commitments for leases in effect at
December 31, 1996 were as follows:
<TABLE>
<S> <C>
1997 $ 640
1998 488
1999 401
2000 192
2001 163
Thereafter 177
--------
Total $ 2,061
========
</TABLE>
F-13
<PAGE>
7. DEPOSITS
At December 31, 1996 scheduled maturities of time deposits are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
<S> <C>
1997 $192,475
1998 53,621
1999 11,127
2000 5,039
2001 and Thereafter 2,137
--------
Total $264,399
========
</TABLE>
Maturities of time deposits of $100,000 or more at December 31, 1996 are
as follows:
<TABLE>
<S> <C>
Within three months $15,357
After three through six months 6,994
After six through twelve months 12,204
After one year 12,809
-------
Total $47,364
=======
</TABLE>
Average deposits and average rates are summarized for the years ended
December 31, as follows:
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
--------------------- -------------------------
Amount % Amount %
<S> <C> <C> <C> <C>
Average Non-interest bearing demand $ 57,979 0.00 % $ 42,420 0.00 %
Average Interest bearing demand 65,480 2.26 % 58,303 2.13 %
Average Money Market 52,981 3.62 % 45,021 3.76 %
Average Savings 50,964 3.83 % 49,276 3.77 %
Average Time 236,787 5.87 % 216,975 5.63 %
-------- --------
Total $464,191 $411,995
======== ========
</TABLE>
Interest expense on deposit accounts for the years ended December 31, is
summarized as follows:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995 1994
<S> <C> <C> <C>
Interest bearing demand $ 1,480 $ 1,241 $ 1,200
Money Market 1,922 1,692 1,614
Savings 1,956 1,860 1,439
Time 13,993 12,295 7,763
------- ------- -------
Total $19,351 $17,088 $12,016
======= ======= =======
</TABLE>
F-14
<PAGE>
8. FEDERAL FUNDS PURCHASED
The outstanding balances for federal funds purchased as of December 31,
1996 and 1995, and the weighted average interest rates paid during each of
the years then ended and at each year end were as follows:
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
Ending balance $ 8,780 $ 6,825
Highest average month-end balance 12,135 16,269
Average daily balance 7,271 5,750
Weighted average interest rate:
Paid during year 5.93 % 5.99 %
At year end 6.30 5.60
</TABLE>
9. LONG-TERM BORROWINGS
Long-term borrowings consisted of the following at December 31, 1996 and
1995:
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
9.45% Class 1995 A-1 lease-backed notes, payable in monthly installments
based on scheduled lease payments plus prepayments, excluding interest,
with final payment due August 15, 2000 $ 8,924 $ 14,334
12% Class 1995 A-3 subordinated notes, due August 15, 2000 1,002 1,002
7.54% variable rate $20 million revolving credit note with First Bank
National Association, Minneapolis, Minnesota. Total outstanding principal
is due December 31, 1999. Interest is payable on demand. Unadvanced
credit is $9,205 as of December 31, 1996. 10,795 -
8.25% variable rate note, payable to Norwest Bank, Iowa, in annual
installments with the final payment due December 31, 1998. 823 1,013
8.01% variable revolving credit notes with First Bank National
Association, Minneapolis, Minnesota. Total outstanding principal due and
paid on December 31, 1996. Interest is payable on demand. - 7,455
Other 35 197
---------- ----------
$ 21,579 $ 24,001
========== ==========
</TABLE>
F-15
<PAGE>
Lease financing receivables of $9,623,500 and restricted cash of $765,406,
are specifically pledged for repayment of the lease-backed notes payable.
Liberty entered into a $25 million lease receivable sale facility in
November 1996. The facility provides for sale of leases for a one-year
period and for a negotiated one-year extension thereafter.
The 7.54% revolving credit note of $20 million with First Bank National
Association, Minneapolis, Minnesota is secured with the stock of Liberty's
subsidiaries. As part of this credit agreement, Liberty must adhere to
certain loan covenants, which is typical for this type of borrowing
arrangement. These covenants include, but are not limited to cash coverage
ratio, collateral coverage ratio, tangible net worth minimum,
profitability minimums, classified asset maximums, loan loss reserves
minimums and non-performing loan maximums. On December 31, 1996 Liberty
was in violation of the cash coverage ratio covenant, due to incurring
one-time merger-related expenses totalling $1,155,000. First Bank granted
a waiver to Liberty for the exception to this covenant.
Long-term debt is scheduled to mature as follows as of December 31, 1996:
<TABLE>
<S> <C>
1997 $ 4,103
1998 3,438
1999 2,015
2000 11,021
2001 1,002
Thereafter -
-------
Total $21,579
=======
</TABLE>
10. REGULATORY RESTRICTIONS
Liberty is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action,
Liberty must meet specific capital guidelines that involve quantitative
measures of assets, liabilities and certain off-balance sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to quantitative judgments by the
regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require maintaining minimum amounts and ratios of total and Tier 1 capital
to risk-weighted assets and of Tier 1 capital to average assets.
Management believes, as of December 31, 1996 and 1995, that Liberty meets
all capital adequacy requirements to which it is subject. Furthermore, all
Liberty's subsidiary banks are deemed "well-capitalized" at December 31,
1996 and 1995 under the regulatory framework for prompt corrective action.
F-16
<PAGE>
Liberty's actual capital amounts and ratios are presented below.
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- -------------------------- ------------------------
Amount Ratio Amount Ratio Amount Ratio
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1996:
Total capital to risk weighted assets
Liberty Financial Corporation $39,925 9.22 % $34,600 8.0 % $43,300 10.0 %
Total banks and thrift 44,953 10.67 33,700 8.0 42,100 10.0
Tier 1 capital to risk weighted assets
Liberty Financial Corporation 35,479 8.20 17,300 4.0 26,000 6.0
Total banks and thrift 41,004 9.73 16,900 4.0 25,300 6.0
Tier 1 capital to average assets
Liberty Financial Corporation 35,479 6.40 22,200 4.0 27,700 5.0
Total banks and thrift 41,004 7.90 20,800 4.0 26,000 5.0
As of December 31, 1995 (unaudited):
Total capital to risk weighted assets
Liberty Financial Corporation 35,518 9.58 29,700 8.0 37,100 10.0
Total banks and thrift 40,495 11.60 27,900 8.0 34,900 10.0
Tier 1 capital to risk weighted assets
Liberty Financial Corporation 31,236 8.42 14,800 4.0 22,273 6.0
Total banks and thrift 36,378 10.42 14,000 4.0 20,900 6.0
Tier 1 capital to average assets
Liberty Financial Corporation 31,236 6.43 19,400 4.0 24,300 5.0
Total banks and thrift 36,378 7.90 18,400 4.0 23,000 5.0
</TABLE>
11. SAIF ASSESSMENT
Liberty's 1996 net earnings included a nonrecurring charge for a special
assessment by the FDIC which was mandated by federal legislation and
recognized in the third quarter of 1996. This legislation called for all
financial institutions with deposits insured by the FDIC under the Savings
Association Insurance Fund (SAIF) to pay an assessment at the rate of
$0.657 per $100 on SAIF insured deposit levels as of March 31, 1995.
Liberty's assessment was $477,000, net of an income tax benefit of
$181,000, which reduced 1996 net income by $296,000 or $.04 per share.
F-17
<PAGE>
12. INCOME TAXES
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995 1994
<S> <C> <C> <C>
Current $ 3,507 $ 2,896 $ 3,487
Deferred (258) 81 (979)
------- ------- -------
Total provision for income taxes $ 3,249 $ 2,977 $ 2,508
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of deferred income tax assets and deferred income tax liabilities
at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
Deferred income tax assets:
Loan and lease losses $1,150 $1,073
Intangible assets 897 428
Deferred compensation 98 60
Deferred fees 349 482
Other 62 170
------ ------
Total deferred income tax assets 2,556 2,213
------ ------
Deferred income tax liabilities:
Premises and equipment 154 136
Deferred loan fees, net 360 287
Deferred loan costs 138 123
FASB 115 39 322
Other 248 269
------ ------
Total deferred income tax liabilities 939 1,137
------ ------
Net deferred income tax assets $1,617 $1,076
====== ======
</TABLE>
The base year bad debt income tax reserve, defined as income tax reserves
arising in tax years beginning before December 31, 1987, was $290,000 at
December 31, 1996. In accordance with SFAS No. 109, no deferred income tax
liability has been recognized on this amount as management does not
anticipate that this bad debt income tax reserve will be taxable in the
foreseeable future.
F-18
<PAGE>
The effective income tax rate differs from the federal statutory income
tax rate in effect each year as a result of the following items:
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995 1994
<S> <C> <C> <C>
Federal statutory income tax rate 35.0 % 35.0 % 35.0 %
Increase (decrease) from:
Tax-exempt interest income (3.5) (4.7) (4.1)
State income taxes 4.0 4.7 4.1
Amortization of intangible assets 2.9 0.7 2.2
Surtax exemption (1.0) (1.0) (1.0)
Other 2.8 (1.8) (2.8)
----- ----- -----
Effective income tax rate 40.2 % 32.2 % 33.4 %
===== ===== =====
</TABLE>
13. EMPLOYEE BENEFIT PLANS
401(k) Plan - Liberty has a qualified 401(k) plan covering all eligible
full-time employees. Employee contributions to the plan are made
voluntarily through payroll deductions up to 15% of the employee's gross
salary. To incent participation in the plan, Liberty makes an annual
matching contribution of 50% of the employee's contribution, limited to 8%
of the employee's deferral. Total expenses for the 401(k) plan were
$217,959, $172,492 and $128,400 in 1996, 1995 and 1994, respectively.
Phantom Stock Plan - Liberty has a Phantom Stock Agreement (Agreement)
covering certain key executives. Benefits under the Agreement are based on
an annual dollar contribution determined by the Board of Directors, the
book value of each bank's stockholder equity, a specified interest rate
and years of service. The shares credited to each executive's account do
not contain rights as are ordinarily attached to the ownership of common
stock. Total expenses for the Agreement were $105,650, $81,602 and $76,891
in 1996, 1995 and 1994, respectively.
F-19
<PAGE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value disclosures are reported in accordance with SFAS No.
107, "Disclosures About Fair Value of Financial Instruments." The
estimated fair value of securities is based primarily upon quoted market
prices within an active market. For the remaining financial instruments,
the estimated fair values presented are management's estimates of the
amount at which the instrument could be exchanged in a current transaction
between willing parties, based upon estimates using present value and
other valuation methods. As these estimates are significantly affected by
the assumptions used, estimated fair values may not be comparable between
entities, nor would they be realizable in an immediate liquidation of the
instruments. SFAS No. 107 excludes certain items including lease
contracts, from its disclosure requirements. Accordingly, the aggregate
fair value amounts presented are not intended to represent, and do not
represent, the underlying value of Liberty. The carrying values and
estimated fair values of Liberty's financial instruments at December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
--------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
<S> <C> <C> <C> <C>
Selected Assets:
Cash and due from banks $ 28,213 $ 28,213 $ 19,886 $ 19,886
Federal funds sold 11,968 11,968 8,746 8,746
Securities available for sale 97,479 97,479 119,248 119,248
Loans 392,212 396,387 317,527 320,344
Selected Liabilities:
Deposits 512,779 512,970 443,765 446,332
Federal funds purchased 8,780 8,780 6,825 6,825
Long-term borrowings 21,579 21,550 24,001 24,023
Off Balance Sheet Financial Instruments:
Commitments to extend credit - 96,940 - 75,880
</TABLE>
Cash and Due From Banks - The carrying value approximates estimated fair
value.
Federal Funds Sold - The carrying value approximates estimated fair value.
Securities - The estimated fair value of securities is based on quoted
market prices where available. Where not available, fair values are based
on quoted market prices of similar securities, adjusted for any
differences in credit ratings or maturities.
Loans - The estimated fair value of loans is calculated by discounting
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings and maturities, adjusted for
credit and prepayment risks.
Deposits - The estimated fair value of non-interest bearing and interest
bearing demand, money market and savings deposits is the amount payable on
demand at the reporting date. The fair value of time deposits is estimated
using a discounted cash flow calculation that applies rates currently
offered for deposits of similar remaining maturities.
F-20
<PAGE>
Federal Funds Purchased - The carrying value of federal funds purchased
approximate the estimated fair value.
Long-Term Borrowings - The fair value of long-term borrowings is estimated
using rates currently available for debt with similar terms and remaining
maturities.
Off-Balance Sheet Financial Instruments - The estimated fair value of
commitments to extend credit are estimated using the contractual rate
which approximates market rates.
15. COMMITMENTS
Liberty engages in certain off-balance sheet activities to meet the
financing needs of customers. Such activities consist principally of
commitments to extend credit and standby letters of credit. Exposure to
credit losses is represented by the contractual amounts of the commitments
to extend credit or standby letters of credit, and credit losses may be
incurred when a customer fails to perform in accordance with the
contractual terms. Liberty uses the same credit standards in making
commitments and conditional obligations as it uses for making loans.
Collateral may be obtained if deemed necessary by management's credit
evaluation. Collateral held varies, but generally may include receivables,
inventory, equipment or real estate. The contractual amounts of these
financial instruments at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
Commitments to extend credit:
Secured by commercial real estate $24,654 $22,338
Credit card lines 22,657 20,230
Home equity lines 4,107 718
Other commitments 43,975 31,110
Letters of credit 1,547 1,484
</TABLE>
Commitments to extend credit are contractual agreements to lend money to
customers for a specific period of time provided there is no violation of
any condition established in the contract. Such commitments may require
payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Letters of credit are issued on behalf of bank customers in connection
with contracts between the customers and third parties. Under a letter of
credit, the bank assured that the third party will not suffer a loss if
the customer fails to meet the contractual obligation.
16. CONTINGENCIES AND STATUTORY RESTRICTIONS
In the normal course of business, Liberty and its subsidiaries are
periodically involved in legal proceedings. Management is of the opinion,
after review with legal counsel, that there are no such actions at
December 31, 1996 or 1995 that would have a material effect upon the
consolidated financial statements.
F-21
<PAGE>
The subsidiaries of Liberty are required to maintain reserve balances at
the Federal Reserve Bank based upon deposit levels and other factors. The
average balances of reserves required to be maintained were $2,070,000 in
1996 and $1,737,000 in 1995.
17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS
CONDENSED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
(Unaudited)
1996 1995
<S> <C> <C>
ASSETS
Cash and due from banks $ 3,804 $ 487
Equity in subsidiaries 43,689 37,362
Equity in other financial institutions 980 1,827
Other assets 147 354
Goodwill and other intangible assets, net 7,480 661
------- -------
TOTAL ASSETS $56,100 $40,691
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Notes payable $11,653 $ 8,329
Other liabilities 1,408 308
------- -------
Total liabilities 13,061 8,637
------- -------
STOCKHOLDERS' EQUITY 43,039 32,054
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $56,100 $40,691
======= =======
</TABLE>
F-22
<PAGE>
17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Management fees from subsidiaries $ 957 $ 809 $ 723
Other income 458 206 182
------- ------- -------
Total income 1,415 1,015 905
------- ------- -------
EXPENSES:
Interest 779 818 781
Personnel 1,911 712 617
Amortization of goodwill 686 569 856
Professional fees 199 2 16
Other 401 427 381
------- ------- -------
Total expenses 3,976 2,528 2,651
------- ------- -------
INCOME BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED INCOME OF SUBSIDIARIES 2,561 1,513 1,746
INCOME TAX BENEFIT (339) (337) (310)
------- ------- -------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME OF SUBSIDIARIES 2,222 1,176 1,436
EQUITY IN UNDISTRIBUTED INCOME
OF SUBSIDIARIES 7,057 7,445 6,447
------- ------- -------
NET INCOME $ 4,835 $ 6,269 $ 5,011
======= ======= =======
</TABLE>
F-23
<PAGE>
17. PARENT COMPANY CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
1996 1995 1994
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,835 $ 6,269 $ 5,011
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed income of subsidiaries (2,649) (2,475) (4,323)
Amortization of goodwill 686 569 856
Decrease (increase) in other assets 207 (39) (57)
Increase (decrease) in other liabilities 1,100 86 (304)
------- ------- -------
Net cash provided by operating activities 4,179 4,410 1,183
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 752 - -
Investments in subsidiaries (4,554) (195) (832)
Investments in other financial institutions 95 (1,827) -
------- ------- -------
Net cash used in investing activities (3,707) (2,022) (832)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 4,300 600 644
Repayments of notes payable (976) (2,809) (1,096)
Dividends paid (479) - -
------- ------- -------
Net cash provided by (used in) financing activities 2,845 (2,209) (452)
------- ------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and cash equivalents 3,317 179 (101)
Balance, beginning of year 487 308 409
------- ------- -------
Balance, end of year $ 3,804 $ 487 $ 308
======= ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid (received):
Interest $ 758 $ 877 $ 818
Income tax refunds (367) (384) (160)
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of common stock in exchange for the minority
interest in common stock of consolidating entities, net 7,055 - -
</TABLE>
18. SUBSEQUENT EVENT - PENDING MERGER
On August 18, 1997 Liberty entered into a reorganization and merger
agreement with Commercial Federal Corporation (Commercial). Under the
terms of the merger agreement, and based on Commercial's closing stock
price on November 24, 1997 of $31.58 (adjusted for Commercial's
three-for-two stock split distributed on December 15, 1997), Commercial
will issue approximately 4,015,561
F-24
<PAGE>
shares (adjusted for Commercial's three-for-two stock split distributed on
December 15, 1997) of its common stock in a tax-free reorganization for all
8,748,500 shares of Liberty's common stock with an aggregate value of
approximately $126,811,000.
Following the proposed acquisition, Liberty will be merged with and into
Commercial Federal Bank, a wholly-owned subsidiary of Commercial. This
pending merger transaction, which is subject to regulatory approvals,
Liberty's stockholders' approvals and other conditions, is expected to be
consummated before March 31, 1998.
In connection with the proposed merger of Liberty with Commercial, Liberty
is obligated to pay at the merger consummation date an investment banking
advisory fee based on Commercial's per share stock price at closing which
is anticipated to be approximately $2,000,000.
F-25
<PAGE>
LIBERTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 (UNAUDITED) AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
ASSETS 1997 1996
<S> <C> <C>
CASH AND DUE FROM BANKS $ 26,024 $ 28,213
FEDERAL FUNDS SOLD 2,458 11,968
-------- --------
Total cash and cash equivalents 28,482 40,181
-------- --------
SECURITIES AVAILABLE FOR SALE, at fair value
amortized cost of $73,962 and $97,420 74,494 97,479
-------- --------
LOANS AND LEASES:
Commercial, financial and agricultural 203,473 174,537
Consumer 81,830 60,705
Real estate 182,334 156,970
Lease financing 44,217 44,920
-------- --------
Total loans and leases 511,854 437,132
Allowance for loan and lease losses 5,423 4,446
-------- --------
Net loans and leases 506,431 432,686
-------- --------
PREMISES AND EQUIPMENT, net 7,179 6,436
OTHER ASSETS 20,579 7,560
GOODWILL, net 7,105 13,863
-------- --------
TOTAL ASSETS $644,270 $598,205
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Non-interest bearing demand $ 69,071 $ 63,902
Interest bearing demand 69,810 70,368
Money market 77,620 61,828
Savings 55,554 52,282
Time 285,215 264,399
Total deposits 557,270 512,779
Federal funds purchased 405 8,780
Long-term borrowings 20,987 21,579
Accrued expenses and other liabilities 15,793 12,028
-------- --------
Total liabilities 594,455 555,166
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 20,000,000 shares
authorized; 8,748,501 shares issued and
outstanding 8,749 8,749
Additional paid in capital 7,055 7,055
Retained earnings 33,479 27,176
Unrealized holding gain on securities available
for sale, net 532 59
-------- --------
Total stockholders' equity 49,815 43,039
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $644,270 $598,205
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-26
<PAGE>
LIBERTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
For Nine Months Ended,
September 30,
----------------------------
1997 1996
<S> <C> <C>
INTEREST INCOME:
Loans and leases $ 36,887 $ 28,927
Taxable securities 3,361 4,348
Tax-exempt securities 533 710
Federal funds sold 621 437
---------- ----------
Total interest income 41,402 34,422
---------- ----------
INTEREST EXPENSE:
Deposits 16,437 14,103
Federal funds purchased 282 359
Long-term borrowings 1,431 1,545
---------- ----------
Total interest expense 18,150 16,007
---------- ----------
NET INTEREST INCOME 23,252 18,415
PROVISIONS FOR LOAN AND LEASE LOSSES 2,351 659
---------- ----------
NET INTEREST INCOME AFTER PROVISIONS FOR LOAN AND
LEASE LOSSES 20,901 17,756
---------- ----------
NONINTEREST INCOME:
Service charges and fees 1,764 1,456
Insurance commissions 482 487
Securities gains 80 10
Other 2,644 1,838
---------- ----------
Total noninterest income 4,970 3,791
---------- ----------
NONINTEREST EXPENSES:
Personnel 8,511 6,906
Occupancy 2,021 1,548
Data processing 586 525
Advertising and promotion 545 452
Professional fees 530 345
Telephone and postage 768 615
FDIC insurance 69 657
Amortization of goodwill 479 552
Other 3,097 2,762
---------- ----------
Total noninterest expenses 16,606 14,362
---------- ----------
INCOME BEFORE INCOME TAXES 9,265 7,185
PROVISION FOR INCOME TAX 2,962 2,653
---------- ----------
NET INCOME $ 6,303 $ 4,532
========== ==========
NET INCOME PER COMMON SHARE $ 0.72 $ 0.52
========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 8,748,500 8,748,500
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-27
<PAGE>
LIBERTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
For Nine Months Ended
September 30,
--------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,303 $ 4,532
Adjustments to reconcile net income to net cash provided (used)
by operating activities:
Depreciation and amortization 827 706
Provisions for loan and lease losses 2,351 659
Amortization and accretion 377 286
Amortization of goodwill 479 548
Gain on sale of available-for-sale securities (80) (10)
(Increase) decrease in other assets (6,740) 1,946
Increase in accrued expenses and other liabilities 3,765 2,920
-------- --------
Net cash provided by operating activities 7,282 11,587
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid for acquisitions - (1,832)
Net increase in loans and leases (76,096) (64,650)
Purchases of:
Securities available for sale (33,936) (20,864)
Premises and equipment (1,570) (1,573)
Proceeds from sales and maturities of:
Securities available for sale 57,097 36,038
-------- --------
Net cash used in investing activities (54,505) (52,881)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits 44,491 36,626
Net increase (decrease) in federal funds purchased (8,375) 4,385
Proceeds from issuance of long-term debt 3,148 2,700
Repayment of long-term debt (3,740) (5,364)
Cash dividends paid - (479)
-------- --------
Net cash provided by financing activities 35,524 37,868
-------- --------
CASH AND CASH EQUIVALENTS:
Decrease in cash and cash equivalents (11,699) (3,426)
Cash and cash equivalents, beginning of year 40,181 28,632
-------- --------
Cash and cash equivalents, end of period $ 28,482 $ 25,206
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid:
Interest $ 17,886 $ 15,705
Income taxes 2,938 2,685
NONCASH INVESTMENT AND FINANCING ACTIVITIES:
Loans transferred to foreclosed property $ - $ 695
</TABLE>
See accompanying notes to consolidated financial statements.
F-28
<PAGE>
LIBERTY FINANCIAL CORPORATION
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying, unaudited, interim financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for fair presentation have
been included. The results of operations for the nine months ended September
30, 1997, are not necessarily indicative of the results that may be expected
for further periods. For further information, refer to the audited financial
statements and footnotes hereto included in Liberty's annual report for the
year ended December 31, 1996.
F-29
<PAGE>
ANNEX A
<PAGE>
- --------------------------------------------------------------------------------
REORGANIZATION AND MERGER AGREEMENT
BY AND AMONG
COMMERCIAL FEDERAL CORPORATION
AND
LIBERTY FINANCIAL CORPORATION
DATED AS OF AUGUST 18, 1997
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
ARTICLE I THE MERGER AND RELATED MATTERS................ 2
1.1 Merger: Surviving Institution................. 2
1.2 Effective Time of the Merger.................. 2
1.3 Conversion of Shares.......................... 3
1.4 Surviving Corporation in the Merger........... 4
1.5 Authorization for Issuance of Commercial
Common Stock; Exchange of Certificates....... 5
1.6 No Fractional Shares.......................... 7
1.7 Shareholders' Approvals....................... 8
1.8 Registration Statement; Prospectus/Proxy
Statement.................................... 8
1.9 Cooperation; Regulatory Approvals............. 10
1.10 Closing....................................... 10
1.11 Closing of Transfer Books..................... 10
1.12 Bank Mergers.................................. 11
ARTICLE II REPRESENTATIONS AND WARRANTIES
OF COMPANY................................... 11
2.1 Organization, Good Standing, Authority,
Insurance, Etc................................ 11
2.2 Capitalization................................ 12
2.3 Ownership of Subsidiaries..................... 12
2.4 Financial Statements and Reports.............. 12
2.5 Absence of Changes............................ 13
2.6 Prospectus/Proxy Statement.................... 14
2.7 No Broker's or Finder's Fees.................. 14
2.8 Litigation and Other Proceedings.............. 14
2.9 Compliance with Law........................... 14
2.10 Corporate Actions............................. 15
2.11 Authority..................................... 15
2.12 Employment Arrangements....................... 16
2.13 Employee Benefits............................. 16
2.14 Information Furnished......................... 17
2.15 Property and Assets........................... 18
2.16 Agreements and Instruments.................... 18
2.17 Material Contract Defaults.................... 19
2.18 Tax Matters................................... 19
2.19 Environmental Matters......................... 20
2.20 Loan Portfolio; Portfolio Management.......... 20
2.21 Real Estate Loans and Investments............. 21
2.22 Derivatives Contracts......................... 21
2.23 Insurance..................................... 21
2.24 Stockholder Agreement......................... 22
i
<PAGE>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMMERCIAL.. 22
3.1 Organization, Good Standing, Authority,
Insurance, Etc............................... 22
3.2 Capitalization................................ 23
3.3 Ownership of Subsidiaries..................... 23
3.4 Financial Statements and Reports.............. 23
3.5 Absence of Changes............................ 24
3.6 Prospectus/Proxy Statement.................... 24
3.7 No Broker's or Finder's Fees.................. 25
3.8 Compliance With Law........................... 25
3.9 Corporate Actions............................. 25
3.10 Authority..................................... 26
3.11 Information Furnished......................... 26
3.12 Litigation and Other Proceedings.............. 26
3.13 Agreements and Instruments.................... 27
ARTICLE IV COVENANTS..................................... 27
4.1 Investigations; Access and Copies............. 27
4.2 Conduct of Business of the Company and the
Company Subsidiaries......................... 27
4.3 No Solicitation............................... 29
4.4 Shareholder Approval.......................... 30
4.5 Filing of Holding Company and Merger
Applications................................. 30
4.6 Consents...................................... 30
4.7 Resale Letter Agreements...................... 30
4.8 Publicity..................................... 30
4.9 Cooperation Generally......................... 31
4.10 Additional Financial Statements and Reports... 31
4.11 Stock Listing................................. 31
4.12 Conforming Adjustments........................ 31
4.13 D&O Indemnification and Insurance............. 32
4.14 Employment Benefits........................... 32
4.15 Board of Directors............................ 33
4.16 Update Disclosures............................ 33
4.17 Liberty-Pocahontas............................ 33
ARTICLE V CONDITIONS OF THE MERGER; TERMINATION
OF AGREEMENT................................. 33
5.1 General Conditions............................ 33
5.2 Conditions to Obligations of Commercial....... 34
5.3 Conditions to Obligations of Company.......... 37
5.4 Termination of Agreement and Abandonment
of Merger.................................... 38
ARTICLE VI TERMINATION OF OBLIGATIONS; PAYMENT OF
EXPENSES..................................... 40
6.1 Termination; Lack of Survival of
Representations and Warranties................ 40
6.2 Payment of Expenses........................... 41
ii
<PAGE>
ARTICLE VII CERTAIN POST-MERGER AGREEMENTS................ 42
7.1 Reports to the SEC............................ 42
7.2 Employees..................................... 42
ARTICLE VIII GENERAL....................................... 42
8.1 Amendments.................................... 42
8.2 Confidentiality............................... 43
8.3 Governing Law................................. 43
8.4 Notices....................................... 43
8.5 No Assignment................................. 44
8.6 Headings...................................... 44
8.7 Counterparts.................................. 44
8.8 Construction and Interpretation............... 44
8.9 Entire Agreement.............................. 44
8.10 Severability.................................. 45
8.11 No Third Party Beneficiaries.................. 45
8.12 Enforcement of Agreement...................... 45
Schedules:
Schedule I Disclosure Schedule for the Company............
