<PAGE>
As filed with the Securities and Exchange Commission on December 17, 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 the 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
Cynthia R. Cross, Esquire Howard H. Mick, Esquire
Housley Kantarian & Bronstein, P.C. AND Stinson, Mag & Fizzell, P.C.
1220 19th Street, N.W., Suite 700 1201 Walnut, Suite 2800
Washington, D.C. 20036 Kansas City, Missouri 64106
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 September 11, 1997 by and among
the Registrant, Commercial Federal Bank, a Federal Savings Bank, First National
Bank Shares, Ltd. and First United National Bank and Trust Company, 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) 992,857 shares (2) N/A $ 8,353,000 (3) $ 2,465 (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 15,318 shares of common stock, par value
$1.00 per share, of First National Bank Shares, Ltd. ("First National"),
upon consummation of the merger of First National 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 ($8,353,000) of
shares of First National common stock on September 30, 1997.
================================================================================
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
1222 KANSAS AVENUE
GREAT BEND, KANSAS 67530-0069
(316) 792-1771
December __, 1997
Dear Stockholder:
You are invited to attend a special meeting of stockholders (the "Special
Meeting") of First National Bank Shares, Ltd. ("First National") 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 First National and its wholly owned savings institution
subsidiary, First United National Bank and Trust Company ("First United"), 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 September
11, 1997 by and among Commercial, the Bank, First National and First United (the
"Merger Agreement"). Pursuant to the Merger Agreement (1) First National will
merge into Commercial and each outstanding share of First National's common
stock will be converted into the right to receive shares of Commercial common
stock and cash in lieu of fractional shares, based upon an exchange ratio as
more fully described in the accompanying Prospectus/Proxy Statement and (2)
First United will merge with and into the Bank (collectively, 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 First National's stockholders.
At the Special Meeting, stockholders of First National 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 First National 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]
J. Thomas Burcham
Chairman of the Board
* PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME *
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
1222 KANSAS AVENUE
GREAT BEND, KANSAS 67530-0069
(316) 792-1771
______________________________
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY __, 1998
______________________________
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (the "Special
Meeting") of First National Bank Shares, Ltd. ("First National") will be held on
_________, ____________, 1998 at __:__ ?.m. at ____________________,
______________________, ____________, ____, for the following purposes:
(1) To approve the merger of First National into Commercial Federal
Corporation ("Commercial"), with Commercial as the surviving
corporation, pursuant to which each outstanding share of First
National's common stock will be converted into shares of Commercial
common stock, $.01 par value per share ("Commercial Common Stock") and
cash in lieu of fractional shares, based upon an exchange ratio as
more fully described in the accompanying Prospectus/Proxy Statement
(the "Acquisition Merger"), and to adopt the Reorganization and Merger
Agreement by and among Commercial, Commercial Federal Bank, a Federal
Savings Bank (the "Bank"), the wholly owned subsidiary of Commercial,
First National and First United National Bank and Trust Company
("First United"), the wholly owned savings institution subsidiary of
First National, dated as of September 11, 1997 (the "Merger
Agreement"), which sets forth the terms and conditions of the
Acquisition Merger and also provides for the subsequent merger of
First United 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 First National is not aware of any other
business to come before the Special Meeting.
The Board of Directors of First National 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]
J. Thomas Burcham
Chairman of the Board
Kansas City, Missouri
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
992,857 Shares of Common Stock
par value $.01 per share
(subject to adjustment)
------------------------------
------------------------------
FIRST NATIONAL BANK SHARES, LTD.
Proxy Statement
For Special Meeting of Stockholders
To Be Held on January __, 1998
------------------------------
This Prospectus/Proxy Statement is being furnished to the holders of the
common stock, par value $1.00 per share ("First National Common Stock") of First
National Bank Shares, Ltd. ("First National") in connection with the
solicitation of proxies by the Company's Board of Directors for use at its
special meeting of stockholders (the "Special Meeting") to be held at
__________________, ____________________, __________, __________, on _______,
January __, 1998 at __:__ ?.m., local time.
The purposes of the Special Meeting and the matters to be acted upon are to
consider and vote upon the proposed merger of First National into Commercial,
with Commercial as the surviving corporation (the "Acquisition Merger"), in
accordance with a Reorganization and Merger Agreement by and among Commercial;
Commercial Federal Bank, a Federal Savings Bank (the "Bank"), the wholly-owned
savings institution subsidiary of Commercial; First National; and First United
National Bank and Trust Company ("First United"), the wholly-owned savings
institution subsidiary of First National, dated September 11, 1997 (the "Merger
Agreement"), which sets forth the terms and conditions of the Acquisition Merger
and also provides for the subsequent merger of First United into the Bank (the
"Bank Merger" and, together, with the Acquisition Merger, the "Merger"); 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 First National Common Stock
outstanding at the effective time of the Acquisition Merger (the "Acquisition
Merger Effective Time") (other than shares owned or held by First National or
Commercial or any of their subsidiaries (other than in any 401(k) plan or in a
fiduciary capacity) or shares the holders which have perfected dissenters'
rights of appraisal "Dissenting Shares")) will be converted into the right to
receive a number of shares of Commercial common stock, par value $.01 per share
(the "Commercial Common Stock") (such number of shares referred to as the
"Exchange Ratio") based upon the "Average NYSE Closing Price" of Commercial
Common Stock (i.e., the arithmetic mean of the per share closing price of the
Commercial Common Stock as reported on the New York Stock Exchange ("NYSE") for
the twenty-fifth through sixth trading day, inclusive, immediately preceding the
business day prior to the later of (A) the date on which all requisite
regulatory approvals have been obtained, including the expiration of any related
waiting periods, or (B) the date First National obtains stockholder approval of
the Merger Agreement (the "Determination Period")) as follows: (i) if the
Average NYSE Closing Price is equal to or greater than $24.00, but equal to or
less than $28.00, the Exchange Ratio shall be that number of shares of
Commercial Common Stock equal to the quotient that results by dividing the
"Aggregate Purchase Price" (as defined below) by the Average NYSE Closing
Price; (ii) if the Average NYSE Closing Price is greater than $28.00, the
Exchange Ratio shall be the quotient that results from dividing the "Aggregate
Purchase Price" by $28.00; and (iii) if the Average Closing Price is less than
$24.00, the Exchange Ratio shall be the quotient that results from dividing the
"Aggregate Purchase Price" by $24.00.
The term "Aggregate Purchase Price" is defined in the Merger Agreement to
equal to $27,800,000, plus (A) the amount of cash held directly by First
----
National as of the Acquisition Merger Effective Time as reflected on its books
and records and (B) any amounts recorded as a receivable by First National on
its books and records from First United and Missouri Bank & Trust Company (the
"Missouri Bank") and their subsidiaries pursuant to First National's income tax
sharing agreements with these banks, less (C) the amount of federal and state
----
income tax liability (to the extent not
<PAGE>
paid prior to the Closing) and net of receivables from the Internal Revenue
Service attributable to the taxable gain, if any, realized on the Spin-Off, the
sale (if applicable) of shares of Missouri Bank and the sale of certain other
assets, (D) the amount of any dividends declared or paid by First United since
June 30, 1997, (E) the amount of any fee paid or payable by First United or
payable by First National to any broker or advisor or similar party whether to
Friedman, Billings Ramsey & Co., Inc. or otherwise and (F) all other liabilities
(including federal and state income tax liability of First National and its
subsidiaries (to the extent not consolidated with First National)), together
with any accrued but unpaid interest, of First National as reflected or required
to be reflected under generally accepted accounting principles on its books and
records as of the Closing. The shares of Commercial Common Stock to be received
by holders of the First National Common Stock pursuant to the Merger Agreement
are referred to herein as the "Merger Consideration").
The number of shares of Commercial Common Stock to be received by First
National stockholders, the Average NYSE Closing Price, as well as 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.
Based on the closing price per share of Commercial Common Stock on the NYSE
on December __, 1997, of $_____, each share of First National Common Stock would
be exchanged for _____ shares of Commercial Common Stock. Cash will be paid in
lieu of fractional shares.
Commercial has filed a registration statement on Form S-4 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
the 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 First National upon consummation
of the Acquisition Merger.
THE BOARD OF DIRECTORS OF FIRST NATIONAL BELIEVES THAT THE ACQUISITION
MERGER IS IN THE BEST INTERESTS OF FIRST NATIONAL'S STOCKHOLDERS AND UNANIMOUSLY
RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE APPROVAL OF THE ACQUISITION MERGER,
INCLUDING THE MERGER AGREEMENT.
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 FEDERAL DEPOSIT INSURANCE CORPORATION.
This Prospectus/Proxy Statement and the accompanying proxy card are first
being sent to the stockholders of First National on or about December __, 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 First National 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 Proxy Statement/Prospectus by those stockholders of Commercial
not deemed to be affiliates of Commercial or First National.
The date of this Prospectus/Proxy Statement is December __, 1997
<PAGE>
PROSPECTUS/PROXY STATEMENT
TABLE OF CONTENTS
Page
----
AVAILABLE INFORMATION.....................................................
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE...........................
SUMMARY...................................................................
The Special Meeting of First National 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 COMBINED FINANCIAL INFORMATION OF
FIRST NATIONAL BANK SHARES, LTD..........................................
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 Recommendations of the
First National Board of Directors........................................
Conversion of First National Common Stock.................................
Dissenters' Rights of Appraisal...........................................
Voting Agreement..........................................................
The Bank Merger...........................................................
Management after the Merger...............................................
Representations and Warranties............................................
Covenants Pending the Acquisition Merger..................................
No Solicitation...........................................................
Conditions to Consummation of the Merger..................................
Amendment or Termination of the Merger Agreement..........................
Termination Fee...........................................................
Required Regulatory Approvals.............................................
Expenses..................................................................
Closing; Merger Effective Times...........................................
Employee Benefit Plans after the Merger...................................
<PAGE>
TABLE OF CONTENTS (continued) Page
----
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 AND COMMERCIAL
FEDERAL BANK, A FEDERAL SAVINGS BANK.....................................
FIRST NATIONAL BANK SHARES, LTD. AND FIRST UNITED
NATIONAL BANK AND TRUST COMPANY..........................................
BUSINESS OF FIRST NATIONAL BANK SHARES, LTD...............................
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................
REGULATION................................................................
BENEFICIAL OWNERSHIP OF FIRST NATIONAL COMMON STOCK.......................
COMMON STOCK PRICES AND DIVIDENDS.........................................
COMPARISON OF STOCKHOLDER RIGHTS..........................................
LEGAL MATTERS.............................................................
EXPERTS...................................................................
INDEPENDENT ACCOUNTANTS...................................................
OTHER MATTERS.............................................................
INDEX TO FINANCIAL STATEMENTS OF FIRST NATIONAL BANKSHARES, LTD.
ANNEX:
Annex A--Reorganization and Merger Agreement by and among Commercial
Federal Corporation and Commercial Federal Bank, a Federal
Savings Bank and First National Bank Shares, LTD. and First
United National Bank and Trust Company (excluding exhibits).... A-1
Annex B--Dissenters' Rights Statute..................................... B-1
<PAGE>
No person is authorized to give any information or make any representation
other than those 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 First National has been furnished by First National. Neither
Commercial nor First National warrants the accuracy or completeness of
information relating to the other party.
AVAILABLE INFORMATION
Commercial has filed with the Commission a registration statement on Form
S-4 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, the Commercial 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 Commercial's Common Stock set forth at Item 1 of
Commercial's registration statement on Form 8-A dated July 17, 1995.
(i)
<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 by reference other documents
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.
(ii)
<PAGE>
SUMMARY
This summary does not purport to be complete and is qualified in its
entirety by the detailed information and definitions appearing elsewhere herein,
the annexes hereto and documents incorporated by reference herein.
The Special Meeting of First National Stockholders
The Special Meeting will be held on ______, January __, 1998 at __:__ ?.m.
at ________________, in __________, Kansas. At the Special Meeting, stockholders
of First National will consider and vote upon proposals (1) to approve the
Acquisition Merger and the Merger Agreement; and (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 December __, 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 First
National Common Stock 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 First National Common Stock is required to
approve the Acquisition Merger and the Merger Agreement.
For additional information, see "Information Concerning the Special
Meeting" herein.
The Parties to the Merger
Commercial Federal Corporation and Commercial Federal Bank, a Federal
Savings Bank. 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 consisting 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. 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.
(iii)
<PAGE>
For additional information, see "Commercial Federal Corporation and
Commercial Federal Bank, a Federal Savings Bank" herein.
First National Bank Shares, Ltd. and First United Bank and Trust Company.
First National, a Kansas corporation, is a registered bank holding company which
owns 100% of the issued and outstanding shares of the capital stock of First
United National Bank and Trust Company, a national bank ("First United")
headquartered in Great Bend, Kansas. First National, through First United,
provides banking and financial services to consumer and business customers in
six communities in central Kansas; Great Bend, Burdett, Ellinwood, Kinsley,
Larned and Lewis. First United is primarily engaged in the business of
attracting deposits from the general public and investing such funds, together
with funds generated from operations, in agricultural loans, commercial loans,
consumer loans and various types of real estate loans including loans secured by
one to four-family residential properties and commercial properties.
Prior to November 20, 1997, First National also owned all of the capital
stock of Missouri Bank & Trust Company (the "Missouri Bank). On November 20,
1997, all of the capital stock of the Missouri Bank was distributed to the
stockholders of First National (the "Spin Off"). All financial statements and
financial data included herein reflect only the assets of First National and
First United on a combined basis. At September 30, 1997, First National and
First United, on a combined basis, had total assets of $150.7 million and total
stockholders' equity of $8.4 million.
The principal executive offices of First National are located at 1222
Kansas Avenue, Great Bend, Kansas 67530-0069 and its telephone number is (316)
792-1771.
For additional information, see "First National Bank Shares, LTD. and First
United Bank and Trust Company" and the combined financial statements of First
National and First United included elsewhere herein.
The Merger
General. The Merger Agreement provides for the acquisition of First
National by Commercial, and the subsequent merger of First United into the Bank,
as follows: (i) First National will merge into Commercial, with Commercial as
the surviving corporation, pursuant to which the outstanding shares of First
National Common Stock (other than shares owned or held by First National (other
than in any 401(k) Plan or in a fiduciary capacity), shares held by Commercial
or Dissenting Shares will be converted into shares of Commercial Common Stock as
set forth below under " -- Conversion of First National Common Stock" (the
"Acquisition Merger"); and (ii) First United will, following the Acquisition
Merger, merge into the Bank, with the Bank as the surviving savings institution
(the "Bank Merger"). At the Acquisition Merger Effective Time, First National
will have merged into Commercial. Upon the consummation of the Bank Merger (the
"Bank Merger Effective Time"), First United will have merged into the Bank,
Commercial will be the resulting savings institution holding company, and the
Bank will be the resulting subsidiary institution. It is anticipated that the
Bank Merger Effective Time will occur immediately following the Acquisition
Merger Effective Time.
The Board of Directors of First National considered the Merger and the
terms of the Merger Agreement, including the Exchange Ratio, in light of
economic, financial, legal, market and other factors and concluded that the
Merger is in the best interests of First National and its stockholders. The
Board of Directors of First National recommends that First National'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 Recommendations of the First
National Board of Directors" herein and the Merger Agreement attached as Annex A
hereto.
Conversion of First National Common Stock. Pursuant to the Merger
Agreement, each share of First National Common Stock issued and outstanding at
the Acquisition Merger Effective Time (other than shares owned by First
(iv)
<PAGE>
National or Commercial or their subsidiaries (other than in a 401(k) plan or in
a fiduciary capacity) or Dissenting Shares)) will be converted into and
represent solely the right to receive a number of shares of Commercial Common
Stock (such number of shares referred to as the "Exchange Ratio") based upon the
Average NYSE Closing Price of Commercial Common Stock as follows: (i) if the
Average NYSE Closing Price is equal to or greater than $24.00 but equal to or
less than $28.00, then the Exchange Ratio shall be such number of shares of
Commercial Common Stock equal to the quotient (carried to four digits and
rounded down) that results by dividing the Aggregate Purchase Price by the
Average NYSE Closing Price of Commercial Common Stock; (ii) if the Average NYSE
Closing Price is greater than $28.00, the Exchange Ratio shall be the quotient
that results from dividing the Aggregate Purchase Price by $28.00; (iii) if the
Average NYSE Closing Price is less than $24.00, then the Exchange Ratio shall be
the quotient that results from dividing the Aggregate Purchase Price by $24.00.
Based on the closing price per share of Commercial Common Stock on the NYSE on
December __, 1997, each share of First National Common Stock would be exchanged
for ___ shares of Commercial Common Stock.
The number of shares of Commercial Common Stock to be received by First
National stockholders, the Average NYSE Closing Price, as well as 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.
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 First National
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 First National
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 First National Common Stock certificates should
surrender their certificates in accordance with the specified procedures. Upon
surrender, each First National Common Stock certificate will be canceled. See
"The Merger -- Conversion of First National Common Stock -- Exchange of First
National Stock Certificates."
Dissenters' Appraisal Rights. Under Kansas law, stockholders of First
National who object to the Acquisition Merger have the statutory right to demand
payment of the "fair value" of their First National Common Stock in cash. To
perfect this right, a First National 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 Section 17-6712 of the Kansas General Corporation Code ("KGCC"), including
delivering written notice of objection to First National 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 First National stockholders having elected their
dissenter and appraisal rights. See "The Merger -- Dissenters' Rights of
Appraisal" and Annex B hereto. See "The Merger -- Dissenters' Rights of
Appraisal."
Voting Agreement. Concurrent with the execution of the Merger Agreement, J.
Thomas Burcham, Chairman of the Board of First National entered into an
agreement with Commercial (the "Voting Agreement") to vote his shares of First
National Common Stock in favor of the Merger Agreement and the Acquisition
Merger. The Voting Agreement covers the shares of First National Common Stock
beneficially owned by Mr. Burcham as of September 11, 1997, as well as any
shares subsequently acquired. A total of _____ shares of First National Common
Stock (a total of ___% of the shares outstanding as of the Record Date) are
covered by the Voting Agreement. See "The Merger -- Voting Agreement."
Conditions to the Merger. The obligations of Commercial and First National
to effect the Acquisition Merger are jointly subject to a number of conditions
including, among other things, the receipt of First National stockholder and
regulatory approval of the Acquisition Merger and the Bank Mergers and receipt
of an opinion with respect to the tax
(v)
<PAGE>
effects of the Merger. For additional information, see "The Merger -- Conditions
to Consummation of the Merger" herein.
Required Regulatory Approvals. The Merger is subject to the approval of the
Office of Thrift Supervision ("OTS") and the Office of the Comptroller of the
Currency ("OCC"). Further the parties are required to notify the Board of
Governors of the Federal Reserve System ("FRB") of the Merger. Following such
approvals 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. For additional information, see "The Merger -- Required Regulatory
Approvals" 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 First National stockholders, in a number of circumstances,
including: (a) by mutual consent of the parties; (b) at the election of either
party, if the closing of the Merger shall not have occurred on or before June
30, 1998; (c) 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; or (d) by First National in certain circumstances at any time
during the two business days commencing on the business day immediately
following the end of the Determination Period, if the Average NYSE Closing Price
of Commercial Common Stock is below certain prescribed levels as described
herein. In the event the Merger Agreement is terminated by First National and,
prior to such termination, a "Termination Event" (as such term is defined
herein) has occurred, First National will be obligated to pay a termination fee
in the amount of $1.0 million and an additional amount equal to reasonable
expenses incurred by Commercial relating to the Merger Agreement and the
transactions contemplated thereby. For additional information, see "The Merger
- -- Amendment or Termination of the Merger Agreement" and "-- Termination Fee"
herein.
No Solicitation. The Merger Agreement provides that First National will not
authorize or permit any representative of First National 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 First National, for the acquisition of a 10.0% or greater
equity interest in First National or for the acquisition of a substantial
portion of the assets of First National). In addition, First National may not
(or authorize any representative to): (i) cooperate with, or furnish, or cause
to be furnished, any non-public information concerning First National'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 First
National's management and Board of Directors have interests in the Acquisition
Merger in addition to their interests as stockholders of First National
generally. Those interests relate to, among other things, officer's severance,
change-in-control provisions and provisions in the Merger Agreement regarding
indemnification and director and officer insurance information.
For additional information, see "The Merger -- Management after the
Merger," "--Employee Benefit Plans after the Merger" and "-- Interests of
Certain Persons in the Merger" herein.
Federal Income Tax Consequences. Commercial and First National 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"); and (ii)
the gain, if any, to be realized by a First National stockholder who receives
Commercial Common Stock in exchange for First National 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. The Merger will be accounted for under the purchase
method of accounting in accordance with generally accepted accounting
principles, resulting in adjustments to the carrying value of First National's
assets and liabilities to reflect their fair values at the date of the
Acquisition Merger.
(vi)
<PAGE>
Comparison of Stockholder Rights
Upon consummation of the Merger, holders of First National Common Stock,
whose rights are presently governed by Kansas law and First National's articles
of incorporation and bylaws, and indirectly, First United's charter and bylaws,
will become stockholders of Commercial, a Nebraska corporation. Accordingly,
their rights will be governed by Nebraska law and the articles of incorporation
and bylaws of Commercial and indirectly by the Bank's charter and bylaws.
Certain differences arise from the differences between Kansas and Nebraska law,
between the articles of incorporation and bylaws of First National and the
articles of incorporation and bylaws of Commercial and between the charter and
bylaws of First United and the Bank, including, among other things, the number
of authorized shares of capital stock, the calling of special meetings of
stockholders, 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, preemptive rights, removal of directors, action of
stockholders without a meeting, approval requirements for business combinations
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.
(vii)
<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.
<TABLE>
<CAPTION>
Financial Condition Data and Capital Ratios:
At At June 30,
September 30, ---------------------------------------------------------------
1997 1997 1996 1995 1994 1993
-------------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Total assets..................................... $7,207,143 $7,096,665 $6,607,670 $6,569,579 $5,982,307 $5,262,336
Investment securities (1)........................ 472,164 399,057 253,043 300,481 290,807 254,889
Mortgage-backed securities (2)................... 1,034,615 1,025,763 1,180,046 1,364,907 1,350,402 952,539
Loans receivable, net (3)........................ 5,291,820 5,258,739 4,813,164 4,540,692 3,970,626 3,655,740
Goodwill and core value of deposits.............. 46,631 48,178 40,734 37,263 67,661 87,946
Deposits......................................... 4,258,902 4,378,919 4,304,576 4,011,323 3,675,825 2,731,127
Advances from Federal Home Loan Bank............. 1,715,312 1,415,506 1,350,290 1,787,352 1,625,456 1,868,779
Securities sold under agreements to repurchase.. 564,294 639,294 380,755 208,373 157,432 154,862
Other borrowings................................. 103,900 128,982 58,546 65,303 66,640 76,966
Stockholders' equity............................. 444,273 426,106 413,277 337,614 304,568 297,848
Book value per common share (4).................. 13.72 13.18 12.17 10.51 9.56 9.46
Tangible book value per common share(4)(5)....... 12.28 11.69 10.97 9.35 7.44 6.66
Regulatory capital ratios of the Bank:
Tangible capital............................... 6.44% 6.31% 6.18% 5.16% 4.69% 4.62%
Core capital (Tier 1 capital).................. 6.59% 6.47% 6.41% 5.47% 5.53% 5.93%
Risk-based capital:
Tier 1 capital............................. 12.91% 12.79% 12.56% 12.02% 12.18% 11.93%
Total capital.............................. 13.92% 13.81% 13.62% 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.
(viii)
<PAGE>
COMMERCIAL FEDERAL CORPORATION
<TABLE>
<CAPTION>
Operating Data:
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)
(ix)
<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.
(x)
<PAGE>
SUMMARY COMBINED FINANCIAL INFORMATION
FIRST NATIONAL BANK SHARES, LTD.
The following summary combined financial data of First National is at and
for the dates indicated. This information has been derived from and should be
read in conjunction with First National's Combined 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 fiscal year 1997.
<TABLE>
<CAPTION>
At At December 31,
September 30, -----------------------
1997 1996 1995
------------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Total amount of:
Assets..................................... $150,672 $143,076 $132,960
Loans receivable, net...................... 79,594 77,935 72,277
Cash and cash equivalents.................. 8,080 9,392 9,593
Investment securities, available for sale.. 55,328 49,021 43,890
Deposits................................... 130,698 124,014 120,328
Short-term borrowings...................... 9,877 10,790 4,980
Stockholders' equity....................... 8,353 6,693 5,930
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------
1997 1996 1996 1995
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Interest income............................. $ 8,204 $ 7,589 $ 10,222 $ 8,998
Interest expense............................ 4,377 3,902 5,244 4,515
-------- ------- -------- --------
Net interest income before provision
for loan losses............................ 3,827 3,687 4,978 4,483
Provision for loan losses................... 45 95 110 40
Net interest income after provision
for loan losses............................ 3,782 3,592 4,868 4,443
Noninterest income.......................... 1,041 735 980 886
Noninterest expense......................... 3,059 2,871 3,892 3,899
Income before income taxes.................. 1,764 1,456 1,956 1,430
Provision for income taxes.................. 359 375 494 346
-------- ------- -------- --------
Net income.................................. $ 1,405 $ 1,081 $ 1,462 $ 1,084
======== ======= ======== ========
Net income per share........................ $ 91.76 $ 70.67 $ 95.49 $ 70.80
======== ======= ======== ========
Weighted average shares outstanding......... 15,318 15,310 15,311 15,310
</TABLE>
(xi)
<PAGE>
Key Operating Ratios
The table below sets forth certain performance ratios of First National at
the dates or for the periods indicated.
<TABLE>
<CAPTION>
At or for the
Nine Months Ended At or for the
September 30, Year Ended December 31,
---------------------- ------------------------
1997 1996 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Return on assets (net income divided
by average total assets)............... 1.77% 1.07% 1.07% 0.94%
Return on average equity earnings
(net income divided by average
equity earnings)....................... 24.84 23.77 23.59% 19.25%
Average equity earnings to average assets.. 5.12 4.48 4.56 4.86
Average loans to average deposits.......... 73.79 70.51 60.79 65.58
</TABLE>
UNAUDITED PRO FORMA COMBINED PER SHARE DATA
The following table presents selected per share data for Commercial and
First National 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 ____________.
Historical information for Commercial and First National 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 the combined
financial statements of First National.
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.
<TABLE>
<CAPTION>
Three Months Ended
September 30, Year Ended June 30,
------------------ -----------------------------
1997 1997 1996 1995
------ ------ ------- ------ ------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss) per common share:
Commercial historical................. $ .52 1.34
First National historical..............
Pro forma combined (1)................
First National pro forma equivalent....
Dividends declared per common share:
Commercial historical................. .047 .185
First National historical..............
Pro forma combined....................
First National pro forma equivalent....
<CAPTION>
At At
September 30, June 30,
1997 1997
------------- ----------
<S> <C> <C>
Book value per common share:
Commercial historical................. $ 13.72 $ 13.18
First National historical..............
Pro forma combined (2)................
First National pro forma equivalent....
</TABLE>
- -------------
(1) Per share presented in the above table is based upon an Exchange Ratio of
_______ and the issuance of _______ shares of Commercial Common Stock for
the three months ended September 30, 1997. Shares issued at the Exchange
Ratio for the years ended June 30, 1997 were _________.