Schedule II Disclosure Schedule for Commercial
and the Bank...................................
Exhibits:
Exhibit 1.1(a) Form of Voting Agreement....................
Exhibit 1.1(b) Form of Acquisition Plan of Merger..........
Exhibit 4.14(a) Form of Employment Agreement................
Exhibit 5.2(a) Form of Opinion of Counsel for
the Company................................
Exhibit 5.3(a) Form of Opinion of Counsel for Commercial...
Exhibit 5.4(e) Index Group.................................
iii
<PAGE>
REORGANIZATION AND MERGER AGREEMENT
==============================================================================
THIS REORGANIZATION AND MERGER AGREEMENT ("Agreement") is dated as of
August 18, 1997, by and among COMMERCIAL FEDERAL CORPORATION, a Nebraska
corporation ("Commercial") and LIBERTY FINANCIAL CORPORATION, an Iowa
corporation ("Company").
WHEREAS, Commercial, a non-diversified, unitary savings and loan
holding company, with principal offices in Omaha, Nebraska, owns all of the
issued and outstanding capital stock of Commercial Federal Bank, a Federal
Savings Bank (the "Bank"), with its principal offices in Omaha, Nebraska;
WHEREAS, Company, a registered bank holding company under the Bank
Holding Company Act of 1956, as amended (the "BHCA"), with principal offices in
West Des Moines, Iowa, owns all of the issued and outstanding capital stock of
Liberty Bank & Trust, Bloomfield, Liberty Bank & Trust, Forest City, Liberty
Bank & Trust, Johnston, Liberty Bank & Trust, Lake Mills, Liberty Bank & Trust,
Mason City, Liberty Bank & Trust, N.A., Pocahontas, Liberty Bank & Trust, Tucson
and Liberty Bank & Trust, Woodbine with offices in Iowa and Arizona
(collectively, the "Liberty Banks") except as set forth in Section 2.3 of
Schedule I.
WHEREAS, Commercial and Company desire to combine their respective
holding companies through an exchange so that the respective shareholders of
both Commercial and Company will have an equity ownership in the combined
holding company;
WHEREAS, following the combination of Commercial and Company it is
intended that Bank and the Liberty Banks will be merged such that the resulting
holding company will retain the advantage of a unitary savings and loan holding
company status and that the resulting savings institution will achieve certain
economies of scale and efficiencies as a result of such subsequent merger;
WHEREAS, it is intended that to accomplish this result, the Company
will be acquired by means of a merger (the "Acquisition Merger") of the Company
with and into Commercial, followed by the merger of the Liberty Banks with and
into the Bank (the "Bank Mergers").
WHEREAS, concurrently with the execution and delivery of this
Agreement, and as a condition and inducement to Commercial's willingness to
enter into this Agreement, each of the directors of the Company has entered into
a voting agreement in the form attached hereto as Exhibit 1.1(a) (the "Voting
Agreements");
WHEREAS, it is intended that (i) for federal income tax purposes, the
Merger shall qualify as a reorganization within the meaning of Section 368 of
the Internal Revenue Code of 1986, as amended (the "Code") and this Agreement
shall constitute a plan of
1
<PAGE>
reorganization pursuant to Section 368 of the Code, and (ii) the Acquisition
Merger shall qualify for pooling of interests accounting treatment under
generally accepted accounting principles; and
WHEREAS, the Boards of Directors of Commercial and the Company (at
meetings duly called and held) have determined that this Agreement and the
transactions contemplated hereby are in the best interests of Commercial and the
Company, respectively, and their respective stockholders and have approved this
Agreement.
NOW THEREFORE, in consideration of the premises and mutual promises
hereinafter set forth, and of other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE I
THE MERGER AND RELATED MATTERS
1.1 Merger: Surviving Institution. Subject to the terms and
-----------------------------
conditions of this Agreement, and pursuant to the provisions of the Nebraska
Business Corporation Act ("NBCA") and the Iowa Business Corporation Act
("IBCA"), at the Acquisition Merger Effective Time (as hereinafter defined), the
Company shall be merged with and into Commercial pursuant to the terms and
conditions set forth herein and in the Plan of Merger to be set forth as Exhibit
1.1(b) attached hereto (the "Acquisition Plan of Merger") and the separate
corporate existence of the Company shall cease. The Acquisition Merger shall
have the effects specified in the NBCA and the IBCA, Section 1.4(e) hereof and
the Acquisition Plan of Merger. Upon the consummation of the Acquisition
Merger, the separate corporate existence of the Company shall cease and
Commercial shall continue as the surviving corporation following the Acquisition
Merger (Commercial is sometimes referred to herein in such capacity as the
"Surviving Corporation"). Commercial may at any time change the method of
effecting the Merger if and to the extent it deems such change to be desirable,
provided, however, that no such change shall (A) alter or change the amount or
- -------- -------
kind of consideration to be issued to holders of Company common stock as
provided for in this Agreement, (B) adversely affect the tax treatment to
Company shareholders as a result of receiving the consideration described in
Section 1.3 herein or (C) materially impede or delay the consummation of the
transactions contemplated by this Agreement.
1.2 Effective Time of the Merger. As soon as practicable after each
----------------------------
of the conditions set forth in Article V hereof have been satisfied or waived,
Commercial and the Company will file, or cause to be filed, articles of merger
with appropriate authorities of Nebraska and Iowa which articles of merger shall
in each case be in the form required by and executed in accordance with
applicable provisions of law. The Acquisition Merger shall become effective at
the time and date which is the later of the time at which
2
<PAGE>
(i) the Nebraska articles of merger are filed with the appropriate authorities
of Nebraska and (ii) the Iowa articles of merger are filed with the appropriate
authorities of Iowa (the "Acquisition Merger Effective Time"), which shall be
immediately following the Closing (as defined in Section 1.11 herein) and on the
same day as the Closing if practicable.
1.3 Conversion of Shares.
--------------------
(a)(i) At the Acquisition Merger Effective Time, by virtue of the
Merger and without any action on the part of Commercial or Company or the
holders of shares of Commercial or Company common stock, each outstanding share
of Company common stock issued and outstanding at the Acquisition Merger
Effective Time (except for Dissenting Shares (as such term is defined in
paragraph (c) below)and shares referred to in subparagraph (ii) of this Section
1.3) shall be converted into and exchanged for the right to receive 0.306 of a
share of Commercial common stock (the "Exchange Ratio"), subject to adjustment
as set forth in subparagraph (a)(v) of this Section 1.3.
(ii) Any shares of Company common stock which are owned or held by
Company or any of its subsidiaries (except shares held in any 401(k) plan of the
Company or any of its subsidiaries or held in a fiduciary capacity) or by
Commercial or any of Commercial's subsidiaries (other than in a fiduciary
capacity) at the Acquisition Merger Effective Time shall cease to exist, and the
certificates for such shares shall as promptly as practicable be cancelled and
no shares of capital stock of Commercial shall be issued or exchanged therefor.
(iii) Each share of common stock of Commercial issued and outstanding
immediately prior to the Acquisition Merger Effective Time shall remain an
outstanding share of common stock of the Surviving Corporation.
(iv) At the Acquisition Merger Effective Time, the holders of
certificates representing shares of Company common stock shall cease to have any
rights as stockholders of the Company, except the right to receive the Merger
Consideration as provided herein.
(v) If the holders of Commercial common stock shall have received or
shall have become entitled to receive, without payment therefor, during the
period commencing on the date hereof and ending with the Acquisition Merger
Effective Time, additional shares of common stock or other securities for their
stock by way of a stock split, stock dividend, reclassification, combination of
shares or similar corporate rearrangement ("Stock Adjustment"), then the
Exchange Ratio shall be proportionately adjusted to take into account such Stock
Adjustment. In addition, the Average NYSE Closing Price, as defined below,
shall be proportionately adjusted to compensate for any such Stock Adjustment.
3
<PAGE>
(b) Each share of Commercial common stock to be issued to the
Company's shareholders pursuant to this Section 1.3 shall include the
corresponding number of rights associated with the Commercial common stock
pursuant to the Rights Agreement dated as of December 19, 1988 by and between
Commercial and Manufacturers Hanover Trust Company, as Rights Agent ("Commercial
Rights Agreement").
(c) Dissenting Shares. Any shares of Company common stock held by a
-----------------
holder who dissents from the Acquisition Merger and becomes entitled to obtain
payment for the value of such shares of Company common stock pursuant to the
applicable provisions of the IBCA shall be herein called "Dissenting Shares."
Any Dissenting Shares shall not, after the Acquisition Merger Effective Time, be
entitled to vote for any purpose or receive any dividends or other distributions
and shall not be entitled to receive the Merger Consideration; provided,
however, that shares of Company common stock held by a dissenting stockholder
who subsequently withdraws a demand for payment, fails to comply fully with the
requirements of the IBCA, or otherwise fails to establish the right of such
stockholder to be paid the value of such stockholders' shares under the IBCA
shall be deemed to be converted into the right to receive the Merger
Consideration pursuant to the terms and conditions referred to above.
(d) The term "Average NYSE Closing Price" shall mean the arithmetic
mean of the closing price per share (carried to the fourth decimal point) of the
Commercial common stock on the New York Stock Exchange ("NYSE") for the twenty-
fifth through the sixth trading day, inclusive, immediately preceding the
business day prior to the later of (A) the date on which all requisite federal
and state regulatory approvals required to consummate the transactions
contemplated by this Agreement, including the Bank Mergers, are obtained (and
Commercial shall notify the Company of the date when all such approvals are
obtained), including for this purpose the period of any requisite waiting
periods in respect thereof, or (B) the date the Company obtains the requisite
approval of its shareholders herein (the "Determination Period").
1.4 Surviving Corporation in the Merger.
-----------------------------------
(a) The name of the Surviving Corporation in the Acquisition Merger
shall be Commercial Federal Corporation.
(b) The Articles of Incorporation of Commercial as in effect
immediately prior to the Acquisition Merger Effective Time shall be the Articles
of Incorporation of the Surviving Corporation as the Surviving Corporation.
(c) The bylaws of Commercial, together with all amendments thereto, if
any, as in effect immediately prior to the Acquisition Merger Effective Time,
shall thereafter be the bylaws of the Surviving Corporation, until amended as
provided therein or by law.
4
<PAGE>
(d) Except as otherwise specified by this Agreement, the directors and
officers of Commercial in office immediately prior to the Acquisition Merger
Effective Time shall be the directors and officers of the Surviving Corporation
following the Acquisition Merger, until their successors shall be duly elected
and qualified.
(e) From and after the Acquisition Merger Effective Time:
(i) The Surviving Corporation shall possess all assets and property of
every description, and every interest in the assets and property, wherever
located, and the rights, privileges, immunities, powers, franchises, and
authority, of a public as well as of a private nature, of the Company, and all
obligations belonging or due to each of Commercial and the Company, all of which
are vested in the Surviving Corporation without further act or deed. Title to
any real estate or any interest in the real estate vested in Commercial or the
Company shall not revert or in any way be impaired by reason of the Acquisition
Merger.
(ii) The Surviving Corporation shall be liable for all the obligations
of each of Commercial and Company. Any claim existing, or action or proceeding
pending, by or against the Company or Commercial, may be prosecuted to judgment,
with right of appeal, as if the Acquisition Merger had not taken place, or the
Surviving Corporation may be substituted in its place.
(iii) All the rights of creditors of each of Company and Commercial
shall be preserved unimpaired, and all liens upon the property of Company and
Commercial are preserved unimpaired, on only the property affected by such liens
immediately prior to the Acquisition Merger Effective Time.
1.5 Authorization for Issuance of Commercial Common Stock;
------------------------------------------------------
Exchange of Certificates.
------------------------
(a) Commercial shall reserve for issuance a sufficient number of
shares of its common stock for the purpose of issuing its shares to the
Company's shareholders in accordance with this Article I. Immediately prior to
the Acquisition Merger Effective Time, Commercial shall make available for
exchange or conversion, by transferring to an exchange agent appointed by
Commercial (the "Exchange Agent") for the benefit of the holders of Company
common stock: (i) such number of whole shares of Company common stock as shall
be issuable in connection with the payment of the aggregate Merger
Consideration, and (ii) such funds as may be payable in lieu of fractional
shares of Commercial common stock.
5
<PAGE>
(b) After the Acquisition Merger Effective Time, holders of
certificates theretofore evidencing outstanding shares of Company common stock
(other than Dissenting Shares and as provided in Section 1.3(a)(ii)), upon
surrender of such certificates to the Exchange Agent, shall be entitled to
receive certificates representing the number of whole shares of Commercial
common stock into which shares of Company common stock theretofore represented
by the certificates so surrendered shall have been converted, as provided in
Section 1.3 hereof and cash payments in lieu of fractional shares as provided in
Section 1.6 hereof. As soon as practicable after the Acquisition Merger
Effective Time, the Exchange Agent will send a notice and transmittal form to
each Company shareholder of record at the Acquisition Merger Effective Time
whose Company stock shall have been converted into Commercial common stock
advising such shareholder of the effectiveness of the Acquisition Merger and the
procedure for surrendering to the Exchange Agent outstanding certificates
formerly evidencing Company common stock in exchange for new certificates for
Commercial common stock and for cash payable in lieu of any fractional interest.
Upon surrender, each certificate evidencing Company common stock shall be
cancelled.
(c) Until surrendered as provided in this Section 1.5 hereof, each
outstanding certificate which, prior to the Acquisition Merger Effective Time,
represented Company common stock (other than Dissenting Shares and shares
cancelled at the Acquisition Merger Effective Time pursuant to Section
1.3(a)(ii) hereof) will be deemed for all corporate purposes to evidence
ownership of the number of whole shares of Commercial common stock into which
the shares of Company common stock formerly represented thereby were converted
and the right to receive cash in lieu of any fractional interest. However,
until such outstanding certificates formerly representing Company common stock
are so surrendered, no dividend or distribution payable to holders of record of
Commercial common stock shall be paid to any holder of such outstanding
certificates, but upon surrender of such outstanding certificates by such holder
there shall be paid to such holder the amount of any dividends or distribution,
without interest, theretofore paid with respect to such whole shares of
Commercial common stock, but not paid to such holder, and which dividends or
distribution had a record date occurring on or subsequent to the Acquisition
Merger Effective Time and the amount of any cash, without interest, payable to
such holder in lieu of fractional shares pursuant to Section 1.6 hereof. After
the Acquisition Merger Effective Time, there shall be no further registration of
transfers on the records of the Company of outstanding certificates formerly
representing shares of Company common stock and, if a certificate formerly
representing such shares is presented to Commercial, it shall be forwarded to
the Exchange Agent for cancellation and exchange for certificates representing
shares of Commercial common stock as herein provided.
6
<PAGE>
(d) All shares of Commercial common stock and cash in lieu of any
fractional share issued and paid upon the surrender for exchange of Company
common stock in accordance with the above terms and conditions shall be deemed
to have been issued in full satisfaction of all rights pertaining to such shares
of Company common stock.
(e) If any new certificate for Commercial common stock is to be issued
in the name other than that in which the certificate surrendered in exchange
thereof is registered, it shall be a condition of the issuance therefor that the
certificate surrendered in exchange shall be properly endorsed and otherwise in
proper form for transfer and that the person requesting such transfer pay to the
Exchange Agent any transfer or other taxes required by reason of the issuance of
a new certificate for shares of Commercial common stock in any name other than
that of the registered holder of the certificate surrendered, or establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
payable.
(f) In the event any certificate for Company common stock shall have
been lost, stolen or destroyed, the Exchange Agent shall issue in exchange for
such lost, stolen or destroyed certificate, upon the making of an affidavit of
that fact by the holder thereof, such shares of Commercial common stock and cash
in lieu of fractional shares, if any, as may be required pursuant hereto;
provided, however, that Commercial may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate to deliver a bond in such sum as it may direct as
indemnity against any claim that may be made against Commercial, the Company,
the Exchange Agent or any other party with respect to the certificate alleged to
have been lost, stolen or destroyed.
1.6 No Fractional Shares. Notwithstanding any term or provision
--------------------
hereof, no fractional shares of Commercial common stock, and no certificates or
scrip therefor, or other evidence of ownership thereof, will be issued in
exchange for any shares of Company common stock; no dividend or distribution
with respect to Commercial common stock shall be payable on or with respect to
any fractional share interests; and no such fractional share interest shall
entitle the owner thereof to vote or to any other rights of a shareholder of
Commercial. In lieu of such fractional share interest, any holder of Company
common stock who would otherwise be entitled to a fractional share of Commercial
common stock will, upon surrender of his certificate or certificates
representing Company common stock outstanding immediately prior to the
Acquisition Merger Effective Time, be paid the applicable cash value of such
fractional share interest, which shall be equal to the product of the fraction
multiplied by the Average NYSE Closing Price. For the purposes of determining
any such fractional share interests, all shares of Commercial common stock
received by the holders of the Company common stock shall be combined so as to
7
<PAGE>
calculate the maximum number of whole shares of Commercial common stock issuable
to such Company shareholder in the Acquisition Merger.
1.7 Shareholders' Approvals.
-----------------------
(a) The Company shall, at the earliest practicable date after delivery
to its shareholders of the Prospectus/Proxy Statement provided for in Section
1.8 below, obtain approval to the Merger of its shareholders by consent or
otherwise (the "Shareholders Approval"). The affirmative approval of the
holders of at least a majority of the issued and outstanding shares of Company
common stock entitled to vote shall be required for such approval.
(b) Commercial shall, at the earliest practicable date, obtain
approval of its shareholders of an amendment to its Articles of Incorporation to
increase the number of authorized shares of Commercial common stock to
50,000,000.
1.8 Registration Statement; Prospectus/Proxy Statement.
--------------------------------------------------
(a) For the purposes (i) of registering the Commercial common stock to
be issued to holders of Company common stock in connection with the Merger with
the Securities and Exchange Commission ("SEC") and with applicable state
securities authorities, and (ii) of obtaining the Shareholders Approval, the
parties hereto shall cooperate in the preparation of an appropriate registration
statement (such registration statement, together with all and any amendments and
supplements thereto, being herein referred to as the "Registration Statement"),
including the prospectus/proxy statement (or information statement) satisfying
all applicable requirements of applicable state laws, and of the Securities Act
of 1933 (the "1933 Act") and the Securities Exchange Act of 1934 (the "1934
Act") and the rules and regulations thereunder (such prospectus/proxy statement
or information statement, together with any and all amendments or supplements
thereto, being herein referred to as the "Prospectus/Proxy Statement").
(b) Commercial shall furnish such information concerning Commercial
and the Commercial Subsidiaries (as defined in Section 3.1 hereof) as is
necessary in order to cause the Prospectus/Proxy Statement, insofar as it
relates to such corporations, to comply with Section 1.8(a) hereof. Commercial
agrees promptly to advise the Company if at any time prior to the Company
Shareholders Approval any information provided by Commercial in the
Prospectus/Proxy Statement becomes incorrect or incomplete in any material
respect and to provide the information needed to correct such inaccuracy or
omission. Commercial shall promptly file such supplemental information as may be
necessary in order to cause such Prospectus/Proxy Statement, insofar as it
relates to Commercial and the Commercial Subsidiaries, to comply with Section
1.8(a).
8
<PAGE>
(c) The Company shall furnish Commercial with such information
concerning the Company and the Company Subsidiaries (as defined in Section 2.1
hereof) as is necessary in order to cause the Prospectus/Proxy Statement,
insofar as it relates to such corporations, to comply with Section 1.8(a)
hereof. The Company agrees promptly to advise Commercial if at any time prior
to the Company Shareholders Approval any information provided by the Company in
the Prospectus/Proxy Statement becomes incorrect or incomplete in any material
respect and to provide Commercial with the information needed to correct such
inaccuracy or omission. The Company shall furnish Commercial with such
supplemental information as may be necessary in order to cause the
Prospectus/Proxy Statement, insofar as it relates to the Company and the Company
Subsidiaries, to comply with Section 1.8(a).
(d) Commercial shall as expeditiously as possible file the
Registration Statement with the SEC and applicable state securities agencies.
Commercial shall use all reasonable efforts to cause the Registration Statement
to become effective under the 1933 Act and applicable state securities laws at
the earliest practicable date. The Company authorizes Commercial to utilize in
the Registration Statement the information concerning the Company and the
Company Subsidiaries provided to Commercial for the purpose of inclusion in the
Prospectus/Proxy Statement. The Company shall have the right to review and
comment on the form of proxy statement included in the Registration Statement as
well as those portions containing or describing information concerning the
Company. Commercial shall advise Company promptly when the Registration
Statement has become effective and of any supplements or amendments thereto, and
Commercial shall furnish Company with copies of all such documents. Prior to
the Acquisition Merger Effective Time or the termination of this Agreement, each
party shall consult with the other with respect to any material (other than
the Prospectus/Proxy Statement) that might constitute a "prospectus" relating to
the Merger within the meaning of the 1933 Act.
(e) The Company shall consult with Commercial in order to determine
whether any directors, officers or shareholders of the Company may be deemed to
be "affiliates" of Company ("affiliated persons") within the meaning of Rule 145
of the SEC promulgated under the 1933 Act. All shares of Commercial common
stock issued to such Company affiliated persons in connection with the Merger
shall bear a legend upon the face thereof stating that transfer of the
securities is or may be restricted by the provisions of the 1933 Act and/or
pooling of interests accounting requirements (if applicable), and notice shall
be given to Commercial's transfer agent of such restriction, provided that such
legend shall be removed by delivery of a substitute certificate without such
legend if such Company affiliated person shall have delivered to Commercial a
copy of a letter from the staff of the SEC or an opinion of counsel, in form and
substance satisfactory to Commercial, to the effect that such legend is not
required for purposes of the 1933 Act, and, in any event, at any time after the
9
<PAGE>
expiration of two years from the Acquisition Merger Effective Time unless, in
the opinion of the counsel for Commercial, such person was an "affiliate" of
Commercial within the meaning of Rule 145 within three months prior to the
expiration of such two year period. So long as shares of such Commercial common
stock bear such legend, no transfer of such Commercial common stock shall be
allowed unless and until the transfer agent is provided with such information as
may reasonably be requested by counsel for Commercial to assure that such
transfer will not violate applicable provisions of the 1933 Act, or rules,
regulations or policies of the SEC. The requirements imposed by this Section
1.8(e) relating to pooling of interests accounting may be waived by Commercial
in writing.
1.9 Cooperation; Regulatory Approvals. The parties shall cooperate
---------------------------------
and use reasonable best efforts to complete the transactions contemplated
hereunder at the earliest practicable date. Each party shall cause each of
their affiliates and subsidiaries to cooperate, in the preparation and
submission by them, as promptly as reasonably practicable, of such applications,
petitions, and other documents and materials as any of them may reasonably deem
necessary or desirable to the Board of Governors of the Federal Reserve System
("FRB"), the Office of the Comptroller of the Currency ("OCC"), the Federal
Deposit Insurance Corporation ("FDIC"), the Superintendent of Banking of Iowa,
the Superintendent of Banking of Arizona, the Office of Thrift Supervision
("OTS"), Federal Trade Commission ("FTC"), Department of Justice ("DOJ"), SEC,
applicable Secretary of State, other regulatory authorities, holders of the
voting shares of common stock of the Company, and any other persons for the
purpose of obtaining any approvals or consents necessary to consummate the
transactions contemplated by this Agreement. At the date hereof, none of the
parties is aware of any reason that the regulatory approvals required to be
obtained by it would not be obtained.
1.10 Closing. If (i) this Agreement has been duly approved by the
-------
shareholders of the Company, and (ii) all relevant conditions of this Agreement
have been satisfied or waived, a closing (the "Closing") shall take place as
promptly as practicable thereafter at the principal office of Commercial at
which the parties hereto will exchange certificates, opinions, letters and other
documents as required hereby and will make the filings described in Section 1.2
hereof. Such Closing will take place as soon as practicable as agreed by the
parties, provided, however, that the Closing shall be no more than thirty (30)
-------- -------
days after the satisfaction or waiver of all conditions and/or obligations
contained in Article V of this Agreement.
1.11 Closing of Transfer Books. At the Acquisition Merger Effective
-------------------------
Time, the transfer books for Company common stock shall be closed, and no
transfer of shares of Company common stock shall thereafter be made on such
books.
10
<PAGE>
1.12 Bank Mergers. Immediately following the Acquisition Merger
------------
Effective Time, each of the Liberty Banks shall be merged with and into the
Bank, pursuant to all applicable laws. The Company agrees to take all
reasonable actions requested by Commercial so that the Bank Mergers may be
effectuated at such time.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
Company represents and warrants to Commercial that, except as
disclosed in Schedule I attached hereto:
2.1 Organization, Good Standing, Authority, Insurance, Etc. The
------------------------------------------------------
Company is a corporation duly organized, validly existing and in good standing
under the laws of the State of Iowa. Section 2.1 of Schedule I lists each
direct and indirect subsidiary of the Company(individually a "Company
Subsidiary" and collectively the "Company Subsidiaries") (unless otherwise noted
herein all references to a "Company Subsidiary" or to the "Company Subsidiaries"
shall include the Liberty Banks). Each of the Company Subsidiaries is duly
organized, validly existing, and in good standing under the laws of the
respective jurisdiction under which it is organized, as set forth in Section 2.1
of Schedule I. The Company and each Company Subsidiary has all requisite power
and authority and is duly qualified and licensed to own, lease and operate its
properties and conduct its business as it is now being conducted. The Company
has delivered to Commercial a true, complete and correct copy of the articles of
incorporation, charter, or other organizing document and of the bylaws, as in
effect on the date of this Agreement, of Company and each Company Subsidiary.
The Company and each Company Subsidiary is qualified to do business as a foreign
corporation and is in good standing in each jurisdiction in which qualification
is necessary under applicable law, except to the extent that any failures to so
qualify would not, in the aggregate, have a material adverse effect on the
business, financial condition or results of operations of the Company and the
Company Subsidiaries, taken as a whole. Liberty Bank & Trust, Johnston, Iowa is
a member in good standing of the Federal Home Loan Bank of Des Moines and all
eligible accounts issued by it are insured by the Savings Association Insurance
Fund ("SAIF") to the maximum extent permitted under applicable law. All eligible
accounts of the remaining Liberty Banks are insured by the Bank Insurance Fund
("BIF") to the maximum extent permitted under applicable law. The Company is
duly registered as a bank holding company under the BHCA.
The minute books of the Company and the Company's Subsidiaries contain
complete and accurate records of all meetings and other corporate actions held
or taken of their respective shareholders and Boards of Directors (including the
committees of such Boards).
11
<PAGE>
2.2 Capitalization. The authorized capital stock of the Company
--------------
consists of (i) 20,000,000 shares of common stock, par value $1.00 per share, of
which 8,748,500 shares were issued and outstanding as of the date of this
Agreement. All outstanding shares of Company common stock are duly authorized,
validly issued, fully paid, nonassessable and free of preemptive rights. Except
as set forth in Section 2.2 of Schedule I, there are no options, convertible
securities, warrants, or other rights (preemptive or otherwise) to purchase or
acquire any of the Company's capital stock from the Company and no oral or
written agreement, contract, arrangement, understanding, plan or instrument of
any kind (collectively, "Stock Contract") to which the Company or any of its
affiliates is subject with respect to the issuance, voting or sale of issued or
unissued shares of the Company's capital stock. Neither the Company nor any
Company Subsidiary is aware of any event or circumstance that would disqualify
the Acquisition Merger from being accounted for as a pooling of interests.
2.3 Ownership of Subsidiaries. Except as set forth in Section 2.3 of
-------------------------
Schedule I, all the outstanding shares of the capital stock of the Company
Subsidiaries are validly issued, fully paid, nonassessable and owned
beneficially and of record by the Company or a Company Subsidiary free and clear
of any lien, claim, charge, restriction or encumbrance (collectively,
"Encumbrance"). Except as set forth in Section 2.3 of Schedule I, all of the
outstanding capital stock or other ownership interests in all of the Company
Subsidiaries is owned by the Company. There are no options, convertible
securities, warrants, or other rights (preemptive or otherwise) to purchase or
acquire any capital stock of any Company Subsidiary and no contracts to which
the Company or any of its affiliates is subject with respect to the issuance,
voting or sale of issued or unissued shares of the capital stock of any of the
Company Subsidiaries. Neither the Company nor any Company Subsidiary owns any
of the capital stock or other equity securities (including securities
convertible or exchangeable into such securities) of or profit participations in
any company except as set forth in Section 2.3 of Schedule I.
2.4 Financial Statements and Reports.
--------------------------------
For the past five years, the Company and the Company Subsidiaries have
timely filed all reports and documents required to be filed by them with the
FRB, OCC, the OTS, the State Banking Department of Iowa, State Banking
Department of Arizona or the FDIC under various financial institution laws and
regulations except to the extent that all failures to so file, in the aggregate,
would not have a material adverse effect on the business, financial condition or
results of operations of the Company and the Company Subsidiaries, taken as a
whole; and all such documents, as finally amended, complied in all material
respects with applicable requirements of law and, as of their respective date or
the date as amended, did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the
12
<PAGE>
circumstances under which they were made, not misleading. Except to the extent
stated therein or in Section 2.4 to Schedule I, all financial statements and
schedules included in the documents referred to in the preceding sentences (or
to be included in similar documents to be filed after the date hereof) (i) are
or will be (with respect to financial statements in respect of periods ending
after December 31, 1996) in accordance with the Company's books and records and
those of any of the Company Subsidiaries, and (ii) present (and in the case of
financial statements in respect of periods ending after December 31, 1996, will
present) fairly the consolidated balance sheet and the consolidated statements
of operations, stockholders' equity and cash flows of the Company and the
Company Subsidiaries as of the dates and for the period indicated in accordance
with generally accepted accounting principles applied on a basis consistent with
prior periods (except for the omission of notes to unaudited statements, year
end adjustments to interim results and changes to generally accepted accounting
principles). The consolidated financial statements of the Company at December
31, 1996 and for the one year then ended and the consolidated financial
statements for all periods thereafter up to the Closing reflect or will reflect,
as the case may be, all liabilities (whether accrued, absolute, contingent,
unliquidated or otherwise, whether due or to become due and regardless of when
asserted) of the Company and the Company Subsidiaries required to be reflected
in such financial statements according to generally accepted accounting
principles and contain or will contain adequate reserves for losses on loans and
properties acquired in settlement of loans, taxes and all other material accrued
liabilities and for all reasonably anticipated material losses, if any as of
such date. There exists no set of circumstances that could reasonably be
expected to result in any liability or obligation material to the Company or the
Company Subsidiaries, taken as a whole, except as disclosed in such consolidated
financial statements at December 31, 1996 or for transactions effected or
actions occurring or omitted to be taken after December 31, 1996 (i) in the
ordinary course of business, or (ii) as permitted by this Agreement.
2.5 Absence of Changes.
------------------
(a) Since December 31, 1996, there has been no material adverse change
in the business, properties, financial condition, results of operations or
assets of the Company and the Company Subsidiaries, taken as a whole. There is
no occurrence, event or development of any nature existing or, to the best
knowledge of the Company, threatened which may reasonably be expected to have a
material adverse effect upon the business, properties, financial condition,
operations or assets of Company or any Company Subsidiary.
(b) Except as set forth in Section 2.5 of Schedule I, since December
31, 1996, each of the Company and the Company Subsidiaries has owned and
operated their respective assets,
13
<PAGE>
properties and businesses in the ordinary course of business and consistent with
past practice.
2.6 Prospectus/Proxy Statement. At the time the Prospectus/ Proxy
--------------------------
Statement is mailed to the shareholders of the Company for the solicitation of
proxies or consents for the approvals referred to in Section 1.7(a) hereof and
at all times subsequent to such mailings up to and including the times of such
approval, such Prospectus/Proxy Statement (including any supplements thereto),
with respect to all information set forth therein relating to the Company
(including the Company Subsidiaries), its shareholders and representatives,
Company common stock and all other transactions contemplated hereby, will:
(a) Comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act and the rules and regulations under such Acts; and
(b) Not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
it is made, not misleading.
2.7 No Broker's or Finder's Fees. Except as set forth in Section 2.7
----------------------------
of Schedule I, no agent, broker, investment banker, person or firm acting on
behalf or under authority of the Company or any of the Company Subsidiaries is
or will be entitled to any broker's or finder's fee or any other commission or
similar fee directly or indirectly in connection with the Acquisition Merger or
any other transaction contemplated hereby, except the Company has engaged
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") to provide financial
advisory services, whose fees and reasonable out-of-pocket expenses will be paid
by Company.
2.8 Litigation and Other Proceedings.
--------------------------------
Except as set forth in Section 2.8 of Schedule I, neither the Company
nor any Company Subsidiary is a defendant in, nor is any of its property subject
to, any pending, or, to the best knowledge of the management of the Company,
threatened, claim, action, suit, investigation, or proceeding, or subject to any
judicial order, judgment or decree.
2.9 Compliance with Law.
-------------------
(a) The Company and the Company Subsidiaries are in compliance in all
material respects with all material laws and regulations applicable to their
respective business or operations or with respect to which compliance is a
condition of engaging in the business thereof, and neither the Company nor any
Company Subsidiary has received notice from any federal, state or local
government or governmental agency of any material violation of, and does not
know of any material violations of, any of the above.
14
<PAGE>
(b) The Company and each of its Subsidiaries have all material
permits, licenses, certificates of authority, orders and approvals of, and have
made all material filings, applications and registrations with, all federal,
state, local and foreign governmental or regulatory bodies that are required in
order to permit them to carry on their respective business as they are presently
conducted.
2.10 Corporate Actions.
-----------------
(a) The Board of Directors of the Company has duly authorized their
respective officers to execute and deliver (as applicable) this Agreement and
the Acquisition Plan of Merger, and to take all action necessary to consummate
the Merger and the other transactions contemplated hereby. The Board of
Directors of the Company has authorized and directed the submission for
shareholders' approval of this Agreement, together with the Merger and any other
action requiring such approval. All corporate authorization by the Board of
Directors of the Company required for the consummation of the Merger has been
obtained.
(b) The Company's Board of Directors has taken or will take all
necessary action to exempt this Agreement, the Acquisition Plan of Merger and
the transactions contemplated hereby and thereby from, (i) any applicable state
takeover laws, (ii) any Iowa laws limiting or restricting the voting rights of
shareholders, (iii) any Iowa laws requiring a shareholder approval vote in
excess of the vote normally required in transactions of similar type not
involving a "related person," "interested shareholder" or person or entity of
similar type, and (iv) any provision in its or any of the Company Subsidiaries'
articles/certificate of incorporation, charter or bylaws, (A) restricting or
limiting stock ownership or the voting rights of shareholders, or (B) requiring
a shareholder approval vote in excess of the vote normally required in
transactions of similar type not involving a "related person," interested
shareholder" or person or entity of similar type.
2.11 Authority. Except as set forth in Section 2.11 of Schedule I,
---------
the execution, delivery and performance of its obligations under this Agreement
by the Company does not violate any of the provisions of, or constitute a
default under or give any person the right to terminate or accelerate payment or
performance under (i) the articles of incorporation or bylaws of the Company,
the articles of incorporation, charter or bylaws of any Company Subsidiary, (ii)
any regulatory restraint on the acquisition of the Company or control thereof,
(iii) any law, rule, ordinance, or regulation or judgment, decree, order, award
or governmental or non-governmental permit or license to which it or any of the
Company Subsidiaries is subject or (iv) any other material agreement, material
lease, material contract, note, mortgage, indenture, arrangement or other
obligation or instrument ("Contract") to which the Company or any of the Company
Subsidiaries is a party or is subject or by which any of their
15
<PAGE>
properties or assets is bound. The parties acknowledge that the consummation of
the Merger and the other transactions contemplated hereby is subject to various
regulatory approvals. The Company has all requisite corporate power and
authority to enter into this Agreement and the Acquisition Plan of Merger and to
perform its respective obligations hereunder and thereunder, except, with
respect to this Agreement and the Acquisition Merger, the approval of the
Company's shareholders required under applicable law. Other than the receipt of
Governmental Approvals (as defined in Section 5.1(c)), the approval of
shareholders and the consents specified in Schedule I with respect to the
Contracts, no consents or approvals are required on behalf of Company in
connection with the consummation of the transactions contemplated by this
Agreement, or the Acquisition Plan of Merger. This Agreement and the Acquisition
Plan of Merger constitute the valid and binding obligation of the Company and
each is enforceable in accordance with its terms, except as enforceability may
be limited by applicable laws relating to bankruptcy, insolvency or creditors
rights generally and general principles of equity.
2.12 Employment Arrangements. Except as disclosed in Section 2.12 of
-----------------------
Schedule I, there are no employment, severance or other agreements, plans or
arrangements with any current or former directors, officers or employees of
Company or any Company Subsidiary which may not be terminated without penalty
(including any augmentation or acceleration of benefits) on 30 days or less
notice to such person. No payments to directors, officers or employees of the
Company or the Company Subsidiaries resulting from the transactions contemplated
hereby will cause the imposition of excise taxes under Section 4999 of the Code
or the disallowance of a deduction to the Company or any Company Subsidiary
pursuant to Sections 162, 280G or any other section of the Code.
2.13 Employee Benefits.
-----------------
(a) Neither the Company nor any of the Company Subsidiaries maintains
any funded deferred compensation plans (including profit sharing, pension,
savings, restricted stock, phantom stock or stock bonus plans), unfunded
deferred compensation arrangements or employee benefit plans as defined in
Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), other than any plans ("Employee Plans") set forth in Section 2.13 of
Schedule I (true and correct copies of which have been delivered to Commercial).
None of Company or any of the Company Subsidiaries has incurred or reasonably
expects to incur any liability to the Pension Benefit Guaranty Corporation
except for required premium payments which, to the extent due and payable, have
been paid. The Employee Plans intended to be qualified under Section 401(a) of
the Code are so qualified, and Company is not aware of any fact which would
adversely affect the qualified status of such plans. Except as set forth in
Section 2.13 of Schedule I, neither the Company nor any of the Company
Subsidiaries (a) provides health, medical, death or survivor benefits to any
former
16
<PAGE>
employee or beneficiary thereof (except in accordance with COBRA requirements
under applicable employment laws), or (b) maintains any form of current
(exclusive of base salary and base wages) or deferred compensation, bonus, stock
option, stock appreciation right, benefit, severance pay, retirement, incentive,
group or individual health insurance, welfare or similar plan or arrangement for
the benefit of any single or class of directors, officers or employees, whether
active or retired (collectively "Benefit Arrangements").
(b) Except as disclosed in Section 2.13 to Schedule I, all Employee
Plans and Benefit Arrangements which are in effect were in effect for
substantially all of calendar year 1996 and there has been no material amendment
thereof (other than amendments required to comply with applicable law) or no
material increase in the cost thereof or benefits payable thereunder on or after
January 1, 1996.
(c) To the best knowledge of the Company, with respect to all Employee
Plans and Benefit Arrangements, the Company and each Company Subsidiary are in
substantial compliance with the requirements prescribed by any and all statutes,
governmental or court orders, or rules or regulations currently in effect,
including but not limited to ERISA and the Code, applicable to such Employee
Plans or Benefit Arrangements. No condition exists that could constitute
grounds for the termination of any Employee Plan under Section 4042 of ERISA; no
"prohibited transaction," as defined in Section 406 of ERISA and Section 4975 of
the Code, has occurred with respect to any Employee Plan, or any other employee
benefit plan maintained by Company or any Company Subsidiary which is covered by
Title I of ERISA, which could subject any person to liability under Title I of
ERISA or to the imposition of any tax under Section 4975 of the Code which could
have an adverse effect on the business, assets, financial condition, results of
operations or prospects of Company or any Company Subsidiary; nor to the best
knowledge of Company has any Employee Plan subject to Part III of Subtitle B of
Title I of ERISA or Section 412 of the Code, or both, incurred any "accumulated
funding deficiency," as defined in Section 412 of the Code, whether or not
waived; nor has Company or any Company Subsidiary failed to make any
contribution or pay any amount due and owing as required by the terms of any
Employee Plan or Benefit Arrangement. To the best of its knowledge, neither
Company nor any Company Subsidiary has incurred or expects to incur, directly or
indirectly, any liability under Title IV of ERISA arising in connection with the
termination of, or a complete or partial withdrawal from, any plan covered or
previously covered by Title IV of ERISA which could constitute a liability of
Commercial, or any of its affiliates at or after the Acquisition Merger
Effective Time.
2.14 Information Furnished. No statement contained in any schedule,
---------------------
certificate or other document furnished (whether prior to or subsequent to the
date of this Agreement) or to be furnished in
17
<PAGE>
writing by or on behalf of Company to Commercial pursuant to this Agreement
contains or will contain any untrue statement of a material fact or any material
omission. No information material to the Merger and which is necessary to make
the representations and warranties not misleading, to the best knowledge of the
Company, has been withheld from Commercial.
2.15 Property and Assets. The Company and the Company Subsidiaries
-------------------
have good and marketable title to all of their real property reflected in the
financial statements at December 31, 1996, referred to in Section 2.4 hereof, or
acquired subsequent thereto, free and clear of all Encumbrances, except for (a)
such items shown in such financial statements or in the notes thereto, (b) liens
for current real estate taxes not yet delinquent, (c) customary title exceptions
that have no material adverse effect upon the value of such property, (d)
property sold or transferred in the ordinary course of business since the date
of such financial statements, (e) pledges or liens incurred in the ordinary
course of business and (f) as otherwise specifically indicated in Section 2.15
of Schedule I. Company and the Company Subsidiaries enjoy peaceful and
undisturbed possession under all material leases for the use of real property
under which they are the lessee; all of such leases are valid and binding and in
full force and effect and neither Company nor any Company Subsidiary is in
default in any material respect under any such lease. Copies of all leases to
which the Company or any Company Subsidiary is party and copies of all deeds and
other ownership documents relating to all real property owned by the Company or
any Company Subsidiary have been or will be provided to Commercial. No consent
of the lessor of any material real property or material personal property lease
is required for consummation of the Merger except as set forth in Section 2.15
of Schedule I. Except as set forth in Section 2.15 of Schedule I, there has
been no material physical loss, damage or destruction, whether or not covered by
insurance, affecting the real properties of Company and the Company Subsidiaries
since December 31, 1996. All property and assets material to their business and
currently used by Company and the Company Subsidiaries are, in all material
respects, in good operating condition and repair, normal wear and tear excepted.
2.16 Agreements and Instruments. Except as set forth in Section 2.16
--------------------------
of Schedule I, neither the Company nor any Company Subsidiary is a party to (a)
any material agreement, arrangement or commitment not made in the ordinary
course of business, (b) any agreement, indenture or other instrument relating to
the borrowing of money by the Company or any Company Subsidiary or the guarantee
by the Company or any Company Subsidiary of any such obligation (other than
Federal Home Loan Bank advances with a maturity of one year or less from the
date hereof), (c) any agreements to make loans or for the provision, purchase or
sale of goods, services or property between Company or any Company Subsidiary
and any director or officer of Company, or any member of the immediate family or
affiliate of any of the foregoing, (d) any agreements with or
18
<PAGE>
concerning any labor or employee organization to which Company or any Company
Subsidiary is a party, (e) any agreements between Company or any Company
Subsidiary and any five percent or more shareholder of Company, and (f) any
agreements, directives, orders, or similar arrangements between or involving the
Company or any Company Subsidiary and any state or federal regulatory authority.
2.17 Material Contract Defaults. Neither the Company nor any Company
--------------------------
Subsidiary nor the other party thereto is in default in any respect under any
contract, agreement, commitment, arrangement, lease, insurance policy, or other
instrument to which the Company or a Company Subsidiary is a party or by which
its respective assets, business, or operations may be bound or affected or under
which it or its respective assets, business, or operations receives benefits,
and which default is reasonably expected to have either individually or in the
aggregate a material adverse effect on the Company or any Company Subsidiary,
and there has not occurred any event that, with the lapse of time or the giving
of notice or both, would constitute such a default.
2.18 Tax Matters.
-----------
(a) The Company and each of the Company Subsidiaries have duly and
properly filed all federal, state, local and other tax returns required to be
filed by them and have made timely payments of all taxes due and payable,
whether disputed or not; the current status of audits of such returns by the
Internal Revenue Service ("IRS") and other applicable agencies is as set forth
in Section 2.18 of Schedule I; and, except as set forth in Section 2.18 of
Schedule I, there is no agreement by the Company or any Company Subsidiary for
the extension of time or for the assessment or payment of any taxes payable.
Except as set forth in Section 2.18 of Schedule I, neither the IRS nor any other
taxing authority is now asserting or, to the best knowledge of Company,
threatening to assert any deficiency or claim for additional taxes (or interest
thereon or penalties in connection therewith), nor is Company aware of any basis
for any such assertion or claim. The Company and each of the Company
Subsidiaries have complied in all material respects with applicable IRS backup
withholding requirements and, in all material respects, have filed all
appropriate information reporting returns for all tax years for which the
statute of limitations has not closed. The Company and each Company Subsidiary
have complied in all material respects with all applicable state law sales and
use tax collection and reporting requirements.
(b) Adequate provision for any federal, state, local, or foreign taxes
due or to become due for the Company or any of the Company Subsidiaries for any
period or periods through and including December 31, 1996, has been made and is
reflected on the December 31, 1996 unaudited Company consolidated financial
statements and has been or will be made with respect to periods ending after
December 31, 1996.
19
<PAGE>
2.19 Environmental Matters. Except as set forth in Section 2.19 of
---------------------
Schedule I, to the best knowledge of the Company, neither the Company nor any
Company Subsidiary owns or leases any properties affected by toxic waste, radon
gas or other hazardous conditions or constructed in part with the use of
asbestos. Except as set forth in Section 2.19 of Schedule I, neither the
Company nor any Company Subsidiary has knowledge of, nor has the Company or any
Company Subsidiary received written notice from any governmental or regulatory
body of, any conditions, activities, practices or incidents which is reasonably
likely to interfere with or prevent compliance or continued compliance with
hazardous substance laws or any regulation, order, decree, judgment or
injunction, issued, entered, promulgated or approved thereunder, or which may
give rise to any common law or legal liability, or otherwise form the basis of
any claim, action, suit, proceeding, hearing or investigation based on or
related to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling, or the emission, discharge, release or
threatened release into the environment, of any pollutant, contaminant or
chemical, or industrial, toxic or hazardous substance or waste. There is no
civil, criminal or administrative claim, action, suit, proceeding, hearing or
investigation pending or, to Company's knowledge, threatened against Company or
any Company Subsidiary relating in any way to such hazardous substance laws or
any regulation, order, decree, judgment or injunction issued, entered,
promulgated or approved thereunder.
2.20 Loan Portfolio; Portfolio Management.
------------------------------------
(a) All evidences of indebtedness reflected as assets in the
consolidated balance sheet of Company as of December 31, 1996, or acquired since
such date, are (except with respect to those assets which are no longer assets
of the Company or any Company Subsidiary) binding obligations of the respective
obligers named therein except as enforcement may be limited by bankruptcy,
insolvency or other similar laws affecting the enforcement of creditors rights
generally, and except that the availability of equitable remedies, including
specific performance, is subject to the discretion of the court before which any
proceeding may be brought, and the payment of no material amount thereof (either
individually or in the aggregate with other evidences of indebtedness) is
subject to any defenses which have been threatened or asserted against the
Company or any Company Subsidiary. All such indebtedness which is secured by an
interest in real property is secured by a valid and perfected mortgage lien
having the priority specified in the loan documents. All loans originated or
purchased by the Company or a Company Subsidiary were at the time entered into
and at all times since in compliance in all material respects with all
applicable laws (including, without limitation, all consumer protection laws)
and regulations. The Company and the Company Subsidiaries administer their
respective loan and investment portfolios (including, but not limited to,
adjustments to adjustable mortgage loans) in accordance with all applicable
20
<PAGE>
laws and regulations and the terms of applicable instruments. The records of the
Company and the Company Subsidiaries regarding all loans outstanding on their
books are accurate in all material respects and the risk classification system
has been established in accordance with the applicable regulatory requirements.
(b) Section 2.20 of Schedule I sets forth a list, accurate and
complete in all material respects, of the aggregate amounts of loans, extensions
of credit and other assets of the Company and the Company Subsidiaries that have
been adversely designated, criticized or classified by it as of June 30, 1997,
separated by category of classification or criticism (the "Asset
Classification"); and no amounts of loans, extensions of credit or other assets
that have been adversely designated, classified or criticized as of the date
hereof by any representative of any government entity as "Special Mention,"
"Substandard," "Doubtful," "Loss" or words of similar import are excluded from
the amounts disclosed in the Asset Classification, other than amounts of loans,
extensions of credit or other assets that were charged off by it or any of its
Subsidiaries before the date hereof.
2.21 Real Estate Loans and Investments. Except for properties
---------------------------------
acquired in settlement of loans, there are no facts, circumstances or
contingencies known to the Company or any Company Subsidiary which exist which
would require a material reduction under generally accepted accounting
principles in the present carrying value of any of the real estate investments,
joint ventures, construction loans, other investments or other loans of the
Company or any Company Subsidiary (either individually or in the aggregate with
other loans and investments).
2.22 Derivatives Contracts. Neither the Company nor any of the
---------------------
Company Subsidiaries is a party to or has agreed to enter into an exchange-
traded or over-the-counter swap, forward, future, option, swap, floor or collar
financial contract or any other contract not included on its Balance Sheet which
is a derivatives contract (including various combinations thereof) (each, a
"Derivatives Contract") or owns securities that are identified in Thrift
Bulletin No. 65 or otherwise referred to as structured notes (each, a
"Structured Note"), except for those Derivatives Contracts and Structured Notes
set forth in Section 2.22 of Schedule I, including a list, as applicable, of any
of its or any of the Company Subsidiaries' assets pledged as security for a
Derivatives Contract.
2.23 Insurance. Except as set forth in Section 2.23 of Schedule I,
---------
the Company and the Company Subsidiaries have in effect insurance coverage with
reputable insurers which, in respect to amounts, types and risks insured, is
reasonably adequate for the business in which the Company and the Company
Subsidiaries are engaged. A schedule of all insurance policies in effect as to
the Company and the Company Subsidiaries (the "Insurance Policies") is as set
forth on Section 2.23 of Schedule I (other than policies
21
<PAGE>
pertaining to mortgage loans made in the ordinary course of business). Except as
set forth on Section 2.23 of Schedule I, all Insurance Policies are in full
force and effect, all premiums with respect thereto covering all periods up to
and including the date of this Agreement have been paid, such premiums covering
all periods from the date hereof up to and including the Acquisition Merger
Effective Date shall have been paid on or before the Acquisition Merger
Effective Date, to the extent then due and payable (other than retrospective
premiums which may be payable with respect to worker's compensation insurance
policies, adequate reserves for which are reflected in the Company's financial
statements). The Insurance Policies are valid, outstanding and enforceable in
accordance with their respective terms and will not in any way be affected by,
or terminated or lapsed solely by reason of, the transactions contemplated by
this Agreement. Except as set forth on Section 2.23 of Schedule I, neither the
Company nor any Company Subsidiary has been refused any insurance with respect
to any material properties, assets or operations, nor has any coverage been
limited or terminated by any insurance carrier to which it has applied for any
such insurance or with which it has carried insurance during the last three
years.