(2) Pro forma combined book value per common share presented in the above table
is based upon an Exchange Ratio of _______ and the issuance of _________
shares of Commercial Common Stock as of September 30, 1997.
(xii)
<PAGE>
INFORMATION CONCERNING THE SPECIAL MEETING
General
This Prospectus/Proxy Statement is being furnished to the stockholders of
First National as part of the solicitation of proxies by its Board of Directors
from holders of the outstanding shares of First National Common Stock for use at
the Special Meeting to be held on January __, 1998, and any adjournments
thereof. This Prospectus/Proxy Statement, and the accompanying proxy card, are
first being mailed to stockholders of First National on or about December __,
1998.
The principal purpose of the Special Meeting is to consider and vote upon
the approval of the Acquisition Merger pursuant to which First National will
merge into Commercial, and the Merger Agreement among Commercial, the Bank,
First National and First United, which sets forth the terms and conditions of
the Acquisition Merger and also provides for the Bank Merger. See "The Merger --
Conversion of First National Common Stock." The Merger is subject to certain
conditions, including regulatory approval of the OTS.
In this Prospectus/Proxy Statement, the terms "Commercial" and "First
National" 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 First National has fixed the close of business on
December __, 1997 as the record date (the "Record Date") for the determination
of the First National stockholders entitled to notice of and to vote at the
Special Meeting. Accordingly, only holders of record of shares of First
National Common Stock at the close of business on such 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 ___ holders of record of the __________ shares of
First National Common Stock then outstanding. The presence, in person or by
proxy, of a majority of the total number of outstanding shares of First National
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 issued
and outstanding shares of First National Common Stock is required to approve the
Acquisition Merger and the Merger Agreement. Mr. J. Thomas Burcham, Chairman of
the Board of First National has entered into a Voting Agreement with Commercial
in which Mr. Burcham agreed to vote all of the _______ shares of outstanding
First National Common Stock beneficially owned by him as of the Record Date
voted FOR approval of the Acquisition Merger and the Merger Agreement. It is
expected that substantially all of the _____ shares of outstanding First
National Common Stock beneficially owned by directors and executive officers of
First National and their affiliates as of the Record Date will be voted for
approval of the Acquisition Merger and the Merger Agreement. See also "The
Merger -- Voting Agreement."
If the accompanying proxy card is properly executed and returned to First
National 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 First National 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 First
National proxy will vote the shares represented by such proxy on such matters as
determined by a majority of First National'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
those proposals.
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<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 First National 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
First National. In addition to use of the postal system, proxies may be
solicited personally or by telephone or telegraph by directors, officers and
employees of First National, who will not be specially compensated for such
activities.
THE MERGER
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 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 First National by
Commercial, and the subsequent merger of First United into the Bank, as follows:
(i) First National will merge into Commercial, with Commercial as the surviving
corporation, pursuant to which the outstanding shares of First National's Common
Stock would be converted into shares of Commercial Common Stock as set forth
below (the Acquisition Merger); and (ii) First United will then merge into the
Bank, with the Bank as the surviving savings institution (the Bank Merger)
(collectively, the Merger). Upon the consummation of the Acquisition Merger
(the Acquisition Merger Effective Time), First National will have merged into
Commercial. Upon the consummation of the Bank Merger (the Bank Merger Effective
Time), First United 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
Merger negotiations between the Management of First National and Commercial
commenced in June of 1997 when Mr. J. Thomas Burcham, Chairman of First National
was approached by Mr. James Laphen, President of Commercial to determine whether
First National had an interest in causing First United to be merged with
Commercial principal subsidiary, the Bank. Because such a transaction would
have resulted in First National, rather than its stockholders, receiving the
merger consideration, Mr. Burcham advised Commercial that the transaction as
proposed would not be acceptable. A merger between First National and
Commercial Federal was not acceptable to either party because Commercial Federal
was not interested in acquiring and First National was not interested in selling
the Missouri Bank which, at that time, and until November 20, 1997, was a
subsidiary of First National.
The financial terms and other aspects of the proposed acquisition of First
United by Commercial Federal were of interest to First National and its
principal stockholders, so efforts commenced by the parties to structure the
transaction in such a way that First National, rather than First United would be
acquired. This would require removal of the stock of Missouri Bank & Trust
Company from First National prior to a transaction with Commercial Federal. For
a period of approximately ten weeks, the parties negotiated price and structure
in consultation with their legal and accounting advisors. After considering a
number of alternatives, the present structure was agreed upon and the Merger
Agreement was signed on September 11, 1997.
Pursuant to the Merger Agreement, First National agreed that the stock of
the Missouri Bank would be spun off to the stockholders in a tax-free
transaction. Although such spin-off was expected to be non-taxable to the
2
<PAGE>
stockholders, it would result in an estimated income tax liability in the amount
of $900,000 to First National as First National recognized a gain to the extent
of the excess of the fair market value of its investment in the Missouri Bank
over its cost basis.
One of the conditions of Commercial's willingness to acquire First National
was that the stockholders of First National inject sufficient funds prior to
the Merger to satisfy its income tax obligations as well as other indebtedness
of First National. The total required injection would amount approximately $4.2
million. To address this concern, an Agreement Among Stockholders was entered
into among the First National stockholders. That Agreement provides that prior
to the effectiveness of the merger, First National will sell sufficient shares
of common stock to its stockholders to retire all of its liabilities. Pursuant
to that commitment, First National has obtained subscriptions from its
stockholders to purchase additional shares of First National's Common Stock for
an aggregate consideration of $3.0 million. Such subscriptions will be paid
immediately prior to the Acquisition Merger. Therefore, the Acquisition Merger
consideration per share takes into account the issuance of such additional
shares immediately prior to the Acquisition Merger.
Reasons for the Merger and Recommendations of the First National Board of
Directors
The Board of Directors of First National believes that the terms of the
Merger Agreement are fair to, and in the best interests of, First National and
its shareholders. In addition, the Board of Directors of First National, by
unanimous vote of those present, approved the Merger Agreement and the
transaction contemplated thereby and recommends that the shareholders of First
National vote for approval and adoption of the Merger Agreement and the
transaction contemplated thereby.
In considering the terms and conditions of the Merger Agreement, the
Board of Directors of First National considered a number of factors. It did not
assign any relative or specific weights to the factors considered. The material
factors considered were:
The Financial Terms and Structure of the Merger. The Board of
-----------------------------------------------
Directors of First National is of the view that, based on historical and
anticipated trading ranges for Commercial Common Stock, the value of the
consideration to be received by the shareholders of First National
represents a fair multiple of First National per share book value and
earnings. The Board of Directors of First National believes that the
Merger provides holders of the First National Common Stock with the
opportunity to receive a premium over the prices per share of First
National Common Stock at which individual purchases have occurred in the
past and will enable them to participate as Commercial stockholders, on a
tax-deferred basis, in the expanded opportunities for growth and
profitability made possible by the Merger. Additionally, the Board of
Directors recognizes that the shares of Commercial Common Stock were listed
for trading on the NYSE and provide a liquid investment as compared to
shares of First National Common Stock. The Board of Directors of First
National also considered that the Merger would qualify as a tax-free
organization under the Internal Revenue Code of 1986, as amended (the
"Code"). See " -- Federal Income Tax Consequences."
The Non-Financial Terms of the Merger. The Board of Directors of
-------------------------------------
First National considered the social and economic effect on the employees,
depositors and customers of, and other dealing with, First United and on
the communities in which First United is located or operates. The Board of
Directors of First National believes that the Merger and the anticipated
merger of First United with the Bank will result in a combined entity that
is (i) committed to serving the banking and other financial needs of First
United's depositors, employees, customers and communities, (ii) capable of
competing more effectively with larger financial institutions that have
exerted increasing competitive pressure on First United, (iii) well-
capitalized, and (iv) capable of enjoying significant market penetration in
Great Bend and the central Kansas banking market. First National's Board
of Directors then concluded that Commercial would be an excellent successor
to First National's existing owners.
3
<PAGE>
THE FIRST NATIONAL BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
MERGER AGREEMENT AND THE ACQUISITION MERGER BE ADOPTED AND APPROVED BY ALL
STOCKHOLDERS.
Conversion of First National Common Stock
Exchange Ratio. Each share of First National Common Stock issued and
outstanding at the Acquisition Merger Effective Time (other than shares owned by
First National or Commercial or their subsidiaries (other than in a 401(k) plan
or in a fiduciary capacity) or Dissenting Shares)) will be converted into and
represent solely the right to receive a number of shares of Commercial Common
Stock (such number of shares referred to as the "Exchange Ratio") based upon the
Average NYSE Closing Price of Commercial Common Stock as follows: (i) if the
Average NYSE Closing Price is equal to or greater than $24.00 but equal to or
less than $28.00, then the Exchange Ratio shall be such number of shares of
Commercial Common Stock equal to the quotient (carried to four digits and
rounded down) that results by dividing the Aggregate Purchase Price by the
Average NYSE Closing Price of Commercial Common Stock; (ii) if the Average NYSE
Closing Price is greater than $28.00, the Exchange Ratio shall be the quotient
that results from dividing the Aggregate Purchase Price by $28.00; (iii) if the
Average NYSE Closing Price is less than $24.00, then the Exchange Ratio shall be
the quotient that results from dividing the Aggregate Purchase Price by $24.00.
Under certain circumstances, the Exchange Ratio could be adjusted upward
pursuant to certain provisions of the Merger Agreement. The Merger Agreement
provides that First National may elect to terminate the Merger Agreement during
the two business day period commencing immediately after the end of the
Determination Period if both of the following conditions are met: (i) the
Average NYSE Closing Price is less than $22.10; and (ii) the quotient obtained
by dividing the Average NYSE Closing Price by the "Starting Price" (as defined
below) is less than the "Index Trigger" (as defined below). If First National
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 two
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 lesser of (i) the quotient obtained by dividing (A) the
product of $22.10 and the Exchange Ratio (as then in effect) by (B) the Average
NYSE Closing Price and (ii) the quotient obtained by dividing the product of the
Index Trigger and the Exchange Ratio (as then in effect) and the Starting Price
by (B) the Average NYSE Closing Price. If Commercial so elects, it must give
notice to First National 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 September 11, 1997 (the date
immediately preceding the date of public announcement of the Merger Agreement)
and subtracting .10 from the quotient. "Starting Price" is defined as $26.00.
"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 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 First National 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
Merger. As soon as practicable after the Acquisition Merger Effective Time but
not later than 10 business days thereafter, the Exchange Agent will send a
notice and transmittal form to each First National stockholder of record at the
Acquisition Merger Effective Time whose First National Common Stock has been
converted into Commercial
4
<PAGE>
Common Stock, advising such stockholder of the effectiveness of the Acquisition
Merger and the procedure for surrendering to the Exchange Agent outstanding
certificates formerly evidencing First National Common Stock in exchange for new
certificates of Commercial Common Stock and for cash in lieu of any fractional
interest. Promptly following receipt of such notice and transmittal form,
holders of First National Common Stock certificates should surrender their
certificates in accordance with the specified procedures. Upon surrender, each
First National Common Stock certificate will be cancelled.
Until surrendered, certificates that, prior to the Acquisition Merger
Effective Time, represented outstanding shares of First National Common Stock
will be deemed for all corporate purposes to evidence the right to receive cash
in lieu of any fractional interest and the ownership of the number of whole
shares of Commercial Common Stock into which such shares of First National
Common Stock have been converted. Until such certificates are so surrendered,
no dividend or distribution 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 or
distribution that theretofore 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 payable with respect
to such dividends or distribution or cash paid in lieu of fractional shares.
If any 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 issuance that the certificate so surrendered is
properly endorsed and otherwise in proper form for transfer and that the person
requesting the transfer of such certificate either pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of the 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 payable.
Holders of First National Common Stock should NOT surrender their
certificates until they receive written instructions from the Exchange Agent.
Any shares of First National Common Stock owned or held by Commercial or
any of its subsidiaries (other than in a fiduciary capacity) or by First
National or any of its subsidiaries (other than in a fiduciary capacity) at the
Acquisition Merger Effective Time will cease to exist, and the certificates for
such shares will be canceled.
Dissenters' Rights of Appraisal
Under Section 17-6711 of the Kansas General Corporation Code ("KGCC"), a
copy of which is attached to this Prospectus/Proxy Statement as Annex B, any
holder of record or beneficial holder of First National 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 First
National, Attention: J. Thomas Burcham, Chief Executive Officer, 1044 Main
Street, Kansas City, Missouri 64196, 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.
A beneficial owner of First National common stock may assert dissenters'
rights of appraisal upon (i) filing a written objection with the corporation
before the vote on the Merger was taken and (ii) either abstaining or voting
against the merger. A stockholder has properly perfected his or her rights to an
appraisal, provided that the appropriate notice is given and vote at the
stockholder meeting is cast.
5
<PAGE>
Upon the Merger becoming effective, the surviving corporation, Commercial,
must send written notice to each of dissenting stockholders of the merged
corporation, First National, who properly perfected their appraisal rights.
Such notice must be sent by Commercial within ten (10) days after the Effective
Date of the merger.
If the dissenting stockholder is dissatisfied with the payment or offer,
such dissenting stockholder, within twenty (20) days after the date notice was
mailed by Commercial, must demand in writing from Commercial, the payment of the
value of the stockholder's stock. Commercial will then have thirty (30) days
after the expiration of the period of the twenty (20) day period, in which to
pay the dissenting stockholder the value of the stockholder's stock on the
effective date of the merger, exclusive of any element of value arising from the
expectation or accomplishment of the merger.
If during the thirty (30) day period Commercial and the dissenting
stockholder fail to agree upon the value of such stock, then either the
dissenting stockholder(s) or Commercial may demand a determination of value of
the stock by an appraiser or appraisers to be appointed by the district court,
by filing a petition with the court within four (4) months after the expiration
of the thirty (30) day period.
The petition for a determination of value by an appraiser or appraisers may
be filed by either the dissenting stockholder or Commercial. A dissenting
stockholder filing the petition with the district court is required to serve a
copy of the petition upon the surviving corporation, Commercial. Then upon
Commercial's receipt of the petition, Commercial must then submit a duly
verified list containing all the names and addresses of all dissenting
stockholders unable to reach an agreement with the surviving corporation, with
the clerk of the court within ten (10) days after receiving such service. If
the petition is filed by Commercial, then Commercial will be required, at the
time of submitting the petition, to also provide the duly verified list of
dissenting stockholders with the clerk of the court. The clerk of the court will
notify all dissenting stockholders appearing on the list by registered or
certified mail, and the clerk will also cause notice to be published one week
prior to the hearing in a newspaper of general circulation in the county where
the court is located.
Upon filing the petition for a determination of value by the court, all of
the dissenting stockholders holding certificated shares must submit those
certificates to the clerk of the court pending the appraisal proceedings. In
addition, the shares of Commercial common stock which the dissenting First
National stockholder would have been entitled to in the conversion had they
assented to the merger will have the status of authorized and unissued shares of
Commercial.
The district court will then hold a hearing (i) to determine the
stockholders that have properly complied with all provisions of this section and
are entitled to valuation of and payment for their shares, (ii) to appoint an
appraiser or appraisers to determine such value.
The court-appointed appraiser is charged with the duty of valuing, and
making a determination of the value of the shares of the merged corporation.
In order to make an accurate determination of the value of the shares, the
appraiser has the authority to examine any of the books and records of the
Commercial and First Federal. The appraiser or appraisers will also afford a
reasonable opportunity to the parties interested to submit pertinent evidence on
the value of the shares. Upon making a determination of value, the appraiser
must file a report respecting such value in the office of the clerk of the
court, and notice of filing of such report will be given by the clerk to the
parties in interest.
The court by decree will determine, based upon legal and factual argument
of each of the parties and the appraisal report, the value of the stock. The
court will then direct the payment of such value, together with interest, if
any, to the dissenting stockholders entitled to payment by the surviving
corporation, Commercial. Commercial, upon payment of the value to the dissenting
stockholders, will receive the certificates held by the clerk of the court.
The decree of the court may be enforced as other judgements of the district
court may be enforced, whether Commercial is a corporation of the State of
Kansas or of any other state.
6
<PAGE>
Any First National stockholder who asserts his or her dissenters' rights
will not be entitled to vote such stock for any purpose or be entitled to the
payment of dividends or other distribution on the stock, except those dividends
or distributions payable to stockholders of a record date prior to the Effective
Date of the merger, unless an appointment of an appraiser has not been provided,
the proceeding is dismissed as to such stockholders, or such stockholders with
written approval of the corporation, will deliver to the corporation a written
withdrawal of the stockholder's objections to and acceptance of the merger.
Voting Agreement
As a condition to Commercial entering into the Merger Agreement, Mr. J.
Thomas Burcham, Chairman of the Board of First National has entered into a
Voting Agreement with Commercial. The Voting Agreement provides that Mr.
Burcham will vote all of his shares of First National Common Stock beneficially
owned in favor of the Merger Agreement and the Acquisition Merger, waiving all
rights he may have under Section 17-6712 of the Kansas General Corporation Code
("KGCC") in connection with the Merger. The Voting Agreement prohibits Mr.
Burcham from voting his shares in favor of any other merger or sale of all or
substantially all of the assets of First National to any person other than
Commercial and its affiliates. The Voting Agreement prohibits the sale,
assignment, or transfer of shares subject to the Voting Agreement. The Voting
Agreement provides that it will terminate upon the earlier of (i) the
Acquisition Merger Effective Time, (ii) the termination of the Merger Agreement
or (iii) the abandonment of the Merger by mutual agreement of Commercial and
First National.
The Bank Merger
Following the Acquisition Merger, First United will merge into the Bank, as
a result of which the Bank will be the surviving savings institution. The Bank
Merger will be undertaken subject to and upon the terms and conditions contained
in the Merger Agreement and in the Plan of Merger between First United and the
Bank dated September 11, 1997. At the Bank Merger Effective Time, the shares of
First United common stock issued and outstanding immediately prior thereto will
be cancelled and the shares of capital stock of the Bank outstanding immediately
prior thereto will constitute the only outstanding shares of capital stock of
the Bank following consummation of the Bank Merger, the charter and bylaws of
the Bank in effect immediately before the Bank Merger will be the charter and
bylaws of the Bank immediately after the Bank Merger, the current home office of
the Bank will continue to be the home office of the Bank, and the former home
office of First United and all branch offices of the Bank and former branch
offices of First United will be branch offices of the Bank. Following the Bank
Merger, the Bank will continue to operate under the name "Commercial Federal
Bank, a Federal Savings Bank." For additional information, see " -- Management
after the Merger," " -- Employee Benefit Plans after the Merger" and " --
Interests of Certain Persons in the Merger."
The obligations of the parties to consummate the Bank Merger are subject to
the receipt of OTS approval of the Bank Merger.
Management after the Merger
The directors and officers of Commercial and the Bank will not be affected
by the Merger, with the exception that ___________________.
Representations and Warranties
Commercial and the Bank, and First National and First United, have given
certain representations and warranties to each other in the Merger Agreement
relating to, among other things, the following: the validity of their
organization; authorized capital; the ownership, organization and status of
their subsidiaries; the accuracy and completeness of certain internal books and
records and of their financial statements, reports and material relating to them
included in this Prospectus/Proxy Statement; the absence of any undisclosed
material adverse change in their business, financial conditions or results of
operations or assets; the accuracy and completeness of information contained in
this
7
<PAGE>
Prospectus/Proxy Statement; disclosure of financial advisory, broker, finders
and similar fees; the absence of undisclosed material pending or threatened
litigation; their standing under and compliance with applicable local, state and
federal law and regulations; the due authorization of the Merger Agreement;
their authority to enter into the Merger Agreement and to undertake the
transactions contemplated by it; material agreements and instruments; and the
accuracy of all information provided to each other in connection with the
Merger. First National and First United have made additional representations as
to their employment agreements or arrangements; ownership of their real property
and assets; absence of any material contract defaults; tax matters; the absence
of environmental hazards and claims; the quality of First United' loan
portfolio; the adequacy of the present carrying values of any real estate
investments, joint ventures, construction loans or other investments or loans
under generally accepted accounting principles; derivative contracts; and the
adequacy of certain types of insurance.
Covenants Pending the Acquisition Merger
First National has agreed to give to Commercial 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 and all documents with
respect to matters to which reference is made in the Merger Agreement.
Pursuant to the Merger Agreement, First National and its subsidiaries,
including First United, will (i) conduct their business only in the ordinary
course, and maintain their books and records in accordance with past practices
and not take any action that would (A) adversely affect the ability to obtain
any governmental approvals contemplated in the Merger Agreement, or (B)
adversely affect First National's ability to perform its obligations under the
Merger Agreement and (ii) prepare all federal and state income tax returns for
full tax years ending on or prior to the Acquisition Merger Effective Time in
the ordinary course and consistent with past practice and shall consult
Commercial prior to filing such returns. Further, First National 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
First National's or First United's capital stock, except that First National and
First United shall be permitted to pay cash dividends in the ordinary course of
business consistent with past practice and any dividends paid by First United
shall have an effect on the aggregate purchase price contemplated by the Merger
Agreement; (ii) reacquire any of First National's outstanding shares of capital
stock; (iii) issue or sell or buy any shares of capital stock of First National
or any First National subsidiary, except that shares of capital stock may be
issued and sold by First National to provide funds to eliminate tax or certain
other liabilities; (iv) effect any stock split, stock dividend or other
reclassification of First National's Common Stock; or (v) grant any options or
issue any warrants exercisable for or securities convertible or exchangeable
into capital stock of First National or any First National subsidiary or grant
any stock appreciation or other rights with respect to shares of capital stock
of First National or of any First National subsidiary.
In addition, pursuant to the Merger Agreement, First National and its
subsidiaries shall not, without the prior written consent of Commercial:
(i) sell or dispose of any significant assets of the First National or of
any First National subsidiary other than in the ordinary course of business
consistent with past practices or as contemplated by the Merger Agreement;
(ii) merge or consolidate First National or any First National subsidiary
with or otherwise acquire any other entity, or file any applications or make any
contract with respect to branching by any First National 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 First National or any First National subsidiary, except
as provided in the Merger Agreement;
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(iv) grant to any executive officer, director or employee of First
National or any First National subsidiary, except as otherwise set forth in the
Merger Agreement, any increase in annual compensation, or any bonus type
payment;
(v) adopt any new or amend or terminate any existing employee plans or
benefit arrangements of any type, except as described in the Merger Agreement;
(vi) authorize severance pay or other benefits for any officer, director
or employee of First National or any First National subsidiary;
(vii) incur any material indebtedness or obligation or enter into or
extend any material agreement or lease, except with respect to First National
subsidiaries in the ordinary course of business consistent with past practices
and, except with respect to First National, as needed to pay income taxes;
(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 First National 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;
(xi) purchase any equity securities other than Federal Home Loan Bank
stock in the ordinary course;
(xii) grant any discretionary vesting with respect to any employee plan or
benefit arrangement which provides for the vesting of benefits;
(xiii) make any loan with a principal balance in excess of $500,000 or not
in the ordinary course of business (even if less than $500,000 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 or acquire a participation interest in a loan
originated by another person or entity other than participations with the
Missouri Bank in the ordinary course of business.
The foregoing limitations also constitute limitations to the making any
commitments with respect to any of the matters set forth above.
First National has further undertaken (i) to obtain approval of its
stockholders 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 its best efforts to obtain the consent or approval of each
person whose consent or approval will be required in order to permit First
National 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 First National within the meaning of Rule 145,
a written letter agreement regarding
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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; (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; (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 First National
(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, wold 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 First National's and its subsidiaries' (other than the Missouri Bank)
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 First National and its subsidiaries from and after the
Acquisition Merger Effective Time); provided, however, that First National and
its subsidiaries will not be required to take such action until: (A) First
National 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 First National, that the conditions to be satisfied by First National
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
First National a Reliance Certificate relating to their performance of the
conditions, (B) Commercial, after reviewing the Reliance Certificate, provides
First National a written waiver of any right it may have to terminate the Merger
Agreement which waiver shall contain an express condition precedent that First
National 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 an 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 First National 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) at or prior to the Closing, First National, without incurring
any additional indebtedness, shall have taken all actions necessary to cause the
sum of (A) the total amount of cash held by First National, (B) amount
receivable from First United and the Missouri Bank and their subsidiaries
pursuant to its income tax sharing agreements with such entities and (C) amounts
receivable from the IRS to be not less than the amount of any unpaid federal and
state income tax liabilities of First National, whether or not due; and (xv) all
other liabilities of First National will be paid off and retired by First
National on or prior to Closing.
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 First National 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;
(v) to refrain, without prior approval of First National, from making any press
release, disclosure or statement to the press or
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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 First National, 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, wold 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
Pursuant to the Merger Agreement, First National also may not authorize any
officer, director, employee, investment banker, financial consultant, attorney,
accountant or other representative of First National or any subsidiary to
initiate contact with any person or entity in an effort to solicit, initiate or
encourage any "takeover proposal" (generally, any proposal, other than as
contemplated by the Merger Agreement, for a merger or other business combination
involving First National or any subsidiary or First United, for the acquisition
of a 10.0% or greater equity interest in First National or any subsidiary or for
the acquisition of a substantial portion of the assets of First National or any
subsidiary) or, to cooperate with, or furnish any non-public information
concerning its business, properties or assets to any person in connection with
any takeover proposal, or to negotiate with or enter into an agreement with any
party relating to a takeover proposal. Further, First National has agreed to
give prompt written notice to Commercial upon becoming aware of any takeover
proposal.
Conditions to Consummation of the Merger
The obligations of Commercial and First National to effect the Acquisition
Merger and the Bank Merger are subject to the following conditions:
(i) holders of the outstanding shares of First National Common Stock and
First National Preferred Stock shall have approved the Merger Agreement and the
Acquisition Merger;
(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 OTS, FRB, OCC, OTS, the FDIC, the Federal Trade
Commission, the Department of Justice, the Commission, and any state regulatory
authority or 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 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 or of any applicable state securities commissioner; and
(v) receipt of either an opinion of Deloitte & Touche llp, or other tax
advisor reasonably acceptable to Commercial and First National, to the effect
that (i) the Acquisition Merger will constitute a reorganization with the
meaning of Section 368(a) of the Internal Revenue Code, (ii) the exchange in the
Acquisition Merger of First National Common Stock for Commercial Common Stock
will not give rise to a gain or loss to First National stockholders (except
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to the extent of any cash received), and (iii) neither Commercial nor First
National or their respective subsidiaries will recognize a gain or loss as a
consequence of the Acquisition Merger or the Bank Merger (see " -- Federal
Income Tax Consequences").