2.24 Stockholder Agreement. Nothing in the Stockholder Agreement,
---------------------
dated August 6, 1996, by and between the Company and certain of its Stockholders
restricts or prohibits (i) the Company from entering into this Agreement or
consummating the transactions contemplated hereby and (ii) each person who is
entering into a Voting Agreement from entering into the Voting Agreement and
carrying out his obligations thereunder including transfer of the Company common
stock to Commercial by operation of law as contemplated by the Acquisition
Merger and voting to approve the Merger. The Stockholder Agreement shall be
terminated no later than the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMMERCIAL
Commercial represents and warrants to Company that, except as
disclosed in Schedule II attached hereto:
3.1 Organization, Good Standing, Authority, Insurance, Etc.
------------------------------------------------------
Commercial is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Nebraska. Each of the subsidiaries of
Commercial within the meaning of Section 10(a)(1)(G) of HOLA (individually a
"Commercial Subsidiary" and collectively the "Commercial Subsidiaries") is duly
organized, validly existing, and in good standing under the laws of the
respective jurisdiction under which it is organized. Commercial and each
Commercial Subsidiary have all requisite power and authority and are duly
qualified and licensed to own, lease and operate their respective properties and
conduct their respective business as they are now being conducted. Commercial
and each Commercial Subsidiary are qualified to do business as a foreign
22
<PAGE>
corporation and is in good standing in each jurisdiction in which qualification
is necessary under applicable law, except to the extent that any failures to so
qualify would not, in the aggregate, have a material adverse effect on the
business, financial condition or results of operations of Commercial and the
Commercial Subsidiaries, taken as a whole.
3.2 Capitalization. The authorized capital stock of Commercial
--------------
consists of 25,000,000 shares of Commercial common stock, par value $.01 per
share, of which 21,570,509 shares were issued and outstanding as of the date of
this Agreement and 10,000,000 shares of serial preferred stock, par value of
$.01 per share, of which no shares were outstanding as of the date of this
Agreement. All outstanding shares of Commercial common stock are, and the
shares of Commercial common stock to be issued in connection with the
Acquisition Merger will be, duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights.
3.3 Ownership of Subsidiaries. All the outstanding shares of the
-------------------------
capital stock of the Commercial Subsidiaries are validly issued, fully paid,
nonassessable and owned beneficially and of record by Commercial or a Commercial
Subsidiary free and clear of any Encumbrance. Except as disclosed in Section
3.3 of Schedule II, all of the outstanding capital stock or other ownership
interests in all of the Commercial Subsidiaries is owned either by Commercial or
the Bank. There are no options, convertible securities, warrants, or other
rights (preemptive or otherwise) to purchase or acquire any capital stock of any
Commercial Subsidiary and no contracts to which Commercial or any of its
affiliates is subject with respect to the issuance, voting or sale of issued or
unissued shares of the capital stock of any of the Commercial Subsidiaries.
3.4 Financial Statements and Reports. No registration statement,
--------------------------------
proxy statement, schedule or report filed by Commercial or any Commercial
Subsidiary with the SEC or the OTS under the 1933 Act, or the 1934 Act, on the
date of effectiveness in the case of such registration statements, or on the
date of filing in the case of such reports or schedules, or on the date of
mailing in the case of such proxy statements, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. For the past five
years, Commercial and the Commercial Subsidiaries have timely filed all
documents required to be filed by them with the SEC, the OTS, or the FDIC under
various securities and financial institution laws and regulations, except to the
extent that all failures to so file, in the aggregate, would not have a material
adverse effect on the business, financial condition or results of operations of
Commercial and the Commercial Subsidiaries, taken as a whole; and all such
documents, as finally amended, complied in all material respects with applicable
23
<PAGE>
requirements of law and, as of their respective date or the date as amended, did
not contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading. Except
to the extent stated therein, all financial statements and schedules included in
the documents referred to in the preceding sentences (or to be included in
similar documents to be filed after the date hereof) (i) are or will be (with
respect to financial statements in respect of periods ending after December 31,
1996) in accordance with Commercial's books and records and those of any of its
Subsidiaries, and (ii) present (and in the case of financial statements in
respect of periods ending after December 31, 1996 will present) fairly the
consolidated statement of financial condition and the consolidated statements of
operations, stockholders' equity and cash flows of Commercial and its
Subsidiaries as of the dates and for the periods indicated in accordance with
generally accepted accounting principles (except for the omission of notes to
unaudited statements, year end adjustments to interim results and changes in
generally accepted accounting principles). The consolidated financial statements
of Commercial as of June 30, 1996 and for the nine months then ended and the
consolidated financial statements for all periods thereafter up to the Closing
disclose or will disclose, as the case may be, all liabilities (including
contingent liabilities) as of such date of Commercial and the Commercial
Subsidiaries, other than liabilities which are not, in the aggregate, material
to Commercial and the Commercial Subsidiaries, taken as a whole, and contain or
will contain in the opinion of management adequate reserves for losses on loans
and properties acquired in settlement of loans, taxes and all other material
accrued liabilities and for all reasonably anticipated material losses, if any
as of such date. There exists no set of circumstances that could reasonably be
expected to result in any liability or obligation material to Commercial or the
Commercial Subsidiaries, taken as a whole, except as disclosed in such
consolidated financial statements at June 30, 1996, or for transactions effected
or actions occurring or omitted to be taken after June 30, 1996, (i) in the
ordinary course of business, or (ii) as permitted by this Agreement.
3.5 Absence of Changes. Since June 30, 1996, there has been no
------------------
material adverse change in the business, properties, financial condition,
results of operations or assets of Commercial and the Commercial Subsidiaries,
taken as a whole. Since June 30, 1996, there is no occurrence, event or
development of any nature existing or, to the best knowledge of Commercial,
threatened which may reasonably be expected to have a material adverse effect
upon the business, properties, financial condition, operations or assets of
Commercial or any Commercial Subsidiary.
3.6 Prospectus/Proxy Statement. At the time the Registration
--------------------------
Statement becomes effective and at the time the Prospectus/Proxy Statement is
mailed to the shareholders of the Company for the
24
<PAGE>
solicitation of proxies for the approval referred to in Section 1.7 hereof and
at all times subsequent to such mailings up to and including the times of such
approval, such Registration Statement and Prospectus/Proxy Statement (including
any amendments or supplements thereto), with respect to all information set
forth therein relating to Commercial (including the Commercial Subsidiaries) and
its shareholders, Commercial common stock, this Agreement, the Merger and all
other transactions contemplated hereby, will:
(a) comply in all material respects with applicable provisions of the
1933 Act, the 1934 Act and the rules and regulations under such Acts; and
(b) not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements contained therein, in light of the circumstances under which
it is made, not misleading.
3.7 No Broker's or Finder's Fees. No agent, broker, investment
----------------------------
banker, person or firm acting on behalf or under authority of Commercial or any
of the Commercial Subsidiaries is or will be entitled to any broker's or
finder's fee or any other commission or similar fee directly or indirectly in
connection with the Merger or any other transaction contemplated hereby, except
Commercial has engaged Merrill Lynch & Co., an investment banking firm, to
provide financial advisory services whose fees and reasonable out-of-pocket
expenses will be paid by Commercial.
3.8 Compliance With Law.
-------------------
(a) Commercial and the Commercial Subsidiaries are in compliance in
all material respects with all material laws and regulations applicable to their
respective business or operations or with respect to which compliance is a
condition of engaging in the business thereof, and neither Commercial nor any
Commercial Subsidiary has received notice from any federal, state or local
government or governmental agency of any material violation of, and does not
know of any material violations of, any of the above.
(b) Commercial and each of it Subsidiaries have all material permits,
licenses, certificates of authority, orders and approvals of, and have made all
material filings, applications and registrations with, all federal, state, local
and foreign governmental or regulatory bodies that are required in order to
permit it to carry on its respective business as it is presently conducted.
3.9 Corporate Actions. The Board of Directors of Commercial has duly
-----------------
authorized its officers to execute and deliver this Agreement and the
Acquisition Plan of Merger, and to take all action necessary to consummate the
Merger and the other transactions contemplated hereby. All corporate
authorizations by
25
<PAGE>
the Board of Directors of Commercial required for the consummation of the Merger
have been obtained.
3.10 Authority. The execution, delivery and performance of this
---------
Agreement by Commercial does not violate any of the provisions of, or constitute
a default under or give any person the right to accelerate payment or
performance under (i) the articles of incorporation or bylaws of Commercial or
the charter or articles of incorporation or bylaws or of any other Commercial
Subsidiary, (ii) any law, rule, ordinance or regulation or judgment, decree,
order, award or governmental or non-governmental permit or license to which
Commercial or any of the Commercial Subsidiaries is subject or (iii) any other
Contract to which Commercial or any of the Commercial Subsidiaries is a party or
is subject to or by which any of their properties or assets is bound which
default, termination or acceleration would have a material adverse effect on the
financial condition, business or results of operations of Commercial and the
Commercial Subsidiaries, taken as a whole. The parties acknowledge that the
consummation of the Merger and the other transactions contemplated hereby is
subject to various regulatory approvals. Commercial has all requisite corporate
power and authority to enter into this Agreement and to perform its obligations
hereunder. Other than the receipt of Government Approvals and the approval of
its shareholders of the increase in the number of authorized shares of
Commercial common stock, no consents or approvals are required on behalf of
Commercial or any Commercial Subsidiary in connection with the consummation of
the transactions contemplated by this Agreement or the Acquisition Plan of
Merger. This Agreement and the Acquisition Plan of Merger constitute the valid
and binding obligations of Commercial, and are enforceable in accordance with
their terms, except as enforceability may be limited by applicable laws relating
to bankruptcy, insolvency or creditors' rights generally and general principles
of equity.
3.11 Information Furnished. No statement contained in any schedule,
---------------------
certificate or other document furnished (whether prior to or subsequent to the
date of this Agreement) or to be furnished in writing by or on behalf of
Commercial to Company pursuant to this Agreement contains or will contain any
untrue statement of a material fact or any material omission. No information
material to the Merger and which is necessary to make the representations and
warranties not misleading, to the best knowledge of Commercial, has been
withheld from the Company.
3.12 Litigation and Other Proceedings. Except for matters which
--------------------------------
would not have a material adverse effect on the business, financial condition or
results of operations of Commercial and the Commercial Subsidiaries taken as a
whole, neither Commercial nor any Commercial Subsidiary is a defendant in, nor
is any of its property subject to, any pending, or, to the best knowledge of the
management of Commercial, threatened, claim, action, suit,
26
<PAGE>
investigation, or proceeding, or subject to any judicial order, judgment or
decree.
3.13 Agreements and Instruments. As of the date of this Agreement,
--------------------------
there are no agreements, directives, orders or similar arrangements between or
involving Commercial or any Commercial Subsidiary and any state or federal
savings institution regulatory authority.
ARTICLE IV
COVENANTS
4.1 Investigations; Access and Copies. Between the date of this
---------------------------------
Agreement and the Acquisition Merger Effective Time, each party agrees to give
to the other party and its respective representatives and agents full access (to
the extent lawful) to all of the premises, books, records and employees of it
and its subsidiaries at all reasonable times, and to furnish and cause its
subsidiaries to furnish to the other party and its respective agents or
representatives access to and true and complete copies of such financial and
operating data, all documents with respect to matters to which reference is made
in Articles II or III of this Agreement or on any list, schedule or certificate
delivered or to be delivered in connection herewith, and such other documents,
records, or information with respect to the business and properties of it and
its subsidiaries as the other party or its respective agents or representative
shall from time to time reasonably request; provided, however, that any such
-------- -------
inspection (a) shall be conducted in such manner as not to interfere
unreasonably with the operation of the business of the entity inspected and (b)
shall not affect any of the representations and warranties hereunder. Each
party will also give prompt written notice to the other party of any event or
development (x) which, had it existed or been known on the date of this
Agreement, would have been required to be disclosed under this Agreement, (y)
which would cause any of its representations and warranties contained herein to
be inaccurate or otherwise materially misleading, or (z) which materially relate
to the satisfaction of the conditions set forth in Article V of this Agreement.
4.2 Conduct of Business of the Company and the Company Subsidiaries.
---------------------------------------------------------------
Between the date of this Agreement and the Acquisition Merger Effective Time,
the Company agrees:
(a) That the Company and the Company Subsidiaries shall conduct their
business only in the ordinary course, and maintain their books and records in
accordance with past practices and not to take any action that would (i)
adversely affect the ability to obtain the Governmental Approvals or (ii)
adversely affect the Company's ability to perform its obligations under this
Agreement;
27
<PAGE>
(b) That the Company shall not, without the prior written consent of
Commercial: (i) declare, set aside or pay any dividend or make any other
distribution with respect to Company's capital stock; (ii) reacquire any of
Company's outstanding shares of capital stock; (iii) issue or sell or buy any
shares of capital stock of the Company or any Company Subsidiary; (iv) effect
any stock split, stock dividend or other reclassification of Company's common
stock; (v) grant any options or issue any warrants exercisable for or securities
convertible or exchangeable into capital stock of Company or any Company
Subsidiary or grant any stock appreciation or other rights with respect to
shares of capital stock of Company or of any Company Subsidiary; or (vi) make
any additional awards after the date hereof pursuant to any Phantom Stock
Agreement;
(c) That Company and the Company Subsidiaries shall not, without the
prior written consent of Commercial: (i) sell or dispose of any significant
assets of the Company or of any Company Subsidiary other than in the ordinary
course of business consistent with past practices; (ii) merge or consolidate the
Company or any Company Subsidiary with or otherwise acquire any other entity, or
file any applications or make any contract with respect to branching by any
Company Subsidiary (whether de novo, purchase, sale or relocation) or acquire or
construct, or enter into any agreement to acquire or construct, any interest in
real property (other than with respect to security interests in properties
securing loans and properties acquired in settlement of loans in the ordinary
course) or improvements to real property; (iii) change the articles of
incorporation, charter documents or other governing instruments of the Company
or any Company Subsidiary, except as provided in this Agreement; (iv) grant to
any executive officer, director or employee of the Company or any Company
Subsidiary (A) any increase in annual compensation, except in a manner and
amount consistent with past practice, or (B) any bonus type payment; (v) adopt
any new or amend or terminate any existing Employee Plans or Benefit
Arrangements of any type or employment arrangements of the type contemplated in
Section 2.12 herein, except as specifically contemplated in this Agreement; (vi)
authorize severance pay or other benefits for any officer, director or employee
of Company or any Company Subsidiary except in a manner and amount consistent
with past practice as such past practice is described in Section 4.2(c) of
Schedule I; (vii) incur any material indebtedness or obligation or enter into or
extend any material agreement or lease, except in the ordinary course of
business consistent with past practices; (viii) engage in any lending activities
other than in the ordinary course of business consistent with past practices;
(ix) form any new subsidiary or cause or permit a material change in the
activities presently conducted by any Company Subsidiary or make additional
investments in subsidiaries; (x) purchase any debt securities or derivative
securities, including CMO or REMIC products, that are defined as "high risk
mortgage securities" under OTS Thrift Bulletin No. 52 dated January 10, 1992 as
revised or purchase any Derivatives Contracts or Structured Notes;
28
<PAGE>
(xi) purchase any equity securities; (xii) make any investment which would cause
Liberty Bank & Trust, Johnston, Iowa to not be a qualified thrift lender under
Section 10(m) of the HOLA, or not to be a "domestic building and loan
association" as defined in Section 7701(a)(19) of the Code; (xiii) make any loan
with a principal balance in excess of $1,000,000 or not in the ordinary course
of business (even if less than $1,000,000 principal balance); (xiv) authorize
capital expenditures other than in the ordinary course of business; (xv) adopt
or implement any change in its accounting principles, practices or methods other
than as may be required by generally accepted accounting principles or adopt or
implement any change in its methods of accounting for Federal income tax
purposes; or (xvi) make any loan in which participation interests therein are to
be sold to other persons or entities other than to the Company or any Company
Subsidiary or acquire a participation interest in a loan originated by another
person or entity other than to the Company or Company Subsidiaries. The
limitations contained in this Section 4.2(c) shall also be deemed to constitute
limitations as to the making of any commitment with respect to any of the
matters set forth in this Section 4.2(c).
4.3 No Solicitation. The Company will not authorize any officer,
---------------
director, employee, investment banker, financial consultant, attorney,
accountant or other representative of Company or any Company Subsidiary,
directly or indirectly, to initiate contact with any person or entity in an
effort to solicit, initiate or encourage any "Takeover Proposal" (as such term
is defined below). The Company will not authorize any officer, director,
employee, investment banker, financial consultant, attorney, accountant or other
representative of the Company or any Company Subsidiary, directly or indirectly,
(A) to cooperate with, or furnish or cause to be furnished any non-public
information concerning its business, properties or assets to, any person or
entity in connection with any Takeover Proposal; (B) to negotiate any Takeover
Proposal with any person or entity; or (C) to enter into any agreement, letter
of intent or agreement in principle as to any Takeover Proposal. The Company
will promptly give written notice to Commercial upon becoming aware of any
Takeover Proposal, such notice to contain, at a minimum, the identity of the
persons submitting the Takeover Proposal, a copy of any written inquiry or other
communication, the terms of any Takeover Proposal, any information requested or
discussions sought to be initiated and the status of any requests, negotiations
or expressions of interest. As used in this Agreement with respect to the
Company, "Takeover Proposal" shall mean any proposal, other than as contemplated
by this Agreement, for a merger or other business combination involving the
Company or any Company Subsidiary or for the acquisition of a ten percent (10%)
or greater equity interest in Company or any Company Subsidiary, or for the
acquisition of a substantial portion of the assets of Company or any Company
Subsidiary.
29
<PAGE>
4.4 Shareholder Approval. The Company shall obtain approval of its
--------------------
shareholders upon consent or otherwise of this Agreement and the Acquisition
Merger and related matters, as referred to in Section 1.7 hereof, as soon as
practicable but in no event later than 45 days after the Registration Statement
becomes effective under the 1933 Act. In connection with such meeting, the
Company Board of Directors shall recommend approval of the Merger. The Company
shall use its best efforts to obtain the Shareholders Approval. Commercial
shall use its best efforts to obtain shareholder approval to the amendment to
its articles of incorporation to increase the number of authorized shares as is
contemplated in Section 1.7(b) herein.
4.5 Filing of Holding Company and Merger Applications. Commercial
-------------------------------------------------
shall use its best efforts promptly to prepare, submit and file such required
regulatory applications for acquisition of control of Company and any other
applications required to be filed with any regulatory authorities in connection
with the transactions contemplated hereby, including the Bank Mergers.
4.6 Consents. Company and Company Subsidiaries will use their best
--------
efforts to obtain the consent or approval of each person whose consent or
approval shall be required in order to permit Company or Company Subsidiaries,
as the case may be, to consummate the Acquisition Merger.
4.7 Resale Letter Agreements. After execution of this Agreement, (i)
------------------------
Company shall use its best efforts to cause to be delivered to Commercial from
each person who may be deemed to be an "affiliate" of Company within the meaning
of Rule 145, a written letter agreement regarding restrictions on resale of the
shares of Commercial common stock received by such persons in the Merger to
ensure compliance with applicable resale restrictions imposed under the federal
securities laws and pooling of interests accounting requirements and (ii)
neither Commercial nor the Company (including the Company Subsidiaries) shall
take any action which would materially impede or delay consummation of the
Acquisition Merger or the Bank Mergers or receipt of the regulatory approvals
referred to in Section 5.1(c) below, or prevent the transactions contemplated
hereby from qualifying as a reorganization within the meaning of Section 368 of
the Code, or as a pooling of interests for accounting purposes.
4.8 Publicity. Between the date of this Agreement and the
---------
Acquisition Merger Effective Time, neither Commercial, Company or any Company
Subsidiary shall, without the prior approval of the other, issue or make, or
permit any of its directors, employees, officers or agents to issue or make, any
press release, disclosure or statement to the press or any third party with
respect to the Merger or the transactions contemplated hereto, except as
required by law. The parties shall cooperate when issuing or making any press
release, disclosure or statement with respect to Merger or the transactions
contemplated hereby, except as required by law.
30
<PAGE>
4.9 Cooperation Generally. Between the date of this Agreement and
---------------------
the Acquisition Merger Effective Time, Commercial, Company and their
subsidiaries shall use their best efforts, and take all actions necessary or
appropriate, to consummate the Acquisition Merger and the other transactions
contemplated by this Agreement at the earliest practicable date.
4.10 Additional Financial Statements and Reports. As soon as
-------------------------------------------
reasonably practicable after they become publicly available, the Company shall
furnish to Commercial and Commercial shall furnish to the Company, respectively,
its balance sheet and related statements of operations, cash flows and
stockholders' equity for all periods prior to the Closing. Except as
specifically described therein, such financial statements will be prepared in
conformity with generally accepted accounting principles applied on a consistent
basis and fairly present the financial condition, results of operations and cash
flows of the Company or Commercial, as the case may be (subject, in the case of
unaudited financial statements, to (a) normal year-end adjustments, (b) any
other adjustments described therein and (c) the absence of notes which, if
presented, would not differ materially from those included in its most recent
consolidated balance sheet).
4.11 Stock Listing. Commercial agrees to use all reasonable efforts
-------------
to cause to be listed on the New York Stock Exchange, subject to official notice
of issuance, the shares of Commercial common stock to be issued in the
Acquisition Merger.
4.12 Conforming Adjustments. At the request of Commercial and in an
----------------------
amount specified by Commercial, prior to the Acquisition Merger Effective Time,
the Company and such of the Company Subsidiaries as Commercial shall direct
shall establish such additional accruals and reserves ("Conforming Adjustments")
as may be necessary in the sole determination of Commercial to conform the
Company's and the Company Subsidiaries' accounting practices and policies as
well as to conform their interest rate risk position to those of Commercial(as
such accounting practices and policies are to be applied to Company and the
Company Subsidiaries from and after the Acquisition Merger Effective Time);
provided, however, that Company and the Company Subsidiaries shall not be
required to take such action until: (i) Company provides to Commercial a written
statement dated the date of Closing certified by the Chairman of the Board, the
President and the Chief Financial Officer of the Company, that the conditions in
Sections 5.1 and 5.2 to be satisfied by the Company or the Company Subsidiaries
or both of them have been satisfied or, alternatively, setting forth in detail
the circumstances that have prevented such conditions from being satisfied (the
"Reliance Certificate") and Commercial provides to the Company a Reliance
Certificate relating to the conditions in Section 5.1 and 5.2; and (ii)
Commercial, after reviewing the Reliance Certificate, provides the Company a
written waiver of any right it may have to terminate the Agreement which waiver
shall contain an express condition precedent that Company
31
<PAGE>
and the Company Subsidiaries have established such additional Conforming
Adjustments as requested by Commercial pursuant to this Section 4.12. No
additional Conforming Adjustments taken by the Company and the Company
Subsidiaries pursuant to this Section 4.12 shall be deemed in and of itself to
be a breach or violation of any representation, warranty, covenant, condition or
other provision of this Agreement.
4.13 D&O Indemnification and Insurance. For a period of three (3)
---------------------------------
years following the Acquisition Merger Effective Time, Commercial agrees that
the Merger shall not affect or diminish any of the Company's duties and
obligations of indemnification existing as of the Acquisition Merger Effective
Time in favor of employees, agents, directors or officers of the Company or the
Company Subsidiaries arising by virtue of its Articles of Incorporation or
Bylaws in the form in effect at the date of this Agreement or arising by
operation of law. Commercial shall cause the persons serving as officers and
directors of the Company immediately prior to the Acquisition Merger Effective
Time to be covered for a period of eighteen (18) months from the Acquisition
Merger Effective Time by the directors' and officers' liability insurance policy
maintained by the Company (provided that Commercial may substitute therefor
policies of at least the same coverage and amounts containing terms and
conditions which are not materially less advantageous than such policy) with
respect to acts or omissions occurring prior to the Acquisition Merger Effective
Time which were committed by such officers and directors in their capacity as
such; provided, however, that in no event shall Commercial be required to expend
more than 150% of the amount currently expended by the Company to maintain or
procure insurance coverage for such eighteen (18) month period pursuant hereto.
4.14 Employment Benefits
-------------------
(a) Immediately prior to the Acquisition Merger Effective Time, the
existing Employment Agreement between Mr. Russell Olson and the Company shall
be terminated and Commercial and Mr. Olson will enter into a new employment
agreement substantially in the form attached hereto as Exhibit 4.14(a).
Termination of Mr. Olson's Employment Agreement with the Company shall not
entitle Mr. Olson to any payment pursuant to Sections 7 or 8 thereof.
(b) Commercial agrees to honor the terms of all other written
employment agreements listed in Section 2.12 of Schedule I in accordance with
their terms.
(c) Immediately prior to the Acquisition Merger Effective Time, the
phantom stock agreements between the Company and various officers of the Company
and Company Subsidiaries will be terminated and all vested amounts due the
officers thereunder shall be paid to the officers in a lump sum payment.
32
<PAGE>
4.15 Board of Directors.
------------------
(a) Commercial agrees to cause Mr. William A. Krause to be elected or
appointed as a director of Commercial at, or promptly after, the Acquisition
Merger Effective Time for a term to expire at the 1998 Annual Meeting of
Shareholders of Commercial. Commercial will cause him to be nominated at the
1998 Annual Meeting for an additional three-year-term and will use its best
efforts to secure his re-election.
(b) Commercial agrees to offer compensated advisory director status to
all members of the boards of directors of the Liberty Banks as of the date
hereof.
4.16 Update Disclosures. From and after the date hereof until the
------------------
Acquisition Merger Effective Time, Company shall promptly, but not less
frequently than monthly, update Schedule I hereto by notice to Commercial to
reflect any matters which have occurred from and after the date hereof which, if
existing on the date hereof, would have been required to be described therein
and which, in the case of all such updates other than the last such update prior
to the Acquisition Merger Effective Time, reflect a material change from the
information provided in Schedule I as of the date hereof; provided, however,
that no such update shall affect the conditions to the obligation of Company to
consummate the transactions contemplated hereby, and any and all changes
reflected in any such update shall be considered in determining whether such
conditions have been satisfied.
4.17 Liberty-Pocahontas. The Company agrees to use its best efforts
------------------
to purchase the 35 shares of common stock of Liberty Bank & Trust, N.A.,
Pocahontas which it presently does not own. Prior to purchasing such shares,
the Company shall consult with Commercial as to the amount to be paid for such
shares, the timing of the purchases and such other matters as are pertinent
thereto.
ARTICLE V
CONDITIONS OF THE MERGER;
TERMINATION OF AGREEMENT
5.1 General Conditions. The obligations of Commercial and the
------------------
Company to effect the Acquisition Merger shall be subject to the following
conditions:
(a) Stockholder Approval. The holders of the outstanding shares of
--------------------
Company common stock shall have approved this Agreement and the Acquisition
Merger as specified in Section 1.7(a) hereof or as otherwise required by
applicable law.
(b) No Proceedings. No order shall have been entered and remain in
--------------
force restraining or prohibiting the Merger in any legal, administrative,
arbitration, investigatory or other proceedings (collectively, "Proceedings") by
any governmental or judicial or other authority.
33
<PAGE>
(c) Government Approvals. To the extent required by applicable law or
--------------------
regulation, all approvals of or filings with any governmental authority
(collectively, "Governmental Approvals"), including without limitation those of
the FRB, the OCC, the OTS, the FDIC, the Superintendent of Banking of Iowa, the
Superintendent of Banking of Arizona, the FTC, DOJ, the SEC, and any state
securities or blue sky authorities, shall have been obtained or made and any
waiting periods shall have expired in connection with the consummation of the
Merger and the Bank Mergers. All other statutory or regulatory requirements for
the valid consummation of the Merger and related transactions shall have been
satisfied.
(d) Registration Statement. The Registration Statement shall have
----------------------
been declared effective and shall not be subject to a stop order of the SEC and,
if the offer and sale of Commercial's common stock in the Merger pursuant to
this Agreement is subject to the Blue Sky laws of any state, shall not be
subject to a stop order of any state securities commissioner.
(e) Federal Tax Opinion. Receipt of an opinion of Deloitte & Touche
-------------------
LLP, in a form and content reasonably satisfactory to Commercial and the
Company, to the effect that (i) the Acquisition Merger will constitute a
reorganization within the meaning of Section 368(a) of the Code, (ii) the
exchange in the Acquisition Merger of Company common stock for Commercial common
stock will not give rise to gain or loss to shareholders of the Company with
respect to such exchange (except to the extent of any cash received), and (iii)
neither the Company nor Commercial will recognize gain or loss as a consequence
of the Acquisition Merger or the Bank Mergers.
5.2 Conditions to Obligations of Commercial. The obligations of
---------------------------------------
Commercial to effect the Merger and the transactions contemplated herein shall
be subject to the following additional conditions:
(a) Opinion of Counsel for Company. Commercial shall have received
------------------------------
from Baird, Holm, McEachen, Pedersen, Hamann & Strasheim, counsel to Company, an
opinion dated as of the Closing covering the matters to be set forth in Exhibit
5.2(a).
(b) Required Consents. In addition to Governmental Approvals, Company
-----------------
and the Company Subsidiaries shall have obtained all necessary third party
consents or approvals in connection with the Merger, the absence of which would
materially and adversely affect Company and the Company Subsidiaries, taken as a
whole; in this connection, the Company and the Company Subsidiaries shall obtain
consents from all lessors to their respective real estate leases that may be
required for consummation of the Merger.
34
<PAGE>
(c) Company Accountants' Letter. Commercial shall have received from
---------------------------
KPMG Peat Marwick LLP, letters dated the date of mailing the Prospectus/Proxy
Statement and the date of the Closing to the effect that: (i) with respect to
the Company they are independent accountants within the meaning of the 1933 Act
and 1934 Act and the applicable rules and regulations thereunder, (ii) it is
their opinion that the financial statements of the Company included in the
Prospectus/Proxy Statement comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and 1934 Act and the
applicable published accounting rules and regulations thereunder, (iii) on the
basis of such procedures as are set forth therein but without performing an
examination in accordance with generally accepted auditing standards nothing has
come to their attention which would cause them to believe that (A) any unaudited
interim financial statements appearing in the Prospectus/Proxy Statement do not
comply as to form in all material respects with the applicable accounting
requirements of the 1933 Act and 1934 Act and the published rules and
regulations thereunder; (B) said financial statements are not stated on a basis
substantially consistent with that of the audited financial statements; (C) (1)
at the date of the latest available consolidated financial statements of the
Company and at a specific date not more than five business days prior to the
date of each such letter there has been, except as specified in such letter, any
increase in the outstanding capital stock, or indebtedness for borrowed money of
the Company (other than deposits and Federal Home Loan Bank advances with a
maturity of one year or less) or any decrease in the stockholders' equity
thereof as compared with amounts shown in the latest statement of financial
condition included in the Prospectus/Proxy Statement, or (2) for the period from
the date of the latest financial statements of the Company included in the
Prospectus/Proxy Statement to a specific date not more than five business days
prior to the date of each such letter, there were, except as specified in such
letter, any decreases, as compared with the corresponding period in the
preceding year, in consolidated net income for Company or any increase, as
compared with the corresponding period in the preceding year, in the provision
for loan losses for Company, (iv) they have performed certain specific
procedures as a result of which they determined that certain information of an
accounting, financial or statistical nature included in the Prospectus/Proxy
Statement and requested by Commercial and agreed upon by such accountants, which
is expressed in dollars (or percentages obtained from such dollar amounts) and
obtained from accounting records which are subject to the internal controls of
the Company's accounting system or which has been derived directly from such
accounting records by analysis or computation is in agreement with such records
or computations made therefrom (excluding any questions of legal
interpretation), and (v) on the basis of such procedures as are set forth in
such letter, nothing came to their attention with respect to the Company which
would cause them to believe that the pro forma financial statements had not been
properly compiled on the pro forma basis described therein.
35
<PAGE>
(d) No Material Adverse Change. Between the date of this Agreement
--------------------------
and the date of Closing, there shall not have occurred any material adverse
change in the financial condition, business or results of operations of Company
and the Company Subsidiaries, taken as a whole, other than any such change
attributable to or resulting from any change in law, regulation or generally
accepted accounting principles which impair both the Company and Commercial in a
substantially similar manner.
(e) Representations and Warranties to be True; Fulfillment of
---------------------------------------------------------
Covenants and Conditions. The representations and warranties of the Company
- ------------------------
shall be true in all material respects at the Acquisition Merger Effective Time
with the same effect as though made at the Acquisition Merger Effective Time (or
on the date when made in the case of any representation or warranty which
specifically relates to an earlier date); Company shall have performed all
obligations and complied with each covenant, in all material respects, and all
conditions under this Agreement on its part to be performed or complied with at
or prior to the Acquisition Merger Effective Time; and Company shall have
delivered to Commercial a certificate, dated the Acquisition Merger Effective
Time and signed by its chief executive officer and chief financial officer, to
such effect.
(f) No Litigation. Neither the Company nor any Company Subsidiary
-------------
shall be a party to any pending litigation, reasonably probable of being
determined adversely to the Company or any Company Subsidiary, which would have
a material adverse effect on the business, financial condition or results of
operations of the Company and the Company Subsidiaries, taken as a whole.
(g) Regulatory Approval. All Governmental Approvals required
-------------------
hereunder to consummate the transactions contemplated hereby shall have been
obtained without the imposition of any conditions which Commercial reasonably
and in good faith determine to be unduly burdensome upon the conduct of the
business of Commercial or the Bank.
(h) Acceptance of Legal Matters. The form and substance of all legal
---------------------------
matters contemplated hereby and all papers delivered hereunder shall be
reasonably acceptable to Housley Kantarian & Bronstein, P.C., special counsel to
Commercial and the Bank.
(i) Affiliates Letters. Commercial shall have received the letter
------------------
agreements from all affiliates of the Company as contemplated in Section 4.7(i)
herein.
(j) Fairness Opinion. Prior to mailing the Prospectus/Proxy
----------------
Statement, Commercial shall have received an updated written opinion from
Merrill Lynch & Co. to the effect that the Merger Consideration is fair to
Commercial from a financial point of view.
36
<PAGE>
(k) Amendment to Articles of Incorporation. Commercial shall have
--------------------------------------
received the approval of its shareholders to amend its Articles of Incorporation
to increase the number of authorized shares of Commercial common stock, as
contemplated in Section 1.7(b).
(l) Environmental Reports. Commercial, at its expense, shall have
---------------------
received a Phase I Environmental Risk Report (as contemplated in OTS Thrift
Bulletin #16) on (i) all commercial real estate owned of, (ii) all offices and
premises used as facilities by, and (iii) all properties which serve as security
for any commercial real estate loan having an original principal balance of
$1,000,000 or more of, the Company or any Company Subsidiary, such reports or
other reports derived therefrom or supplemental thereto to be satisfactory to
Commercial. Commercial's right to terminate this Agreement due to failure of
the condition set forth in this Section 5.2(l) shall only be applicable if the
costs to cleanup, remove, remediate, or take any other action to bring such
property or properties into material compliance with environmental laws exceed
$250,000 in the aggregate and shall expire unless exercised by Commercial on or
prior to three months from the date of this Agreement.
(m) Dissenting Shareholders. None of the shareholders of the Company
-----------------------
shall have elected their dissenter and appraisal rights pursuant to IBCA.
5.3 Conditions to Obligations of Company. The obligation of Company
------------------------------------
to effect the Acquisition Merger and the transactions contemplated herein shall
be subject to the following additional conditions:
(a) Opinion of Counsel for Commercial. Company shall have received
---------------------------------
from Housley Kantarian & Bronstein, P.C., special counsel to Commercial, and
Fitzgerald, Schorr, Barmettler & Brennan, an opinion dated as of the Closing
covering the matters to be set forth in Exhibit 5.3(a).
(b) Representations and Warranties to be True; Fulfillment of
---------------------------------------------------------
Covenants and Conditions. The representations and warranties of Commercial
- ------------------------
shall be true in all material respects at the Acquisition Merger Effective Time
with the same effect as though made at the Acquisition Merger Effective Time (or
on the date when made in the case of any representation or warranty which
specifically relates to an earlier date); Commercial shall have performed all
obligations and complied with each covenant, in all material respects, and all
conditions under this Agreement on their parts to be performed or complied with
at or prior to the Acquisition Merger Effective Time; and Commercial shall have
delivered to Company a certificate, dated the Acquisition Merger Effective Time
and signed by its chief executive officer and chief financial officer, to such
effect.
37
<PAGE>
(c) Acceptance of Legal Matters. The form and substance of all legal
---------------------------
matters contemplated hereby and all papers delivered hereunder shall be
reasonably acceptable to Baird, Holm, McEachen, Pedersen, Hamann & Strasheim,
counsel to the Company.
(d) Commercial Common Stock. A certificate for the required number of
-----------------------
whole shares of Commercial common stock, as determined pursuant to Section 1.3
hereof, and cash for fractional share interests, as so determined, shall have
been delivered to the Exchange Agent.
(e) Required Consents. In addition to Governmental Approvals,
-----------------
Commercial shall have obtained all necessary third party consents or approvals
in connection with the Merger, the absence of which would materially and
adversely affect Commercial and the Commercial Subsidiaries, taken as a whole.
(f) NYSE Listing. The shares of Commercial common issuable pursuant
------------
to this Agreement shall have been approved for listing on the NYSE, subject to
official notice of issuance.
5.4 Termination of Agreement and Abandonment of Merger. This
--------------------------------------------------
Agreement and the Acquisition Plan of Merger may be terminated at any time
before the Acquisition Merger Effective Time, whether before or after approval
thereof by shareholders of Company, as provided below:
(a) Mutual Consent. By mutual consent of the parties, evidenced by
--------------
their written agreement.
(b) Closing Delay. At the election of either party, evidenced by
-------------
written notice, if the Closing shall not have occurred on or before May 31,
1998, or such later date as shall have been agreed to in writing by the parties;
provided, however, that the right to terminate under this Section 5.4(b) shall
- -------- -------
not be available to any party whose failure to perform an obligation hereunder
has been the cause of, or has resulted in, the failure of the Closing to occur
on or before such date.
(c) Conditions to Commercial Performance Not Met. By Commercial upon
--------------------------------------------
delivery of written notice of termination to Company if any event occurs which
renders impossible of satisfaction in any material respect one or more of the
conditions to the obligations of Commercial to effect the Merger set forth in
Sections 5.1 and 5.2 and noncompliance is not waived by Commercial, provided,
--------
however, that the right to terminate under this Section 5.4(c) shall not be
- -------
available to Commercial where Commercial's failure to perform an obligation
hereunder has been the cause of, or has resulted in, the failure of the Closing
to occur on or before such date.
(d) Conditions to Company Performance Not Met. By the Company upon
-----------------------------------------
delivery of written notice of termination to
38
<PAGE>
Commercial if any event occurs which renders impossible of satisfaction in any
material respect one or more of the conditions to the obligations of Company to
effect the Merger set forth in Sections 5.1 and 5.3 and noncompliance is not
waived by Company, provided, however, that the right to terminate under this
-------- -------
this Section 5.4(d) shall not be available to the Company where the Company's
failure to perform an obligation hereunder has been the cause of, or has
resulted in, the failure of the Closing to occur on or before such date.
(e) Average NYSE Closing Price. By the Company at any time during
--------------------------
the three business day period commencing on the business day immediately after
the end of the Determination Period, if both of the following conditions are
met:
(i) the Average NYSE Closing Price shall be less than $31.53
(adjusted as indicated below in this Section 5.4(e)); and
(ii) (A) the quotient obtained by dividing the Average NYSE Closing
Price by the Starting Price (as defined below) shall be less than (B) the Index
Trigger (as defined below); subject, however, to the following three sentences.
If the Company elects to exercise its termination right pursuant to this Section
5.4(e), it shall give written notice to Commercial no later than the end of the
aforementioned three day period. During the two business day period commencing
with the business day after its receipt of such notice, Commercial shall have
the option to increase the consideration to be received by the holders of
Company common stock hereunder, by adjusting the Exchange Ratio to equal the
quotient (calculated to four digits) obtained by dividing (A) the product of
$31.53 and the Exchange Ratio (as then in effect) by (B) the Average NYSE
Closing Price. If Commercial so elects within such two day period, it shall give
written notice to the Company no later than the end of the aforementioned two
day period of such election and the revised Exchange Ratio, whereupon no
termination shall have occurred pursuant to this Section 5.4(e) and this
Agreement shall remain in effect in accordance with its terms (except as the
Exchange Ratio shall have been so modified).
For purposes of this Section 5.4, the following terms shall have the
meanings indicated:
"Average NYSE Closing Price" shall have the meaning specified in
Section 1.3(d).
"Determination Period" shall have the meaning specified in
Section 1.3(d).
"Index Group" means the financial institutions listed on Exhibit
5.4(e) hereto. In the event that the common stock of any such company ceases to
be publicly traded or a proposal to acquire
39
<PAGE>
any such company is announced after the Starting Date and before the
Determination Date, such company will be removed from the Index Group, and the
weights attributed to the remaining companies (as set forth on Exhibit 5.4(e)
hereto) will be adjusted proportionately for purposes of determining the Index
Price.
"Index Price," on a given date, means the weighted average of the
closing prices on such dates of the common stocks of the companies comprising
the Index Group.
"Index Trigger," means the quotient obtained by dividing the Index
Price on the last day of the Determination Period by the Index Price on the
Starting Date and subtracting 0.15 from the quotient in this clause.
"Starting Date" means the last trading day immediately preceding the
date of the first public announcement of entry into this Agreement or, if no
trades of Commercial common stock occur on such day then the date most
immediately preceding such day in which a trade of Commercial common stock
occurred.
"Starting Price" means $39.41.
If Commercial or any company belonging to the Index Group declares or
effects a stock dividend, reclassification, recapitalization, split-up,
combination, exchange of shares or similar transaction between the Starting Date
and the Determination Date, the prices for the common stock of such company
shall be appropriately adjusted for the purposes of applying this Section
5.4(e).
ARTICLE VI
TERMINATION OF OBLIGATIONS; PAYMENT OF EXPENSES
6.1 Termination; Lack of Survival of Representations and Warranties.
---------------------------------------------------------------
In the event of the termination and abandonment of this Agreement pursuant to
Section 5.4 of this Agreement, this Agreement shall become void and have no
effect, except that (i) the provisions of Sections 2.7 and 3.7 (Brokers and
Finders), 4.8 (Publicity), 6.2 (Expenses) and 8.2 (Confidentiality) of this
Agreement shall survive any such termination and abandonment, and (ii) a
termination pursuant to Sections 5.4(c) or 5.4(d) of this Agreement shall not
relieve the breaching party from liability for an uncured intentional and
willful breach of a representation, warranty, covenant, or agreement giving rise
to such termination.
The representations, warranties and agreements of the parties set
forth in this Agreement shall not survive the Acquisition Merger Effective Time,
and shall be terminated and extinguished at the Acquisition Merger Effective
Time, and from and after the Acquisition Merger Effective Time none of the
parties hereto shall have any liability to the other on account of any breach or
failure of any of those representations, warranties and agreements;
40
<PAGE>
provided, however, that the foregoing clause shall not (i) apply to agreements
- --------- -------
of the parties which by their terms are intended to be performed after the
Acquisition Merger Effective Time, and (ii) shall relieve any person for
liability for fraud, deception or intentional misrepresentation.
6.2 Payment of Expenses.
-------------------
(a) Each of the parties hereto shall bear and pay all costs and
expenses incurred by it or on its behalf in connection with the transactions
contemplated hereunder.
(b) Notwithstanding any provision in this Agreement to the contrary,
in order to induce Commercial to enter into this Agreement and as a means of
compensating Commercial for the substantial direct and indirect monetary, and
other costs incurred and to be incurred in connection with this Agreement and
the transactions contemplated hereby, the Company agrees that if this Agreement
is terminated in accordance with its terms and, prior to such termination, (1) a
Termination Event, as defined in paragraph (c) below, shall have occurred, or
(2) a Preliminary Termination Event, as defined in paragraph (d) below, shall
have occurred and within 18 months after the date this Agreement is terminated
the Termination Event described in subparagraph (c)(i) of this Section 6.2 shall
occur, then in either event the Company will upon demand pay to Commercial in
immediately available funds the sum of Three Million Dollars ($3,000,000.00)
(the "Termination Fee") and an additional amount equal to the reasonable
expenses incurred by Commercial relating to this Agreement and the transactions
contemplated hereby; provided that such amounts shall represent the exclusive
remedy of Commercial with respect to a Termination Event.
(c) For purposes of this Agreement, a Termination Event shall mean
any of the following:
(i) The Company or any Company Subsidiary or any shareholder of the
Company shall have entered into an agreement to engage in an Acquisition
Transaction (as defined below) with any person (the term "person" for purposes
of this Agreement having the meaning assigned thereto in Section 3(a)(9) and
13(d)(3) of the Securities Exchange Act of 1934, and the rules and regulations
thereunder) other than Commercial or any affiliate of Commercial (the term
"affiliate" for purposes of this Agreement having the meaning assigned thereto
in Rule 405 under the Securities Act of 1933). For purposes of this Agreement,
"Acquisition Transaction" shall mean (x) a merger or consolidation, or any
similar transaction, involving the Company or any Company Subsidiary, (y) a
purchase, lease, or other acquisition of all or substantially all of the assets
of the Company or any Company Subsidiary or (z) a purchase or other acquisition
(including by way of merger, consolidation, share exchange or otherwise) of 10%
or more of any class of equity securities of the Company or any Company
Subsidiary; or
41
<PAGE>
(ii) the shareholders of the Company shall not have approved the
Acquisition Merger at the meeting held for that purpose or any adjournment
thereof (or through solicitation of consents) or such meeting shall not have
been held or shall have been cancelled prior to termination of this Agreement
(unless consents shall have been solicited and received in lieu of such meeting)
or no consents solicited or the Board of Directors of the Company shall have
recommended that the shareholders of the Company approve or accept any
Acquisition Transaction with any person other than Commercial or any affiliate
of Commercial.
(d) For purposes of this Agreement, a "Preliminary Termination Event"
shall mean the making of a proposal by any person other than Commercial or any
affiliate of Commercial to the Company or any of its shareholders to engage in
an Acquisition Transaction.
ARTICLE VII
CERTAIN POST-MERGER AGREEMENTS
7.1 Reports to the SEC. Commercial shall continue to file all
------------------
reports and data with the SEC necessary to permit the shareholders of Company
who may be deemed "underwriters" (within the meaning of Rule 145 under the 1933
Act) of Company common stock to sell the Company common stock received by them
in connection with the Merger pursuant to Rules 144 and 145(d) under such Act if
they would otherwise be so entitled.
7.2 Employees. Employees of the Company who become employees of
---------
Commercial or the Bank after the Acquisition Merger Effective Time shall be
eligible to participate in all benefit plans sponsored by Commercial or the Bank
to the same extent as other similarly situated Commercial or Bank employees,
with full credit for prior service with the Company or Company Subsidiaries for
purposes of vesting, eligibility for participation and co-payments and
deductibles. Commercial shall honor all accrued vacation leave for the
employees of Company and the Company Subsidiaries following the Acquisition
Merger Effective Time.
ARTICLE VIII
GENERAL
8.1 Amendments. Subject to applicable law, this Agreement may be
----------
amended, whether before or after any relevant approval of shareholders, by an
agreement in writing executed in the same manner as this Agreement and
authorized or ratified by the Boards of Directors of the parties hereto,
provided that, after the adoption of the Agreement by the shareholders of the
- -------------
Company, no such amendment without further shareholder approval may change the
amount or form of the consideration to be received by the Company shareholders
in the Merger.
42
<PAGE>
8.2 Confidentiality. All information disclosed hereafter by any
---------------
party to this Agreement to any other party to this Agreement, including, without
limitation, any information obtained pursuant to Sections 4.1 or 4.10 hereof,
shall be kept confidential by such other party and shall not be used by such
other party otherwise than as herein contemplated except to the extent that (i)
it was known by such other party when received, (ii) it is or hereafter becomes
lawfully obtainable for other sources, (iii) it is necessary or appropriate to
disclose to any regulatory authority having jurisdiction over the parties or
their subsidiaries or as may otherwise be required by law, or (iv) to the extent
such duty as to confidentiality is waived by the other party. In the event of
the termination of this Agreement, each party shall use all reasonable efforts
to return upon request to the other parties all documents (and reproductions
thereof) received from such other parties (and, in the case of reproductions,
all such reproductions made by the receiving party) that include information not
within the exceptions contained in the first sentence of this Section 8.2.
8.3 Governing Law. This Agreement and the legal relations between
-------------
the parties shall be governed by and construed in accordance with the laws of
the State of Nebraska without taking into account a provision regarding choice
of law, except to the extent certain matters may be governed by federal law by
reason of preemption.
8.4 Notices. Any notices or other communications required or
-------
permitted hereunder shall be sufficiently given if sent by registered mail or
certified mail, postage prepaid, addressed, if to Commercial or Company, to
Commercial Federal Corporation
2120 South 72nd Street
Omaha, Nebraska 68124
Attention: William A. Fitzgerald, Chairman of
the Board and Chief Executive
Officer
with a copy to:
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, N.W.
Washington, DC 20036
Attention: Leonard S. Volin, Esq.
and
43
<PAGE>
Liberty Financial Corporation
4201 Westown Parkway, Suite 320
West Des Moines, Iowa 50266-6774
Attention: Mr. William A. Krause, Chairman
with a copy to:
Baird, Holm, McEachen, Pedersen,
Hamann & Strasheim
1500 Woodmen Tower
Omaha, Nebraska 68102
Attention: John S. Zeilinger, Esquire
or such other address as shall be furnished in writing by any such party, and
any such notice or communication shall be deemed to have been given two business
days after the date of such mailing (except that the notice of change of address
shall not be deemed to have been given until received by the addressee).
Notices may also be sent by telegram, telex, facsimile transmission or hand
delivery and in such event shall be deemed to have been given as of the date
received.
8.5 No Assignment. This Agreement may not be assigned by any of the
-------------
parties hereto, by operation of law or otherwise, except as contemplated hereby.
8.6 Headings. The description heading of the several Articles and
--------
Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement.
8.7 Counterparts. This Agreement may be extended in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each of
the parties hereto and delivered to each of the other parties hereto.
8.8 Construction and Interpretation. Except as the context otherwise
-------------------------------
requires, (a) all references herein to any state or federal regulatory agency
shall also be deemed to refer to any predecessor or successor agency, and (b)
all references to state and federal statutes or regulations shall also be deemed
to refer to any successor statute or regulation.
8.9 Entire Agreement. This Agreement, together with the schedules,
----------------
lists, exhibits and certificates required to be delivered hereunder, and any
amendment hereafter executed and delivered in accordance with Section 8.1,
constitutes the entire agreement of the parties, and supersedes any prior
written or oral agreement or understanding among any of the parties hereto
pertaining to the Merger. This Agreement is not intended to confer upon any
other persons any rights or remedies hereunder except as expressly set forth
herein.
44
<PAGE>
8.10 Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of the Agreement.
8.11 No Third Party Beneficiaries. Nothing in this Agreement shall
----------------------------
entitle any person (other than the Company, Commercial and their respective
successors and assigns permitted hereby) to any claim, cause of action, remedy
or right of any kind, except as otherwise expressly provided herein.
8.12 Enforcement of Agreement. The parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court of the United
States or any state having jurisdiction, this being in addition to any other
remedy to which they are entitled at law or in equity.
45
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to
be executed on its behalf by its officers thereunder duly authorized, all as of
the date set forth above.
COMMERCIAL FEDERAL CORPORATION LIBERTY FINANCIAL CORPORATION
By: _____________________________ By: ____________________
Name: William A. Fitzgerald Name: William A. Krause
Title: Chairman of the Board and Title: Chairman of the Board
Chief Executive Officer
46
<PAGE>
ANNEX B
<PAGE>
Annex B - Liberty
IOWA BUSINESS CORPORATION ACT
DIVISION XIII
DISSENTERS' RIGHTS
PART A
490.1301 DEFINITIONS FOR DIVISION XIII. -- In this division:
1. "Beneficial shareholder" means the person who is a beneficial owner of
shares held by a nominee as the record shareholder.
2. "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer.
3. "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 490.1302 and who exercises that right when and in
the manner required by sections 490.1320 through 490.1328.
4. "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action unless exclusion would be inequitable.
5. "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by the
corporation on its principal bank loans or, if none, at a rate that is fair and
equitable under all the circumstances.
6. "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation.
7. "Shareholder" means the record shareholder or the beneficial
shareholder.
490.1302 SHAREHOLDERS' RIGHT TO DISSENT. -- 1. A shareholder is entitled to
dissent from, and obtain payment of the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
a. Consummation of a plan of merger to which the corporation is a
party if either of the following apply:
(1) Shareholder approval is required for the merger by section
490.1103 or the articles of incorporation and the shareholder is entitled
to vote on the merger.