The obligations of Commercial and the Bank to effect the Merger and the
transactions contemplated in the Merger Agreement are subject to the following
additional conditions, any of which may be waived by Commercial and the Bank:
(i) Commercial shall have received from First National's counsel an opinion
dated as of the Closing of the Merger covering certain matters; (ii) First
National and its 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 First National and its subsidiaries, taken as a
whole; (iii) Commercial shall have received a letter from First National's
independent public accountants regarding certain financial information included
in this Prospectus/Proxy Statement and other matters; (iv) between the date of
the Merger Agreement and the Closing of the Merger, there shall not have
occurred any material adverse change in the financial condition, business or
results of operations of First National and its 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 First
National and Commercial in a substantially similar manner; (v) the
representations and warranties of First National and First United 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 or is based on best knowledge); First National and
First United shall each 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 First National and First United 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; (vi) neither First National nor any of its subsidiaries
shall be a party to any pending litigation, reasonably probable of being
determined adversely to First National or any First National subsidiary, which
would have a material adverse effect on the business, financial condition or
results of operations of First National and its subsidiaries, taken as a whole;
(vii) all requisite governmental approvals necessary to consummate the
transactions contemplated by the Merger Agreement 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; (viii) 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 Commercial and the Bank; (ix) Commercial
shall have received the resale letter agreements from all affiliates of First
National; (x) Commercial shall have received the approval of its stockholders to
amend its Articles of Incorporation to increase the number of authorized shares
of Commercial Common Stock; (xi) Commercial, at its expense, shall have
received a Phase I Environmental Risk Report (as contemplated in OTS Thrift
Bulletin No. 16) on (A) all commercial real estate owned by, (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
$500,000 or more of, First National or any of its 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
to take any other action to bring such property or properties in material
compliance with environmental laws exceed $250,000 in the aggregate and shall
expire on December 11, 1997; (xii) no First National stockholder has elected to
exercise dissenter and appraisal rights pursuant to the KGCC; and (xiii) none of
the outstanding shares of First National capital stock owned by J. Thomas
Burcham and none of the outstanding shares of First United capital stock shall
be subject to an encumbrance.
The obligations of First National and First United to effect the
Acquisition Merger and the transactions contemplated in the Merger Agreement are
subject to the following additional conditions, any of which may be waived by
First National and First United: (i) First National shall have received from
counsel to Commercial opinions dated as of the Closing covering certain matters;
(ii) the representations and warranties of Commercial and the Bank 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 and the Bank shall have performed all
obligations and complied with
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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
Company a certificate, dated the Acquisition Merger Effective Time and signed by
its chief executive officer and chief financial officer, to such effect; (iii)
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
First National; (iv) a certificate for the required number of whole shares of
Commercial Common Stock, as determined in accordance with the Merger Agreement,
and cash for payment for fractional share interests, as so determined, shall
have been delivered to the Exchange Agent; (v) 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 its subsidiaries, taken as a whole; 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 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 or Termination of the Merger Agreement
The Merger Agreement may be amended, whether before or after approval by
stockholders, by an agreement in writing executed in the same manner as the
Merger Agreement and authorized or ratified by the Boards of Directors of First
National and Commercial, except that after approval of the Merger Agreement by
First National's stockholders, no such amendment without further approval by
First National's stockholders may change the amount or form of the consideration
to be received by First National'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 First National
stockholders; (i) by mutual consent of the parties evidenced by their written
agreement; (ii) at the election of either party, if the closing of the Merger
shall not have occurred on or before June 30, 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 First National 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 and the Bank to effect the Merger as
set forth in the Merger Agreement and noncompliance is not waived by Commercial,
provided that the right to terminate under this provision shall not be available
to Commercial where Commercial's failure to perform an obligation under the
Merger Agreement has been the cause of, or has resulted in, the failure of the
closing on or before such date; (iv) by First National upon delivery of written
notice of termination to Commercial if any event occurs which renders impossible
of satisfaction in any material respect of one or more of the conditions to the
obligations of First National and First United to effect the Merger set forth in
the Merger Agreement and noncompliance is not waived by First National provided
that the right to terminate under this provision shall not be available to First
National where First National's failure to perform an obligation under the
Merger Agreement has been the cause of, or has resulted in, the failure of the
closing to occur on or before such date; and (v) by First National at any time
during the two 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 of Commercial Common Stock
is less than $22.10 and (2) the quotient obtained by dividing the Average NYSE
Closing Price by the Starting Price ($26.00) is less than the Index Trigger (the
quotient obtained by dividing the weighted average of closing prices of the
common stocks of companies comprising the Index Group (the "Index Group") on the
last day of the Determination Period by the Index Price on the last trading day
immediately preceding September 11, 1997 (or if no trades of Commercial Common
Stock occurred on that day, the date most immediately preceding September 11,
1997 on which a trade occurred) and subtracting 0.10); subject to the following:
(a) written notice to Commercial no later than the end of the two business day
period; (b) Commercial shall have the option to inform First National in writing
during the two day period following the receipt of First National's written
notice to increase the consideration to be received by the holders of First
National Common Stock, by adjusting the
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Exchange Ratio to equal the lesser of (I) the quotient obtained by (A) dividing
the product of $22.10 and the Exchange Ratio (as then in effect) by (B) the
Average NYSE Closing Price and (II) the quotient obtained by dividing (A) the
product of the Index Trigger and the Exchange Ratio (as then in effect) and
$26.00 by (B) 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 survive
the Acquisition Merger Effective Time, and shall not be terminated and
extinguished at the Acquisition Merger Effective Time.
Termination Fee
The Merger Agreement further provides that in the event the Merger
Agreement is terminated by either Commercial or First National in accordance
with the Merger Agreement and, prior to such termination, a "Termination Event"
(as defined below) has occurred, then First National will pay on demand One
Million Dollars ($1,000,000) (the "Termination Fee") and an additional amount
equal to the reasonable expenses incurred by Commercial relating to the Merger
Agreement and the transactions contemplated thereby. A "Termination Event" is
defined in the Merger Agreement to mean any of the following: (i) First
National or any First National Subsidiary or any stockholder of First National
shall have entered into an agreement to engage in an "Acquisition Transaction"
(as defined below) with any person (the term "person" for purposes of the Merger
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); (ii) the stockholders of First National 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 First
National shall have recommended that the stockholders of First National approve
or accept any Acquisition Transaction with any person other than Commercial or
any affiliate of Commercial; and (iii) after a proposal is made by any person
other than Commercial or any affiliate of Commercial to First National or any of
its stockholders to engage in an Acquisition Transaction. First National or any
First National subsidiary shall have knowingly and intentionally breached any
representation, warranty, agreement, covenant or obligation contained in the
Merger Agreement, such breach would entitle Commercial to terminate the Merger
Agreement and such breach is not cured within 30 day thereafter.
For purposes of the Merger Agreement, the term "Acquisition Transaction" is
defined to mean: (i) a merger or consolidation or any similar transaction
involving First National or any subsidiary of First National; (ii) a purchase,
lease or other acquisition of all or substantially all of the assets of First
National or any First National 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
First National or any First National 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
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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 and the Bank reasonably and in good faith determine
to be unduly burdensome upon the conduct of the business of Commercial or the
Bank and, in the sole discretion of Commercial, substantially diminish the
benefits expected to be received by Commercial from the transactions
contemplated by the Merger Agreement. 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 First National'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 following the approval of the Merger Agreement
by First National's stockholders and the satisfaction or waiver of all
conditions of the Merger Agreement, the closing shall take place at which the
parties thereto will exchange documents required by the Merger Agreement.
Immediately following the Closing, and on the same day if practicable, the
Acquisition Merger shall become effective at the time and date the Nebraska
articles of merger are filed with the appropriate authorities in Nebraska and
the Kansas certificate of merger is filed with the appropriate authorities in
Kansas. Following the Acquisition Merger, the Bank Merger shall become
effective at the time the articles of combination for such merger are endorsed
by the OTS.
Employee Benefit Plans after the Merger
To the extent permitted by applicable law, the employees of First National
who become employees of Commercial 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 employees of Commercial or the Bank, with full credit
for prior service with First National or its subsidiaries for purposes of
vesting, eligibility for participation and co-payments and deductibles.
Commercial shall honor accrued vacation leave for the employees of First
National and its subsidiaries following the Acquisition Merger Effective Time.
Interests of Certain Persons in the Merger
Advisory Board. Commercial has also agreed to offer compensated advisory
director status to all members of the boards of directors of First United,
except for J. Thomas Burcham and Grant Burcham.
Consulting Agreement. In addition, Commercial has entered into a
consulting agreement with Mr. J. Thomas Burcham, Chairman of the Board of First
National, commencing at the Acquisition Merger Effective Time and continuing for
a period of three years. Under this Agreement, Mr. Burcham will be required to
provide assistance in the post-Merger transition period and to render
consulting, advisory and other services regarding business development and
general banking matters in the communities served by First United. Under the
consulting agreement, Mr. Burcham will receive approximately $125,000 per year.
Indemnification; Director and Officer Insurance. Pursuant to the Merger
Agreement, Commercial has agreed that for a period of three years following the
Acquisition Merger Effective Time, the Merger will not affect or diminish any of
First National's duties and obligations of indemnification existing as of the
Acquisition Merger Effective Time in favor of employees, agents, directors or
officers of First National or any of its subsidiaries arising by virtue of First
National's Articles of Incorporation or Bylaws in the form in effect at the date
of the Merger Agreement or arising by operation of law. Commercial will cause
the persons serving as officers and directors of First National immediately
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prior to the Acquisition Merger Effective Time to be covered for a period of 18
months from the Acquisition Merger Effective Time by the directors' and
officers' liability insurance policy maintained by First National (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; however, in no event will Commercial be
required to expend more than 150% of the amount currently expended by First
National on an annual basis to maintain or procure insurance coverage for such
18 month period pursuant to the Merger Agreement.
Federal Income Tax Consequences
Commercial and First National 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. First National and
Commercial should each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code.
. First National 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) of the
Code.
. no gain or loss should be recognized by First National upon the
distribution of the Commercial Common Stock to the First National
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
First National's assets in exchange for Commercial Common Stock, and
the assumption by Commercial of First National's liabilities, by
reason of the application of Section 1032(a) of the Code.
. the basis of the assets of First National in the hands of Commercial
should be the same as the basis of such assets in the hands of First
National 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 First
National should include the holding period of such property in the
hands of First National 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 First National
stockholders (including fractional share interests which they might
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 First National stockholder would otherwise be entitled to
receive) to be received by a First National stockholder who exchanges
First National Common Stock for Commercial Common Stock should be the
same as the basis of the First National Common Stock surrendered in
the exchange by reason of Section 358(a)(i) 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 First National stockholders should, in each
instance, include the holding period of the First National shares
surrendered in the exchange, provided First National stock was held as
a capital asset on the date of the exchange, by reason of the
application of Code Section 1223(1).
16
<PAGE>
. 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
First National described in Code Section 381(c), subject to the
conditions and limitations specified in Code Sections 381(b) and
381(c), by reason of the application of Code Section 381(a)(2).
. as provided in Code 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 First National as of the date or dates of transfer. Any
deficit in earnings and profits of either Commercial or First National
should be used only to offset earnings and profits accumulated after
the date or dates of transfer.
. cash received by a stockholder of First National otherwise entitled to
receive a fractional share of Commercial Common Stock in exchange for
his First National 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 Code 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 First
National stockholder, provided the First National stock was a capital
asset in such former stockholder's hands and as such, will be subject
to the provisions and limitations of Subchapter P of Chapter 1 (Rev.
Rul. 66-365 and Rev. Rul. 77-41).
. where cash is received by a dissenting stockholder of First National,
such cash should be treated as received by the dissenting stockholder
as a distribution in redemption of his 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
Commercial's registration statement on Form S-4 of which this Prospectus/Proxy
Statement is a part. See " -- Additional Information."
Cash payments made to the holders of First National 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.
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 FIRST NATIONAL'S STOCKHOLDER'S SITUATION. EACH FIRST
NATIONAL STOCKHOLDER IS ENCOURAGED TO CONSULT HIS OR HER OWN TAX AND FINANCIAL
ADVISORS AS TO PARTICULAR FACTS AND CIRCUMSTANCES WHICH MAY BE UNIQUE TO SUCH
STOCKHOLDER AND NOT COMMON TO STOCKHOLDERS AS A WHOLE 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.
17
<PAGE>
Accounting Treatment
The Merger will be accounted for under the purchase method of accounting in
accordance with generally accepted accounting principles, resulting in
adjustments to the carrying value of First National's assets and liabilities to
reflect their respective fair values at the date of the Acquisition Merger.
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 First National 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 First National 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.
First National has agreed in the Merger Agreement to use its best efforts
to cause each director, executive officer and other person who is an affiliate
(for purposes of Rule 145) of First National to deliver to Commercial a written
agreement intended to ensure compliance with 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 First
National Common Stock is required for First National's stockholders to approve
the Merger Agreement and the Acquisition Merger. Each share of First National
Common Stock outstanding at the close of business on the record date for the
Special Meeting, December __, 1997, is entitled to one vote on each matter to be
considered at such meeting. First National's directors and executive officers,
and their affiliates, are expected to vote substantially all of the ______
shares of First National's outstanding Common Stock, beneficially owned by them
as of the Record Date for approval of the Acquisition Merger and the Merger
Agreement.
COMMERCIAL FEDERAL CORPORATION AND
COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK
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.
18
<PAGE>
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: Liberty Financial Corporation, a commercial bank and thrift holding
company; and Mid Continent Bancshares, Inc., a savings and loan holding
company. Together with First National, 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. Liberty Financial Corporation,
headquartered in West Des Moines, Iowa, operates seven bank subsidiaries and one
thrift subsidiary with 36 branch locations in Iowa and six branch locations in
the Tucson, Arizona metropolitan area. Mid Continent Bancshares, Inc.,
headquartered in EL Dorado, Kansas, operates 10 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.
Commercial's principal executive offices are located at 2120 South 72nd
Street, Omaha, Nebraska 68124, and its telephone number is (402) 554-9200.
19
<PAGE>
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.
FIRST NATIONAL BANK SHARES, LTD. AND
FIRST UNITED NATIONAL BANK AND TRUST COMPANY
First National is a registered bank holding company under the Bank Holding
Company Act of 1956, as amended, and was incorporated in the state of Kansas in
1978. First National owns 100% of the issued and outstanding shares of the
capital stock of First United. First United became a subsidiary of First
National in 1978. First National, through First United, provides banking and
financial services to consumer and business customers in six communities in
central Kansas; Great Bend, Burdett, Ellinwood, Kinsley, Larned and Lewis.
First United is primarily engaged in the business of attracting deposits from
the general public and investing such funds, together with funds generated from
operations, in agricultural loans, commercial loans, consumer loans and various
types of real estate loans including loans secured by one to four-family
residential properties and commercial properties.
Prior to November 20, 1997, First National also owned 100% of the capital
stock of the Missouri Bank. The Missouri Bank is a financial institution
headquartered in downtown Kansas City, Missouri and was acquired by First
National in 1994. On November 20, 1997, the capital stock of the Missouri Bank
was spun off to the stockholders of First National.
The principal executive offices of First National are located at 1222
Kansas Avenue, Great Bend, Kansas 67530-0069 and its telephone number is (316)
792-1771.
20
<PAGE>
BUSINESS OF FIRST NATIONAL BANK SHARES, LTD.
General. First National's principal lending activities consist of the
origination of agricultural loans, commercial loans, consumer loans and various
types of real estate-secured loans including one- to four-family loans and
commercial real estate loans.
Loan Composition. The following table sets forth the types of loans held
by First United at each of the dates shown.
<TABLE>
<CAPTION>
At December 31,
----------------------------------
1996 1995
---------------- ----------------
Amount % Amount %
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial.............. $17,996 22.83% $16,107 22.04%
Construction............ 356 0.45 222 .30
Commercial real estate.. 12,333 15.64 10,213 13.97
1-4 single family....... 9,403 11.93 8,661 11.85
Installment............. 8,766 11.12 9,293 12.72
Agricultural............ 23,127 29.33 23,704 32.44
All other............... 6,862 8.58 4,881 6.68
------- ------ ------- ------
Total................... $78,843 100.00% $73,081 100.00%
======= ====== ======= ======
</TABLE>
Loan and Mortgage-Backed Securities Maturity and Repricing. The following
table shows the maturity analysis of loans outstanding (excluding real estate
mortgage, installment and other loans) as of December 31, 1996. Variable rate
loans are included and analyzed according to their next repricing date.
<TABLE>
<CAPTION>
After One
Within But Within After
One Year Five Years Five Years Total
--------- ---------- ---------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial..... $13,693 $ 4,187 $ 116 $17,996
Real Estate:
Construction.. 356 -- -- 356
Agricultural... 13,988 2,949 155 17,092
------- ------- ------- -------
$28,037 $ 7,136 $ 271 $35,444
======= ======= ======= =======
</TABLE>
The following table shows as of December 31, 1996, the dollar amount of all
loans due one year or more after December 31, 1996 which have fixed interest
rates and which have floating or adjustable rates.
<TABLE>
<CAPTION>
<S> <C> <C>
Loans maturing after one year with:
Predetermined interest rates........... $7,136 $271
Floating or adjustable interest rates.. -- --
------ ----
Total........................... $7,136 $271
====== ====
</TABLE>
21
<PAGE>
Nonperforming Assets. The following table sets forth information regarding
nonaccrual loans and real estate owned. As of the dates indicated, First United
did not have any troubled debt restructurings within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At December 31,
---------------
1996 1995
------- ------
(In thousands)
<S> <C> <C>
LOANS ACCOUNTED FOR ON A
NONACCRUAL BASIS:
Commercial................. $ 221 $ 319
Real estate................ 248 302
Construction............... -- --
Mortgage................... -- --
Installment................ -- 48
Agricultural............... 31 --
----- -----
Total...................... $ 500 $ 669
===== =====
ACCRUING LOANS WHICH ARE
PAST DUE 90 DAYS OR MORE:
Installment................ $ 39 $ 8
Agricultural............... 26 5
Commercial................. -- 17
Real Estate................ 837 --
----- -----
Total...................... $ 902 $ 30
===== =====
RESTRUCTURED LOANS......... -- --
</TABLE>
The gross interest income on non-accrual loans that would have been
recorded during the year ended December 31, 1996, if the loans had been current
in accordance with their original terms and had been outstanding throughout the
year or since origination if held for part of the year, amounts to $60,000.
There are approximately $1.4 million of loans classified current (and which
are performing) about which there are doubts as to the ability of the borrower
to comply with the loan repayment terms in the future. Of this amount,
management believes that approximately $1.4 million of such loans have
sufficient collateral to cover the debt in the event of liquidation. These loans
have been considered by First United in establishing the allowance for loan
losses.
At December 31, 1996, the Bank had no foreign loans outstanding and no loan
concentrations, except for those indicated in the first table under "-- Loan
Composition," exceeding 10% of total loans.
22
<PAGE>
The following table summarizes First United's loan loss experience for the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
----------- ------------
(Dollars in thousands)
<S> <C> <C>
Balance of allowance for loan losses
at the beginning..................... $ 804 $ 800
Charge-offs:
Commercial.......................... -- 114
Real Estate Construction........... -- --
Real Estate Mortgage............... 22 27
Installment........................ 18 43
Agricultural....................... 1 59
All Other.......................... -- --
----- -----
Total Loan Charge-offs................ $ 41 $ 243
Recoveries:
Commercial......................... $ 9 $ 19
Real Estate Construction........... -- --
Real Estate Mortgage............... -- --
Installment........................ 12 32
Agricultural....................... 14 16
All Other.......................... -- --
----- -----
Total Loan Recoveries................. $ 35 $ 67
Net Recoveries (charge-offs).......... $ (6) $(176)
Changes Incident to Acquisition....... -- 140
Additions Charged to Operations....... 110 40
----- -----
Balance at end of period.............. $ 908 $ 804
===== =====
</TABLE>
The amount charged to operations and the related balance in the allowance
for loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience, classification of loans, and management's estimation of future
potential losses.
The allowance for loan losses should not be interpreted as an indication
that charge-offs will occur in these amounts or proportions, or that the
allocation indicates future charge-off trends. Furthermore, the portion
allocated to each category is not the total amount available for future losses
that might occur within such categories.
23
<PAGE>
The following table illustrates the allocation of the allowance for loan
losses for each category of loan. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the use of the allowance to absorb losses in other
categories.
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1996 1995
--------------- ---------------
Amount % Amount %
------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial................. $ 19 2.00% $ 24 3.00%
Real Estate:
Construction.............. -- -- -- --
Mortgage.................. 70 8.00 88 11.00
Installment................ 11 1.00 13 1.00
Agricultural............... 10 1.00 47 6.00
All Other.................. -- -- -- --
Unallocated................ 798 88.00 632 79.00
---- ------ ---- ------
Total.................... $908 100.00% $804 100.00%
==== ====== ==== ======
</TABLE>
The following table sets forth by major category the ratio of net loans
charged off (recovered) to total average loans outstanding.
<TABLE>
<CAPTION>
At December 31,
-----------------
1996 1995
-------- -------
<S> <C> <C>
Commercial....... (.01)% .14%
Real Estate:
Construction.. -- --
Mortgage...... .03 .04
Installment...... .01 .02
Agricultural..... (.02) .06
All Other........ -- --
----- ----
Total............ .01% .26%
===== ====
</TABLE>
For additional information, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Provision for Loan Losses."
Investments. The carrying values of the major classifications of
securities available for sale at December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(In thousands)
<S> <C> <C>
U.S. Treasury and other U.S. Government agencies
and corporations.............................. $27,544 $29,196
State and political subdivisions................. 18,954 12,143
Other securities.................................. 2,523 2,551
------- -------
Total........................................ $49,021 $43,890
======= =======
</TABLE>
24
<PAGE>
Analysis of Securities Portfolio. The following table sets forth the
stated maturities of securities at December 31, 1996, and the weighted average
yields of such securities (calculated on the basis of the cost and effective
yield weighted for the scheduled maturity of each security). Mortgage-backed
securities are reported at their estimated average life. Yields on tax exempt
obligations have been computed on a tax equivalent basis using a 34% tax rate.
<TABLE>
<CAPTION>
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
---------------- ------------------ ----------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------- ------- --------- ------- -------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Available for Sale
U.S. Treasury and other U.S.
government agencies
and corporations............... $4,021 5.50% $23,563 6.70% $ 978 6.75% $1,466 6.75%
State and political subdivisions.. 1,815 7.08 7,520 7.25 5,422 7.50 1,705 7.75
Other securities.................. 1,290 6.00 611 8.50 520 7.60 -- --
------ ------- ------ ------
Total........................... $7,126 6.00 $31,694 6.83 $6,920 7.34 $3,171 7.29
====== ======= ====== ======
</TABLE>
States and political subdivisions at September 30, 1997, included $14,000
of tax exempt securities issued by various political subdivisions. The market
value of these securities totaled $14,000. These tax exempt securities were
purchased to reduce First National's effective marginal tax rate.
For more information concerning securities, see Notes 1 and 3 of "Notes to
Combined Financial Statements."
Deposits. The average daily amount of deposits and rates paid on savings
deposits is summarized for the periods indicated in the following table:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1996 1995
--------------- --------------
Amount Rate Amount Rate
-------- ----- ------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Deposits:
Non-interest bearing demand.. $ 15,144 -- % $13,528 -- %
Interest bearing demand...... 14,646 2.10 12,659 2.31
Savings deposits............. 26,359 3.19 26,010 3.55
Time deposits................ 66,041 5.51 59,946 5.53
-------- --------
$122,190 $103,143
======== ========
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of December 31,
1996.
<TABLE>
<CAPTION>
Certificates
Maturity Period of Deposits
--------------- --------------
(In thousands)
<S> <C>
Three months or less........... $ 7,691
Over three through six months.. 3,400
Over six through 12 months..... 3,202
Over 12 months................. 1,912
-------
Total........................ $16,205
=======
</TABLE>
Deposits by foreign depositors at December 31, 1996 and 1995 were
insignificant. For additional information, see Note 7 of "Notes to Consolidated
Financial Statements."
25
<PAGE>
Short-Term Borrowings. For the nine months ended September 30, 1997 and
1996 and for the years ended December 31, 1996 and 1995, short-term borrowings
consisted primarily of FHLB advances. The following is a summary of
consolidated short-term debt for the periods indicated.
<TABLE>
<CAPTION>
At or for the
Year Ended December 31,
-------------------------
1996 1995
---- ----
(Dollars in thousands)
<S> <C> <C>
FHLB advances................................... $6,915 $1,525
Weighted average interest rate at end of year... 5.50% 5.50%
Maximum amount outstanding during the year...... 6,915 5,335
Average amount outstanding during the year...... 3,190 1,662
Weighted average interest rate during the year.. 5.52% 6.14%
</TABLE>
Properties. First National maintains its office at 1222 Kansas Avenue,
Great Bend, Kansas, which is the same location as First United's main office.
The building has, with additions, approximately 19,700 square feet of office
space, four drive-up lanes, one walk-up window, and one drive-up ATM. The
building was built in 1900, with additions built in 1955, 1967, and 1972.
First National, through its banking facilities and subsidiaries, owns the
following buildings and property: Great Bend (914 square feet; purchased in
1981), Ellinwood (1,600 square feet with full basement; built in 1990), Larned
(2,036 square feet; built in 1993), Burdett (3,375 square feet with partial
basement; purchased in 1995), Lewis (8,120 square feet; purchased in 1994),
Kinsley (2,460 square feet; purchased in 1994).
First National leases a walk up ATM facility in Ellinwood.
Other information regarding premises and equipment can be located in Notes
1 and 6 to "Notes to the Combined Financial Statements."
Significant Financial Ratios. The following table sets forth combined
operating and capital ratios for the last three years:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1996 1995
------------ -----------
<S> <C> <C>
Return on average assets............... 1.07% 0.94%
Return on average equity............... 23.59 19.25
Average equity to average asset ratio.. 4.56 4.86
Dividend payout ratio to net income.... 10.47 --
</TABLE>
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General. The following discussion is provided for the combined operations
of First National and First United.
The purpose of this discussion is to focus on significant factors
affecting First National's financial condition and results of operations. This
discussion should be read along with the Combined Financial Statements
(including the notes thereto). In this discussion, net interest income and net
interest margin are presented on a fully taxable equivalent basis. All per share
data is adjusted to reflect all stock dividends and stock splits.