(2) The corporation is a subsidiary that is merged with its parent
under section 490.1104.
b. Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired, if the
shareholder is entitled to vote on the plan.
c. Consummation of a sale or exchange of all, or substantially all,
of the property of the corporation other than in the usual and regular
course of business, if the shareholder is entitled to vote on the sale or
exchange, including a sale in dissolution, but not including a sale
pursuant to court order or a sale for cash pursuant to a plan by which all
or substantially all of the net proceeds of the sale will be distributed to
the shareholders within one year after the date of sale.
B-1
<PAGE>
d. An amendment of the articles of incorporation that materially and
adversely affects rights in respect of a dissenter's shares because it does
any or all of the following:
(1) Alters or abolishes a preferential right of the shares.
(2) Creates, alters, or abolishes a right in respect of
redemption, including a provision respecting a sinking fund for the
redemption or repurchase, of the shares.
(3) Alters or abolishes a preemptive right of the holder of the
shares to acquire shares or other securities.
(4) Excludes or limits the right of the shares to vote on any
matter, or to cumulate votes, other than a limitation by dilution
through issuance of shares or other securities with similar voting
rights.
(5) Reduces the number of shares owned by the shareholder to a
fraction of a share if the fractional share so created is to be
acquired for cash under section 490.604.
(6) Extends, for the first time after being governed by this
chapter, the period of duration of a corporation organized under
chapter 491 or 496A and existing for a period of years on the day
preceding the date the corporation is first governed by this chapter.
e. Any corporate action taken pursuant to a shareholder vote to the
extent the articles of incorporation, bylaws, or a resolution of the board
of directors provides that voting or nonvoting shareholders are entitled to
dissent and obtain payment for their shares.
2. A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this chapter is not entitled to challenge the
corporate action creating the shareholder's entitlement unless the action is
unlawful or fraudulent with respect to the shareholder or the corporation.
490.1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS. -- 1. A record shareholder
may assert dissenters' rights as to fewer than all the shares registered in that
shareholder's name only if the shareholder dissents with respect to all shares
beneficially owned by any one person and notifies the corporation in writing of
the name and address of each person on whose behalf the shareholder asserts
dissenters' rights. The rights of a partial dissenter under this subsection are
determined as if the shares as to which the shareholder dissents and the
shareholder's other shares were registered in the names of different
shareholders.
2. A beneficial shareholder may assert dissenters' rights as to shares
held on the shareholder's behalf only if the shareholder does both of the
following:
a. Submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights.
b. Does so with respect to all shares of which the shareholder is the
beneficial shareholder or over which that beneficial shareholder has power
to direct the vote.
PART B
490.1320 NOTICE OF DISSENTERS' RIGHTS. -- 1. If proposed corporate action
creating dissenters' rights under section 490.1302 is submitted to a vote at a
shareholders' meeting, the meeting notice must state that shareholders are or
may be entitled to assert dissenters' rights under this part and be accompanied
by a copy of this part.
B-2
<PAGE>
2. If corporate action creating dissenters' rights under section 490.1302
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in section 490.1322.
490.1321 NOTICE OF INTENT TO DEMAND PAYMENT. -- 1. If proposed corporate
action creating dissenters' rights under section 490.1302 is submitted to a vote
at a shareholder's meeting, a shareholder who wishes to assert dissenters'
rights must do all of the following:
a. Deliver to the corporation before the vote is taken written notice
of the shareholder's intent to demand payment for the shareholder's shares
if the proposed action is effectuated.
b. Not vote the dissenting shareholder's shares in favor of the
proposed action.
2. A shareholder who does not satisfy the requirements of subsection 1,
is not entitled to payment for the shareholder's shares under this part.
490.1322 DISSENTERS' NOTICE. -- 1. If proposed corporate action creating
dissenters' rights under section 490.1302 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of section 490.1321.
2. The dissenters' notice must be sent no later than ten days after the
proposed corporate action is authorized at a shareholders' meeting or, if the
corporate action is taken without a vote of the shareholders, no later than ten
days after the corporate action is taken, and must do all of the following:
a. State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited.
b. Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received.
c. Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the terms of the
proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not the person acquired beneficial
ownership of the shares before that date.
d. Set a date by which the corporation must receive the payment
demand, which date shall not be fewer than thirty nor more than sixty days
after the date the dissenters' notice is delivered.
e. Be accompanied by a copy of this division.
490.1323 DUTY TO DEMAND PAYMENT. -- 1. A shareholder sent a dissenter's
notice described in section 490.1322 must demand payment, certify whether the
shareholder acquired beneficial ownership of the shares before the date required
to be set forth in the dissenter's notice pursuant to section 490.1322,
subsection 2, paragraph "c", and deposit the shareholder's certificates in
accordance with the terms of the notice.
2. The shareholder who demands payment and deposits the shareholder's
shares under subsection 1 retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
3. A shareholder who does not demand payment or deposit the shareholder's
share certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for the shareholder's shares under this
B-3
<PAGE>
division.
490.1324. SHARE RESTRICTIONS. -- 1. The corporation may restrict the transfer
of uncertificated shares from the date the demand for their payment is received
until the proposed corporate action is taken or the restrictions released under
section 490.1326.
2. The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are canceled or modified by the taking of the proposed corporate action.
490.1325 PAYMENT. -- 1. Except as provided in section 490.1327, at the time
the proposed corporate action is taken, or upon receipt of a payment demand,
whichever occurs later, the corporation shall pay each dissenter who complied
with section 490.1323 the amount the corporation estimates to be the fair value
of the dissenter's shares, plus accrued interest.
2. The payment must be accompanied by all of the following:
a. The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen months before the date of payment, an income
statement for that year, a statement of changes in shareholders' equity for
that year, and the latest available interim financial statements, if any.
b. A statement of the corporation's estimate of the fair value of the
shares.
c. An explanation of how the interest was calculated.
d. A statement of the dissenter's right to demand payment under
section 490.1328.
e. A copy of this division.
490.1326 FAILURE TO TAKE ACTION. -- 1. If the corporation does not take the
proposed action within sixty days after the date set for demanding payment and
depositing share certificates, the corporation shall return the deposited
certificates and release the transfer restrictions imposed on uncertificated
shares.
2. If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a new
dissenters' notice under section 490.1322 as if the corporate action was taken
without a vote of the shareholders and repeat the payment demand procedure.
490.1327 AFTER-ACQUIRED SHARES. -- 1. A corporation may elect to withhold
payment required by section 490.1325 from a dissenter unless a dissenter was the
beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
2. To the extent the corporation elects to withhold payment under
subsection 1, after taking the proposed corporate action, it shall estimate the
fair value of the shares, plus accrued interest, and shall pay this amount to
each dissenter who agrees to accept it in full satisfaction of the dissenter's
demand. The corporation shall send with its offer a statement of its estimate
of the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenter's right to demand payment under
section 490.1328.
490.1328 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER. -- 1. A
dissenter may notify the corporation in writing of the dissenter's own estimate
of the fair value of the dissenter's shares and amount of interest due, and
demand payment of the dissenter's estimate, less any payment under section
490.1325, or reject the corporation's offer under section 490.1327 and demand
payment of the fair value of the dissenter's shares and
B-4
<PAGE>
interest due, if any of the following apply:
a. The dissenter believes that the amount paid under section 490.1325
or offered under section 490.1327 is less than the fair value of the
dissenter's shares or that the interest due is incorrectly calculated.
b. The corporation fails to make payment under section 490.1325
within sixty days after the date set for demanding payment.
c. The corporation, having failed to take the proposed action, does
not return the deposited certificates or release the transfer restrictions
imposed on uncertificated shares within sixty days after the date set for
demanding payment.
2. A dissenter waives the dissenter's right to demand payment under this
section unless the dissenter notifies the corporation of the dissenter's demand
in writing under subsection 1 within thirty days after the corporation made or
offered payment for the dissenter's shares.
PART C
490.1330 COURT ACTION. -- 1. If a demand for payment under section 490.1328
remains unsettled, the corporation shall commence a proceeding within sixty days
after receiving the payment demand and petition the court to determine the fair
value of the shares and accrued interest. If the corporation does not commence
the proceeding within the sixty-day period, it shall pay each dissenter whose
demand remains unsettled the amount demanded.
2. The corporation shall commence the proceeding in the district court of
the county where a corporation's principal office or, its none in this state,
its registered office is located. If the corporation is a foreign corporation
without a registered office in this state, it shall commence the proceeding in
the county in this state where the registered office of the domestic corporation
merged with or whose shares were acquired by the foreign corporation was
located.
3. The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend decision on the question
of fair value. The appraisers have the powers described in the order appointing
them, or in any amendment to it. The dissenters are entitled to the same
discovery rights as parties in other civil proceedings.
5. Each dissenter made a party to the proceeding is entitled to judgment
for either of the following:
a. The amount, if any, by which the court finds the fair value of the
dissenter's shares, plus interest, exceeds the amount paid by the
corporation.
b. The fair value, plus accrued interest, of the dissenter's after-
acquired shares for which the corporation elected to withhold payment under
section 490.1327.
B-5
<PAGE>
490.1331 COURT COSTS AND COUNSEL FEES. -- 1. The court in an appraisal
proceeding commenced under section 490.1330 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under section 490.1328.
2. The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable, for either of
the following:
a. Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of section 490.1320 through 490.1328.
b. Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this chapter.
3. If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded the
dissenters who were benefitted.
B-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Indemnification of directors and officers of Commercial is provided
under Article VI of the Articles of Incorporation of Commercial for judgments,
fines, settlements, and expenses, including attorney fees incurred in connection
with any threatened, pending, or completed action, suit, or proceeding, whether
civil, criminal, administrative, or investigative if such director or officer
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of Commercial and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful.
Article VI of Commercial's Articles of Incorporation provides that an
outside director shall not be personally liable to Commercial or its
stockholders for monetary damages for breach of his fiduciary duty as a director
and authorizes Commercial to indemnify such outside director against monetary
damages for such breach to the full extent permitted by law. This provision
applies to acts or omissions occurring after the effective date of the
amendment, and does not limit liability for (i) any act or omission not in good
faith which involves intentional misconduct or a knowing violation of law, (ii)
any transaction from which the outside director derived an improper direct or
indirect financial benefit, (iii) paying a dividend or approving a stock
repurchase in violation of the Nebraska Business Corporation Act or (iv) any act
or omission which violates a declaratory or injunctive order obtained by
Commercial or its stockholders. For purposes of Article VI, "outside director"
is defined as any member of the Board of Directors who is not an officer or a
person who may control the conduct of Commercial through management agreements,
voting trusts, directorships in related corporations or any other device or
relationship.
Commercial has purchased director and officer liability insurance that
insures directors and officers against certain liabilities in connection with
the performance of their duties as directors and officers, including liabilities
under the Securities Act of 1933, as amended, and provides for payment to
Commercial of costs incurred by it in indemnifying its directors and officers.
Under Nebraska law, indemnification of directors and officers may be
provided for judgments, fines, settlements, and expenses, including attorney's
fees, incurred in connection with any threatened, pending, or completed action,
suit, or proceeding other than an action by or in the right of Commercial. This
applies to any civil, criminal, investigative or administrative action provided
that the director or officer involved acted in good faith, in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Indemnification of directors and officers may be also provided for
judgments, fines, settlements, and expenses, including attorney's fees, incurred
in connection with any threatened, pending, or completed action, or suit by or
in the right of the corporation if such director or officer acted in good faith
and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation. However, no indemnification shall be made in
respect of any claim, issue or matter in which such person is adjudged to be
liable for negligence or misconduct in the performance of his duties to the
corporation unless the court in which the action is brought deems indemnity
proper.
The grant of indemnification to a director or officer shall be
determined by a majority of a quorum of disinterested directors, by a written
opinion from independent legal counsel, or by the shareholders.
Indemnification shall be provided to any directors and officers for
expenses, including attorney's fees, actually and reasonably incurred in the
defense of any action, suit or proceeding to the extent that he or she has been
successful on the merits.
II-1
<PAGE>
Item 21. Exhibits and Financial Statement Schedules
(a) The following are filed as exhibits to this Registration
Statement:
Exhibit No. Description
-------------------------------------------------------
2/1/ Reorganization and Merger Agreement by and between
Commercial Federal Corporation and Liberty Financial
Corporation dated August 18, 1997
3.1/2/ Articles of Incorporation of Commercial Federal Corporation,
as amended and restated
3.2/3/ Bylaws of Commercial Federal Corporation, as amended and
restated
4.1/4/ Form of Certificate of Common Stock of Commercial Federal
Corporation
4.2/5/ Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company
5 Opinion of Fitzgerald, Schorr, Barmettler & Brennan
regarding the legality of the securities being registered
hereby (with consent)
8 Form of Opinion of Deloitte & Touche LLP regarding certain
federal tax matters (with consent)
10.1/3/ Employment Agreement with William A. Fitzgerald dated June
8, 1995
10.2/3/ Change in Control Executive Severance Agreements with
William A. Fitzgerald and James A. Laphen, dated June 8,
1995
10.3/3/ Form of Change in Control Executive Severance Agreement
entered into with Senior Vice Presidents and First Vice
Presidents
10.4/6/ Commercial Federal Corporation Incentive Plan effective July
1, 1994
10.5/6/ Commercial Federal Bank Deferred Compensation Plan effective
July 1, 1994
10.6/7/ Commercial Federal Corporation 1984 Stock Option and
Incentive Plan, as Amended and Restated, Effective August 1,
1992
10.7/8/ Stock Purchase Agreement between CAI Corporation and
Registrant, dated August 21, 1996
10.8/8/ Employment Agreement with William A. Fitzgerald, dated
May 15, 1974, as Amended February 14, 1996
10.9/8/ Commercial Federal Savings and Loan Association Survivor
Income Plan, as Amended February 14, 1996
10.10/9/ Employment Agreement with James A. Laphen dated
June 1, 1997
10.11/10/ Commercial Federal Corporation 1996 Stock Option and
Incentive Plan Effective January 30, 1997
II-2
<PAGE>
10.12/11/ Railroad Financial Corporation 1994 Stock Option and
Incentive Plan, Railroad Financial Corporation 1991
Directors' Stock Option Plan and Railroad Financial
Corporation 1986 Stock Option and Incentive Plan, as Amended
February 22, 1991
10.13/12/ Railroad Financial Corporation 1994 Stock Option and
Incentive Plan
21/9/ Subsidiaries of Commercial Federal Corporation
23.1 Consent of Deloitte & Touche LLP (with respect to
Commercial)
23.2 Consent of Deloitte & Touche LLP (with respect to Liberty)
23.3 Consent of Fitzgerald, Schorr, Barmettler & Brennan, P.C.
(included in opinion filed as Exhibit 5)
24 Power of Attorney (See Signature Page)
27/13/ Financial Data Schedule
99 Form of Proxy solicited by Board of Directors of Liberty
Financial Corporation
- -----------
/1/ Incorporated by reference to Annex A to the Prospectus/Proxy
Statement included herein.
/2/ Incorporated by reference to Registrant's Current Report on Form 8-K
dated December 8, 1997
/3/ Incorporated by reference to Registrant's Registration Statement on
Form S-4 (File No. 33-60589)
/4/ Incorporated by reference to Registrant's Registration Statement on
Form S-1 (File No. 33-00330)
/5/ Incorporated by reference to Registrant's Current Report on Form 8-K
dated January 9, 1989
/6/ Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994 (File No. 0-13082)
/7/ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 33-60448)
/8/ Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (File No. 1-11515)
/9/ Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 (File No. 1-11515)
/10/ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 333-20739)
/11/ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 33-63221) and Post-Effective Amendment No. 1 to
Registration Statement No. 33-01333 and No. 33-10396
/12/ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 33-63629)
/13/ Not required to be filed pursuant to Rule 401 of Regulation S-T
The Exhibit Index immediately precedes the attached exhibits.
II-3
<PAGE>
Item 22. Undertakings
Item 512 of Regulation S-K.
Rule 415 Offering. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement: (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in the
effective registration statement; (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
Filings Incorporating Subsequent Exchange Act Documents By Reference.
The undersigned registrant hereby undertakes that, for purposes of determining
any liability under the Securities Act of 1933, each filing of the registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Incorporated Annual and Quarterly Reports. The undersigned registrant
hereby undertakes to deliver or cause to be delivered with the prospectus, to
each person to whom the prospectus is sent or given, the latest annual report to
security holders that is incorporated by reference in the prospectus and
furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3
under the Securities Exchange Act of 1934; and, where interim financial
information required to be presented by Article 3 of Regulation S-X is not set
forth in the prospectus, to deliver, or cause to be delivered to each person to
whom the prospectus is sent or given, the latest quarterly report that is
specifically incorporated by reference in the prospectus to provide such interim
financial information.
Registration on Form S-4 of Securities Offered for Resale. The
undersigned registrant hereby undertakes as follows: that prior to any public
offering of the securities registered hereunder through use of a prospectus
which is a part of this registration statement, by any person or party who is
deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other items of the applicable form.
II-4
<PAGE>
The registrant undertakes that every prospectus (i) that is filed
pursuant to the immediately preceding paragraph, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Request for Acceleration of Effective Date. Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. If acceleration is
requested of the effective date of this registration statement pursuant to Rule
461 under the Act, in the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question to whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Instructions to Form S-4.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Prospectus/Proxy
Statement pursuant to Items 4, 10(b), 11 or 13 of this form, within one business
day of receipt of such request, and to send the incorporated documents by
first-class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of this
registration statement through the date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Omaha, Nebraska as of
December 18, 1997.
COMMERCIAL FEDERAL CORPORATION
By: /s/ William A. Fitzgerald
-------------------------------------------------
William A. Fitzgerald
Chairman of the Board and Chief Executive Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Commercial Federal
Corporation, do hereby severally constitute and appoint William A. Fitzgerald
and James A. Laphen and each of them singly, our true and lawful attorneys and
agents, to do any and all things and acts in our names in the capacities
indicated below and to execute any and all instruments for us and in our names
in the capacities indicated below which said William A. Fitzgerald and/or James
A. Laphen may deem necessary or advisable to enable Commercial Federal
Corporation to comply with the Securities Act of 1933, as amended, and any
rules, regulations and requirements of the Securities and Exchange Commission,
in connection with the registration statement on Form S-4 relating to the
offering of Commercial's Common Stock, including specifically, but not limited
to, power and authority to sign for us in our names in the capacities indicated
below the registration statement and any and all amendments (including
post-effective amendments) thereto; and we hereby ratify and confirm all that
said William A. Fitzgerald and/or James A. Laphen shall do or cause to be done
by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and as of the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/ William A. Fitzgerald Principal Executive December 18, 1997
- ---------------------------------
William A. Fitzgerald Officer and Director
Chairman of the Board and
Chief Executive Officer
/s/ James A. Laphen Principal Financial December 18, 1997
- ---------------------------------
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
/s/ Gary L. Matter Principal Accounting December 18, 1997
- ---------------------------------
Gary L. Matter Officer
Senior Vice President, Controller
and Secretary
/s/ Talton K. Anderson Director December 18, 1997
- ---------------------------------
Talton K. Anderson
/s/ Michael P. Glinsky Director December 18, 1997
- ---------------------------------
Michael P. Glinsky
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Robert F. Krohn Director December 18, 1997
- ---------------------------------
Robert F. Krohn
/s/ Carl G. Mammel Director December 18, 1997
- ---------------------------------
Carl G. Mammel
/s/ Robert S. Milligan Director December 18, 1997
- ---------------------------------
Robert S. Milligan
/s/ James P. O'Donnell Director December 18, 1997
- ---------------------------------
James P. O'Donnel
/s/ Robert D. Taylor Director December 18, 1997
- ---------------------------------
Robert D. Taylor
/s/ Aldo J. Tesi Director December 18, 1997
- ---------------------------------
Aldo J. Tesi
</TABLE>
<PAGE>
COMMERCIAL FEDERAL CORPORATION
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
2 /1/ Reorganization and Merger Agreement by and between
Commercial Federal Corporation and Liberty Financial
Corporation dated August 18, 1997
3.1/2/ Articles of Incorporation of Commercial Federal Corporation,
as amended and restated
3.2/3/ Bylaws of Commercial Federal Corporation, as amended and
restated
4.1/4/ Form of Certificate of Common Stock of Commercial Federal
Corporation
4.2/5/ Shareholder Rights Agreement between Commercial Federal
Corporation and Manufacturers Hanover Trust Company
5 Opinion of Fitzgerald, Schorr, Barmettler & Brennan
regarding the legality of the securities being registered
hereby (with consent)
8 Form of Opinion of Deloitte & Touche LLP regarding certain
federal tax matters (with consent)
10.1/3/ Employment Agreement with William A. Fitzgerald dated
June 8, 1995
10.2/3/ Change in Control Executive Severance Agreements with
William A. Fitzgerald and James A. Laphen, dated June 8,
1995
10.3/3/ Form of Change in Control Executive Severance Agreement
entered into with Senior Vice Presidents and First Vice
Presidents
10.4/6/ Commercial Federal Corporation Incentive Plan effective
July 1, 1994
10.5/6/ Commercial Federal Bank Deferred Compensation Plan effective
July 1, 1994
10.6/7/ Commercial Federal Corporation 1984 Stock Option and
Incentive Plan, as Amended and Restated, Effective August 1,
1992
10.7/8/ Stock Purchase Agreement between CAI Corporation and
Registrant, dated August 21, 1996
10.8/8/ Employment Agreement with William A. Fitzgerald, dated
May 15, 1974, as Amended February 14, 1996
10.9/8/ Commercial Federal Savings and Loan Association Survivor
Income Plan, as Amended February 14, 1996
10.10/9/ Employment Agreement with James A. Laphen dated June 1, 1997
10.11/10/ Commercial Federal Corporation 1996 Stock Option and
Incentive Plan Effective January 30, 1997
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.12/11/ Railroad Financial Corporation 1994 Stock Option and
Incentive Plan, Railroad Financial Corporation 1991
Directors' Stock Option Plan and Railroad Financial
Corporation 1986 Stock Option and Incentive Plan, as Amended
February 22, 1991
10.13/12/ Railroad Financial Corporation 1994 Stock Option and
Incentive Plan
21/9/ Subsidiaries of Commercial Federal Corporation
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte & Touche LLP (with respect to Liberty)
23.3 Consent of Fitzgerald, Schorr, Barmettler & Brennan, P.C.
(included in opinion filed as Exhibit 5)
24 Power of Attorney (See Signature Page)
27/13/ Financial Data Schedule
99.1 Form of Proxy solicited by Board of Directors of Liberty
Financial Corporation
</TABLE>
- ----------------
/1/ Incorporated by reference to Annex A to the Prospectus/Proxy Statement
included herein.
/2/ Incorporated by reference to Registrant's Current Report on Form 8-K
dated December 8, 1997
/3/ Incorporated by reference to Registrant's Registration Statement on
Form S-4 (File No. 33-60589)
/4/ Incorporated by reference to Registrant's Registration Statement on
Form S-1 (File No. 33-00330)
/5/ Incorporated by reference to Registrant's Current Report on Form 8-K
dated January 9, 1989
/6/ Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1994 (File No. 0-13082)
/7/ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 33-60448)
/8/ Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1996 (File No. 1-11515)
/9/ Incorporated by reference to Registrant's Annual Report on Form 10-K
for the fiscal year ended June 30, 1997 (File No. 1-11515)
/10/ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 333-20739)
/11/ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 33-63221) and Post-Effective Amendment No. 1 to
Registration Statement No. 33-01333 and No. 33-10396
/12/ Incorporated by reference to Registrant's Registration Statement on
Form S-8 (File No. 33-63629)
/13/ Not required to be filed pursuant to Rule 401 of Regulation S-T
<PAGE>
[LETTERHEAD OF FITZGERALD, SCHORR, BARMETTLER & BRENNAN, P.C. APPEARS HERE]
December 18, 1997
Board of Directors
Commercial Federal Corporation
1500 Commercial Federal Tower
2120 South 72nd Street
Omaha, Nebraska 68124
Re: Commercial Federal Corporation
Registration Statement on S-4
-----------------------------------
Gentlemen:
We have acted as special counsel to Commercial Federal Corporation
("Commercial") in connection with the preparation of the Registration Statement
on Form S-4 (the "Registration Statement") filed on or about December 18, 1997,
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended relating to up to 4,015,561 authorized but unissued shares of common
stock, par value $.01 per share ("Common Stock"), of Commercial which may be
issued under the Reorganization and Merger Agreement by and between Commercial
Federal Corporation and Commercial Federal Bank and Liberty Financial Corp.
dated August 18, 1997 (the "Merger Agreement"), as more fully described in the
Registration Statement. You have requested the opinion of this firm with respect
to certain legal aspects of the proposed offering.
We have examined such documents, records and matters of laws as we have deemed
necessary for purposes of this opinion, and based thereon, we are of the opinion
that the Common Stock to be issued pursuant to and in accordance with the terms
of the Merger Agreement will be duly and validly issued, fully paid, and
nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to references to our firm included under the caption
"Legal Matters" in the Prospectus which is part of the Registration Statement.
Very truly yours,
FITZGERALD, SCHORR,
BARMETTLER & BRENNAN, P.C.
By: /s/ Douglas W. Reno
------------------------
Douglas W. Reno
<PAGE>
Exhibit 8
LIBERTY
[Date]
Board of Directors
Commercial Federal Corporation
2120 South 72nd Street
P.O. Box 1103, Downtown Station
Omaha, NE 68101
Members of the Board:
Commercial Federal Corporation has requested our opinion regarding the Federal
income tax consequences of the proposed merger of Liberty Financial Corporation
(hereinafter, Company) into Commercial Federal Corporation (hereinafter,
Commercial) and the merger of Liberty Bank & Trust, Bloomfield (hereinafter,
Bloomfield); Liberty Bank & Trust, Forest City (hereinafter, Forest City);
Liberty Bank & Trust, Johnston (hereinafter, Johnston); Liberty Bank & Trust,
Lake Mills (hereinafter, Lake Mills); Liberty Bank & Trust, Mason City
(hereinafter, Mason City); Liberty Bank & Trust, N.A., Pocahontas (hereinafter,
Pocahontas); Liberty Bank & Trust, Tucson (hereinafter, Tucson); and Liberty
Bank and Trust, Woodbine (hereinafter, Woodbine) into Commercial Federal Bank
(hereinafter, Bank). (As used hereinafter, the term "Liberty Banks" and/or
"Liberty Bank" refers collectively or individually, as the case may be, to the
financial institutions listed in the preceding sentence which are subsidiaries
of Company.) The conclusions presented herein represent our understanding of
the transaction as represented to us in the Reorganization and Merger Agreement
between Commercial and Bank and Company and Liberty Banks dated August 18, 1997
(hereinafter, Merger Agreement), your letter of representations dated ________
__, 199_, a letter of representations dated __________ __, 199_, received from
Company, a letter of representation received from Housley, Kantarian & Bronstein
dated _________ __, 199_; Form S-4 dated _______ __, 199_, the facts as set
forth below, and Federal income tax law as it exists today.