27
<PAGE>
Average Balances, Interest and Average Yield. The following table sets
forth the average consolidated balance sheets of First National for the past two
years along with an analysis of net interest earnings for each major category of
interest earning assets and interest bearing liabilities, the average yield or
rate paid on each category, and net yield on interest earning assets:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
1996 1995
------------------------------------ -------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Cost Balance Interest Cost
------- -------- ------- ------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
INTEREST EARNING ASSETS
Loans (2)
Commercial and agricultural.............................. $ 37,093 $ 3,795 10.23% $ 37,140 $ 3,993 10.75%
Real estate.............................................. 26,497 2,440 9.20 21,932 2,093 9.54
Consumer and other....................................... 10,684 958 8.97 8,570 697 8.13
-------- -------- ----- --------- -------- -----
74,274 7,193 9.68 67,642 6,783 10.03
Securities
Taxable.................................................. 36,870 2,350 6.37 27,040 1,672 6.18
Nontaxable (2)........................................... 10,941 798 7.29 8,445 602 7.13
Federal funds sold and other interest-earning assets..... 4,546 295 6.49 4,295 287 6.68
-------- -------- ----- --------- -------- -----
52,357 3,443 39,780 2,561
Total interest-earning assets........................ 126,631 10,636 8.40% 107,422 9,344 8.70%
NON-INTEREST EARNING ASSETS
Cash and due from banks.................................. 3,523 3,408
Other assets............................................. 6,724 5,682
Less: allowance for loan losses.......................... (860) (761)
-------- ---------
Total.................................................... $136,018 $ 115,751
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
INTEREST BEARING LIABILITIES
Interest bearing demand.................................. $ 14,646 $ 307 2.10% $ 12,659 $ 292 2.31%
Savings deposits......................................... 26,359 841 3.19 26,010 923 3.55
Time deposits............................................ 66,041 3,638 5.51 50,946 2,817 5.53
-------- -------- ----- --------- -------- -----
107,046 4,786 4.47 89,615 4,032 4.49
Short-term borrowings.................................... 3,800 208 5.47 2,824 168 5.95
Notes payable............................................ 3,100 250 8.06 3,300 315 9.55
-------- -------- ----- --------- -------- -----
Total interest-bearing liabilities....................... 113,946 5,244 4.60 95,739 4,515 4.72
NON-INTEREST BEARING LIABILITIES
AND STOCKHOLDERS' EQUITY
Demand deposits.......................................... 15,144 13,528
Other.................................................... 731 853
Stockholders' equity..................................... 6,197 5,631
-------- ---------
Total.................................................... $136,018 $ 115,751
======== =========
Net interest income...................................... $ 5,392 $ 4,829
======== ========
Net yield on interest earning assets.................... 4.26% 4.50%
====== ======
Tax equivalent adjustment (2)............................ $ 414 $ 345
</TABLE>
- --------
(1) For purposes of these computations, non-accruing loans are included in the
daily average loan amounts outstanding.
(2) Taxable equivalent adjustments is computed using a 34% tax rate.
28
<PAGE>
Rate/Volume Analysis. The following table sets forth the periods indicated
a summary of the changes in interest earned and interest paid resulting from
changes in volume and changes in rates. The in interest due to volume and rate
has been allocated to volume and rate changes in proportion to the relationship
of the absolute dollar amounts of the change in each.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1996 Compared to 1995 1995 Compared to 1994
----------------------------- -----------------------------
Volume Rate Net Volume Rate Net
------ ---- ---- ------ ---- ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST EARNED ON:
Loans: (2)
Commercial................................................ $ (5) $(193) $(198) $436 $ (17) $ 419
Real estate............................................... 436 (89) 347 305 28 333
Consumer and other........................................ 172 89 261 128 (175) (47)
------ ----- ------ ------ ----- ------
Total..................................................... 603 (193) 410 869 (164) 705
Securities:
Taxable.................................................... 607 71 678 270 104 374
Non-taxable (2)............................................ 178 18 196 309 (105) 204
Other interest-earning assets.............................. 17 (9) 8 (100) 24 (76)
------ ----- ------ ------ ----- ------
Total interest earning assets.............................. 1,405 (113) 1,292 1,348 (141) 1,207
INTEREST PAID ON:
Deposits:
Interest bearing demand.................................... 46 (31) 15 (19) 6 (13)
Savings deposits........................................... 12 (94) (82) 80 155 235
Time deposits.............................................. 833 (12) 821 551 365 916
------ ----- ------ ------ ----- ------
Total...................................................... 891 (137) 754 612 526 1,138
Short-term borrowing (1)................................... 59 (19) 40 (26) 44 18
Note payable............................................... (19) (46) (65) 2 73 75
------ ----- ------ ------ ----- ------
Total interest-bearing liabilities......................... 931 (202) 729 588 643 1,231
------ ----- ------ ------ ----- ------
Net interest income........................................ $ 474 $ 89 $ 563 $ 760 $(784) $ (24)
====== ===== ====== ====== ===== ======
</TABLE>
- --------------
(1) Short-term borrowing includes federal funds purchased, securities sold
under agreements to repurchase, and the FHLB overnight borrowings account.
(2) Taxable equivalent adjustment is computed using a 34% tax rate.
Comparison of Results of Operations for the Nine Months Ended
September 30, 1997 and 1996
Net income for the nine months ended September 30, 1997 was $1.4 million,
representing a 30% increase over net income of $1.1 million for the first nine
months of 1996. Net income per share was $91.72 in the 1997 period compared to
$70.67 per share in the comparable period in 1996. For 1997 and 1996, the
return on average assets was 1.27% and 1.07%, respectively. Return on average
equity was 24.8% in 1997 compared to 23.8% in 1996.
The increase in net income for the first three quarters of 1997 was due to
an increase in net interest income. Net interest income increased $260,000 or
7%, primarily as a result of an increase in average earning assets associated
with an increase in loan and securities volume.
29
<PAGE>
Net Interest Income. Net interest income, First National's primary source
of revenue, is the difference between the amount of interest and fees generated
by earning assets, primarily loans and securities, that exceeds the interest
cost of deposits and purchased funds.
Net interest income for the first nine months of 1997 totaled $8.6
million, a $735,000 (9.3%) increase over the same period in 1996. The increase
resulted from an increase in average earning assets, while net interest margin
declined slightly.
Net interest income is influenced by changes in both interest rate(s)
and changes in interest-bearing assets and liabilities (volume). First
National's average earning assets during the 1997 period increased $12.2
million over the 1996 period while First National's average interest-bearing
liabilities increased $7.1 million. The difference between the interest earned
and the interest paid on this increased volume resulted in approximately
$735,000 in additional net interest income during 1997.
The yield on earning assets decreased 4 basis points during the first nine
months of 1997 to 8.42% as compared to 8.46% last year. Loan yields decreased
due to prime rate fluctuations and competitive pressures. Security yields
increased due to the rollover of lower yielding securities to higher yielding
securities. First National's cost of funds increased 28 basis points during 1997
to 4.57% as compared to 4.29% last year. The increase reflects the repricing of
lower rate deposits to higher rates. Because the increase in the cost of funds
and the decrease in the yield on earning assets, First National's net interest
margin decreased from 4.28% to 4.15% from 1996 to 1997.
Interest rates decreased during the first half of 1996, were steady during
the second half of 1996 and through September 30, 1997. The changes in interest
rates have not impacted First National's net interest margin significantly.
However, because First National is asset-sensitive to interest rates, a change
in the direction of rates may have an impact on First National's net interest
margins. Generally when interest rates increase, First National's net interest
margin may increase and if interest rates decrease, First National's net
interest margin may decrease. The impact on First National's net interest margin
is also dependent on the magnitude and direction of future interest rates,
deposit customer alternatives, and First National's need for liquidity.
At September 30, 1997 First National has approximately $63 million in
earning assets repricing or maturing within the next year. As a repricing
offset, First National has approximately $66 million in certificates of deposit
maturing in one year and $44 million in savings and checking accounts whose
interest rates may increase or decrease along with other market rates.
Historically, the interest rates paid on savings and checking accounts lag and
do not increase as far as the rates earned on loans and investments. During
1997, strong loan demand has resulted in competitive pressures among banks to
keep deposit rates relatively high and these high rates may have a negative
impact on First National's net interest margin.
In order to help protect First National against significant rising
interest rates, First National has all of its securities classified as
available-for-sale. If they are sold prior to maturity, First National may
experience losses which may be offset by high interest income when reinvested
at higher yields.
Provision and Allowance for Loan Losses. First National provided
approximately $45,000 for loan losses during the first nine months of 1997
compared to $95,000 of provisions during the same period in 1996. First National
had net loan charge offs of $17,000 in 1997 and $13,000 during 1996. The
provisions should be characterized as general provisions not related to any
specific or impaired loans.
The allowance for loan losses totaled $970,000 (1.20% of loans) at
September 30, 1997, compared to $912,000 (1.20% of loans) at September 30, 1996.
Based upon management's continuing evaluation of inherent risks in the current
loan portfolio, current levels of classified assets, and economic factors,
management believes the allowance to be adequate to absorb potential losses in
the current portfolio.
Other Income. Other income, excluding security gains and losses, increased
$213,000 (24%) during 1997 compared to 1996.
30
<PAGE>
Other Expenses. Other expenses increased $54,000 during the first nine
months of 1997 compared to the same period in 1996. Other expenses as a percent
of average assets was 2.8% in 1997 compared to 2.8% in 1996. First National's
efficiency ratio (operating expenses as a percent of operating income) improved
to 64% in 1997 compared to 64% last year.
Comparison of Results of Operations for the Years Ended
December 31, 1996 and 1995
Net income for 1996 was $1.5 million, representing a 36.8% increase over
1995 net income of $1.1 million. Net income per share was $95.49 in 1996
compared to $70.80 per share in 1995. For 1996 and 1995, the return on average
assets was 1.07% and 0.94%, respectively. Return on average equity was 23.6% in
1996 compared to 19.3% in 1995. The increase in net income in 1996 was due
primarily to an increase in net interest income and a reduction in expenses. Net
interest income increased $563,000 or 11.7% in 1996, primarily as a result of an
increase in average earning assets associated with purchase and acquisition of
the assets and liabilities of Burdett State Bank in late 1995. Other expenses
decreased $22,000 in 1996. First National's efficiency ratio improved to 61% in
1996 as compared to 67% last year.
Net Interest Income. Net interest income, First National's primary source
of revenue, is the difference between the amount of interest and fees generated
by earning assets, primarily loans and securities, that exceeds the interest
cost of deposits and purchased funds. Net interest income on a tax equivalent
basis adjusts tax exempt income to an amount which would have been earned had
the income been fully subject to income tax. This discussion is based upon tax
equivalency.
The following table summarizes the adjustments made to interest income as
reported in the Combined Statements of Operations to arrive at net interest
income. All rates used in the analysis following this table are on a tax-
equivalent basis using a 34% tax rate.
<TABLE>
<CAPTION>
1996 Increase 1995
------ --------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Total interest income....................... $10,222 $1,224 $8,998
Plus tax-equivalent adjustment.............. 414 68 346
------- ------ ------
Interest income(tax-equivalent)............. 10,636 1,292 9,344
Less interest expense....................... 5,244 729 4,515
------- ------ ------
Net interest income, (tax-equivalent basis). $ 5,392 $ 563 $4,829
======= ====== ======
Yield on earning assets..................... 8.40% 8.70%
Cost of funds............................... 4.60% 4.72%
Net interest margin......................... 4.26% 4.50%
</TABLE>
Net interest income during 1996 totaled $5.4 million, a $563,000 (11.7%)
increase over 1995. The increase resulted from an increase in average earning
assets, while net interest margin declined slightly. Net interest income is
influenced by changes in both interest rate(s) and changes in interest-bearing
assets and liabilities (volume). First National's average earning assets in 1996
increased $19.2 million over 1995 while First National's average interest-
bearing liabilities increased $18.2 million. The difference between the interest
earned and the interest paid on this increased volume resulted in approximately
$563,000 in additional net interest income during 1996.
The yield on earning assets decreased 30 basis points during 1996 to 8.40%
as compared to 8.70% last year. Loan yields decreased due to prime rate
fluctuations and competitive pressures. Security yields increased due to the
rollover of lower yielding securities to higher yielding securities. First
National's cost of funds decreased 12 basis points during 1996 to 4.60% as
compared to 4.72% last year. The decrease reflects the repricing of higher rate
deposits
31
<PAGE>
to lower rates. Because the decrease in the cost of funds was slightly lower
than the decrease in the yield on earning assets, First National's net interest
margin decreased from 4.50% to 4.26% from 1995 to 1996.
Interest rates were steady during 1995, decreased during the first half of
1996, and were steady during the second half of 1996. The changes in interest
rates have not impacted First National's net interest margin significantly.
However, because First National is asset-sensitive to interest rates, a change
in the direction of rates may have an impact on First National's net interest
margins. Generally when interest rates increase, First National's net interest
margin may increase and if interest rates decrease, First National's net
interest margin may decrease. The impact on First National's net interest margin
is also dependent on the magnitude and direction of future interest rates,
deposit customer alternatives, and First National's need for liquidity.
First National has approximately $65.8 million in earning assets repricing
or maturing within the next year. As a repricing offset, First National has
approximately $52.3 million in certificates of deposit maturing in one year and
$56 million in savings and checking accounts whose interest rates may increase
or decrease along with other market rates. Historically, the interest rates paid
on savings and checking accounts lag and do not increase as far as the rates
earned on loans and investments. During 1996, strong loan demand has resulted in
competitive pressures among banks to keep deposit rates relatively high and
these high rates may have a negative impact on First National's net interest
margin.
In order to help protect First National against significant rising
interest rates, First National has all of its securities classified as
available-for-sale. If they are sold prior to maturity, First National may
experience losses which may be offset by high interest income when reinvested at
higher yields.
Provision And Allowance For Loan Losses. First National provided
approximately $110,000 for loan losses during 1996 compared to provisions
totaling $40,000 during 1995. First National had net loan charge offs of $6,000
in 1996 and $176,000 during 1995. The provisions should be characterized as
general provisions not related to any specific or impaired loans.
The allowance for loan losses totaled $908,000 (1.15% of loans) at
December 31, 1996, compared to $804,000 (1.10% of loans) at December 31, 1995.
Based upon management's continuing evaluation of inherent risks in the current
loan portfolio, current levels of classified assets, and economic factors,
management believes the allowance to be adequate to absorb potential losses in
the current portfolio.
32
<PAGE>
Other Income. The following table summarizes the changes in the
components of noninterest income:
<TABLE>
<CAPTION>
Increase
1996 (Decrease) 1995
------ ---------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Service charges on deposit accounts......... $ 446 $ (16) $ 462
Gain (Loss) on sale of securities, net...... 28 50 (22)
Credit card fees............................ 10 0 10
Other....................................... 496 60 436
------- ------ ------
Total other income.......................... $ 980 $ 94 $ 886
======= ====== ======
</TABLE>
Noninterest income, excluding security gains and losses, increased $44,000
(5%) during 1996 compared to 1995. An increase in fiduciary fees was primarily
responsible for the increase.
Other Expenses. The following table summarizes the changes in the
components of noninterest expenses:
<TABLE>
<CAPTION>
Increase
1996 (Decrease) 1995
------ ---------- ------
(Dollars in thousands)
<S> <C> <C> <C>
Salaries and employee benefits.............. $ 2,069 $ 95 $1,974
Occupancy expense of premises............... 541 24 517
Printing, stationery and supplies........... 53 (6) 59
Data processing............................. 272 29 243
Legal and professional...................... 35 (73) 108
Audits and examinations..................... 82 (5) 87
Marketing................................... 78 15 63
Insurance................................... 47 9 38
FDIC assessments............................ 2 (113) 115
Postage..................................... 83 6 77
Telephone & telegraph....................... 63 6 57
Other....................................... 567 6 561
------- ------ ------
Subtotal.................................... $ 3,892 $ (7) $3,899
======= ====== ======
</TABLE>
Noninterest expenses decreased $7,000 during 1996 compared to 1995.
The decrease in noninterest expenses is primarily attributed to a decrease in
the FDIC insurance assessment of $113,000. This was offset by an increase in
salaries and employee benefits.
Noninterest expenses as a percent of average assets was 2.9% in 1996
compared to 3.4% in 1995. First National's efficiency ratio (operating expenses
as a percent of operating income) improved to 61% in 1996 compared to 68% last
year.
33
<PAGE>
Comparison of Financial Condition at December 31, 1996 and 1995
First National functions as a financial intermediary, and as such its
financial condition should be examined in terms of trends in sources and uses of
funds.
<TABLE>
<CAPTION>
1995-1996
1996 Increase (Decrease) 1995
Average ------------------- Average
Balance Amount % Balance
--------- ------- ----- ---------
<S> <C> <C> <C> <C>
FUNDING USES
Earning Assets
Loans............................................ $ 74,274 $ 6,632 9.8% $ 67,642
Taxable investment securities.................... 36,870 9,830 36.4 27,040
Non-taxable investment securities................ 10,941 2,496 29.6 8,445
Other interest earning assets.................... 4,546 251 0.6 4,295
-------- ------- ------ --------
Total earning assets............................. 126,631 19,209 17.9 107,422
Cash and due from banks.......................... 3,523 115 3.4 3,408
Other funding uses............................... 5,864 943 19.2 4,921
-------- ------- ------ --------
Total funding uses............................... 136,018 20,267 17.5 115,751
FUNDING SOURCES
Interest bearing liabilities
Interest bearing deposits........................ 107,046 17,431 19.5 89,615
Short-term borrowings............................ 3,800 976 34.6 2,824
Note payable..................................... 3,100 (200) (6.1) 3,300
-------- ------- ------ --------
Total interest bearing liabilities............... 113,946 18,207 19.0 95,739
Non-interest demand deposits..................... 15,144 1,616 11.9 13,528
Stockholders' equity............................. 6,197 566 10.1 5,631
Other sources.................................... 731 (122) (14.3) 853
-------- ------- ------ --------
Total funding uses............................... $136,018 $20,267 17.5% $115,751
======== ======= ====== ========
</TABLE>
Total average earning assets increased $19.2 million or 17.9% and total
average interest bearing liabilities increased $18.2 million or 19.0%, in 1996.
Average loans, the largest use of funds, increased $6.6 million or 9.8%.
The increase was primarily in commercial, agricultural, and real estate loans.
The loan increase was funded from an increase in deposits.
Total average deposits increased $17.4 million. Depositors increased their
investment in time certificate of deposits as the interest rate differential
between savings and demand deposit alternatives increased.
Total stockholders' equity increased $.6 million or 10.1% in 1996 as a
result of the retention of 1996 earnings, partially offset by the payment of
cash dividends and a redemption of preferred stock.
34
<PAGE>
Non-accrual, Past Due and Restructured Loans
Certain information concerning non-accruals, past due and restructured
loans as set forth in the following tables.
<TABLE>
<CAPTION>
December 31,
-------------
1996 1995
---- ----
(In thousands)
<S> <C> <C>
Non-accrual loans........................................... $ 500 $669
Accruing loans past due 90 days or more.................... 902 30
Restructured loans.......................................... -- --
Interest foregone on non-accrual loans...................... 60 63
Past due and non-accrual loans as percentage of loans....... 1.80% .96%
</TABLE>
The total of accruing loans past due 90 days or more and non-accrual loans
increased $699,000 to $1,402,000 at December 31, 1996. The increase in accruing
loans past due 90 days or more was related to one agricultural loan and one
commercial loan. First National does not presently anticipate any significant
losses with respect to these loans or any other assets not reported above.
Liquidity and Interest Rate Sensitivity
The primary functions of asset/liability management are to assure adequate
liquidity and to maintain an appropriate balance between interest earning assets
and interest bearing liabilities. Liquidity represents the ability of First
National to meet maturing obligations and existing commitments, to provide funds
necessary to respond to fluctuations in deposit levels, to fund operations, and
to provide for customers' credit needs.
Liquidity can be provided from both the asset and liability sides of the
balance sheet. On the asset side, liquidity arises primarily through maturities
of investments, daily receipt of principal and interest payments on loans, and
the sale of loans and investments to investors in the secondary market.
Liquidity on the liability side involves the ability of First National to
attract and retain deposits and other funds at a reasonable cost. First United
has not actively sought deposits from outside of its service area or from large-
denomination time certificates of deposits which are available to the highest
bidder. Other sources of liquidity include the purchase of Federal Funds,
repurchase of U.S. government securities, and sale of long-term debt and common
stock. Additional liquidity is also available through the discounting facilities
of the Federal Reserve Bank, and the borrowings from the Federal Home Loan Bank.
First National's liquidity position was stable during 1996. First National
believes its liquidity to be strong and more than adequate to meet future
funding needs. Indicators of liquidity include: loan-to-deposit ratio (loans as
a percent of deposits less time deposits $100,000 or more) 73.1% at December 31,
1996, compared to 68.3% at December 31, 1995; securities maturing in one year
$7.1 million compared to $8.3 million at December 31, 1996 and 1995,
respectively; and interest-bearing deposits in other banks of $4.6 million at
December 31, 1996, compared to $4.2 million at December 31, 1995.
Interest rate sensitivity is a function of the repricing characteristics
of First National's assets and liabilities -- the time at which, either at
replacement at maturity or during the life of the instrument, interest bearing
assets and liabilities are subject to changes in interest rates. Examples of
interest sensitive assets include loans with floating rates and assets that will
mature within a designated time period. Interest sensitive liabilities include
short-term certificates of deposits and money market accounts. The difference
between the amount of rate sensitive assets and rate sensitive liabilities, on
which interest rates may change with market fluctuations within a given period
of time, is referred to as a rate sensitive gap. In theory, any gap can have a
potential impact on a bank's net interest income. For example, if interest-
sensitive liabilities exceed interest-sensitive assets, an increase in general
interest rates might have an adverse effect on earnings which might have been
realized in the absence of such an interest rate change. Conversely, a decrease
in general interest rates might improve earnings.
35
<PAGE>
The objective of the interest rate sensitivity process is to maintain an
appropriate balance between First National's interest earning assets and
interest bearing liabilities over a specified time frame. The interest rate
sensitivity analysis, presented below (in thousands), represents the
relationship at the end of 1996 and 1995 between assets and liabilities that are
interest-rate adjustable within given time periods.
<TABLE>
<CAPTION>
1 to 90 91 to 365 1 to 5 Over Five
Total Total Days Years Years *
----- ----- ---- ----- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1996
Assets
Loans.................................... $ 78,843 $ 38,343 $ 20,814 $ 18,307 $ 1,379
Securities............................... 49,021 2,316 1,610 19,860 25,235
Other earning assets..................... 4,556 200 600 3,756
Other assets............................. 11,564 -- -- -- 11,564
-------- -------- -------- -------- -------
Total.................................. $143,984 $ 40,859 $ 23,024 $ 41,923 $38,178
Liabilities and Equity
Deposits................................. $124,014 $ 60,161 $ 30,818 $ 15,603 $17,432
Short-term borrowing..................... 7,520 7,520 -- -- --
Notes payable............................ 3,270 100 3,037 133 --
Other liabilities........................ 2,487 -- -- -- 2,487
Stockholders' equity..................... 6,693 -- -- -- 6,693
-------- -------- -------- -------- -------
Total.................................. $143,984 $ 67,781 $ 33,855 $ 15,736 $26,612
Net assets (liabilities)................. $(26,922) $(10,831) $ 26,187 $11,566
======== ======== ======== =======
Cumulative net assets (liabilities)
as a percent of assets................. (18.70)% (26.24)% (8.03)%
DECEMBER 31, 1995
Assets
Loans.................................... $ 73,081 $ 39,959 $ 14,439 $ 16,619 $ 2,064
Securities............................... 43,890 1,886 2,984 20,792 18,228
Other earning assets..................... 4,166 600 666 2,900
Other assets............................. 12,627 -- -- -- 12,627
-------- -------- -------- -------- -------
Total.................................. $133,764 $ 42,445 $ 18,089 $ 40,311 $32,919
Liabilities and Equity
Deposits................................. $120,328 $ 62,632 $ 25,850 $ 16,629 $15,217
Short-term borrowings.................... 1,730 1,730 -- -- --
Notes payable............................ 3,250 100 400 2,750 --
Other liabilities........................ 2,526 -- -- -- 2,526
Stockholders' equity..................... 5,930 -- -- -- 5,930
-------- -------- -------- -------- -------
Total.................................. $133,764 $ 64,462 $ 26,250 $ 19,379 $23,673
Net assets (liabilities)................. $(22,017) $ (8,161) $ 20,932 $ 9,246
======== ======== ======== =======
Cumulative net assets (liabilities)
as a percent of assets................. (16.5)% (22.6)% (6.9)%
</TABLE>
________________
* Over 5 years includes non-interest bearing assets and liabilities and
stockholders' equity. Interest bearing demand and savings accounts are
included in less than 3 months.
36
<PAGE>
The above chart reflects the contractual maturity and repricing
characteristic of First National's assets and liabilities, and suggests a
liability sensitive structure. Although First National appears somewhat
liability sensitive to interest rates, history has shown that certain interest
rates paid on deposit products lag and do not increase as far as the rates
earned on loans and investments. Therefore, First National's net interest margin
depends not only on the direction and magnitude of future rates, but also
customer alternatives, and need for liquidity. First National's internal
interest rate sensitivity model currently suggests that First National is asset
sensitive. Therefore, in the event of lower interest rates, First National's net
interest margin may decrease.
First National's one year cumulative interest rate sensitive GAP
increased from 22.6% to 26.2% at December 31, 1995 and 1996, respectively. The
increase resulted from the origination of fewer interest rate sensitive loans, a
longer-term security portfolio, and depositors purchasing shorter-term
certificates of deposits during 1996.
Capital Resources
First National believes a strong capital base is important to the
continued profitability and success of First National, because it promotes
depositor and investor confidence. In addition, it provides a solid foundation
for future growth. First National frequently evaluates the overall adequacy of
its capital position. First National considers among other things, the present
and anticipated needs of the company, current market conditions, and other
relevant factors. Earnings retention continues to be First National's primary
source of increasing capital. However, to remain flexible, First National has
additional authorized but unissued shares of its capital stock. This allows the
Board an opportunity to raise additional capital when necessary and prudent to
do so.
First National's common stockholders' equity at December 31, 1996, was
$6,693,000 compared to $5,930,000 at December 31, 1995. On a per share basis,
stockholders' equity totaled $436.94 compared to $387.33 on the same dates,
respectively. First National's annualized return on average equity during 1996
totaled 23.6% compared to 19.3% during 1995. The increase in stockholders'
equity was the result of the retention of earnings after redemption of all
outstanding preferred stock in the amount of $473,000 and payment of $153,000 in
cash dividends. Also, during 1996, First National sold 8 shares of new common
stock.
First National and First United are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory (and possibly
additional discretionary) actions by regulators that, if undertaken, could have
a direct material affect on First National's financial condition and results of
operations. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, First National and its subsidiary must each meet
specific capital guidelines that involve quantitative measures of their assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. First National and its subsidiary's capital amounts and
classifications are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require First National and its subsidiary to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of December 31,
1996, that First National and its subsidiary meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996 and December 31, 1995, the most recent regulatory
notification categorized First United as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios set forth in the table. There are no conditions or events since
that notification that management believes have changed First United's category.
On a consolidated basis First National has met its minimum regulatory
capital requirements, however, since the financial statements have been prepared
on a combined basis, the capital ratios for First National have not been
presented.
37
<PAGE>
Below is a summary of the various capital ratios of First National at
December 31, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
To be Well Capitalized
Under Prompt Corrective
Actual Minimum Action Provisions
------ ------- -----------------------
<S> <C> <C> <C> <C>
Tier I Capital (to
average assets) 12-31-96 6.05% 4.0% 5%
12-31-95 6.44%
Tier I Capital (to
risk-weighted assets) 12-31-96 9.11% 4.0% 6%
12-31-95 9.21%
Total Capital (to
risk-weighted assets) 12-31-96 10.09% 8.0% 10%
12-31-95 10.16%
</TABLE>
The above ratios do not include unrealized gains and losses on securities
available for sale which are excluded from the ratios by the federal regulatory
agencies.
REGULATION
Regulation of First National
General. First National 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, First National 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. First National 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
38
<PAGE>
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 First National 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.
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 First United
- -- 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 First United
General. As a national bank, First United is subject to the primary
supervision of the OCC under the National Bank Act. The OCC regularly examines
the operations of First United, including but not limited to capital adequacy,
reserves, loans, investments and management practices. These examinations are
for the protection of First United's depositors and not its shareholders. In
addition, First United is required to furnish quarterly and annual reports to
the OCC. The OCC's enforcement authority includes the power to remove officers
and directors and the authority to issue cease-and-desist orders to prevent a
bank from engaging in unsafe or unsound practices or violating laws or
regulations governing its business.
First United is a member of the Federal Reserve System and its deposits are
insured by the FDIC to the legal maximum of $100,000 for each insured depositor.
Some of the aspects of the lending and deposit business of First
39
<PAGE>
United that are subject to regulation by the Federal Reserve Board and the FDIC
include reserve requirements and disclosure requirements in connection with
personal and mortgage loans and savings deposit accounts. In addition, First
United is subject to numerous federal and state laws and regulations which set
forth specific restrictions and procedural requirements with respect to the
establishment of branches, investments, interest rates on loans, credit
practices, the disclosure of credit terms and discrimination in credit
transactions.
Capital Adequacy. The Federal Reserve Board and the OCC have established
guidelines with respect to the maintenance of appropriate levels of capital by
bank holding companies and national banks, respectively. The regulations impose
two sets of capital adequacy requirements: minimum leverage rules, which require
bank holding companies and banks to maintain a specified minimum ratio of
capital to total assets, and risk-based capital rules, which require the
maintenance of specified minimum ratios of capital to "risk-weighted" assets.
The regulations of the Federal Reserve Board and the OCC require bank
holding companies and national banks, respectively, to maintain a minimum
leverage ratio of "Tier 1 capital" (as defined in the risk-based capital
guidelines discussed in the following paragraphs) to total assets of 3.0%.
Although setting a minimum 3.0% leverage ratio, the capital regulations state
that only the strongest bank holding companies and banks, with composite
examination ratings of 1 under the rating system used by the federal bank
regulators, would be permitted to operate at or near such minimum level of
capital. All other bank holding companies and banks are expected to maintain a
leverage ratio of at least 1% to 2% above the minimum ratio, depending on the
assessment of an individual organization's capital adequacy by its primary
regulator. Any bank or bank holding company experiencing or anticipating
significant growth would be expected to maintain capital well above the minimum
levels. In addition, the Federal Reserve Board has indicated that whenever
appropriate, and in particular when a bank holding company is undertaking
expansion, seeking to engage in new activities or otherwise facing unusual or
abnormal risks, it will consider, on a case-by-case basis, the level of an
organization's ratio of tangible Tier 1 capital (after deducting all
intangibles) to total assets in making an overall assessment of capital.
The risk-based capital rules of the Federal Reserve Board and the OCC
require bank holding companies and state member 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.
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
40
<PAGE>
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. As of September 30, 1997, First United
was well-capitalized as defined by the OCC's regulations.
For information regarding First United's compliance with its regulatory
capital requirements, see Note 11 of Notes to Combined Financial Statements.
Branching. Under the McFadden Act of 1927, national banks may only
establish branches to the extent specifically authorized by statute for banks
chartered by the state in which the national bank is located and subject to the
restrictions as to location imposed by state law on state banks. The Riegle-
Neal Act authorizes the OCC and FDIC to approve interstate branching de novo by
national and state banks, respectively, only in states which specifically allow
for such branching. The Riegle-Neal Act also requires the appropriate federal
banking agencies to prescribe regulations by June 1, 1997 which prohibit any
out-of-state bank from using the interstate branching authority primarily for
the purpose of deposit production. These regulations must include guidelines to
ensure that interstate branches operated by an out-of-state bank in a host state
are reasonably helping to meet the credit needs of the communities which they
serve.
Dividend Limitations. Pursuant to the National Bank Act, no national bank
may pay dividends from its paid-in capital. All dividends must be paid out of
current or retained net profits, after deducting reserves for losses and bad
debts. The National Bank Act further restricts the payment of dividends out of
net profits by prohibiting a national bank from declaring a dividend on its
shares of common stock until the surplus fund equals the amount of capital stock
or, if the surplus fund does not equal the amount of capital stock, until one-
tenth of a bank's net profits for the preceding half year in the case of
quarterly or semi-annual dividends, or the preceding two half-year periods in
the case of annual dividends, are transferred to the surplus fund. Prior OCC
approval is required for the payment of a dividend if the total of all dividends
declared by a national bank in any calendar year would exceed the total of its
net profits for that year combined with its net profits for the two preceding
years, less any required transfers to surplus or a fund for the retirement of
any preferred stock. In addition, First United is prohibited by federal statute
from paying dividends or making any other capital distribution that would cause
First United to fail to meet its regulatory capital requirements. Further, the
OCC also has authority to prohibit the payment of dividends by a national bank
when it determines such payment to be an unsafe and unsound banking practice.
Deposit Insurance. The deposits of First United are insured up to
applicable limits by the FDIC through the Bank Insurance Fund (the "BIF").
First United is required to pay semi-annual assessments based on a percentage of
its insured deposits to the FDIC for insurance of its deposits by the BIF.
41
<PAGE>
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.
Transactions with Affiliates. Transactions between a national bank and any
affiliate are governed by Sections 23A and 23B of the Federal Reserve Act. An
affiliate of a national bank is any company or entity which controls, is
controlled by or is under common control with the national bank. In a holding
company context, the parent holding company of a national bank (such as First
National) and any companies which are controlled by such parent holding company
are affiliates of the national bank. Generally, Sections 23A and 23B (i) limit
the extent to which the bank or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such bank's
capital stock and surplus, and contain an aggregate limit on all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus and (ii) require that all such transactions be on terms
substantially the same, or at least as favorable, to the institution or
subsidiary as those provided to a non-affiliate. The term "covered transaction"
includes the making of loans, purchase of assets, issuance of a guarantee and
similar other types of transactions. In addition to the restrictions imposed by
Sections 23A and 23B, no national bank may (i) loan or otherwise extend credit
to an affiliate, except for any affiliate which engages only in activities which
are permissible for bank holding companies, or (ii) purchase or invest in any
stocks, bonds, debentures, notes or similar obligations of any affiliate, except
for affiliates which are subsidiaries of the national bank. The BHCA further
prohibits a depository institution from extending credit to or offering any
other services, or fixing or varying the consideration for such extension of
credit or service, on the condition that the customer obtain some additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions.
Loans to Directors, Executive Officers and Principal Stockholders.
National banks are also subject to the restrictions contained in Section 22(h)
and 22(g) of the Federal Reserve Act on loans to executive officers, directors
and principal stockholders. Under Section 22(h), loans to a director, executive
officer or greater than 10% stockholder of a national bank and certain
affiliated interests of the foregoing, may not exceed, together with all other
outstanding loans to such person and affiliated interests, the bank's loans to
one borrower limit (generally equal to 15% of the institution's unimpaired
capital and surplus) and all loans to such persons may not exceed the
institution's unimpaired capital and unimpaired surplus. Section 22(h) also
prohibits loans, above amounts prescribed by the appropriate federal banking
agency, to directors, executive officers and greater than 10% stockholders of a
national bank, and their respective affiliates, unless such loan is approved in
advance by a majority of the board of directors of the association with any
"interested" director not participating in the voting. The Federal Reserve
Board has prescribed the loan amount (which includes all other outstanding loans
to such person), as to which such prior board of director approval if required,
as being the greater of $25,000 or 5% of capital and surplus (up to $500,000).
Further, the Federal Reserve Board pursuant to Section 22(h) requires that loans
to directors, executive officers and principal stockholders be made on terms
substantially the same as offered in comparable transactions to other persons
unless the loan is made pursuant to a benefit or compensation plan that is
widely available to other employees and does not give preference to insiders.
Section 22(h) also prohibits a depository institution from paying the overdrafts
of any of its executive officers or directors. Section 22(g) of the Federal
Reserve Act requires that loans to executive officers of depository institutions
be approved by the board of directors of the institution, and imposes reporting
requirements for and additional restrictions on the type, amount and terms of
credits to such officers. In addition, Section 106 of the BHCA prohibits
extensions of credit to executive officers, directors, and greater than 10%
stockholders of a depository institution by any other institution which has a
correspondent banking relationship with the institution, unless such extension
of credit is on substantially the same terms as those prevailing at the time for
comparable transactions with other persons and does not involve more than the
normal risk of repayment or present other unfavorable features.
42
<PAGE>
BENEFICIAL OWNERSHIP OF FIRST NATIONAL COMMON STOCK
The following tables set forth information with respect to the shares of
First National Common Stock beneficially owned by (1) those persons who were
beneficial owners of more than 5.0% of the outstanding shares of First National
Common Stock, (2) First National's directors and certain executive officers, and
(3) all directors and executive officers of First National as a group.
Principal Stockholders
<TABLE>
<CAPTION>
Amount and Nature of Percent of Shares
Beneficial Ownership of First National
Name and Address of First National Common Common Stock
of Beneficial Owner Stock at the Record Date Outstanding
------------------- ------------------------ -----------------
<S> <C> <C>
</TABLE>
Management
<TABLE>
<CAPTION>
Shares of First National Percent of Shares
Common Stock of First National
Beneficially Owned at Common Stock
Name the Record Date Outstanding
---- ----------------- ---------------
<S> <C> <C>
All Executives Officers and
Directors as a Group (___ persons)
</TABLE>
_________
* Less than 1%.
43
<PAGE>
COMMON STOCK PRICES AND DIVIDENDS
The following table sets forth the market prices of Commercial Common Stock
for the periods indicated, indicated by the high and low closing sales prices
for Commercial Common Stock and dividends declared and as reported on the NYSE.
The Commercial Common Stock is currently traded on the NYSE under the symbol
"CFB."
There is currently no public market for First National Common Stock nor any
uniformly quoted price. As of the Record Date, there were approximately
-----
holders of record of First National Common Stock. [HAVE ANY DIVIDENDS BEEN
PAID?]
<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 0.089
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............. .055
(through December , 1997)..
--
</TABLE>
On September 11, 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 $29.63 per share. On December __, 1997,
the closing sale price for Commercial Common Stock was $ per share.
----
44
<PAGE>
COMPARISON OF STOCKHOLDER RIGHTS
Introduction. Upon consummation of the Merger, the holders of First
National Common Stock, whose rights are presently governed by Kansas law and
First National'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 the Articles of Incorporation and Bylaws of
First National 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 First National. See "Available Information."
Issuance of Common 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 First National authorize the issuance of 20,000 shares of
Common Stock, par value $1.00 per share, 52,483 shares of Class A 10% Preferred
Stock, par value $17.15 per share, 2,250,000 shares of Class B 7% Preferred
Stock, par value $1.00 per share, 12,500 shares of Class C 7% Preferred Stock,
par value $10.00 per share and 2,000 shares of Class D 10% Preferred Stock, par
value $10.00 per share. On December , 1997 and shares of
--- -------- --------
Commercial Common Stock and First National Common Stock, respectively, were
issued and outstanding. Neither Commercial nor First National had any shares of
preferred stock outstanding. Under Commercial's Articles of Incorporation and
First National's Articles of Incorporation, Commercial and First National are
authorized to issue additional shares of capital stock up to the amount
authorized without stockholder approval. Under the rules of the NYSE, however,
shares issuances equal to 20% or more of the shares outstanding immediately
prior thereto must be approved by stockholders.
Holders of both Commercial and First National Common Stock are entitled to
one vote per share on all matters submitted to vote to the stockholders, other
than during the election of directors, where voting rights are cumulative.
Preemptive Rights. Neither the holders of First National Common Stock nor
the holders of Commercial Common Stock have any preemptive or preferential right
to purchase or to subscribe for additional shares of First National Common Stock
or Commercial Common Stock, respectively, or any other securities that either
First National or Commercial may issue.
Number and Terms of Directors. The Board of Directors of Commercial is
divided into three classes with three separate terms, so that only one class is
elected at each annual meeting of stockholders. Commercial's Board of Directors
consists of between nine and twelve persons with the precise number to be
specified in the 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. First National's Board consists
of between five and fifteen persons with the precise number to be specified in
the Bylaws without separate classes of directors. Action to change the number
of First National directors requires a majority vote of the directors then in
office.
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. First National's Bylaws do not provide for
nominations for the election of directors and proposals for any new business to
be taken up at any annual or special meeting of stockholders.
Removal of Directors. The KGCC, provides for the removal of any First
National director, with or without cause, by an affirmative vote of not less
than a majority of total votes eligible to be cast by stockholders, except where
a corporation has cumulative voting for directors and less than the entire board
is being removed, then a director may only be removed without cause when the
votes cast against such director's removal would be sufficient to elect such
director if then cumulatively voted at an election of directors. The Articles
and Bylaws of Commercial provide for
45
<PAGE>
removal of any director or the entire Board of Directors at any time with an
affirmative vote of the holders of seventy-five percent (75%) or more of the
shares entitled to vote.
Special Meetings. Under the First National Bylaws, special meetings of
stockholders may only be called by resolution of the Board of Directors, the
Chairman of the Board, the President, the Secretary, or by the holders of not
less than twenty-five percent (25%) of outstanding stock entitled to vote at
such meeting. A special meeting of Commercial's stockholders may be called for
any purpose and at any time by a majority of the members of the Board of
Directors, by the holders of seventy-five percent (75%) or more of shares
entitled to vote at such meeting, or by a committee of the Board of Directors
which has been duly designated by the Board of Directors to have the power to
call such special meetings. No other person or persons may call special
meetings.
Approval of Business Combination. Under the KGCC, a business combination
involving First National will require that each constituent corporation's board
of directors adopt a resolution approving the Plan of Merger, and then following
board approval, the business combination must be submitted to the stockholders
of each constituent corporation for approval which will require the affirmative
vote of a majority of holders of the outstanding shares of voting stock of each
constituent corporation. Unless otherwise provided in the Articles of
Incorporation of the surviving corporation, no vote of stockholders shall be
required of the surviving corporation to authorize the merger if the agreement
of merger does not amend in any respect the articles of incorporation of such
constituent corporation, each share of stock of such constituent corporation
outstanding immediately prior to the effective date of the merger is to be an
identical outstanding or treasury share of the surviving corporation after the
effective date of the merger, and either no shares of common stock of the
surviving corporation and no shares, securities or obligations convertible into
such stock are to be issued or delivered under the plan of merger, or the
authorized unissued shares or the treasury shares of common stock of the
surviving corporation to be issued or delivered under the plan of merger plus
those initially issuable upon conversion of any other shares, securities or
obligations to be issued or delivered under such plan do not exceed 20% of the
shares of common stock of such constituent corporation outstanding immediately
prior to the effective date of the merger.
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 stockholders 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.
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 stockholders 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
stockholders 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.
46
<PAGE>
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 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
47
<PAGE>
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.
First National does not have any similar stockholder rights plan.
Amendment of Bylaws. The Board of Directors of First National may adopt,
alter, amend, or repeal the Bylaws by a majority vote of directors present at a
regular or special meeting.
The Board of Directors of Commercial are authorized to make, repeal, alter,
amend or rescind any or all of the Bylaws of the corporation. Stockholders may
make, repeal, alter, amend or rescind the Bylaws only upon a seventy-five
percent (75%) or more of the total voting power of outstanding shares of each
class of capital stock entitled to vote.
Amendment of Articles of Incorporation. Under the KGCC, a Kansas
Corporation, such as First National, has the right to amend, alter, change or
repeal any provision of its Articles, provided that first there is an resolution
adopted by a majority of the board of directors, and then the matter is
subsequently approved by an affirmative vote of a majority of stockholders
entitled to vote at the election of directors. The holders of outstanding shares
of a class shall be entitled to vote as a class upon a proposed amendment to the
Articles of Incorporation, whether or not entitled to vote by the Articles of
Incorporation, if the amendment would increase or decrease the aggregate number
of authorized shares of such class, increase or decrease the par value of the
shares of such class, or alter or change the powers, preferences or special
rights of the shares of such class so as to affect them adversely.
Commercial in its Articles reserved the right to amend, alter, change, or
repeal any provision contained in its Articles of Incorporation except in
Article VII (dealing with the number of directors of the corporation), Article
VIII (dealing with the classified board of directors), Article IX (dealing with
the removal of directors), Article X (dealing with filing vacancies on the Board
of Directors and newly created directorships), Article XI (dealing with the
power to call special meetings of the stockholders), Article XII ( dealing with
the amount of stock which can be acquired), Article XIII (dealing with the
approval of Business Combinations),Article XIV (dealing with the market price of
stock involved in any business combination), Article XV(dealing with the
amendment of Bylaws by directors and by stockholders) and Article XVI ( the
provision explaining these exceptions), may not be repealed or amended in any
respect, unless such repeal or amendment is approved by the affirmative vote of
the holders of not less than seventy-five percent (75%) of all outstanding
shares of stock of the corporation 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 the outstanding shares of stock of the corporation entitled to
vote generally, other than election of directors and other than Principal
Shareholders.
Action of Stockholders Without a Meeting. The Articles and Bylaws of First
National provide that no action required to be taken or which may be taken at
any annual or special meeting of stockholders of the corporation may be taken
without a meeting. The power for stockholders to consent in writing to take
action without a meeting is expressly denied.
48
<PAGE>
The Bylaws of Commercial permit any action required to be taken at a
meeting of the stockholders, or any action which may be taken at a meeting of
the stockholders, may be taken without a meeting if a consent in writing,
setting for the action so taken, shall be signed by all of the stockholders
entitled to vote. Such written stockholder consent will have the effect of a
unanimous stockholder vote.
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 First National by Stinson, Mag & Fizzell, P.C., Kansas City, Missouri.
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 & Touche llp, independent auditors, as stated in their
report, which is incorporated by reference herein and have been so incorporated
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The combined financial statements of First National as of December 31,
1996 and 1995 and for each of the two years in the period ended December 31,
1996, have been included herein in reliance upon the report of Deloitte & Touche
llp, independent auditors, included herein, and upon the authority of said firm
as experts in accounting and auditing.
INDEPENDENT ACCOUNTANTS
Representatives of Deloitte & Touche llp, First National's independent
certified public accountants, are expected to be present at the Special Meeting.
They will be afforded the opportunity to make a statement if they desire to do
so and are expected to be available to respond to appropriate questions.
OTHER MATTERS
The First National Board of Directors is not aware of any business to come
before the Special Meeting other than those matters described in this Proxy
Statement/Prospectus. 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.
49
<PAGE>
INDEX TO FINANCIAL STATEMENTS
OF FIRST NATIONAL BANK SHARES, LTD.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report..........................................................
Combined Statements of Financial Condition as of December 31, 1996 and 1996..........
Combined Statements of Operations for the Years Ended December 31, 1996 and 1995......
Combined Statements of Stockholders' Equity for the Years Ended December 31,
1996 and 1995.........................................................................
Combined Statements of Cash Flows for the Years Ended December 31, 1996 and 1995......
Notes to Combined Financial Statements................................................
Combined Statements of Financial Condition as of September 30, 1997 and December
31, 1996..............................................................................
Combined Statements of Operations for the Nine Months Ended September 30, 1997
and 1996..............................................................................
Combined Statements of Cash Flows for the Nine Months Ended September 30, 1997
and 1996..............................................................................
Notes to Combined Financial Statements................................................
</TABLE>
50
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
Combined Financial Statements for the
Year Ended December 31, 1996
and Independent Auditors' Report
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
TABLE OF CONTENTS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS:
Combined Statement of Financial Condition 2
Combined Statement of Operations 3
Combined Statement of Stockholders' Equity 4
Combined Statement of Cash Flows 5
Notes to Combined Financial Statements 6
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of First National Bank Shares, Ltd.
Great Bend, Kansas
We have audited the accompanying combined statement of financial condition of
First National Bank Shares, Ltd. (First National) as of December 31, 1996, and
the related combined statements of operations, stockholders' equity, and cash
flows for the year then ended. These financial statements are the
responsibility of First National'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 combined financial statements present fairly, in all
material respects, the financial position of First National 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.
DELOITTE & TOUCHE LLP
Kansas City, Missouri
December 15, 1997
F-1
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
COMBINED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS. EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(Unaudited)
ASSETS 1996 1995
<S> <C> <C>
CASH AND DUE FROM BANKS $ 4,836 $ 5,427
INTEREST BEARING DEPOSITS IN OTHER BANKS 4,556 4,166
-------- --------
Cash and cash equivalents 9,392 9,593
SECURITIES AVAILABLE FOR SALE, at fair value
amortized cost of $48,911 and $43,638 49,021 43,890
LOANS 78,843 73,081
ALLOWANCE FOR LOAN LOSSES 908 804
-------- --------
Net loans 77,935 72,277
ACCRUED INTEREST RECEIVABLE 1,687 1,606
PREMISES AND EQUIPMENT, net 2,482 2,460
OTHER ASSETS 2,559 3,134
-------- --------
TOTAL ASSETS $143,076 $132,960
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Interest bearing $106,582 $105,111
Noninterest bearing 17,432 15,217
-------- --------
Total deposits 124,014 120,328
Short-term borrowings 7,520 1,730
Notes payable 3,270 3,250
Accrued interest and other liabilities 1,579 1,722
-------- --------
Total liabilities 136,383 127,030
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock:
Class B, 7% cumulative, nonvoting with $1 par value, $10 par value - authorized 2,250,000 shares;
issued and outstanding, no shares in 1996 and 350,000 shares in 1995 - 350
Class C, 7% cumulative, nonvoting with a $10 par value, $100 par value - authorized 12,500 shares;
issued and outstanding, no shares in 1996 and 12,263 shares in 1995 - 123
Common stock, $1 par value - authorized 20,000 shares; issued and outstanding,
15,318 shares in 1996 and 15,310 shares in 1995 15 15
Additional paid-in capital 2,509 2,497
Retained earnings 4,097 2,788
Unrealized holding gain on securities available for sale, net 72 157
-------- --------
Total stockholders' equity 6,693 5,930
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $143,076 $132,960
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-2
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
COMBINED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
INTEREST INCOME:
Loans $ 7,050 $ 6,642
Securities:
Taxable 2,350 1,672
Exempt from federal income tax 527 397
Interest-bearing deposits 295 287
------- -------
Total interest income 10,222 8,998
INTEREST EXPENSE:
Deposits 4,786 4,032
Short-term borrowings 208 168
Notes payable 250 315
------- -------
Total interest expense 5,244 4,515
------- -------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 4,978 4,483
PROVISION FOR LOAN LOSSES 110 40
------- -------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 4,868 4,443
NONINTEREST INCOME:
Service charges on deposit accounts 446 462
Gain (loss) on sales of securities, net 28 (22)
Other service charges and fees 506 446
------- -------
Total noninterest income 980 886
NONINTEREST EXPENSES:
Salaries and employee benefits 2,069 1,974
Occupancy of premises 541 517
Printing, stationery, and supplies 53 59
Equipment and data processing 272 243
Legal and professional 35 108
Deposit insurance assessment 2 115
Other 920 883
------- -------
Total noninterest expenses 3,892 3,899
------- -------
INCOME BEFORE INCOME TAXES 1,956 1,430
PROVISION FOR INCOME TAXES 494 346
------- -------
NET INCOME $ 1,462 $ 1,084
======= =======
NET INCOME PER COMMON SHARE $95.49 $70.80
======= =======
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,311 15,310
======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-3
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
COMBINED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAIN (LOSS)
ON SECURITIES
ADDITIONAL AVAILABLE
PREFERRED COMMON PAID-IN RETAINED FOR SALE,
STOCK STOCK CAPITAL EARNINGS NET TOTAL
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995 (Unaudited) $1,273 $15 $2,497 $1,704 $(102) $5,387
Net income - - 1,084 - 1,084
Redemption of preferred stock (800) - - - - (800)
Change in unrealized holding gain (loss) on
securities available for sale, net - - - - 259 259
--------- ----- ---------- -------- --------- -------
BALANCE, December 31, 1995 (Unaudited) 473 15 2,497 2,788 157 5,930
Common stock issued - - 12 - - 12
Net income - - - 1,462 - 1,462
Cash dividends - $10 per share - - - (153) - (153)
Redemption of preferred stock (473) - - - - (473)
Change in unrealized holding gain (loss) on
securities available for sale, net - - - - (85) (85)
--------- ----- ---------- -------- --------- -------
BALANCE, December 31, 1996 $ - $ 15 $ 2,509 $ 4,097 $ 72 $ 6,693
========= ===== ========== ======== ========= =======
</TABLE>
See accompanying notes to combined financial statements.
F-4
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,462 $ 1,084
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization 272 273
Provision for loan losses 110 40
Cash provided (used) by changes in operating assets and liabilities:
(Gain) loss on securities available for sale (28) 22
Dividends on FHLB stock (66) (4)
Other 305 173
-------- --------
Net cash provided by operating activities 2,055 1,588
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and maturity of securities available for sale 21,851 15,563
Purchases of securities available for sale (27,058) (26,278)
Loan originations, net of principal repayments (5,762) (4,847)
Acquisition of premises and equipment, net (169) (357)
-------- --------
Net cash used in investing activities (11,138) (15,919)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 3,686 21,712
Net increase (decrease) in short-term borrowings 5,790 (5,660)
Proceeds from issuance of notes payable 420 400
Principal payments on notes payable (400) (422)
Redemption of preferred stock (473) (800)
Sale of common stock 12 -
Cash dividends (153) -
-------- --------
Net cash provided by financing activities 8,882 15,230
-------- --------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and cash equivalents (201) 899
Cash and cash equivalents, beginning of year 9,593 8,694
-------- --------
Cash and cash equivalents, end of year $ 9,392 $ 9,593
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,269 $ 4,163
======== ========
Income taxes $ 494 346
======== ========
</TABLE>
See accompanying notes to combined financial statements.
F-5
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(COLUMNAR AMOUNTS IN THOUSANDS)
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND NATURE OF BUSINESS - The combined financial
statements of First National Bank Shares, Ltd. (FNBS), a bank holding
company, are the separate financial statements relating to FNBS's wholly-
owned subsidiary, First United National Bank and Trust Company (FUNB) and
FNBS's activities as the parent company of its subsidiary. FNBS's investment
in its subsidiary other than FUNB and the operations of that other subsidiary
have been carved out of FNBS's financial statements. The combined financial
statements present the financial condition, results of operations and cash
flows of FNBS as if it were a separate entity for all periods presented.
FNBS's historical basis in the assets and liabilities have been carried over.
All material intercompany transactions and balances have been eliminated in
combination.
USE OF ESTIMATES - 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.
CASH EQUIVALENTS - For purposes of reporting cash flows, cash equivalents
consist of highly liquid investments with an original maturity of 90 days or
less.
SECURITIES - All securities are available for sale and are carried at fair
value. Unrealized holding gains and losses are excluded from earnings and
reported net of deferred taxes, as a separate component of stockholders'
equity until realized. Gains and losses on the sale of investment securities
are computed under the specific identification method. Premiums and discounts
are amortized over the contractual lives of the related securities on the
level yield method. Unrealized losses on securities, if any, reflecting a
decline in the fair value of such securities to be other than temporary, are
charged against income. Realized gains or losses on securities available for
sale are based on the specific identification method and are included in
results of operations on the trade date.
LOANS - Loans are stated at their principal amount outstanding. Mortgage
loans held for sale are valued at the lower of aggregate cost or market.
Interest on loans and amortization of unearned income is credited to income
on a daily basis, based on principal amounts outstanding at applicable rates.