FACTS
- -----
<PAGE>
Board of Directors
___________, 199__
Page 2
Company is headquartered in West Des Moines, Iowa, is incorporated under ____
law and is a holding company that conducts no independent business activity.
Company's primary asset is the stock it owns in Liberty Banks. Company is
authorized to issue ___________ shares of common stock, par value $__.__ per
share. Company's stock is owned by seventeen shareholders, three of whom own
__.__% of the total shares outstanding.
Bloomfield is incorporated under the laws of _________. Bloomfield is a banking
institution whose principal business is the acceptance of deposits from the
general public and the origination, purchase, sale and servicing of loans to its
customers. Bloomfield is authorized to issue __________ shares of common stock,
par value $__.__ per share, and __________ shares of preferred stock. At the
merger date, Bloomfield will have ________ shares of common stock outstanding,
and ________ outstanding shares of preferred stock. For federal income tax
purposes, Bloomfield joins in the filing of a consolidated corporate income tax
return with Company.
Forest City is incorporated under the laws of _________. Forest City is a
banking institution whose principal business is the acceptance of deposits from
the general public and the origination, purchase, sale and servicing of loans to
its customers. Forest City is authorized to issue __________ shares of common
stock, par value $__.__ per share, and __________ shares of preferred stock. At
the merger date, Forest City will have ________ shares of common stock
outstanding, and ________ outstanding shares of preferred stock. For federal
income tax purposes, Forest City joins in the filing of a consolidated corporate
income tax return with Company.
Johnston is incorporated under the laws of _________. Johnston is a banking
institution whose principal business is the acceptance of deposits from the
general public and the origination, purchase, sale and servicing of loans to its
customers. Johnston is authorized to issue __________ shares of common stock,
par value $__.__ per share, and __________ shares of preferred stock. At the
merger date, Johnston will have ________ shares of common stock outstanding, and
________ outstanding shares of preferred stock. For federal income tax
<PAGE>
Board of Directors
___________, 199__
Page 3
purposes, Johnston joins in the filing of a consolidated corporate income tax
return with Company.
Lake City is incorporated under the laws of _________. Lake City is a banking
institution whose principal business is the acceptance of deposits from the
general public and the origination, purchase, sale and servicing of loans to its
customers. Lake City is authorized to issue __________ shares of common stock,
par value $__.__ per share, and __________ shares of preferred stock. At the
merger date, Lake City will have ________ shares of common stock outstanding,
and ________ outstanding shares of preferred stock. For federal income tax
purposes, Lake City joins in the filing of a consolidated corporate income tax
return with Company.
Lake Mills is incorporated under the laws of _________. Lake Mills is a banking
institution whose principal business is the acceptance of deposits from the
general public and the origination, purchase, sale and servicing of loans to its
customers. Lake Mills is authorized to issue __________ shares of common stock,
par value $__.__ per share, and __________ shares of preferred stock. At the
merger date, Lake Mills will have ________ shares of common stock outstanding,
and ________ outstanding shares of preferred stock. For federal income tax
purposes, Lake Mills joins in the filing of a consolidated corporate income tax
return with Company.
Mason City is incorporated under the laws of _________. Mason City is a banking
institution whose principal business is the acceptance of deposits from the
general public and the origination, purchase, sale and servicing of loans to its
customers. Mason City is authorized to issue __________ shares of common stock,
par value $__.__ per share, and __________ shares of preferred stock. At the
merger date, Mason City will have ________ shares of common stock outstanding,
and ________ outstanding shares of preferred stock. For federal income tax
purposes, Mason City joins in the filing of a consolidated corporate income tax
return with Company
Pocahontas is incorporated under the laws of _________. Pocahontas is a banking
institution whose principal business is the acceptance of deposits from the
general public and the
<PAGE>
Board of Directors
___________, 199__
Page 4
origination, purchase, sale and servicing of loans to its customers. Pocahontas
is authorized to issue __________ shares of common stock, par value $__.__ per
share, and __________ shares of preferred stock. At the merger date, Pocahontas
will have ________ shares of common stock outstanding, and ________ outstanding
shares of preferred stock. For federal income tax purposes, Pocahontas joins in
the filing of a consolidated corporate income tax return with Company.
[ADD DESCRIPTION OF POCAHONTAS`S REDEMPTION OF 35 MINORITY SHARES.]
Tucson is incorporated under the laws of _________. Tucson is a banking
institution whose principal business is the acceptance of deposits from the
general public and the origination, purchase, sale and servicing of loans to its
customers. Tucson is authorized to issue __________ shares of common stock, par
value $__.__ per share, and __________ shares of preferred stock. At the merger
date, Tucson will have ________ shares of common stock outstanding, and ________
outstanding shares of preferred stock. For federal income tax purposes, Tucson
joins in the filing of a consolidated corporate income tax return with Company.
Woodbine is incorporated under the laws of _________. Woodbine is a banking
institution whose principal business is the acceptance of deposits from the
general public and the origination, purchase, sale and servicing of loans to its
customers. Woodbine is authorized to issue __________ shares of common stock,
par value $__.__ per share, and __________ shares of preferred stock. At the
merger date, Woodbine will have ________ shares of common stock outstanding, and
________ outstanding shares of preferred stock. For federal income tax
purposes, Woodbine joins in the filing of a consolidated corporate income tax
return with Company.
Commercial is headquartered in Omaha, Nebraska, is a unitary non-diversified
savings and loan holding company incorporated under Nebraska law and is a
holding company that conducts no independent business activity. Commercial's
primary asset is the stock it owns in Bank. Commercial is authorized to issue
___________ shares of common stock, par value $.01 per share and _____________
shares of preferred stock, par value $0.01 per share. At the merger date,
Commercial will have _____________ shares of common outstanding and no shares of
<PAGE>
Board of Directors
___________, 199__
Page 5
preferred stock outstanding. Commercial's common stock is traded over the New
York Stock Exchange.
Bank is incorporated under the laws of the United States. Bank is a savings
institution whose principal business is the acceptance of deposits from the
general public and the origination, purchase, sale and servicing of mortgage
loans for the purpose of constructing, financing or refinancing one- to four-
family dwellings, and other residential and commercial real estate. Bank is
authorized to issue ___________ shares of common stock, par value $.01 per share
and __________ shares of preferred stock, no par value. At the merger date,
Bank will have ____________ shares of common stock outstanding and no shares of
preferred stock outstanding. For federal income tax purposes, Bank joins in the
filing of a consolidated corporate income tax return with Commercial.
Commercial and Company have determined that a number of business reasons exist
for the mergers including:
[INFORMATION TO BE PROVIDED BY COMMERCIAL FEDERAL.]
The proposed mergers will be completed as follows and in the following order:
1) Upon approval by the shareholders of both Company and Commercial and pursuant
to the corporation laws of the States of Nebraska and Iowa, Company will
merge with and into Commercial, with Commercial surviving and Company ceasing
to exist. (Hereinafter, the merger of Company with and into Commercial will
be referred to as the Acquisition Merger.) Company's shareholders will
exchange each share of Company common stock for 0.306 of a share of
Commercial common stock. Commercial will not issue fractional shares but
instead will distribute cash to the Company shareholders to the extent of
fractional shares. Any shares of Company common stock held by a holder who
dissents from the Acquisition Merger shall be entitled under the Iowa
Business Corporation Act to obtain payment for the value of such shares,
pursuant to the applicable provisions of such Act. Payment to dissenting
shareholders will be made either by Company (if such dissent
<PAGE>
Board of Directors
___________, 199__
Page 6
occurs prior to the Acquisition Merger) or by Commercial (if such dissent
occurs simultaneous with the Acquisition Merger).
2) All shares of Commercial common stock to be exchanged as a result of the
Acquisition Merger will be issued to the former Company common shareholders
at the consummation of such merger. No shares will be held back or placed in
escrow due to covenants and/or assurances in the Merger Agreement.
3) Following the Acquisition Merger and pursuant to the corporation laws of the
United States, Liberty Banks will merge with and into Bank, with Bank
surviving. (Hereinafter, the merger of Liberty Banks with and into Bank will
be referred to as the Bank Merger.) As a result of the Bank Merger, the
shares of Liberty Banks common stock issued and outstanding immediately
prior to the transfer will be canceled and the shares of Bank stock
outstanding immediately before the merger will constitute the only shares of
capital stock of Bank. Following the transaction, Liberty Banks will cease
to exist.
REPRESENTATIONS
- ---------------
Acquisition Merger
- ------------------
In your letter dated _______ __, 199_, the following representations of fact
were made regarding the Acquisition Merger:
. The fair market value of the Commercial stock received by each Company
shareholder will be approximately equal to the fair market value of the
Company stock surrendered in the exchange
. Commercial has no plan or intention to re-acquire any of its stock issued in
the transaction.
. Following the transaction, Commercial intends to continue Company's historic
business or use a significant portion of Company's historic business assets
in a business.
<PAGE>
Board of Directors
___________, 199__
Page 7
. Commercial has no plan or intention to sell or otherwise dispose of any
assets of Company acquired in the transaction, except for the disposition of
the stock of Liberty Banks in the Bank Merger, dispositions made in the
ordinary course of business, or transfers described in Section
368(a)(2)(C)/1/.
. Commercial will pay its own expenses, if any, incurred in connection with the
transaction.
. There is no intercorporate indebtedness existing between Company and
Commercial that was issued, acquired, or will be settled at a discount.
. Commercial is not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv). The term investment company in this context means
a corporation 50% or more of the value of whose total assets are stock and
securities and 80% of more of the value of whose total assets are assets held
for investment. In making the 50% and 80% determinations under the preceding
sentence, stock and securities in any subsidiary corporation shall be
disregarded and the parent corporation shall be deemed to own its ratable
share of the subsidiary's assets.
. The payment of cash in lieu of fractional shares of Commercial is solely for
the purpose of avoiding the expense and inconvenience to Commercial of
issuing fractional shares and does not represent separately bargained for
consideration. The total cash consideration to be paid in the transaction to
the Company shareholders, instead of issuing fractional shares of Commercial
stock, will not exceed 1% of the total consideration to be given in the
transaction to the Company shareholders in exchange for their shares of
Company stock. The fractional share interests of each Company shareholder
will be aggregated, and no Company shareholder will receive cash in an amount
equal to or greater than the value of one full share of Commercial stock.
- ---------------------
/1/ All references herein to Sections or Code are to the Internal Revenue Code
of 1986, as amended.
<PAGE>
Board of Directors
___________, 199__
Page 8
In its letter of ___________, __, 199_, Housley, Kantarian & Bronstein indicated
that, in their opinion, the Acquisition Merger will qualify as a merger under
the applicable laws of Nebraska and Iowa.
In its letter of ________ __, 1997, Company made the following representations
of fact regarding the Acquisition Merger:
. On December 31, 1996, ___________, _____________, _____________,
_____________, _____________, _____________, ___________, and ___________
merged with and into KPW Financial Corporation, a predecessor corporation to
Company. Also on that date, KPW Financial Corporation acquired all of the
outstanding shares of Liberty Leasing Company and Liberty Financial
Corporation. These transactions were separate and distinct from the merger of
Company with and into Commercial and none of these transactions were
consummated in contemplation of the merger of Company with and into
Commercial.
. The fair market value of the Commercial stock received by each Company
shareholder will be approximately equal to the fair market value of the
Company stock surrendered in the exchange.
. There is no plan or intention by the shareholders of Company who own 1% or
more of the Company common stock, and to the best of the knowledge of the
management of Company, there is no plan or intention on the part of the
remaining common shareholders of Company to sell, exchange, or otherwise
dispose of a number of shares of Commercial stock received in the transaction
that would reduce the Company shareholders' ownership of Commercial stock to
a number of shares having a value, as of the date of the transaction, of less
than 50% of the value of all of the formerly outstanding common stock of
Company as of the same date. For purposes of this representation, shares of
Company common stock surrendered by dissenters, or exchanged for cash in lieu
of fractional shares of Commercial stock will be treated as outstanding
Company common stock on the date of the transaction. Moreover, shares of
Company common stock and shares of Commercial stock held by Company
shareholders and otherwise sold, redeemed, or disposed of prior or subsequent
to the transaction will be considered in making this representation.
<PAGE>
Board of Directors
___________, 199__
Page 9
. The liabilities of Company assumed by Commercial and the liabilities to which
the transferred assets of Company are subject were incurred by Company in the
ordinary course of its business.
. Company and the shareholders of Company will pay their respective expenses,
if any, incurred in connection with the transaction.
. There is no intercorporate indebtedness existing between Company and
Commercial that was issued, acquired, or will be settled at a discount.
. Company is not an investment company as defined in Section 368(a)(2)(F)(iii)
and (iv). The term investment company in this context means a corporation 50%
or more of the value of whose total assets are stock and securities and 80%
of more of the value of whose total assets are assets held for investment. In
making the 50% and 80% determinations under the preceding sentence, stock and
securities in any subsidiary corporation shall be disregarded and the parent
corporation shall be deemed to own its ratable share of the subsidiary's
assets.
. Company is not under the jurisdiction of a Court in a Title 11 or similar
case within the meaning of Section 368(a)(3)(A).
. The fair market value of the assets of Company transferred to Commercial will
equal or exceed the sum of the liabilities assumed by Commercial plus the
amount of liabilities, if any, to which the transferred assets are subject.
. None of the compensation received by any shareholder-employees of Company
will be separate consideration for, or allocable to, any of their shares of
Company stock; none of the shares of Commercial stock received by any Company
shareholder-employees will be separate consideration for, or allocable to,
any employment agreement; and the compensation paid to any Company
shareholder-employees will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length
for similar services.
<PAGE>
Board of Directors
___________, 199__
Page 10
Bank Merger
- -----------
In your letter dated _________ __, 199_, the following representations of fact
were made regarding the Bank Merger:
. Following the transaction, Bank intends to continue the historic business of
each Liberty Bank or use a significant portion of the historic business
assets of each Liberty Bank in a business
. Bank has no plan or intention to sell or otherwise dispose of any of the
assets of Liberty Banks acquired in the Bank Merger, except for dispositions
made in the ordinary course of business, or transfers described in Section
368(a)(2)(C).
. Commercial has no plan or intention to sell or otherwise dispose of the stock
of Bank following its merger with Liberty Banks.
. Liberty Bank and Commercial will each pay their own expenses, if any,
incurred in connection with the transaction.
. There is no intercorporate indebtedness existing between Liberty Banks and
Bank that was issued, acquired, or will be settled at a discount.
. Bank is not an investment company as defined in Section 368(a)(2)(F)(iii) and
(iv). The term investment company in this context means a corporation 50% or
more of the value of whose total assets are stock and securities and 80% of
more of the value of whose total assets are assets held for investment. In
making the 50% and 80% determinations under the preceding sentence, stock and
securities in any subsidiary corporation shall be disregarded and the parent
corporation shall be deemed to own its ratable share of the subsidiary's
assets.
In its letter of ___________, __, 199_, Housley, Kantarian & Bronstein indicated
that, in their opinion, the Bank Merger will qualify as a merger under the
applicable federal laws.
<PAGE>
Board of Directors
___________, 199__
Page 11
In its letter of ________ __, 199_, Company made the following representations
of fact regarding the Bank Merger:
. Bank will acquire at least 90% of the fair market value of the net assets and
at least 70% of the fair market value of the gross assets held by each
Liberty Bank immediately prior to the transaction. For purposes of this
representation, amounts paid by each Liberty Bank to dissenters, each Liberty
Bank's assets used to pay their reorganization expenses, and all redemptions
and distributions (except for regular, normal dividends) made by each Liberty
Bank immediately preceding the transfer, will be included as assets of each
Liberty Bank held immediately prior to the transaction.
. The liabilities of Liberty Banks to be assumed by Bank and the liabilities to
which the transferred assets of Liberty Banks are subject were incurred by
Liberty Banks in the ordinary course of its business.
. Liberty Banks will each pay their expenses, if any, incurred in connection
with the transaction
. There is no intercorporate indebtedness existing between Liberty Banks and
Bank that was issued, acquired, or will be settled at a discount.
. Liberty Banks are not an investment company as defined in Section
368(a)(2)(F)(iii) and (iv). The term investment company in this context means
a corporation 50% or more of the value of whose total assets are stock and
securities and 80% of more of the value of whose total assets are assets held
for investment. In making the 50% and 80% determinations under the preceding
sentence, stock and securities in any subsidiary corporation shall be
disregarded and the parent corporation shall be deemed to own its ratable
share of the subsidiary's assets.
. Liberty Banks are not under the jurisdiction of a Court in a Title 11 or
similar case within the meaning of Section 368(a)(3)(A).
<PAGE>
Board of Directors
___________, 199__
Page 12
. The fair market value of the assets of Liberty Banks to be transferred to
Bank will equal or exceed the sum of the liabilities to be assumed by Bank
plus the amount of liabilities, if any, to which the transferred assets are
subject.
. The total adjusted basis of the assets of Liberty Banks transferred to Bank
will equal or exceed the sum of the liabilities assumed by Bank, plus the
amount of the liabilities, if any, to which the transferred assets are
subject.
OPINION
- -------
Acquisition Merger
- ------------------
Based on the facts contained herein, the Merger Agreement, the representations
of facts as set forth in your letter dated ________ __, 199_; the
representations of fact contained in the letter of _______ __, 199_ from
Company; the opinion letter of _________ __, 199_ from Housley Kantarian &
Bronstein; and our assumption that the Acquisition Merger will be consummated as
described in the Merger Agreement and Form S-4 as filed with the Securities and
Exchange Commission, it is our opinion that the federal income tax consequences
of the proposed Acquisition Merger are as follows:
. The merger of Company with and into Commercial, with Commercial surviving,
should qualify as a reorganization within the meaning of Section
368(a)(1)(A). Company and Commercial should each be a "party to a
reorganization" within the meaning of Section 368(b).
. Company should recognize no gain or loss on the transfer of its assets to
Commercial in exchange for the Commercial common stock, cash, if any, and the
assumption of its liabilities by Commercial, by reason of the application of
Sections 361(a), 361(b) and 357(a).
<PAGE>
Board of Directors
___________, 199__
Page 13
. No gain or loss should be recognized by Company upon the distribution of the
Commercial common stock to the Company shareholders, by reason of the
application of Section 361(c)(1).
. No gain or loss should be recognized by Commercial on the receipt of
Company's assets in exchange for Commercial common stock, and the assumption
by Commercial of Company's liabilities, by reason of the application of
Section 1032(a).
. The basis of the assets of Company in the hands of Commercial should be the
same as the basis of such assets in the hands of Company immediately prior to
the reorganization, by reason of the application of Section 362(b).
. The holding period of the property acquired by Commercial from Company should
include the holding period of such property in the hands of Company
immediately prior to the reorganization, by reason of the application of
Section 1223(2).
. No gain or loss should be recognized by the former Company shareholders upon
the exchange of their Company common stock for the Commercial common stock
(including fractional shares which they otherwise might be entitled to
receive), by reason of the application of Section 354(a).
. The basis of the Commercial common stock (including fractional share
interests a Company shareholder would otherwise be entitled to receive) to be
received by a Company shareholder who exchanges Company stock for Commercial
common stock and cash should be the same as the basis of the Company stock
surrendered in the exchange by reason of Section 358(a)(1).
. The holding period of the Commercial common stock (including fractional share
interests that they would otherwise be entitled to receive) to be received by
Company shareholders should, in each instance, include the holding period of
the Company shares surrendered in the exchange, provided Company stock was
held as a capital asset on the date of the exchange, by reason of the
application of Section 1223(1).
<PAGE>
Board of Directors
___________, 199__
Page 14
. Commercial as the survivor should succeed to and take into account as of the
close of the day of the distribution or transfer the items of Company
described in Section 381(c) , subject to the conditions and limitations
specified in Sections 381(b) and 381(c), by reason of the application of
Section 381(a)(2).
. As provided in Section 381(c)(2) and Regulation Section 1.381(c)(2)-1,
Commercial as the survivor should succeed to and take into account the
earnings and profits, or deficit in earnings and profits, of Company as of
the date or dates of transfer. Any deficit in earnings and profits of either
Commercial or Company should be used only to offset earnings and profits
accumulated after the date of transfer.
. Cash received by a shareholder of Company otherwise entitled to receive a
fractional share of Commercial common stock in exchange for his Company stock
should be treated as if the fractional shares were distributed as part of the
exchange and then were redeemed by Commercial. These cash payments should be
treated as having been received as distributions in full payment in exchange
for the stock redeemed as provided in Section 302(a). This receipt of cash
should result in gain or loss measured by the difference between the basis of
such fractional share interest and the cash received. Such gain or loss
should be capital gain or loss to the former Company shareholder, provided
the Company stock was a capital asset in such former shareholder's hands and
as such, should be subject to the provisions and limitations of Subchapter P
of Chapter 1 (Rev. Rul. 66-365, 1966-1 C.B. 116; and Rev. Rul. 77-41, 1977-2
C.B. 574).
. Where cash is received by a dissenting shareholder of Company, such cash
should be treated as received by the dissenting shareholder as a distribution
in redemption of his stock, subject to the provisions and limitations of
Section 302.
Bank Merger
- -----------
Based on the facts contained herein, the Merger Agreement, the representations
of facts as set forth in your letter dated ____________ __, 199_; the
representations of fact contained in the
<PAGE>
Board of Directors
___________, 199__
Page 15
letter of _________ __, 199_, from Company; the opinion letter of Housely
Kantarian & Bronstein of _______ __, 199_ that the Bank Merger will qualify as a
merger under the applicable laws of the United States; and our assumption that
the Bank Merger will be consummated as described in the Merger Agreement and
Form S-4 as filed with the Securities and Exchange Commission, it is our opinion
that the federal income tax consequences of the proposed Bank Merger are as
follows:
. The merger of Liberty Banks with and into Bank, with Bank surviving, should
qualify as a reorganization within the meaning of Section 368(a)(1)(A).
Liberty Banks and Bank should each be a "party to a reorganization" within
the meaning of Section 368(b).
. Liberty Banks should recognize no gain or loss on the transfer of its assets
to Bank in constructive exchange for the stock of Bank and the assumption of
Liberty Banks' liabilities by Bank, by reason of the application of Sections
361(a), 357(a) and Section 357(c).
. No gain or loss should be recognized by Bank on the receipt of Liberty Banks'
assets in constructive exchange for Bank stock, and the assumption by Bank of
Liberty Banks' liabilities, by reason of the application of Section 1032(a).
. The basis of the assets of Liberty Banks in the hands of Bank should be the
same as the basis of such assets in the hands of Liberty Banks immediately
prior to the reorganization, by reason of the application of Section 362(b).
. The holding period of the property acquired by Bank from Liberty Banks should
include the holding period of such property in the hands of Liberty Banks
immediately prior to the Bank Merger, by reason of the application of Section
1223(2).
. No gain or loss should be recognized by Commercial upon the constructive
exchange of Bank stock for Liberty Banks common stock, by reason of the
application of Section 354(a)(1).
<PAGE>
Board of Directors
___________, 199__
Page 16
. The basis of the Bank stock held by Commercial after the Bank Merger should
be the same as the basis in the stock immediately before the merger, plus its
basis in the Liberty Banks stock canceled in the merger, by reason of the
application of Section 358(a)./2/
. The holding period of the Bank stock constructively received by Commercial in
the transaction should include the period in which the Liberty Banks stock
was held by Commercial provided the Liberty Banks stock was held as a capital
asset on the date of the exchange, by reason of the application of Section
1223(1).
. Bank as the survivor should succeed to and take into account as of the close
of the day of the distribution or transfer the items of Liberty Banks
described in Section 381(c), subject to the conditions and limitations
specified in Sections 381(b) and 381(c), by reason of the application of
Section 381(a)(2). Under Regulation Section 1.381(c)(4)-1(a)(1)(ii), Bank
should succeed to and take into account the dollar amount of Liberty Bank's
reserve for bad debts accumulated in prior years under Section 593.
. As provided in Section 381(c)(2) and Regulation Section 1.381(c)(2)-1/3/,
Bank as the survivor should succeed to and take into account the earnings and
profits, or deficit in earnings and profits, of Liberty Banks as of the date
of transfer. Any deficit in earnings and profits of either Liberty Banks or
Bank should be used only to offset earnings and profits accumulated after the
date or dates of transfer.
APPLICABLE LAW
- --------------
- ---------------------
/2/ The Internal Revenue Service sometimes treats reorganizations structured
like the Bank Merger as a reorganization within the meaning of Section
368(a)(1)(A) by reason of the application of Section 368(a)(2)(D) of the
Code. If the Bank Merger is a reorganization under Section 368(a)(1)(A) and
Section 368(a)(2)(D), then the basis of the Bank common stock in the hands
of Commercial will be increased, generally, by the net asset basis of
Liberty Banks. See Treas. Reg. Section 1.358-6(b) and (c).
/3/ All references herein to the Regulations are to the Income Tax Regulations
issued by the Department of the Treasury as of the date of this letter.
<PAGE>
Board of Directors
___________, 199__
Page 17
Section 368(a)(1)(A) provides that the term "reorganization" means a statutory
merger or consolidation. Regulation Section 1.368-2(b)(1) provides that in
order to qualify as a reorganization under Section 368(a)(1)(A), the Acquisition
Merger and the Bank Merger must be mergers effected pursuant to the applicable
state or Federal corporation laws. It has been represented that the Acquisition
Merger will qualify as a statutory merger under the applicable Nebraska and Iowa
law and that the Bank Merger will qualify as a statutory merger under the
applicable Federal law.
In addition to the requirements set forth in the statute, in order for a
transaction to be a tax-free reorganization, certain requirements set forth in
the regulations under Section 368 must also be met. Regulation Section 1.368-
1(b) provides that the purpose of the reorganization provisions of the Code is
to except from the general rule of taxability certain specifically described
exchanges incident to such readjustments of corporate structures made in one of
the particular ways specified in the Code as are required by business exigencies
and which affect only a readjustment of continuing interest in property under
modified corporate form. To qualify as a tax free reorganization under the
Code, a number of criteria must be met including 1) a valid business purpose
for the transaction, 2) continuity of the business enterprise under the
modified corporate form and 3) continuity of ownership interest on the part of
those persons who, directly or indirectly, were the owners of the enterprise
prior to the reorganization.