The accrual of interest income on impaired loans is discontinued when
management has determined that the borrower may be unable to meet payments as
they become due. Accrual of interest income is generally discontinued when a
loan becomes 90 days past due as to principal or interest. When interest
income accruals are discontinued, interest credited to income in the current
year is reversed, and interest accrued in the prior year is charged to the
allowance for loan losses. Interest income is subsequently recognized only
to the extent cash payments are received.
ALLOWANCE FOR LOAN LOSSES - The management of credit risk is the
responsibility of FNBS's Executive Committee. Such Committee has established
maximum credit limits for single borrowers and for loan
F-6
<PAGE>
classifications generally. The comparison of limits and actual levels of
activity is reviewed by the Board of Directors on a regular basis.
The allowance for loan losses (the allowance) is intended to absorb future
possible losses in the loan portfolio. Provisions for loan losses, which are
charged to operating expenses and added to the allowance, are based upon
several factors including actual loss experience, current and forecasted
economic conditions, a review of the quality of the loan portfolio, and other
pertinent factors. The balance of the allowance is considered by management
adequate to absorb losses which may exist in the loan portfolio at December
31, 1996. In connection with the determination of the allowances for loan
losses and real estate owned, management obtains independent appraisals for
significant properties.
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 the allowance for loan losses.
LOAN FEE INCOME - Fees related to lending activities are recognized as other
income during the period the related services are performed. Loan fee income
for the years ended December 31, 1996 and 1995 was not material.
PREMISES AND EQUIPMENT - Premises and equipment are recorded at cost and
depreciated over their estimated useful lives. Depreciation expense is
computed using the straight-line method over the estimated useful lives of
the related assets. Estimated lives are 5 to 40 years for buildings and
leasehold improvements and 3 to 25 years for equipment and fixtures. Gains
or losses on disposition are reflected in operations. Expenditures for
improvements are capitalized and ordinary maintenance and repairs are charged
to operations as incurred.
OTHER REAL ESTATE OWNED - Real estate acquired through foreclosures or in
settlement of loans is recorded at the lower of fair market value minus
estimated costs to sell or carrying value of the loan at the acquisition
date. Other real estate owned is included in other assets in the combined
statement of financial condition.
INCOME TAXES - Deferred income taxes related to the timing differences of
recognizing income and expense for financial statement and income tax
purposes are recorded on the liability method.
NET INCOME PER COMMON SHARE - Net income per share is computed using the
weighted average number of shares of common stock.
NEWLY-ISSUED ACCOUNTING STANDARDS - In June 1996, the 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
F-7
<PAGE>
the adoption of the provisions of this statement on FNBS's combined financial
statements will not be material.
In February 1997 the FASB issued SFAS No. 128, Earnings per Share, which will
be adopted by FNBS 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. The adoption of
SFAS No. 128 will not impact FNBS's results of operations or materially
change the results of current earnings per share calculation.
In February 1997, the FASB issued SFAS No. 129, Disclosure of Information
about Capital Structure, which will be adopted by FNBS 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. The adoption
of the new standard will not impact FNBS's results of operations.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
which will be adopted by FNBS 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 combined balance sheet. The adoption of the new
standard will not impact FNBS'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 FNBS 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. The adoption of the new standard will not
impact FNBS's results of operations.
2. SECURITIES AVAILABLE FOR SALE
The amortized cost and estimated fair values of securities available for sale
at December 31, computed on a specific identification basis, are summarized
as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury $ 1,879 $ 5 $ 1 $ 1,883
U.S. Government agencies and corporations 25,697 17 53 25,661
Corporate securities 2,421 102 - 2,523
Obligations of states and political
subdivisions 18,914 63 23 18,954
------- ----- ----- --------
$48,911 $187 $77 $49,021
======= ===== ===== ========
Weighted average interest rate 6.80%
=======
</TABLE>
F-8
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1995 (Unaudited) COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
U.S. Treasury $ 4,312 $ 80 $ - $ 4,392
U.S. Government agencies and corporations 24,740 124 60 24,804
Corporate securities 2,518 33 - 2,551
Obligations of states and political
subdivisions 12,068 102 27 12,143
-------- ------- ------ -------
$43,638 $339 $87 $43,890
======== ======= ====== =======
Weighted average interest rate 6.77%
========
</TABLE>
As of December 31, 1996 and 1995, FNBS recorded unrealized gains on
securities available for sale as increases to stockholders' equity totaling
$72,000 and $157,000, respectively, net of deferred income taxes of $38,000
and $95,000, respectively.
The amortized cost and estimated fair value of securities available for sale
at December 31, 1996, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturity because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in one year or less $ 3,568 $ 3,666
Due after one year through five years 19,860 19,933
Due after five years 6,645 6,635
------- -------
30,073 30,234
Mortgage-backed securities 18,838 18,787
------- -------
$48,911 $49,021
======= =======
</TABLE>
Proceeds from sales of securities available for sale were $13,229,000 and
$8,867,000 in 1996 and 1995. Gross gains of $28,000 and gross losses of
$22,000 were realized on those sales during 1996 and 1995, respectively.
Securities with carrying values of $26,141,000 and $23,632,000 at December
31, 1996 and 1995, respectively, were pledged to secure public and trust
deposits, and for other purposes as required or permitted by law.
F-9
<PAGE>
3. LOANS
Loans by category at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
Real Estate:
1 - 4 single family $ 9,403 $ 8,661
Commercial 12,333 10,213
Construction 356 222
Installment 8,766 9,293
Commercial 17,996 16,107
Agricultural 23,127 23,704
All other 6,862 4,881
------- -------
$78,843 $73,081
======= =======
</TABLE>
Nonaccrual loans at December 31, 1996 and 1995, totaled approximately
$500,000 and $669,000, respectively. Interest income foregone on such loans
was $60,000 and $63,000 during 1996 and 1995, respectively. At December 31,
1996 and 1995, there were no loans considered to be impaired.
Real estate mortgage loans at December 31, 1996, include $122,800 of loans
held for sale which are carried at the lower of cost or market value. There
were no loans held for sale at December 31, 1995.
FNBS originates both adjustable and fixed interest rate loans. At December
31, 1996, the composition of those loans, less undisbursed amounts and
nonaccrual loans, were as follows:
<TABLE>
<CAPTION>
1996
<S> <C>
Fixed rate (term to maturity):
Three months or less $ 5,112
Three months through one year 4,681
Over one year through five years 17,380
Over five years 1,379
-------
Total 28,552
-------
Adjustable rate (term to rate adjustment):
Quarterly or more frequently 32,731
Annually or more frequently, but less frequently than quarterly 16,133
Every five years or more frequently, but less frequently than annually 927
Less frequently than every five years -
-------
Total 49,791
-------
Total loans $78,343
=======
</TABLE>
FUNB originates loans principally throughout central Kansas. This region is
predominately agricultural based, and its economic stability is dependent on
the strength of the grain industry. Although the subsidiaries have a
diversified loan portfolio, a substantial portion of their debtors' ability
to pay is dependent on the local economy.
Substantially all of FNBS's commercial loans are secured by assignments of
inventory, accounts receivable, buildings and equipment, or savings deposits;
agricultural loans are secured by crops and
F-10
<PAGE>
crop equipment; consumer loans are generally secured by personal property
or savings deposits; and all real estate loans are secured by land and
buildings.
4. ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses activities for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
Balance, beginning of year $ 804 $ 800
Provision charged to operations 110 40
Loans charged off (41) (103)
Recoveries on loans previously charged-off 35 67
----------- -----------
Balance, end of year $ 908 $ 804
=========== ===========
</TABLE>
5. PREMISES AND EQUIPMENT
Premises and equipment at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
Buildings and leasehold improvements $2,988 $2,979
Equipment and fixtures 1,945 1,785
----------- -----------
4,933 4,764
Less accumulated depreciation and amortization 2,451 2,304
----------- -----------
$2,482 $2,460
=========== ===========
</TABLE>
Depreciation and amortization of premises and equipment, included in
occupancy expense of premises, totaled $272,000 and $273,000 for fiscal
years 1996 and 1995, respectively.
6. INTEREST-BEARING DEPOSITS
Interest-bearing deposits (with ranges of interest rates) at December 31
are summarized as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
Interest-bearing demand (1.0%-3.0%) $ 14,261 $ 13,868
Money market accounts (3.0%-6.0%) 19,566 22,272
Savings accounts (2.0%-3.0%) 4,892 6,143
Time deposits, $100,000 or more (3.0%-7.0%) 16,205 13,309
Other time deposits (2.0%-7.0%) 51,658 49,519
----------- -----------
$106,582 $105,111
=========== ===========
</TABLE>
F-11
<PAGE>
As of December 31, 1996, scheduled maturities of time deposits were as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
<S> <C>
1997 $52,260
1998 15,603
--------------
$67,863
==============
</TABLE>
Interest expense on deposit accounts for the years ended December 31 is
summarized as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
Interest bearing demand $ 307 $ 292
Money market accounts 700 785
Savings accounts 141 138
Time deposits, $100,000 or more 747 410
Other time deposits 2,891 2,407
----------- -----------
$4,786 $4,032
=========== ===========
</TABLE>
FUNB is required to maintain reserve balances with the Federal Reserve
Bank. At December 31, 1996 and 1995, vault cash balances were sufficient to
offset gross required reserves. Required reserves are based on specified
percentages of the subsidiary's total average deposits. The percentage of
deposits required to be maintained is established by the Federal Reserve
Board.
7. SHORT-TERM BORROWINGS
Short-term borrowings at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
Securities sold under repurchase agreements $ - $ 100
Federal funds purchased 605 105
Advances from Federal Home Loan Bank 6,915 1,525
----------- -----------
$7,520 $1,730
=========== ===========
</TABLE>
Securities sold under repurchase agreements specify the sale and later
repurchase of certain U.S. Government or U.S. Government agency securities
at an agreed-upon interest rate. At December 31, 1996, FNBS sold securities
with par amounts of $105,000 with an agreement to repurchase the securities
on January 2, 1996, at an interest rate of 5.00%.
The borrowings from the Federal Home Loan Bank have fixed and variable rate
advances collateralized under blanket pledge agreements with the Federal
Home Loan Bank totaling $6,915,000 and $1,525,000 at December 31, 1996 and
1995, respectively. The amount outstanding at December 31, 1996, matures on
January 2, 1997, with interest payable monthly at 5.60%.
F-12
<PAGE>
8. NOTES PAYABLE
FNBS has a note payable of $3,270,000 and $3,250,000 at December 31, 1996
and 1995, respectively, maturing June 30, 1997. Principal is payable in
quarterly installments of $100,000, and interest is payable quarterly at
prime plus one-half percent which was 8.25% and 8.5% at December 31, 1996
and 1995, respectively. The note is secured by all outstanding stock of
FUNB.
9. INCOME TAXES
The components of income tax expense for the years ended December 31 were
as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
Current:
Federal $ 338 $ 242
State 132 94
Deferred 24 10
----------- -----------
$ 494 $ 346
=========== ===========
</TABLE>
The reasons for the differences between income tax expense and the amount
computed by applying the statutory federal income tax rate to income before
income tax expense are as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
--------------------------- ---------------------------
AMOUNT % AMOUNT %
<S> <C> <C> <C> <C>
Tax computed at statutory income tax rates $ 665 34 % $ 486 34 %
Effect of tax-exempt income (235) (12) (222) (16)
Other 64 3 82 6
----------- ----------- ----------- -----------
$ 494 25 % $ 346 24 %
=========== =========== =========== ===========
</TABLE>
F-13
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are presented below:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses not currently deductible $ 11 $ -
Other 79 142
----- -----
Gross deferred tax assets 90 142
Deferred tax liabilities:
Allowance for loan losses not currently deductible - (31)
Difference between book and tax basis of premises and equipment (260) (248)
Unrealized holding gain on securities available for sale (38) (95)
----- -----
Gross deferred liabilities (298) (374)
----- -----
Net deferred tax liability $(208) $(232)
===== =====
</TABLE>
10. REGULATORY RESTRICTIONS
CAPITAL REQUIREMENTS - FNBS and FUNB are subject to various regulatory
capital requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain mandatory (and
possibly additional discretionary) actions by regulators that, if
undertaken, could have a direct material effect on FNBS's financial
condition and results of operations. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, FNBS and its
subsidiary must each meet specific capital guidelines that involve
quantitative measures of their assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting
practices. FNBS and its subsidiary's capital amounts and classification are
also subject to qualitative judgments by the regulators about components,
risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require FNBS and its subsidiary to maintain minimum amounts and ratios (set
forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital
(as defined) to average assets (as defined). Management believes, as of
December 31, 1996, that FNBS and its subsidiary meet all capital adequacy
requirements to which they are subject.
As of December 31, 1996 and December 31, 1995, the most recent regulatory
notification categorized FUNB as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized the Bank must maintain minimum total risk-based, Tier I risk-
based and Tier I leverage ratios as set forth in the table. There are no
conditions or events since that notification that management believes have
changed FUNB's category.
On a consolidated basis FNBS has met its minimum regulatory capital
requirements, however, since these financial statements have been prepared
on a combined basis, the capital ratios for FNBS have not been presented.
F-14
<PAGE>
The actual capital amounts and ratios for FUNB are presented below:
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- --------------------- ------------------
AS OF DECEMBER 31, 1996: AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk-weighted assets) $9,341 10.1 % $7,406 8.0 % $9,258 10.0 %
Tier I Capital (to risk-weighted assets) 8,433 9.1 3,703 4.0 5,554 6.0
Tier I Capital (to average assets) 8,433 6.1 5,576 4.0 6,969 5.0
</TABLE>
<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------- --------------------- ------------------
AS OF DECEMBER 31, 1995 (UNAUDITED): AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to risk-weighted assets) $8,633 10.2 % $6,800 8.0 % $8,500 10.0 %
Tier I Capital (to risk-weighted assets) 7,829 9.2 3,400 4.0 5,100 6.0
Tier I Capital (to average assets) 7,829 6.4 4,863 4.0 6,078 5.0
</TABLE>
RESTRICTIONS ON DIVIDENDS - There are limited restrictions on the ability
of FNBS to pay dividends from its retained earnings; however, under
national banking law, FNBS's banking subsidiary may not, without approval
of the Office of the Comptroller of the Currency (OCC), declare dividends
payable to FNBS in excess of undivided profits, as defined by statute, less
any required transfers to surplus. This statute also grants to the OCC the
discretion to require any bank to suspend the payment of any and all
dividends until any requirements that may have been made by the OCC, or any
duly appointed examiner, shall have been complied with. At December 31,
1996 and 1995, FUNB could have provided funds to FNBS of up to
approximately $930,000 and $622,000, respectively, without further approval
of regulatory authorities.
11. EMPLOYEE BENEFIT PLANS
FNBS has adopted a 401(k) savings and profit sharing plan (PSP). All full-
time employees who have been continuously employed for one year are
eligible to participate by having a percentage of their pay deferred under
the PSP. FNBS, at its direction, may contribute a portion of the profits to
the PSP. Participants will receive their share of those profits upon
retirement or termination subject to the PSP's vesting schedule, as
defined. The PSP provides deferred investment options to participants.
FNBS's contribution to the PSP was $75,000 during 1996 and $70,000 during
1995.
12. RELATED PARTIES
FNBS has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). The aggregate amount
of loans to such related parties at December 1996 and 1995 was $55,000 and
$100,000, respectively. During 1996, new loans to such related parties
amounted to $45,000 with no repayments made.
13. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (SFAS No. 107), requires disclosure of
estimated fair value amounts of its financial
F-15
<PAGE>
instruments. It is management's belief that the fair values presented below
are reasonable based on the valuation techniques and data available as of
December 31, 1996 and 1995, as more fully described in the following table.
It should be noted that FNBS's operations are managed from a going concern
basis and not a liquidation basis. As a result, the ultimate value realized
for the financial instruments presented could be substantially different
when actually recognized over time through the normal course of operations.
Additionally, a substantial portion of FNBS's inherent value is FUNB's
capitalization and franchise value. Neither of these components have been
given consideration in the presentation of fair values which follow.
The following presents the carrying value and fair value of the specified
assets and liabilities held at December 31, 1996 and 1995. This information
is presented solely for compliance with SFAS No. 107 and is subject to
change over time based on a variety of factors.
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
-------------------------------- --------------------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Selected Assets:
Cash and due from banks $ 4,836 $ 4,836 $ 5,427 $ 5,427
Interest-bearing deposits in other banks 4,556 4,556 4,166 4,166
Securities available for sale 47,929 47,929 42,923 42,923
Federal Home Loan Bank stock 1,092 1,092 967 967
Loans, before allowance for loan losses 77,935 78,010 72,277 73,493
Selected Liabilities
Noninterest-bearing deposits 17,432 17,432 15,217 15,217
Demand deposits 38,719 38,719 42,283 42,283
Time deposits 67,863 67,897 62,828 62,753
Short-term borrowings 7,520 7,520 1,730 1,730
Notes payable 3,270 3,270 3,250 3,250
Off-balance sheet information:
Commitments on line-of-credit
arrangements - 2,713 - 4,369
Standby letters of credit - 127 - 54
</TABLE>
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS IN OTHER BANKS - The
book value of such financial instruments is assumed to approximate the fair
value of such assets.
SECURITIES AVAILABLE FOR SALE - Quoted market prices of dealer quotes were
used to determine the fair value of investment securities.
FEDERAL HOME LOAN BANK STOCK - The fair value of such stock approximates
book value since FNBS is able to redeem this stock with the Federal Home
Loan Bank at par value.
F-16
<PAGE>
LOANS - Loans were priced using the discounted cash flow method. The
discount rate used was the rate currently offered on similar products.
NONINTEREST-BEARING DEPOSITS AND DEMAND DEPOSITS - The fair value was
determined to approximate the carrying value (the amount payable on demand)
since such deposits are immediately withdrawable.
TIME DEPOSITS - For time certificates of deposit, the fair value was
determined using the discounted cash flow method. The discount rate was
equal to the rate currently offered on similar products.
SHORT-TERM BORROWINGS AND NOTES PAYABLE - These notes were valued using the
discounted cash flow method. The discount rate was equal to rates currently
offered on similar borrowings.
COMMITMENTS ON LINE-OF-CREDIT AGREEMENTS AND STANDBY LETTERS OF CREDIT -
These commitments are at market interest rates and approximate fair value.
14. CONDENSED FINANCIAL INFORMATION OF FNBS
Condensed financial information of FNBS (parent only) for the years ended
December 31, 1996 and 1995, follows:
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
1996 1995
<S> <C> <C>
ASSETS: $ 143 $ 48
Cash and due from banks 9,702 8,933
Equity in FUNB 266 360
Other assets, net ------- ------
$10,111 $9,341
TOTAL ASSETS ======= ======
LIABILITIES: $ 3,270 $3,250
Notes payable 148 161
Other liabilities ------- ------
3,418 3,411
Total liabilities ------- ------
6,693 5,930
STOCKHOLDERS' EQUITY ------- ------
$10,111 $9,341
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ======= ======
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
1996 1995
<S> <C> <C>
Equity in net income of FUNB $1,668 $1,374
Expenses:
Interest expense 250 315
Operating expenses 130 165
------ ------
Total expenses 380 480
------ ------
Net income before federal income taxes 1,288 894
Federal income tax benefit (174) (190)
------ ------
Net income $1,462 $1,084
====== ======
</TABLE>
F-18
<PAGE>
<TABLE>
<CAPTION>
CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,462 $ 1,084
Adjustments to reconcile net income to net cash provided by
operating activities:
Equity in net income of FUNB (1,668) (1,374)
Dividends received from FUNB 1,102 1,008
Changes in other assets and liabilities (4) (49)
------- -------
Net cash provided by operating activities 892 669
CASH FLOWS FROM INVESTING ACTIVITIES:
Advances to FUNB (203) (25)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable 420 400
Principal repayments of notes payable (400) (422)
Redemption of preferred stock (473) (800)
Sale of common stock 12 -
Cash dividends (153) -
------- -------
Net cash used by financing activities (614) (800)
------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and due from banks 75 (156)
Balance, beginning of year 48 226
------- -------
Balance, end of year $ 123 $ 70
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 254 $ 315
======= =======
Income taxes $ 360 $ 232
======= =======
</TABLE>
15. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are various commitments outstanding
and contingent liabilities (such as guarantees and commitments to extend
credit, etc.) that are not reflected in the accompanying financial
statements. Commitments to extend credit are agreements to lend to a
borrower as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require the 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.
FNBS evaluates each borrower's creditworthiness on a case-by-case basis. The
amount of the collateral obtained, if it is deemed necessary by FNBS upon
extension of credit, is based on management's credit evaluation of the
borrower. Collateral held varies but may include accounts receivable;
inventory; property, plant, and equipment; and deposits.
F-19
<PAGE>
Standby letters of credit are conditional commitments issued by the
subsidiary to guarantee the performance of a customer to a third party.
Generally, standby letters of credit are expected to expire without being
drawn upon. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to
borrowers. The subsidiary holds real or personal property as collateral
supporting those commitments for which collateral is necessary.
The amounts committed under these agreements represent the maximum potential
loss of principal, if fully drawn and if the customer defaults. However, the
actual credit risk varies depending on the creditworthiness of the customer
and the value of the collateral held.
Commitments outstanding at December 31 are summarized as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
1996 1995
<S> <C> <C>
Loan commitments $2,713 $4,369
Standby letters of credit 127 54
</TABLE>
16. PROPOSED MERGER
On September 11, 1997, FNBS entered into a reorganization and merger
agreement with Commercial Federal Corporation (Commercial). Under the terms
of the merger agreement, and based upon Commercial's closing stock price at
December 12, 1997 of $35.25 (adjusted for Commercial's three-for-two stock
split distributed on December 15, 1997), Commercial will issue approximately
992,857 shares (adjusted for Commercial's three-for-two stock split
distributed on December 15, 1997) of its common stock with a total aggregate
value of $34,998,000.
Following the proposed acquisition, FNBS 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, FNBS's
shareholders' approvals and other conditions, is expected to be consummated
before March 31, 1998.
F-20
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 1997 1996
<S> <C> <C>
CASH AND DUE FROM BANKS $ 4,817 $ 4,836
INTEREST BEARING DEPOSITS IN OTHER BANKS 3,263 4,556
-------- ---------
Cash and cash equivalents 8,080 9,392
SECURITIES AVAILABLE FOR SALE, at fair value
amortized cost of $48,911 and $43,638 55,328 49,021
LOANS 80,564 78,843
ALLOWANCE FOR LOAN LOSSES 970 908
-------- ---------
Net loans 79,594 77,935
ACCRUED INTEREST RECEIVABLE 2,078 1,687
PREMISES AND EQUIPMENT, net 2,475 2,482
OTHER ASSETS 3,117 2,559
-------- ---------
TOTAL ASSETS $150,672 $ 143,076
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits:
Interest bearing $114,342 $ 106,582
Noninterest bearing 16,356 17,432
-------- ---------
Total deposits 130,698 124,014
Short-term borrowings 7,169 7,520
Notes payable 2,708 3,270
Accrued interest and other liabilities 1,744 1,579
-------- ---------
Total liabilities 142,319 136,383
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Preferred stock:
Class B, 7% cumulative, nonvoting with $1 par value, $10 par value - authorized 2,250,000
shares issued and outstanding, no shares in 1996 and 350,000 shares in 1995 - -
Class C, 7% cumulative, nonvoting with a $10 par value, $100 par value - authorized 12,500
shares issued and outstanding, no shares in 1996 and 12,263 shares in 1995 - -
Common stock, $1 par value - authorized 20,000 shares; issued and outstanding,
15,318 shares in 1997 and 15,310 shares in 1996 15 15
Additional paid-in capital 2,511 2,509
Retained earnings 5,502 4,097
Unrealized holding gain on securities available for sale, net 325 72
-------- ---------
Total stockholders' equity 8,353 6,693
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $150,672 $ 143,076
======== =========
</TABLE>
See accompanying notes to combined financial statements.
F-21
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1996
<S> <C> <C>
INTEREST INCOME:
Loans $5,736 $5,279
Securities:
Taxable 1,646 1,730
Exempt from federal income tax 631 371
Interest-bearing deposits 191 209
------- -------
Total interest income 8,204 7,589
INTEREST EXPENSE:
Deposits 3,956 3,568
Borrowings 37 18
Notes payable 384 316
------- -------
Total interest expense 4,377 3,902
------- -------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 3,827 3,687
PROVISION FOR LOAN LOSSES 45 95
------- -------
NET INTEREST INCOME 3,782 3,592
NONINTEREST INCOME:
Service charges on deposit accounts 346 328
Gain (loss) on sales of securities, net 116 23
Other service charges and fees 579 384
------- -------
Total noninterest income 1,041 735
NONINTEREST EXPENSES:
Salaries and employee benefits 1,655 1,532
Occupancy of premises 437 426
Printing, stationery and supplies 42 48
Equipment and data processing 209 205
Legal and professional 28 24
Deposit insurance assessment 11 2
Other 677 634
------- -------
Total noninterest expenses 3,059 2,871
------- -------
INCOME BEFORE INCOME TAXES 1,764 1,456
PROVISION FOR INCOME TAXES 359 375
------- -------
NET INCOME $1,405 $1,081
======= =======
NET INCOME PER COMMON SHARE $ 91.76 $ 70.67
======= =======
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 15,318 15,310
======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-22
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
COMBINED STATEMENT OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 and 1996
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(UNAUDITED)
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
---------------------------
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,405 $ 1,082
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization 206 205
Provision for loan losses 45 95
Cash provided (used) by changes in operating assets and liabilities:
Origination of loans held for sale
(Gain) loss on securities available for sale (116) (23)
Dividends on FHLB stock (58) (50)
Other (776) (743)
------- -------
Net cash flows from operating activities 706 566
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of securities available for sale (5,917) (3,400)
Loan originations, net of principal repayments (1,721) (1,691)
Acquisition of premises and equipment, net (151) (206)
------- -------
Net cash flows used in investing activities (7,789) (5,297)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 6,684 1,218
Net increase (decrease) in short-term borrowings (351) 3,305
Redemption of preferred stock - (473)
Principal payments on notes payable (562) (67)
Cash dividends - (120)
------- -------
Net cash flows from financing activities 5,771 3,863
------- -------
CASH AND CASH EQUIVALENTS:
Increase (decrease) in cash and cash equivalents (1,312) (868)
Cash and cash equivalents, beginning of year 9,392 9,593
------- -------
Cash and cash equivalents, end of year $ 8,080 $ 8,725
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 4,172 $ 3,976
Income taxes 350 370
</TABLE>
See accompanying notes to combined financial statements.
F-23
<PAGE>
FIRST NATIONAL BANK SHARES, LTD.
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
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 First National Bank Shares,
Ltd.'s annual report for the year ended December 31, 1996.
F-24
<PAGE>
ANNEX A
<PAGE>
- --------------------------------------------------------------------------------
REORGANIZATION AND MERGER AGREEMENT
BY AND AMONG
COMMERCIAL FEDERAL CORPORATION
AND
COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK
AND
FIRST NATIONAL BANK SHARES, LTD
AND
FIRST UNITED NATIONAL BANK AND TRUST COMPANY
DATED AS OF SEPTEMBER 11, 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.............................. 6
1.5 Authorization for Issuance of Commercial
Common Stock; Exchange of Certificates......................... 7
1.6 No Fractional Shares............................................. 8
1.7 Shareholders' Approvals.......................................... 9
1.8 Registration Statement; Prospectus/Proxy Statement............... 9
1.9 Cooperation; Regulatory Approvals................................ 11
1.10 Closing.......................................................... 11
1.11 Closing of Transfer Books........................................ 12
1.12 Sale of Other Assets............................................. 12
ARTICLE II REPRESENTATIONS AND WARRANTIES OF COMPANY
AND FIRST UNITED............................................... 12
2.1 Organization, Good Standing, Authority, Insurance, Etc........... 12
2.2 Capitalization................................................... 13
2.3 Ownership of Subsidiaries........................................ 14
2.4 Financial Statements and Reports................................. 14
2.5 Absence of Changes............................................... 15
2.6 Prospectus/Proxy Statement....................................... 15
2.7 No Broker's or Finder's Fees..................................... 16
2.8 Litigation and Other Proceedings................................. 16
2.9 Compliance with Law.............................................. 16
2.10 Corporate Actions................................................ 16
2.11 Authority........................................................ 17
2.12 Employment Arrangements.......................................... 18
2.13 Employee Benefits................................................ 18
2.14 Information Furnished............................................ 20
2.15 Property and Assets.............................................. 20
2.16 Agreements and Instruments....................................... 20
2.17 Material Contract Defaults....................................... 21
2.18 Tax Matters...................................................... 21
2.19 Environmental Matters............................................ 22
2.20 Loan Portfolio; Portfolio Management............................. 22
2.21 Real Estate Loans and Investments................................ 23
2.22 Derivatives Contracts............................................ 23
2.23 Insurance........................................................ 23
i
<PAGE>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF COMMERCIAL
AND BANK....................................................... 24
3.1 Organization, Good Standing, Authority, Insurance, Etc........... 24
3.2 Capitalization................................................... 24
3.3 Ownership of Subsidiaries........................................ 25
3.4 Financial Statements and Reports................................. 25
3.5 Absence of Changes............................................... 26
3.6 Prospectus/Proxy Statement....................................... 26
3.7 No Broker's or Finder's Fees..................................... 27
3.8 Compliance With Law.............................................. 27
3.9 Corporate Actions................................................ 27
3.10 Authority........................................................ 27
3.11 Information Furnished............................................ 28
3.12 Litigation and Other Proceedings................................. 28
3.13 Agreements and Instruments....................................... 28
ARTICLE IV COVENANTS........................................................ 29
4.1 Investigations; Access and Copies................................ 29
4.2 Conduct of Business of the Company and the Company Subsidiaries.. 29
4.3 No Solicitation.................................................. 31
4.4 Shareholder Approval............................................. 32
4.5 Filing of Holding Company and Merger Applications................ 32
4.6 Consents......................................................... 32
4.7 Resale Letter Agreements......................................... 32
4.8 Publicity........................................................ 32
4.9 Cooperation Generally............................................ 33
4.10 Additional Financial Statements and Reports...................... 33
4.11 Stock Listing.................................................... 33
4.12 Conforming Adjustments........................................... 33
4.13 D&O Indemnification and Insurance................................ 34
4.14 Employment Benefits.............................................. 34
4.15 Advisory Board of Directors...................................... 35
4.16 Update Disclosures............................................... 35
4.17 Elimination of Liabilities....................................... 35
ARTICLE V CONDITIONS OF THE MERGER; TERMINATION OF
AGREEMENT...................................................... 36
5.1 General Conditions............................................... 36
5.2 Conditions to Obligations of Commercial.......................... 37
5.3 Conditions to Obligations of Company............................. 40
5.4 Termination of Agreement and Abandonment of Merger............... 41
ARTICLE VI TERMINATION OF OBLIGATIONS; PAYMENT OF
EXPENSES....................................................... 43
6.1 Termination; Lack of Survival of Representations and Warranties.. 43
6.2 Payment of Expenses.............................................. 43
ii
<PAGE>
ARTICLE VII CERTAIN POST-MERGER AGREEMENTS.................................. 45
7.1 Reports to the SEC.............................................. 45
7.2 Employees....................................................... 45
7.3 Income Tax Return............................................... 45
7.4 Continuation of Loan Participation Purchases by First United.... 46
ARTICLE VIII GENERAL......................................................... 46
8.1 Amendments...................................................... 46
8.2 Confidentiality................................................. 46
8.3 Governing Law................................................... 46
8.4 Notices......................................................... 47
8.5 No Assignment................................................... 47
8.6 Headings........................................................ 47
8.7 Counterparts.................................................... 48
8.8 Construction and Interpretation................................. 48
8.9 Entire Agreement................................................ 48
8.10 Severability.................................................... 48
8.11 No Third Party Beneficiaries.................................... 48
8.12 Enforcement of Agreement........................................ 48
Schedules:
Schedule I Disclosure Schedule for the Company
and First United............................................
Schedule II Disclosure Schedule for Commercial
and the Bank................................................
Exhibits:
Exhibit A List of Other Assets.........................................
Exhibit B Form of Voting Agreement.....................................
Exhibit 1.3(d) Aggregate Purchase Price Adjustments.........................
Exhibit 4.14(b) Form of Consulting 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
September 11, 1997, by and among COMMERCIAL FEDERAL CORPORATION, a Nebraska
corporation ("Commercial"), and COMMERCIAL FEDERAL BANK, A FEDERAL SAVINGS BANK,
a Federally chartered savings bank and wholly-owned subsidiary of Commercial
("Bank"); and FIRST NATIONAL BANK SHARES, LTD, a Kansas corporation ("Company")
and FIRST UNITED NATIONAL BANK AND TRUST COMPANY, a national bank and wholly-
owned subsidiary of Company ("First United").
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 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
Kansas City, Missouri, owns all of the issued and outstanding capital stock of
First United, with its principal offices in Great Bend, Kansas, and Missouri
Bank & Trust Company, Kansas City, Missouri ("Missouri Bank")as well as minority
equity interests in various other financial institutions and certain other
assets. (These minority equity interests in various other financial institutions
and those certain other assets are collectively referred to herein as the "Other
Assets" and are listed in Exhibit A hereto);
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, prior to consummation of the combination of Commercial and
Company it is intended that the majority stockholder of the Company will
purchase the Other Assets from the Company and that the Company will distribute
the stock of Missouri Bank to the Company's shareholders (the "Spin-Off")
pursuant to Section 355 of the Internal Revenue Code;
WHEREAS, it is intended that to accomplish this result, the Company
will be acquired by means of a merger (the "Acquisition Merger or the "Merger")
of the Company with and into Commercial;
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, J. Thomas Burcham, majority shareholder of Company
and its chairman of the board, has
1
<PAGE>
entered into a voting agreement in the form attached hereto as Exhibit B (the
"Voting Agreements");
WHEREAS, it is intended that 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 reorganization pursuant to Section 368 of the Code;
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 Kansas General Corporation Code
("KGCC"), 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 the separate corporate existence of the Company
shall cease. The Acquisition Merger shall have the effects specified in the
NBCA and the KGCC, 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 or
certificates of merger with appropriate authorities of Nebraska and Kansas which
articles or
2
<PAGE>
certificates 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 (i) the Nebraska articles of merger are filed with the appropriate
authorities of Nebraska and (ii) the Kansas certificate of merger is filed with
the appropriate authorities of Kansas (the "Acquisition Merger Effective Time"),
which shall be immediately following the Closing (as defined in Section 1.10
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 (a)(ii) of this
Section 1.3) shall be converted into and exchanged for the right to receive a
number of shares of Commercial common stock, $.01 par value per share (the
"Commercial common stock"), (such number of shares of Commercial common stock
the "Merger Consideration"), as follows:
(A) If the Average NYSE Closing Price is equal to or less than $42.00,
but equal to or greater than $36.00, then the number of shares of Commercial
common stock to be received (the "Per Share Stock Consideration") shall equal
the quotient that results by dividing (x) the Per Share Purchase Price by (y)
the average NYSE Closing Price;
(B) If the Average NYSE Closing Price is less than $36.00, then the
Per Share Stock Consideration shall equal that number of shares of Commercial
common stock which would have been issued as the Per Share Stock Consideration
if the Average NYSE Closing Price was $36.00; and
(C) If the Average NYSE Closing Price is greater than $42.00 then the
Per Share Stock Consideration shall equal that number of shares of Commercial
common stock which would have been issued as the Per Share Stock Consideration
if the Average NYSE Closing Price was $42.00.
(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.
3
<PAGE>
(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 amount
of Commercial common stock to be exchanged at the Acquisition Merger Effective
Time for Company common stock 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.
(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 KGCC 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 KGCC, or otherwise fails to establish the right of such
stockholder to be paid the value of such stockholders' shares under the KGCC
shall be deemed to be converted into the right to receive the Merger
Consideration pursuant to the terms and conditions referred to above.
(d) Definitions. (i) The term "Average NYSE Closing Price" shall mean
-----------
the arithmetic mean of the closing price per
4
<PAGE>
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 Merger, 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 as
contemplated in Section 1.7(a) herein (the "Determination Period").
(ii) The term "Per Share Purchase Price" shall be equal to the
quotient that results by dividing (i) the Aggregate Purchase Price by (ii)
15,317.65 plus any additional number of shares of Company common stock issued
after the date hereof in conformance with Section 4.2(b)(iii) herein.
(iii) The term "Aggregate Purchase Price" shall be equal to
$27,800,000, plus (A) the amount of cash held directly by the Company as of the
----
Acquisition Merger Effective Time as reflected on the Company's books and
records and (B) any amounts recorded as a receivable by the Company on its books
and records from First United and Missouri Bank and their subsidiaries pursuant
to the Company's income tax sharing agreements, with these banks dated February
15, 1997, April 24, 1995 and April 5, 1995, respectively, less (C) the amount of
----
federal and state income tax liability (to the extent not paid prior to the
Closing) and net of receivables from the Internal Revenue Service attributable
to the taxable gain, if any, realized on the Spin-Off, the sale (if applicable)
of shares of Missouri Bank and the sale of the Other Assets as contemplated in
Section 1.12,(D) the amount of any dividends declared or paid by First United
since June 30, 1997, (E) the amount of any fee paid or payable by First United
or payable by the Company for the type of services referenced in Section 2.7
herein whether to Friedman, Billings Ramsey & Co., Inc. or otherwise and (F) all
other liabilities (including federal and state income tax liability of the
Company and Company Subsidiaries (to the extent not consolidated with the
Company)), together with any accrued but unpaid interest, of the Company as
reflected or required to be reflected under generally accepted accounting
principles on the Company's books and records as of the Closing (for purposes of
this subparagraph (iii), Exhibit 1.3(d) to the Agreement sets forth the amounts
as of the date hereof which would result in increases or reductions to the
Aggregate Purchase Price pursuant to clauses (A), (B),(D),(E) and (F) above
based upon contemplated contributions to capital and repayment of liabilities
intended to be effected on or prior to the Closing as contemplated herein. Such
Exhibit shall be revised by the Company (to Commercial's reasonable
satisfaction) and delivered to Commercial as of the Closing). Such Aggregate
Purchase Price shall be adjusted, according to the formulas set
5
<PAGE>
forth in Section 1.3(a)(i)(B) and (C) above, if the Average NYSE Closing Price
is below $36.00 or above $42.00.
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.
(d) 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.
6
<PAGE>
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 payment of the aggregate Merger Consideration,
and (ii) such funds as may be payable for cash in lieu of fractional shares of
Commercial common stock.
(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)), 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 well as 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 the Stock Consideration 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 cash 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)
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
7
<PAGE>
paid to such holder, and which dividends or distribution had a record date
occurring on or subsequent to the Acquisition Merger Effective Time and cash
without interest 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 and cash in lieu of
fractional shares as herein provided.
(d) All shares of Commercial common stock and cash payable 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
payable 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
8
<PAGE>
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 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 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
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<PAGE>
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).
(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 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
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<PAGE>
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 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
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.
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 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. Without limiting the foregoing,
Commercial agrees to use its best efforts to cause all necessary applications to
be filed by November 1, 1997.
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
11
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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.
1.12 Sale of Other Assets. Prior to December 31, 1997 (unless
--------------------
Commercial otherwise agrees in writing) the Company shall (i) effectuate the
Spin-Off and (ii) sell to J. Thomas Burcham, or his designee, the Other Assets,
for an aggregate purchase price (with respect to sale of the Other Assets) and
on such other terms and conditions as are reasonably satisfactory to Commercial
(which shall include indemnification from Mr. Burcham to Commercial against
claims or liabilities relating to Missouri Bank and the Other Assets, and for
any income tax liability either not reflected on the books of the Company (other
than with respect to First United) or arising from the Spin-Off or sale of the
Other Assets). The parties recognize that prior to the Spin-Off the Company may
sell a portion of the Missouri Bank stock for cash at a price which reflects a
valuation of the fair market for 100 percent of the outstanding shares of
capital stock of Missouri Bank at not less than $7,773,000 unless otherwise
agreed to by Commercial. Nothing contained herein shall be deemed to prohibit
the Company from effecting such sale, and for purposes hereof, the Company's tax
liability with respect to such sale shall be considered as a liability which
must be offset by cash on hand as of the Closing as provided in Section 4.17
herein.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF COMPANY
AND FIRST UNITED
Company and First United represent and warrant 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 Kansas. 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 First United and Missouri Bank). 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
12
<PAGE>
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. All eligible deposit accounts issued by
First United are insured by the Bank Insurance Fund ("BIF") of the FDIC to the
maximum extent permitted under applicable law. The Company is duly registered
as a bank holding company under the BHCA. For purposes of Article II of this
Agreement, a "Subsidiary" shall include any company, partnership, joint venture
or other business association or entity in which the Company, directly or
indirectly, owns or controls the power to vote five percent (5%) or more of the
outstanding equity securities. If any of the Other Assets is not deemed to be a
Company Subsidiary hereunder, Section 2.1 of Schedule I shall separately list
the name and location of each such Other Bank and the amount of equity
securities of such Other Bank owned by the Company expressed as both a number
and percentage of outstanding shares.
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).
2.2 Capitalization. The authorized capital stock of the Company
--------------
consists of (i) 20,000 shares of common stock, par value $1.00 per share, of
which 15,317.65 shares were issued and outstanding as of the date of this
Agreement, and (ii) shares of various classes of preferred stock, none of which
shares of preferred stock are issued or outstanding. All outstanding shares of
Company common stock are duly authorized, validly issued, fully paid,
nonassessable and free of preemptive rights and with respect to the shares of
Company common stock owned by J. Thomas Burcham, either (1) are, or will be at
the Acquisition Merger Effective Time, owned by him free and clear of any lien,
claim, charge, restriction or encumbrance (collectively, "Encumbrance") or (2)
arrangements satisfactory to Commercial for release of any Encumbrance upon such
shares concurrently upon payment of the outstanding Company indebtedness shall
have been agreed to. 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
or any of its stockholders is subject with respect to the issuance, voting,
transfer, encumbrance, or sale of issued or unissued shares of the Company's
capital stock.
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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 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 Missouri Department of Finance 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
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
14
<PAGE>
the three years 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 as required
by generally accepted accounting principles. 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, 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,
insofar as such information has been provided by the Company to Commercial for
its use in such Prospectus/Proxy Statement.
15
<PAGE>
(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 financial advisory or
financial services fee or any other commission or similar fee directly or
indirectly in connection with the Acquisition Merger or any other transaction
contemplated hereby.
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.
(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 Boards of Directors of the Company and First United have duly
authorized their respective officers to execute and deliver this Agreement 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
16
<PAGE>
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 and the transactions contemplated
hereby and thereby from, (i) any applicable state takeover laws, (ii) any Kansas
laws limiting or restricting the voting rights of shareholders, (iii) any Kansas
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 and First United 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 or association, charter or
bylaws of any Company Subsidiary, (ii) any regulatory restraint on the
acquisition of the Company or First United 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 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 and First United have all requisite corporate power and authority to
enter into this Agreement 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 or any Company Subsidiary in connection with the consummation of the
transactions contemplated by this Agreement or the Bank Merger. This Agreement
constitutes
17
<PAGE>
the valid and binding obligation of the Company and First United and 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 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"). With respect to each Employee Plan and Benefit Arrangement of
the Company or any Company Subsidiary, Section 2.13 of Schedule I sets forth as
of the date of this Agreement: (i) any and all payments more than 30 days past
due, (ii) the actuarial present value, determined and prepared in accordance
with GAAP (based, where applicable, on the same actuarial assumptions as
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<PAGE>
those previously used for funding purposes, other than turnover assumptions, and
computed on the basis of a terminated plan), of any accrued benefits or other
obligations not listed elsewhere in this schedule, including without limitation,
premiums and contributions for which the Company or any Company Subsidiary is or
may be directly or indirectly liable to present or former employees, officers,
directors, and their beneficiaries, (iii) the net fair market value of the
assets held in any fund, policy, or other arrangement, and (iv) the amount of
any contribution or other obligation paid, accrued, or payable, or reasonably
expected to be payable between the date of this Agreement and the Closing.
Neither the Company nor any Company Subsidiary will make any contribution, or
undertake any obligation to contribute any amount to any Employee Plan or
Benefit Arrangement other than the amounts listed in Schedule 2.13 of Schedule
I.
(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) Each Employee Plan and Benefit Arrangement (i) has been
administered to date, and will be administered until the Closing, in accordance
with their terms and in compliance with the Code, ERISA, and all other
applicable rules and regulations, (ii) has, in a timely, accurate, and proper
manner, both filed all required government reports and made all required
employee communications, and (iii) between the date of this Agreement and the
Closing, will complete and file all such required reports. 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 nor 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. 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.
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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 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 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, (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
20
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the immediate family or affiliate of any of the foregoing, (d) any agreements
with or 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 Company consolidated financial statements and
has been or will be made with respect to periods ending after December
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31, 1996, and ending on or prior to the Acquisition Merger Effective Time.
2.19 Environmental Matters. To the best knowledge of the Company,
---------------------
except as set forth in Section 2.19 of Schedule I, neither the Company nor any
Company Subsidiary (other than Missouri Bank) 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
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<PAGE>
Company Subsidiaries administer their respective loan and investment portfolios
(including, but not limited to, adjustments to adjustable mortgage loans) in all
material respects in accordance with all applicable 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 (other
than Missouri Bank) 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. A schedule of all insurance policies in effect as to
---------
the Company and the Company Subsidiaries (the "Insurance Policies") (other than
Missouri Bank) is as set forth on
23
<PAGE>
Section 2.23 of Schedule I (other than policies 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.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF COMMERCIAL AND BANK
Commercial and the Bank represent and warrant to Company and First
United 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
corporation and are 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
24
<PAGE>
stock, par value $.01 per share, of which 21,575,394 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
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
25
<PAGE>
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 year 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 March 31, 1997, 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 March 31, 1997, 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 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:
26
<PAGE>
(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 Boards of Directors of Commercial and the
-----------------
Bank have duly authorized its officers to execute and deliver this Agreement and
to take all action necessary to consummate the Merger and the other transactions
contemplated hereby. All corporate authorizations by 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 and the Bank 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
27
<PAGE>
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 and
the Bank have 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
Bank Merger. This Agreement constitutes the valid and binding obligation of
Commercial and the Bank, and 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.
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, 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.
28
<PAGE>
ARTICLE IV
COVENANTS
4.1 Investigations; Access and Copies. Between the date of this
---------------------------------
Agreement and the Acquisition Merger Effective Time, Company agrees to give to
Commercial and its 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
Commercial and its 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 Article II 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 the Company and its subsidiaries as Commercial or its
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 (i) 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 (A)
adversely affect the ability to obtain the Governmental Approvals or (B)
adversely affect the Company's ability to perform its obligations under this
Agreement and (ii) prepare all Federal and state income tax returns for full tax
years ending on or prior to the Acquisition Merger Effective Time in the
ordinary course and consistent with past practice and shall consult with
Commercial with respect to such returns prior to filing thereof;
(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 or cause or allow First United to declare, set aside or pay any
dividend or make any other distribution with respect to Company's or First
United's capital stock except that the Company and First United shall be
permitted to pay cash dividends in the ordinary course of business consistent
29
<PAGE>
with past practice and any dividends paid by First United shall have the effect
on the Aggregate Purchase Price as is contemplated in Section 1.3(d)(iii)
herein; (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, except that shares of capital stock may be issued, if
necessary, for the Company to meet its obligations with respect to Section 4.17
herein; (iv) effect any stock split, stock dividend or other reclassification of
Company's common stock; or (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; and
(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; provided, however, that the
Spin-Off and the sale of Other Assets specifically set forth in Section 1.12
herein shall be permitted; (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)
except as set forth in Section 4.2(a) of Schedule I, any increase in annual
compensation, 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; (vii) incur any material indebtedness or obligation or enter into or
extend any material agreement or lease, except with respect to the Company
Subsidiaries in the ordinary course of business consistent with past practices
and, except with respect to the Company, as needed to pay income taxes; (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
30
<PAGE>
Bulletin No. 52 dated January 10, 1992 as revised or purchase any Derivatives
Contracts or Structured Notes; (xi) purchase any equity securities other than
Federal Home Loan Bank stock in the ordinary course; (xii) with respect to any
Employee Plan or Benefit Arrangement which provides for the vesting of benefits,
there shall not be any discretionary vesting;(xiii) make any loan with a
principal balance in excess of $500,000 or not in the ordinary course of
business (even if less than $500,000 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 or acquire a participation interest in a
loan originated by another person or entity other than participations with
Missouri Bank in the ordinary course of business. 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.
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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 by November 1, 1997, to prepare, submit and file (and
thereafter prosecute) 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 Merger.
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 (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 Merger 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.
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.
32
<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 (other than Missouri Bank) 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
33
<PAGE>
precedent that Company 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, and shall not, to the extent
applicable, be taken into account in determining the amount of the Merger
Consideration.
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 on an annual basis 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, all
existing Employment or Consulting Agreements between Company or First United and
any employees or consultants thereof shall be terminated without penalty or any
other payment paid pursuant to or on account of such termination.
(b) In order to assist Commercial in an orderly transition and in
light of J. Thomas Burcham's knowledge of the communities and banking business
served by First United, Commercial and Mr. Burcham shall enter into a consulting
agreement (substantially in the form attached as Exhibit 4.14(b) hereto) for
three years at $125,000 per year, effective as of the Acquisition Merger
Effective Time.
(c) On or before 15 days after execution hereof, the Company will
provide Commercial with true and complete copies of the following documents
where applicable to any Employee Plan or
34
<PAGE>
Benefit Arrangement: (i) each plan document or agreement, and any amendments
thereto, and related trust agreements, insurance contracts and policies, annuity
contracts, and any other funding arrangement; (ii) the most recent summary plan
description and summary of material modifications, along with disclosure of the
date of their distribution to participants and filing with the Department of
Labor; (iii) for the three most recent plan years, Form 5500 Annual
Return/Report and all actuarial and financial reports and appraisals; (iv) the
most recent determination letter received from the Internal Revenue Service,
plus any open requests and all other rulings received from any governmental
agency; and (v) with respect to any action taken within the current and three
preceding plan years, a certified copy of all Board of Directors resolutions.
At least 60 days before the Closing, the Company shall provide Commercial with
documentation, reasonably satisfactory to Commercial, demonstrating that the
requirements of Sections 401(k), 401(m), 404, 410, 412, 415, and 416 of the Code
have been satisfied by each Employee Plan that is intended to qualify under
Section 401 of the Code.
(d) If Commercial so requests, the Company and any Company Subsidiary
shall develop a plan and timetable for terminating each Employee Plan and
Benefit Arrangement as of the date of Closing, and, with the advance written
consent of Commercial, shall proceed with the implementation of said termination
plan and timetable.
4.15 Advisory Board of Directors. The Bank shall offer compensated
---------------------------
advisory director status to all members of the board of directors of First
United as of the date hereof, except for J. Thomas Burcham and Grant Burcham,
neither of whom shall become advisory directors.
4.16 Update Disclosures. From and after the date hereof until the
------------------
Acquisition Merger Effective Time, Company and First United 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 Commercial and Bank 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 Elimination of Liabilities. At or prior to the Closing, the
--------------------------
Company, without incurring any additional indebtedness, shall have taken action
necessary to cause the sum of (a) the total amount of cash held by the Company
plus (b) amounts receivable from
35
<PAGE>
First United and Missouri Bank and their subsidiaries pursuant to the Company's
income tax sharing agreements referred to in Section 1.3(d)(iii) plus (c)
amounts receivable from the Internal Revenue Service, to be not less than the
amount of any unpaid federal and state income tax liabilities of the Company
whether due or not yet due. All other liabilities of the Company, together with
accrued and unpaid interest thereon, (which liabilities shall include but not be
limited to outstanding indebtedness to Mercantile Bank and John Roy Evans and
the engagement fee of Friedman Billings Ramsey & Co., Inc.) will be paid off and
retired by the Company in full on or prior to the Closing.
ARTICLE V
CONDITIONS OF THE MERGER;
TERMINATION OF AGREEMENT
5.1 General Conditions. The obligations of Commercial, the Bank, the
------------------
Company and First United to effect the 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.
(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 FTC, DOJ, the SEC, and any state
regulatory authority or 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. 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 Acquisition 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
36
<PAGE>
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 or any of their respective subsidiaries will recognize gain or loss
as a consequence of the Acquisition Merger or the Bank Merger.
5.2 Conditions to Obligations of Commercial. The obligations of
---------------------------------------
Commercial and the Bank 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 Stinson, Mag & Fizzell, P.C. 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.
(c) Company Accountants' Letter. Commercial shall have received from
---------------------------
Deloitte & Touche, 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
audit 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) or any decrease in the
37
<PAGE>
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.
(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 and
- ------------------------
First United 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 or is based on best
knowledge); Company and First United shall each 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 and First United 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.
38
<PAGE>
(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) 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).
(k) 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
$500,000 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.
(l) Dissenting Shareholders. None of the shareholders of the Company
-----------------------
shall have elected their dissenter and appraisal rights pursuant to the KGCC.
(m) Release of Pledge. None of the outstanding shares of capital
-----------------
stock of the Company owned by J. Thomas Burcham and none
39
<PAGE>
of the outstanding shares of capital stock of First United shall be subject to
an Encumbrance.
5.3 Conditions to Obligations of Company. The obligation of Company
------------------------------------
and First United 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 and
- ------------------------
the Bank 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 and the Bank
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.
(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 Stinson, Mag & Fizzell, counsel to the Company.
(d) Commercial Common Stock. A certificate for the required number of
-----------------------
whole shares of Commercial common stock, payable for the aggregate Stock
Consideration, as determined pursuant to Section 1.3 hereof, and cash for
payment 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.
40
<PAGE>
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 June 30,
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 and Bank 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 and Bank 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 and First United Performance Not Met. By
----------------------------------------------------------
the Company upon delivery of written notice of termination to 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 and First United 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
-------- -------
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 two 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 $33.15 (adjusted
as indicated below in this Section 5.4(e)); and
41
<PAGE>
(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 two 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 lesser of (I) the
quotient (calculated to four digits) obtained by dividing (A) the product of
$33.15 and the Exchange Ratio (as then in effect) by (B) the Average NYSE
Closing Price and (II) the quotient calculated to four digits) obtained by
dividing (A) the product of the Index Trigger and the Exchange Ratio (as then in
effect) and the Starting Price 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).