To be treated as a reorganization described in Section 368(a)(1)(A) , the
transaction must be planned and carried out for a genuine business purpose. As
enumerated in the Form S-4 filed with the Securities and Exchange Commission, a
number of business reasons exist for the Acquisition Merger and Bank Merger
including:
[INFORMATION TO BE PROVIDED BY COMMERCIAL FEDERAL.]
Accordingly, the business purpose requirement should be met for both the
Acquisition Merger and the Bank Merger.
Regulation Section 1.368-1(d) provides that continuity of business enterprise
requires that the acquiring corporation either (i) continue the acquired
corporation's historic business or (ii) use a
<PAGE>
Board of Directors
___________, 199__
Page 18
significant portion of the acquired corporation's historic assets in a business.
It has been represented that following the Acquisition Merger, Commercial
intends to continue Company's historic business or use a significant portion of
Company's historic business assets in a business. It has also been represented
that following the Bank Merger, Bank intends to continue Liberty Bank's historic
business or use a significant portion of Liberty Bank's historic business assets
in a business.
According to Rev. Rul. 85-198, 1985-2 C.B. 120, the continuity of business
enterprise requirement of Regulation Section 1.368-1(d) is satisfied when the
business of a former subsidiary of a merged bank holding company is carried on
in the same manner and form indirectly, through a second tier subsidiary, of the
surviving bank holding company. Though the facts are slightly different in this
case as Liberty Banks will merge into Bank instead of operating as a second tier
subsidiary of Commercial, Liberty Bank's operations will continue to be carried
on indirectly through Bank. Accordingly, the continuity of business enterprise
requirement should be met for both Acquisition Merger and Bank Merger.
Under Regulation Section 1.368-1(b), there must be a continuing interest on the
part of those shareholders who, directly or indirectly, were the shareholders of
the enterprise prior to the reorganization. Rev. Proc. 77-37, 1977-2 C.B. 568
provides that the "continuity of interest" requirement of Regulation Section
1.368-1(b) is satisfied if the former shareholders of the acquired corporation
own, as a result of the transaction, stock in the acquiring corporation having a
value equal to at least 50% of the value of all of the formerly outstanding
stock of the acquired corporation as of the same date. It is not necessary that
each shareholder of the acquired corporation receive in the exchange stock of
the acquiring corporation, which is equal in value to at least 50% of the value
of his former stock interest in the acquired corporation, so long as one or more
of the shareholders of the acquired corporation have a continuing interest
through stock ownership in the acquiring corporation which is, in the aggregate,
equal in value to at least 50% of the value of all of the formerly outstanding
stock of the acquired corporation. Sales, redemptions, and other dispositions
of stock occurring prior or subsequent to the exchange which are part of the
plan of reorganization will be considered in determining whether there is a 50%
continuing interest through stock ownership as of the effective date of the
reorganization.
<PAGE>
Board of Directors
___________, 199__
Page 19
It has been represented that there is no plan or intention by shareholders of
Company who own 1% or more of the common stock of Company, and to the best of
the knowledge of the management of Company, there is no plan or intention on the
part of the remaining Company shareholders to sell, exchange or otherwise
dispose of Commercial common stock received in the merger such that the former
Company shareholders will afterwards own Commercial common stock having an
aggregate value which is less than 50% of the total value of all Company common
stock outstanding immediately before the merger. For purposes of this
representation, shares of Company common stock exchanged for cash or other
property surrendered by dissenters, or exchanged for cash in lieu of fractional
shares of Company stock will be treated as outstanding Company stock on the date
of the transaction. Moreover, shares of Company stock and shares of Commercial
stock held by Company shareholders and otherwise sold, redeemed, or disposed of
prior or subsequent to the transaction will be considered.
In Rev. Rul. 68-526, 1968-2 C.B. 156, the Service held that the acquisition of
the assets of a parent corporation and its 60 percent owned subsidiary by
another corporation for stock of that corporation and the assumption of
liabilities constituted separate tax-free reorganizations when the transactions
occurred pursuant to one plan of reorganization. See also Rev. Rul. 76-528,
1976-2 C.B. 103, which indicated that continuity of interest was met in Rev.
Rul. 68-526 in the merger of the 60 percent owned subsidiary because of the
continuing interest of the shareholders of parent corporation. Although not
directly on point, if continuity is met in Rev. Rul. 68-526 it seems that
continuity of interest should be met in the Bank Merger by reason of the
shareholders of Company meeting the continuity of interest requirement in the
Acquisition Merger. In fact, although the Service no longer issues merger
ruling, they have issued numerous private letters rulings in which it has held
that the continuity interest requirement is met on the bank merger in the side
by side mergers of a bank holding company and its wholly owned bank subsidiary
into another bank holding company and its wholly owned subsidiary. See Private
Letter Rulings ("PLRs") 9325026 (March 24, 1993), 9328042 (April 21, 1993),
9317027 (January 29, 1993), 9240026 (July 6, 1992), 9247016 (August 22, 1992)
and 9237031 (June 16, 1992). Although private letter rulings are not binding on
the Service, they do provide some indication of the Service's position regarding
an issue.
<PAGE>
Board of Directors
___________, 199__
Page 20
It has also been represented that Commercial has no plan or intention to
otherwise dispose of the stock of Bank following its merger with Liberty Banks.
Accordingly, the continuity of interest requirement should be met in the
Acquisition Merger and Bank Merger.
Based on the analysis set forth above, the Acquisition Merger and the Bank
Merger should qualify as reorganizations described in Section 368(a)(1)(A).
Section 368(b)(2) provides that, in the case of a reorganization resulting from
the acquisition by one corporation of stock or properties of another, the term
"a party to a reorganization" includes both corporations. Accordingly, in the
Acquisition Merger, Company and Commercial each should be a party to a
reorganization. In addition, in the Bank Merger, Liberty Banks and Bank each
should be a party to a reorganization.
Section 361(a) provides that no gain or loss shall be recognized to a
corporation if such corporation is a party to a reorganization and exchanges
property, pursuant to a plan of reorganization, solely for stock or securities
in another corporation who also is a party to the reorganization.
Section 357(a) provides that if the taxpayer receives property which would be
permitted to be received under Section 361 without the recognition of gain if it
were the sole consideration, and as part of the consideration, another party to
the exchange assumes a liability of the taxpayer, or acquires from the taxpayer
property subject to a liability, then such assumption or acquisition shall not
be treated as money or other property, and will not prevent the exchange from
being within the provisions of Section 361.
<PAGE>
Board of Directors
___________, 199__
Page 21
Section 357(c) provides that in an exchange of property described under Section
368(a)(1)(D)/4/, if the sum of the liabilities assumed plus the amount of the
liabilities to which the property is subject, exceeds the basis of the property
transferred pursuant to the exchange, then such excess shall be considered gain
from the sale of a capital asset or of property which is not a capital asset, as
the case may be.
Because Company and Commercial each should be a party to a reorganization and
the cash, if any, will be distributed pursuant to the Merger Agreement, no gain
or loss should be recognized to Company on the transfer of its property to
Commercial in exchange for Commercial common stock and cash, if any. In Rev.
Rul. 70-240, 1970-1 C.B. 81, the Internal Revenue Service held that the transfer
of property by one corporation, X, to another, Y, where the stock of both
corporations are owned 100% by one shareholder, B, is treated as a constructive
issuance of Y stock. See also Rev. Rul. 75-383, 1975-2 C.B. 127. Further,
because Liberty Banks and Bank each should be a party to a reorganization and it
has been represented that the adjusted basis of the assets transferred will
exceed the sum of the liabilities assumed, plus the liabilities to which the
transferred assets are subject, no gain or loss should be recognized to Liberty
Banks on the transfer of its property in constructive exchange for Bank stock in
the Bank Merger.
Section 361(c)(1) provides that except as provided in Section 361(c)(2), no gain
or loss is recognized to a corporation, which is a party to a reorganization, on
the distribution to its shareholders of property pursuant to a plan of
reorganization. Section 361(c)(2) provides that the general rule of Section
361(c)(1) does not apply if the corporation distributes property other
- ------------------
/4/ Section 368(a)(1)(D) provides that a reorganization includes a transfer by a
corporation of all or a part of its assets to another corporation if
immediately after the transfer the transferor, or one or more or its
shareholders is in control of the corporation to which the assets are
transferred; but only if, pursuant to the plan, stock or securities of the
corporation to which the assets are transferred are distributed in a
transaction which qualifies under Section 354, 355 or 356. Section 354(a)(1)
provides that no gain or loss will be recognized if stock or securities in a
corporation a party to a reorganization are, pursuant to the plan of
reorganization, exchanged solely for stock or securities in such corporation
or in another corporation a party to the reorganization. Section 354(b)(1)
states, in part, that the receipt of stock in an exchange pursuant to a
reorganization within the meaning of Section 368(a)(1)(D) of the Code does
not give rise to gain or loss where the corporation to which the assets are
transferred acquires substantially all of the properties of the transferor.
In the Bank Merger, Bank will acquire all the assets of Liberty Banks and
Commercial will be in control of Liberty Banks and Bank, thus, the
transaction may also qualify as a reorganization under Section 368(a)(1)(D).
<PAGE>
Board of Directors
___________, 199__
Page 22
than "qualified property". Qualified property includes stock in a corporation
which is a party to the reorganization if such stock is received by the
distributing corporation in the exchange. In the Acquisition Merger, except for
cash that may be received by dissenting shareholders, the sole consideration the
Company shareholders receive is Commercial stock. Because Commercial should be a
party to a reorganization, and the Commercial stock is received by Company in
the Acquisition Merger, Commercial stock should be qualified stock.
Accordingly, no gain or loss should be recognized by Company on the distribution
of Commercial stock to the former Company shareholders pursuant to the Merger
Agreement. In the Bank Merger, Commercial is constructively receiving solely
Bank stock. Because Bank should be a party to a reorganization and Bank stock
is constructively received in the Bank Merger, the constructive Bank stock
should be qualified stock. Accordingly, no gain or loss should be recognized by
Liberty Banks on the distribution of the constructive Bank stock to Commercial
pursuant to the Merger Agreement.
Section 1032(a) provides that no gain or loss shall be recognized to a
corporation on the receipt of money or other property in exchange for stock of
such corporation. In the Acquisition Merger, Company will merge with and into
Commercial. Accordingly, Commercial should not recognize any gain or loss as a
result of the exchange of its stock for the property of Company. In the Bank
Merger, Liberty Banks will merge with and into Bank. Accordingly, Bank should
not recognize any gain or loss as a result of the constructive exchange of its
stock for the property of Liberty Banks.
Section 362(b) provides that if property was acquired by a corporation in
connection with a reorganization, the basis of such property is the same as it
was in the hands of the transferor, increased in the amount of gain recognized
to the transferor on such transfer. Because Commercial should receive property
from Company in connection with a reorganization within the meaning of Section
368(a)(1)(A) and Company should recognize no gain or loss on the transfer, the
basis of the assets received by Commercial should be the same as the basis of
those assets in the hands of Company immediately prior to the Acquisition
Merger. Because Bank should receive property from Liberty Banks in connection
with a reorganization under Section 368(a)(1)(A) and Bank should recognize no
gain or loss on the transfer, the basis of the assets
<PAGE>
Board of Directors
___________, 199__
Page 23
received by Bank should be the same as the basis of those assets in the hands of
Liberty Banks immediately prior to the Bank Merger.
Section 1223(2) provides that, in determining the period for which the taxpayer
has held property, however acquired, there shall be included the period for
which such property was held by any other person, if such property has, for
purposes of determining gain or loss from a sale or exchange, the same basis (in
whole or in part) in his hands as it would have had in the hands of such other
person. Because the basis of the assets to be received by Commercial from
Company should be the same as the basis of those assets in the hands of Company
immediately prior to the transfer, the holding period for the assets of Company
to be received by Commercial should include the period during which such assets
were held by Company. Because the basis of the assets to be received by Bank
from Liberty Banks should be the basis of those assets in the hands of Liberty
Banks immediately prior to the transfer, the holding period for the assets of
Liberty Banks to be received by Bank should include the period during which such
assets were held by Liberty Banks.
Section 354(a)(1) provides that no gain or loss is recognized if stock or
securities in a corporation a party to a reorganization are, pursuant to the
plan of reorganization, exchanged solely for stock or securities of another
corporation a party to the reorganization.
In the Acquisition Merger, because Company and Commercial are each a party to a
reorganization and the Company shareholders are exchanging Company stock solely
for Commercial stock, the shareholders of Company should recognize no gain or
loss on the exchange of the Company stock for Commercial stock (including
fractional share interests that they would otherwise be entitled to receive.)
In addition, because Bank and Liberty Banks are each a party to a reorganization
and Commercial should be treated as constructively receiving solely Bank stock,
Commercial should recognize no gain or loss on the constructive exchange of
Liberty Banks stock for Bank stock.
Section 358(a)(1) provides that, in the case of an exchange to which Section 354
applies, the basis of the property permitted to be received under Section 354
without the recognition of gain
<PAGE>
Board of Directors
___________, 199__
Page 24
or loss shall be the same as that of the property exchanged, decreased by (i)
the fair market value of any other property (except money) received by the
taxpayer, (ii) the amount of any money received by the taxpayer, and (iii) the
amount of loss to the taxpayer which was recognized on such exchange, and
increased by (i) the amount which was treated as a dividend, and (ii) the amount
of gain to the taxpayer which was recognized on such exchange (not including any
portion of such gain which was treated as a dividend).
Because the Acquisition Merger should constitute an exchange to which Section
354 applies, the basis of the Commercial common stock (including the fractional
share interests that they would otherwise be entitled to receive) in the hands
of the Company shareholders should be the same as the basis of the Company stock
held immediately before the exchange.
Because the Bank Merger should constitute an exchange to which Section 354
applies, the basis of the constructive Bank common stock in the hands of
Commercial should be the same as the basis of the Liberty Banks stock exchanged.
Thus, Commercial's basis in the Bank stock should equal the basis of such stock
held immediately prior to the Bank Merger, plus its basis in the Liberty Banks
stock canceled as a result of the Bank Merger./5/
Section 1223(1) provides that, in determining the period for which the taxpayer
has held a capital asset (as defined in Section 1221 or Section 1231) received
in an exchange, there shall be included the period for which the taxpayer held
the property exchanged if the property has, for the purpose of determining gain
or loss from a sale or exchange, the same basis (in whole or in part) in its
hands as the property exchanged. Because the basis of the Commercial common
stock (including fractional share interests that they would otherwise be
entitled to receive) held by the Company shareholders following the Acquisition
Merger should have the same basis as the Company stock exchanged, and provided
the Company stock exchanged was a capital asset on the date of the exchange, the
holding period of the Commercial common stock should include
- -----------------------
/5/ The Internal Revenue Service sometimes treats reorganizations structured
like the Bank Merger as a reorganization within the meaning of Section
368(a)(1)(A) by reason of the application of Section 368(a)(2)(D) of the
Code. If the Bank Merger is a reorganization under Section 368(a)(1)(A) and
Section 368(a)(2)(D), then the basis of the Bank common stock in the hands
of Commercial will be increased, generally, by the net asset basis of
Liberty Banks. See Treas. Reg. Section 1.358-6(b) and (c).
<PAGE>
Board of Directors
___________, 199__
Page 25
the period for which the Company stock was held. Because the basis of the Bank
common stock constructively received by Commercial should have the same basis as
the Liberty Banks common stock, the holding period of Commercial in the Bank
common stock constructively received should include the period for which the
Liberty Banks common stock was held, provided that such stock was a capital
asset on the date of the exchange.
Section 381(a)(2) provides that in the case of the acquisition of the assets of
another corporation in a transfer to which Sections 361 and 368(a)(1)(A) apply,
the acquiring corporation succeeds to and takes into account, as of the close of
the day of such transfer, the items of the transferor described in Section
381(c), subject to the conditions and limitations specified in Section 381(b)
and (c). Regulation Section 1.381(a)-1(a) provides that the items of the
transferor described in Section 381(c), which the acquiring corporation succeeds
to and takes into account are subject to the provisions and limitations
specified in Sections 381, 382, 383, and 384 and the regulations thereunder.
Because the Acquisition Merger is a transaction to which Sections 361 and
Section 368(a)(1)(A) should apply, Commercial should succeed to and take into
account the items of Company described in Section 381(c), subject to the
conditions and limitations specified in Section 381(b) and (c). Because the Bank
Merger is a transaction to which Sections 361 and Section 368(a)(1)(A) should
apply, Bank should succeed to and take into account the items of Liberty Banks
described in Section 381(c) subject to the conditions and limitations specified
in Section 381(b) and (c).
Regulation Section 1.381(c)(4)-1(a)(1)(ii) provides that, in a transaction to
which Sections 361 and 368(a)(1)(A) apply, the acquiring corporation takes into
its accounts the dollar balances of those accounts of the transferor corporation
which represent reserves for which the transferor corporation has claimed a
deduction in computing its taxable income for taxable years ending on or before
the date of distribution. Because the Bank Merger is a transaction to which
Sections 361 and Section 368(a)(1)(A) should apply, Bank should succeed to and
take into account the dollar amount of Savings' reserve for bad debts
accumulated in prior years under Section 593.
Section 381(c)(2) and Regulation Section 1.381(c) (2)-1 provide that in the case
of a transfer described in Section 381(a), the earnings and profits of the
transferor corporation or deficit in
<PAGE>
Board of Directors
___________, 199__
Page 26
earnings and profits, are deemed to have been received or incurred by the
acquiring corporation as of the close of the date of the transfer, except that
any deficit in earnings or profits of either the transferor or the transferee
will be used only to offset earnings and profits accumulated after the date of
the transfer. Because the merger of Company into Commercial should be a transfer
described in Section 381(a), the earnings and profits, or deficit in earnings
and profits, of Company should be deemed to have been received or incurred by
Commercial as of the close of the date of transfer, except that any deficit in
earnings and profits of Company on the one hand, or Commercial on the other
hand, should be used only to offset earnings and profits accumulated after the
date of the transfer. Because the merger of Liberty Banks with and into Bank
should also be a transfer described in Section 381(a), the earnings and profits,
or deficit in earnings and profits, of Liberty Banks should be deemed to have
been received or incurred by Bank as of the close of the date of transfer,
except that any deficit in earnings and profits of Liberty Banks on the one
hand, or Bank on the other hand, should be used only to offset earnings and
profits accumulated after the date of the transfer.
Rev. Rul. 66-365, provides that cash received by a shareholder as part of a plan
of reorganization under Section 368(a)(1)(A) , which is attributable to
fractional shares of stock of the acquiring corporation, will be treated as if
the fractional shares were distributed as part of the exchange and then were
redeemed by the acquirer. Under Section 302(a), such cash payments will be
treated as having been received as distributions in full payment in exchange for
the stock redeemed provided the redemption is not essentially equivalent to a
dividend.
Rev. Proc. 77-41, provides that the IRS will issue an advance ruling under
Section 302(a) that cash to be distributed to shareholders in lieu of fractional
share interests arising in corporate reorganizations will be treated as having
been received in part or in full payment in exchange for the stock redeemed if
the cash distribution is undertaken solely for the purpose of saving the
corporation the expense and inconvenience of issuing and transferring fractional
shares, and is not separately bargained for consideration. The purpose of the
transaction giving rise to the fractional share interest, the maximum amount of
cash that may be received by any one shareholder, and the percentage of the
total consideration that will be cash are among the factors that will be
considered in determining whether a ruling is to be issued.
<PAGE>
Board of Directors
___________, 199__
Page 27
It has been represented that the payment of cash in lieu of fractional shares of
Commercial stock is solely for the purpose of avoiding the expense and
inconvenience to Commercial of issuing fractional shares and does not represent
separately bargained for consideration. The total cash consideration that will
be paid in the transaction to the Company shareholders instead of issuing
fractional shares of Commercial common stock will not exceed one percent of the
total consideration that will be issued in the transaction to the Company
shareholders in exchange for their shares of Company stock. The fractional
share interests of each Company shareholder will be aggregated, and no Company
shareholder will receive cash attributable to the fractional shares in an amount
equal to or greater than the value of one full share of Commercial common stock.
Accordingly, cash received by a shareholder of Company otherwise entitled to
receive a fractional share of Commercial common stock in the exchange for
Company common stock should be treated as if the fractional shares were
distributed as part of the exchange and then were redeemed by Commercial. These
cash payments should be treated as having been received as distributions in full
payment in exchange for the stock redeemed as provided in Section 302(a). The
receipt of cash should result in gain or loss measured by the difference between
the shareholder's basis of such fractional share interest exchanged and the cash
received. Such gain or loss should be capital gain or loss to a Company
shareholder, provided the Company shareholder's common stock was a capital asset
in the shareholder's hands and, as such, would be subject to the provisions and
limitations of Subchapter P of Chapter 1.
Section 302(b)(3) provides that if a redemption is in complete redemption of the
stock of a corporation owned by a shareholder, such redemption shall be treated
as a distribution in part or in full payment in exchange for such stock. In the
proposed transaction, former shareholders of Company who dissent to the proposed
merger will receive a cash distribution equal to the fair market value of the
stock at the time of the redemption. Accordingly, to the extent cash is
received by a dissenting Company shareholder, such cash will be treated as
received by the Company shareholder as a distribution in redemption of his stock
subject to the provisions and limitation of Section 302.
* * * * * * * * *
<PAGE>
Board of Directors
___________, 199__
Page 28
Our opinion is based solely upon:
. The representations, information, documents, and facts ("representations")
referred to in this letter;
. Our assumption (without independent verification or review) that all of the
representations and all of the original, copies, and signatures of documents
are accurate, true and authentic;
. Our assumption (without independent verification or review) that there will
be timely execution and delivery of, and performance as required by the
representations and documents;
. Our assumption (without independent verification or review) that all
documents pertaining to the proposed transaction and provided for our review
are accurate, true and authentic.
Our opinion is limited to those expressed above and we express no opinion with
regard to any sections of the Code other than those referred to above. We
express no opinion with regard to the taxation of the proposed transaction
described herein under the laws of any state, local or foreign jurisdiction. We
express the opinions contained herein as of the date of this letter only.
We express no opinion regarding the federal income tax consequences of the
transactions which Liberty Financial Corporation entered into on December 31,
1996 (the "December 31, 1996 Transactions") whereby i) ___________,
_____________, _____________, _____________, _____________, _____________,
___________, and ___________ merged into KPW Financial Corporation (the
predecessor to Liberty Financial Corporation) and ii) Liberty Financial
Corporation acquired the stock of Liberty Leasing Company and Liberty Services
Corp. Our opinions expressed above are dependent on Company's representation
that such transactions were separate and distinct from the merger of Company
with and into Commercial and were not consummated in contemplation of the merger
of Company with and into Commercial. Furthermore, we express no opinion as to
the federal income tax consequences to the
<PAGE>
Board of Directors
___________, 199__
Page 29
shareholders of ___________, _____________, _____________, _____________,
_____________, _____________, ___________, and ___________ or to __________,
_____________, _____________, _____________, _____________, _____________,
___________, and ___________ or to Commercial if the Internal Revenue Service
determines that the December 31, 1996 Transactions and the transaction described
herein are related.
In rendering our opinion, we have necessarily relied on the relevant provisions
of the Code the regulations thereunder, and judicial and administrative
interpretations thereof which exist as of the date of this letter, all of which
are subject to change or modification by subsequent legislative, regulatory,
administrative, or judicial decisions. If there are any significant changes to
the federal income tax authorities cited above (changes for which we have no
responsibility to advise you), our opinion may become invalid and/or necessitate
(upon your request) reconsideration. Our opinion is not binding on the Internal
Revenue Service.
This opinion letter is solely for your information, for the information of your
shareholders, for the information of the Company shareholders and inclusion in
Form S-4 as filed with the Securities and Exchange Commission with regard to the
transaction described herein. Other than the uses indicated in the preceding
sentence, our opinion may not be relied upon, distributed, or disclosed by
anyone without the prior written consent of Deloitte & Touche LLP.
We hereby consent to the filing of this letter as an Exhibit to the Registration
Statement Form S-4 of Commercial Federal Corporation. We also consent to the
references to Deloitte & Touche LLP under the headings: _____________________
contained in the Prospectus/Proxy which is part of this Registration Statement.
Sincerely,
Deloitte & Touche LLP
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Commercial Federal Corporation on Form S-4 of our report dated August 15, 1997
(September 11, 1997 as to Note 29) (which report expresses an unqualified
opinion and includes and explanatory paragraph referring to a change in the
method of accounting for mortgage servicing rights in fiscal year 1996),
incorporated by reference in the Annual Report on Form 10-K of Commercial
Federal Corporation for the year ended June 30, 1997 and to the reference to us
under the heading "Experts" in the Prospectus, which is part of this
Registration Statement.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
December 16, 1997
<PAGE>
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Liberty Financial
Corporation on Form S-4 of our report dated November 24, 1997, appearing in the
Prospectus, which is part of such Registration Statement, and to the reference
to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Des Moines, Iowa
December 16, 1997
<PAGE>
Exhibit 99.1
REVOCABLE PROXY
LIBERTY FINANCIAL CORPORATION
SPECIAL MEETING, ____________, 1998
PROXY SOLICITED BY BOARD OF DIRECTORS
The undersigned hereby appoints ________________, ________________ and
________________, and each of them, proxies with power of substitution to vote
on behalf of the stockholders of Liberty Financial Corporation ("Liberty"), at a
special meeting to be held on ____________, 1998 and any adjournment thereof,
with all powers that the undersigned would possess if personally present, with
respect to the following:
The shares represented by this Proxy will be voted as specified on the
reverse hereof, but if no specification is made, this Proxy will be voted FOR
the approval of the Acquisition Merger and the Merger Agreement (defined on the
reverse side). The proxies may vote in their discretion as to other matters
which may come before the meeting.
[X] Please mark votes as in this example.
1. Approval of the merger of Liberty into Commercial
Federal Corporation ("Commercial") with Commercial as the surviving
corporation (the "Acquisition Merger") and adoption of the
Reorganization and Merger Agreement by and between Commercial and
Liberty dated as of August 18, 1997 (the "Merger Agreement"), which
sets forth the terms and conditions of the Acquisition Merger and also
provides for the subsequent merger of Liberty's banking subsidiaries
with and into Commercial Federal Bank, a Federal Savings Bank (the
"Bank"), with the Bank as the surviving institution.
FOR AGAINST ABSTAIN
[_] [_] [_]
Please date and sign as name is imprinted hereon, including designation
as executor, etc., if applicable. A corporation must sign in its name
by the president or other authorized officer(s).
2. Transaction of such other business as may properly come before the
meeting and any adjournments thereof.
A majority of the proxies or substitutes present at the meeting may exercise all
powers granted hereby.
Signature Date
------------------- ------------
Signature Date
------------------- ------------