"Exchange Ratio" shall mean the ratio of shares of Commercial common
stock to shares of Company common stock to be exchanged as provided in Section
1.3 herein.
"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 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.
42
<PAGE>
"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 0.10 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 $39.00.
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 survive the Acquisition Merger Effective Time, and
shall not be terminated and extinguished at the Acquisition Merger Effective
Time.
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
43
<PAGE>
Agreement is terminated in accordance with its terms and, prior to such
termination, a Termination Event, as defined in paragraph (c) below, shall have
occurred, then the Company will upon demand pay to Commercial in immediately
available funds the sum of One Million Dollars ($1,000,000.00) (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
(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.
(iii) After a proposal is made 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, the Company or any Company Subsidiary shall have
knowingly and intentionally breached any representation, warranty, agreement,
covenant or obligation contained in this Agreement, such breach would entitle
Commercial to terminate this Agreement and such breach is not cured within
thirty (30) days thereafter.
44
<PAGE>
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.
7.3 Income Tax Return.
-----------------
(a) In determining the amount of federal and state income tax
liability attributable to the taxable gain, if any, realized on the Spin Off,
the sale (if applicable) of shares of Missouri Bank and the sale of the Other
Assets (as set forth in Section 1.12 herein), for purposes of determining the
Aggregate Purchase Price as contemplated in Section 1.3(d)(iii)(C) of this
Agreement, the parties shall prior to the Closing record a "good faith" estimate
of the amount of such liability. For purposes of preparing this estimate, the
fair market value for 100 percent of the outstanding shares of Missouri Bank
capital stock shall not be less than $7,773,000.
(b) As soon as possible following the Acquisition Merger Effective
Time, Commercial shall cause to be prepared the final consolidated federal and
state income tax returns of the Company for the period from the end of the last
preceding fiscal income tax year of the Company to the Acquisition Merger
Effective Time. The income and other tax items of Missouri Bank and the Other
Assets for all tax periods ending on or prior to, respectively, the dates of the
Spin Off and sale of the Other Assets shall be included in the consolidated
income tax return of the affiliated group of which the Company is the common
parent. The Company agrees that its officers, including J. Thomas Burcham,
shall be reasonably available after the Acquisition Merger Effective Time to
consult with Commercial regarding such final income tax returns. Commercial
agrees to provide Mr. Burcham with a copy of any such returns a reasonable time
prior to their filing with applicable taxing authorities and to consider in good
faith any comments he may have with respect to such returns.
45
<PAGE>
7.4 Continuation of Loan Participation Purchases by First United.
------------------------------------------------------------
The parties recognize that both First United and Missouri Bank have benefitted
from the present practice of Missouri Bank selling overline loan participations
to First United. Notwithstanding that any purchase of a loan participation by
First United or any successor thereto following the Merger must necessarily be
based on such participation meeting such financial institution's then credit
standards as determined in good faith, Commercial agrees that the current
practice of First United in purchasing loan participations offered by Missouri
Bank shall be continued by First United or any successor thereto but only for so
long as Commercial desires and only on such terms as are determined acceptable
by Commercial in its sole discretion (to be reasonably exercised).
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.
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.
46
<PAGE>
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
First National Bank Shares, Ltd.
c/o: Missouri Bank & Trust Company
1044 Main Street
Kansas City, Missouri 64196
Attention: Mr. J. Thomas Burcham
Chairman of the Board
with a copy to:
Stinson, Mag & Fizzell, P.C.
1201 Walnut
Suite 2800
Kansas City, Missouri 64106
Attention: Howard H. Mick, 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.
47
<PAGE>
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.
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.
48
<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.
ATTEST: COMMERCIAL FEDERAL CORPORATION
By: By:
______________________________ ____________________________________
Name: Gary L. Matter Name: James A. Laphen
Title: Secretary Title: President
ATTEST: COMMERCIAL FEDERAL BANK, A
FEDERAL SAVINGS BANK
By: By:
______________________________ ____________________________________
Name: Gary L. Matter Name: James A. Laphen
Title: Secretary Title: President
ATTEST: FIRST NATIONAL BANK SHARES, LTD
By: By:
______________________________ ____________________________________
Name: Name: J. Thomas Burcham
Title: Secretary Title: Chairman
ATTEST: FIRST UNITED NATIONAL BANK
AND TRUST COMPANY
By: By:
______________________________ ____________________________________
Name: Name: J. Thomas Burcham
Title: Secretary Title: Chairman
49
<PAGE>
ANNEX B
<PAGE>
ANNEX B
DISSENTERS' RIGHTS STATUTE
PAYMENT FOR "STOCK" OF "STOCKHOLDER" OBJECTING TO MERGER OR
CONSOLIDATION; "STOCKHOLDER," "STOCK" AND "SHARE" DEFINED; NOTICE TO OBJECTING
STOCKHOLDERS; DEMAND FOR PAYMENT; APPRAISAL AND DETERMINATION OF VALUE BY
DISTRICT COURT, WHEN; TAXATION OF COSTS; RIGHTS OF OBJECTING STOCKHOLDERS;
STATUS OF STOCK; SECTION IN APPLICABLE TO CERTAIN SHARES OF STOCK. --(a) When
used in this section, the word "stockholder" means a holder of record of stock
in a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation.
(b) The corporation surviving or resulting from any merger or
consolidation, within 10 days after the effective date of the merger or
consolidation, shall notify each stockholder of any corporation of this state so
merging or consolidating who objected thereto in writing and whose shares either
were not entitled to vote or were not voted in favor of the merger or
consolidation, and who filed such written objection with the corporation before
the taking of the vote on the merger or consolidation, that the merger or
consolidation has become effective. If any such stockholder, within 20 days
after the date of mailing of the notice, shall demand in writing, from the
corporation surviving or resulting from the merger or consolidation, payment of
the value of the stockholder's stock, the surviving or resulting corporation
shall pay to the stockholder, within 30 days after the expiration of the period
of 20 days, the value of the stockholder's stock on the effective date of the
merger or consolidation, exclusive of any element of value arising from the
expectation or accomplishment of the merger or consolidation.
(c) If during a period of 30 days following the period of 20 days
provided for in subsection (b), the corporation and any such stockholder fail to
agree upon the value of such stock, any such stockholder, or the corporation
surviving or resulting from the merger or consolidation, may demand a
determination of the value of the stock of all such stockholders by an appraiser
or appraisers to be appointed by the district court, by filing a petition with
the court within four months after the expiration of the thirty-day period.
(d) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the corporation, which shall file with the clerk
of such court, within 10 days after such service, a duly verified list
containing the names and addresses of all stockholders who have demanded payment
for their shares and with whom agreements as to the value of their shares have
not been reached by the corporation. If the petition shall be filed by the
corporation, the petition shall be accompanied by such duly verified list. The
clerk of the court shall give notice of the time and place fixed for the hearing
of such petition by registered or certified mail to the corporation and to the
stockholders shown upon the list at the address therein stated and notice shall
also be given by publishing a notice at least once, at least one week before the
day of the hearing, in a newspaper of general circulation in the county in which
the court is located. The court may direct such additional publication of notice
as it deems advisable. The forms of the notices by mail and by publication shall
be approved by the court.
(e) After the hearing on such petition the court shall determine the
stockholders who have complied with the provisions of this section and become
entitled to the valuation of and payment for their shares, and shall appoint an
appraiser or appraisers to determine such value. Any such appraiser may examine
any of the books and records of the corporation or corporations the stock of
which such appraiser is charged with the duty of valuing, and such appraiser
shall make a determination of the value of the shares upon such investigation as
seems proper to the appraiser. The appraiser or appraisers shall also afford a
reasonable opportunity to the parties interested to submit to the appraiser
pertinent evidence on the value of the shares. The appraiser or appraisers,
also, shall have the powers and authority conferred upon masters by K.S.A. 60-
253 and amendments thereto.
(f) The appraiser or appraisers shall determine the value of the stock
of the stockholders adjudged by the court to be entitled to payment therefor and
shall file a report respecting such value in the office of the clerk of the
court,
B-1
<PAGE>
and notice of the filing of such report shall be given by the clerk of the court
to the parties in interest. Such report shall be subject to exceptions to be
heard before the court both upon the law and facts. The court by its decree
shall determine the value of the stock of the stockholders entitled to payment
therefor and shall direct the payment of such value, together with interest, if
any, as hereinafter provided, to the stockholders entitled thereto by the
surviving or resulting corporation. Upon payment of the judgment by the
surviving or resulting corporation, the clerk of the district court shall
surrender to the corporation the certificates of shares of stock held by the
clerk pursuant to subsection (g). The decree may be enforced as other judgments
of the district court may be enforced, whether such surviving or resulting
corporation be a corporation of this state or of any other state.
(g) At the time of appointing the appraiser or appraisers, the court
shall require the stockholders who hold certificated shares and who demanded
payment for their shares to submit their certificates of stock to the clerk of
the court, to be held by the clerk pending the appraisal proceedings. If any
stockholder fails to comply with such direction, the court shall dismiss the
proceedings as to such stockholder.
(h) The cost of any such appraisal, including a reasonable fee to and
the reasonable expenses of the appraiser, but exclusive of fees of counsel or of
experts retained by any part, shall be determined by the court and taxed upon
the parties to such appraisal or any of them as appears to be equitable, except
that the cost of giving the notice by publication and by registered or certified
mail hereinabove provided for shall be paid by the corporation. The court, on
application of any party in interest, shall determine the amount of interest, if
any, to be paid upon the value of the stock of the stockholders entitled
thereto.
(i) Any stockholder who has demanded payment of the stockholders' stock
as herein provided shall not thereafter be entitled to vote such stock for any
purpose or be entitled to the payment of dividends or other distribution on the
stock, except dividends or other distributions payable to stockholders of record
at a date which is prior to the effective date of the merger or consolidation,
unless the appointment of an appraiser or appraisers shall not be applied for
within the time herein provided, or the proceeding be dismissed as to such
stockholder, or unless such stockholder with the written approval of the
corporation shall deliver to the corporation a written withdrawal of the
stockholder's objections to and an acceptance of the merger or consolidation, in
any of which cases the right of such stockholder to payment for the
stockholder's stock shall cease.
(j) The shares of the surviving or resulting corporation into which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
(k) This section shall not apply to the shares of any class or series
of a class of stock, which, at the record date fixed to determine the
stockholders entitled to receive notice of and to vote at the meeting of
stockholders at which the agreement of merger or consolidation is to be acted
on, were either (1) registered on a national securities exchange or designated
as a national market system security on an interdealer quotation system by the
national association of securities dealers, inc., or (2) held of record by not
less than 2,000 stockholders, unless the articles of incorporation of the
corporation issuing such stock shall otherwise provide; nor shall this section
apply to any of the shares of the constituent corporation surviving a merger, if
the merger did not require for its approval the vote of the stockholders of the
surviving corporation, as provided in subsection (f) of K.S.A. 17-6701 and
amendments thereto. This subsection shall not be applicable to the holders of a
class or series of a class of stock of a constituent corporation if under the
terms of a merger of consolidation pursuant to K.S.A. 17-6701 or 17-6702, and
amendments thereto, such holders are required to accept for such stock anything
except (i) stock or stock and cash in lieu of fractional shares of the
corporation surviving or resulting from such merger or consolidation, or (ii)
stock or stock and cash in lieu of fractional shares of any other corporation,
which at the record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders at which the agreement of
merger or consolidation is to be acted on, were either registered on a national
securities exchange or held of record by not less than 2,000 stockholders, or
(iii) a combination of stock or stock and cash in lieu of fractional shares as
set forth in (i) and (ii) of this subsection.
B-2
<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 stockholders.
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 among Commercial
Federal Corporation and First National Bank Shares, LTD.
dated September 11, 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 First
National)
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 First
National Bank Shares, LTD.
_____________
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.
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: 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.
II-3
<PAGE>
(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.
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.
II-4
<PAGE>
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 10,
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 Officer December 10, 1997
- -----------------------------------------------
William A. Fitzgerald and Director
Chairman of the Board and
Chief Executive Officer
/s/ James A. Laphen Principal Financial Officer December 10, 1997
- -----------------------------------------------
James A. Laphen
President, Chief Operating Officer
and Chief Financial Officer
/s/ Gary L. Matter Principal Accounting Officer December 10, 1997
- -----------------------------------------------
Gary L. Matter
Senior Vice President, Controller and
Secretary
/s/ Talton K. Anderson Director December 10, 1997
- -----------------------------------------------
Talton K. Anderson
/s/ Michael P. Glinsky Director December 10, 1997
- -----------------------------------------------
Michael P. Glinsky
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
/s/ Robert F. Krohn Director December 10, 1997
- -----------------------------------------------
Robert F. Krohn
/s/ Carl G. Mammel Director December 10, 1997
- -----------------------------------------------
Carl G. Mammel
/s/ Robert S. Milligan Director December 10, 1997
- -----------------------------------------------
Robert S. Milligan
/s/ James P. O'Donnell Director December 10, 1997
- -----------------------------------------------
James P. O'Donnell
/s/ Robert D. Taylor Director December 10, 1997
- -----------------------------------------------
Robert D. Taylor
/s/ Aldo J. Tesi Director December 11, 1997
- -----------------------------------------------
Aldo J. Tesi
</TABLE>
<PAGE>
COMMERCIAL FEDERAL CORPORATION
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
2/1/ Reorganization and Merger Agreement by and among Commercial
Federal Corporation and First National Bank Shares, LTD. dated
September 11, 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
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)
<PAGE>
23.2 Consent of Deloitte & Touche LLP (with respect to First National)
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 First National
Bank Shares, LTD.
_______________
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 17, 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 17, 1997,
with the Securities and Exchange Commission under the Securities Act of 1933, as
amended relating to up to 992,857 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 First National Bank Shares,
Ltd. and First United National Bank and Trust Company dated September 11, 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
[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 First National Bank Shares,
Ltd. (hereinafter, Company) into Commercial Federal Corporation (hereinafter,
Commercial) and the merger of First United National Bank and Trust Company
(hereinafter, First United); into Commercial Federal Bank (hereinafter, Bank).
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 First United dated September 11, 1997
(hereinafter, Merger Agreement), your letter of representations dated ________
__, 199_, the Consulting Agreement dated ________ __, 1997 between J. Thomas
Burcham (hereinafter, Burcham) and Commercial, 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
- -----
Company is headquartered in Great Bend, Kansas 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 First United. Company is
authorized to issue ___________ shares of common stock, par value $__.__ per
share. Company's stock is owned by 23 shareholders, of which Burcham owns
directly __.__% of the total shares outstanding.
<PAGE>
Board of Directors
_________ __, 199_
Page 2
First United is incorporated under the laws of _________. First United 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. First United is authorized to issue __________ shares of common
stock, par value $__.__ per share, and __________ shares of preferred stock. At
the merger date, First United will have ________ shares of common stock
outstanding, and ________ outstanding shares of preferred stock. For federal
income tax purposes, First United joins in the filing of a consolidated
corporate income tax return with Company.
United also owns all of the outstanding stock of Missouri Bank & Trust Company
(hereinafter, Missouri Bank), minority equity interests in various other
financial institutions and certain other assets (hereinafter, the Other Assets).
Prior to December 31, 1997, Company will distribute the stock of Missouri Bank
to Company's shareholders in a transaction (hereinafter, the Spin-Off) intended
to qualify under Section 355(1) and sell the Other Assets to Burcham. Prior to
the Spin-Off, Company may sell a portion of Missouri Bank stock for cash at a
price which is not below an agreed upon minimum.
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
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.
- -------------------
(1) All references herein to Sections or Code are to the Internal Revenue Code
of 1986, as amended.
<PAGE>
Board of Directors
_________ __, 199_
Page 3
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 Kansas,
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).
2) Company's shareholders will exchange each share of Company common stock as
follows:
. If the Average New York Stock Exchange (hereinafter NYSE) Closing Price
(as defined in the Merger Agreement) is equal to or less than $42.00, but
equal to or greater than $36.00, the number of shares of Commercial
common stock to be received (hereinafter, the Per Share Stock
Consideration) equals the quotient that results by dividing the Per Share
Purchase Price (as defined in the Merger Agreement) by the average NYSE
Closing Price.
. If the Average NYSE Closing Price is less than $36.00, the Per Share
Stock Consideration equals that number of shares of Commercial common
stock which would have been issued as the Per Share Stock Consideration
if the Average NYSE Closing Price was $36.00.
<PAGE>
Board of Directors
_________ __, 199_
Page 4
. If the Average NYSE Closing Price is greater than $42.00, the Per Share
Stock Consideration equals the number of shares of Commercial common
stock which would have been issued as the Per Share Stock Consideration
if the Average NYSE Closing Price was $42.00.
. If the Average NYSE Closing Price is less than $33.15, the quotient
obtained by dividing the Average NYSE Closing Price by the Starting Price
(as defined in the Merger Agreement) is less than the Index Trigger (as
defined in the Merger Agreement), and if Company elects to otherwise
terminate the Acquisition Merger, Commercial may increase the
consideration to be received by the holders of Company common stock by
adjusting the Exchange Ratio (as defined in the Merger Agreement) to
equal the lesser of i) the quotient obtained by dividing a) the product
of $33.15 and the Exchange Ratio (as then in effect) by b) the Average
NYSE Closing Price and ii) the quotient obtained by dividing a) the
product of the Index Trigger (as defined in the Merger Agreement) and the
Exchange Ratio (as then in effect) and the Starting Price (as defined in
the Merger Agreement) by b) the Average NYSE Closing Price.
1) 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 shareholder who dissents from the
Acquisition Merger are entitled under the Kansas General 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 occurs prior to the Acquisition Merger)
or by Commercial (if such dissent occurs simultaneous with the Acquisition
Merger).(2)
2) Other than shares placed in escrow pursuant to the Merger Agreement and
Indemnity Agreement discussed below, all shares of Commercial common stock
to be exchanged as
- --------------------
(2) Commercial's performance under the terms of the Merger Agreement is
conditioned on none of the Company shareholders electing dissenter and appraisal
rights pursuant to the Kansas General Corporation Act.
<PAGE>
Board of Directors
_________ __, 199_
Page 5
a result of the Acquisition Merger will be issued to the former Company
common shareholders at the consummation of such merger.
3) Following the Acquisition Merger and pursuant to the corporation laws of
the United States, First United will merge with and into Bank, with Bank
surviving. (Hereinafter, the merger of First United with and into Bank will
be referred to as the Bank Merger.) As a result of the Bank Merger, the
shares of First United 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, First United will
cease to exist.
Commercial and Burcham have also entered into an Indemnity Agreement. Under the
terms of the Indemnity Agreement, Burcham has agreed to indemnify and hold
harmless Commercial from any liability actually incurred following the
Acquisition Merger for i) additional tax; ii) claims or liabilities asserted
against Commercial (including in its capacity as successor to Company) relating
to the Missouri Bank the Other Assets (as defined in the Merger Agreement); and,
iii) any income tax liability not reflected on Company's books and records as of
the Acquisition Merger. If Commercial seeks indemnification, proper notice must
be given to Burcham. In addition, Burcham has the right to receive adequate
information about the claim(s) asserted and participate in Commercial's defense.
Following the Acquisition Merger, Burcham will deposit shares of Commercial
common stock having a fair market value as of the Acquisition Merger equal to $1
million in an Escrow Fund. Burcham will be entitled to all cash dividends paid
by Commercial on the stock held in escrow as well as all voting rights on such
stock. At such time as Commercial is entitled to indemnification from Burcham
and he has failed to pay such amount, Commercial may recover the indemnified
amount by directing the escrow agent to sell the appropriate number of shares of
Commercial common stock. If the indemnified amount exceeds the value of the
Commercial shares held in escrow, Commercial may demand payment of the
difference from Burcham. The Escrow Fund
<PAGE>
Board of Directors
_________ __, 199_
Page 6
will terminate upon the earlier of the final settlement of any tax claims
attributable to Company's final income tax returns or expiration of the
applicable statute of limitations. Any Commercial stock or other property
(including cash) remaining in the Escrow Fund are to be returned to Burcham.
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.
. In contemplation of the Acquisition Merger, Company intends to distribute
the stock of Missouri Bank to Company's shareholders in the Spin-Off and
sell the Other Assets to Burcham. For purpose of this representation, it
should be noted that contemporaneous with the Acquisition Merger, the
assets which Company will spin-off or sell will represent less than 66% of
the total value of Company's assets immediately prior to such
disposition/distribution.
. 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 First United in the Bank Merger, dispositions made in the
ordinary course of business, or transfers described in Section
368(a)(2)(C).
. Commercial will pay its own expenses, if any, incurred in connection with
the transaction.
<PAGE>
Board of Directors
_________ __, 199_
Page 7
. 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.
. The shares of Commercial common stock placed in escrow under the terms of
the Indemnity Agreement of ___________ __, 199_, will be issued and
outstanding under the applicable Nebraska corporation statutes and will be
so reported on Commercial's balance sheet following the Acquisition Merger.
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 Kansas.
<PAGE>
Board of Directors
_________ __, 199_
Page 8
In its letter of ________ __, 1997, Company made the following representations
of fact 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.
. 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. For purposes of this representation, the value of
Company will include the value of Missouri Bank as well as the value of the
Other Assets purchased by Burcham. 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.
. 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.
<PAGE>
Board of Directors
_________ __, 199_
Page 9
. 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 or
consultants 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 or consultants will be
separate consideration for, or allocable to, any employment or consulting
agreement; and the compensation paid to any Company shareholder-employees
or consultants will be for services actually rendered and will be
commensurate with amounts paid to third parties bargaining at arm's-length
for similar services.
. The business reason for establishing the Escrow Fund pursuant to the
Indemnity Agreement is to indemnify Commercial for additional Company
income taxes, other claims or liabilities asserted against Commercial
relating to Missouri Bank, and any income tax liability not reflected on
Company's books and records as of the Acquisition Merger.
. No shares of Commercial placed in the Escrow Fund established pursuant to
the Indemnity Agreement will be subject to restrictions requiring their
return to Commercial because of death, failure to continue employment, or
similar restrictions.
. At least 50% of the number of Commercial common shares initially issued to
Burcham will not be subject to the Indemnity Agreement.
<PAGE>
Board of Directors
_________ __, 199_
Page 10
. The return of Commercial common stock held by the Escrow Fund under the
terms of the Indemnity Agreement will not be attributable to an event the
occurrence or non-occurrence of which is within the control of Commercial.
. As set forth in the Indemnity Agreement, the mechanism for the calculation
of the number of Commercial shares to be returned to Commercial is
objective and readily ascertainable.
<PAGE>
Board of Directors
_________ __, 199_
Page 11
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 First United or use a significant portion of the historic business
assets of First United in a business.
. Bank has no plan or intention to sell or otherwise dispose of any of the
assets of First United 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 First United.
. Bank, First United and Commercial will each pay its own expenses, if any,
incurred in connection with the transaction.
. There is no intercorporate indebtedness existing between First United 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 corporation laws.
In its letter of ________ __, 199_, Company made the following representations
of fact regarding the Bank Merger:
<PAGE>
Board of Directors
_________ __, 199_
Page 12
. 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 First
United immediately prior to the transaction. For purposes of this
representation, amounts paid by First United to dissenters, First United's
assets used to pay their reorganization expenses, and all redemptions and
distributions (except for regular, normal dividends) made by First United
immediately preceding the transfer, will be included as assets of First
United held immediately prior to the transaction.
. The liabilities of First United to be assumed by Bank and the liabilities
to which the transferred assets of First United are subject were incurred
by First United in the ordinary course of its business.
. First United will pay its expenses, if any, incurred in connection with the
transaction
. There is no intercorporate indebtedness existing between First United and
Bank that was issued, acquired, or will be settled at a discount.
. First United 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.
. First United 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 First United 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.
<PAGE>
Board of Directors
_________ __, 199_
Page 13
. The total adjusted basis of the assets of First United 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 Consulting
Agreement dated _______ __, 1997 between Burcham and Commercial; 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).
. 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).
<PAGE>
Board of Directors
_________ __, 199_
Page 14
. 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 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).
. 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).
<PAGE>
Board of Directors
_________ __, 199_
Page 15
. As provided in Section 381(c)(2) and Regulation Section 1.381(c)(2)-1(3)
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, will 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 letter of _________ __, 199_, from
Company; the opinion letter of Housley 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
- --------------------
(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 16
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 First United with and into Bank, with Bank surviving, should
qualify as a reorganization within the meaning of Section 368(a)(1)(A).
First United and Bank should each be a "party to a reorganization" within
the meaning of Section 368(b).
. First United 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 First United's 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 First
United's assets in constructive exchange for Bank stock, and the assumption
by Bank of First United's liabilities, by reason of the application of
Section 1032(a).
. The basis of the assets of First United in the hands of Bank should be the
same as the basis of such assets in the hands of First United immediately
prior to the reorganization, by reason of the application of Section
362(b).
. The holding period of the property acquired by Bank from First United
should include the holding period of such property in the hands of First
United 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 First United common stock, by reason of the
application of Section 354(a)(1).
. 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 First United stock canceled in the merger, by reason of
the application of Section 358(a).(4)
- -------------------
(4) 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
<PAGE>
Board of Directors
_________ __, 199_
Page 17
. The holding period of the Bank stock constructively received by Commercial
in the transaction should include the period in which the First United
stock was held by Commercial provided the First United 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 First United
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
will succeed to and take into account the dollar amount of First United's
reserve for bad debts accumulated in prior years under Section 593.
. As provided in Section 381(c)(2) and Section 1.381(c)(2)-1 of the
Regulations, Bank as the survivor should succeed to and take into account
the earnings and profits, or deficit in earnings and profits, of First
United as of the date of transfer. Any deficit in earnings and profits of
either First United or Bank should be used only to offset earnings and
profits accumulated after the date or dates of transfer.
APPLICABLE LAW
- --------------
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
Kansas law and that the Bank Merger will qualify as a statutory merger under the
applicable Federal law.
- ------------------
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 First United. See Regulation Section 1.358-
6(b) and (c).
<PAGE>
Board of Directors
_________ __, 199_
Page 18
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 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 assets in a
business. It has also been represented that, in contemplation of the
Acquisition Merger, Company intends to distribute the stock of Missouri Bank to
Company's shareholders in the Spin-Off and sell the Other Assets to Burcham.
Furthermore, it has been represented that contemporaneous with the Acquisition
Merger, the assets which Company will dispose and/or distribute will represent
less
<PAGE>
Board of Directors
_________ __, 199_
Page 19
than 66% of the total value of Company's assets immediately prior to such
disposition/distribution.
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 First United will merge into Bank instead of operating as a second tier
subsidiary of Commercial, First United's operations will continue to be carried
on indirectly through Bank. In addition, if the acquired company has more than
one line of business, continuity of business enterprise requires only that the
acquiring corporation continue a significant line of business and use a
significant portion of the historic assets of the acquired business. In
Regulation Section 1.368-1(d)(5) at Example 1, the acquired corporation had
three lines of business which were approximately equal in value. Two of the
three businesses were sold and it was held that the continuity of business
enterprise requirement was met. Because Commercial will continue a significant
line of Company's business i.e., the banking business of First United which is
equal in value to at least 34% of the value of Company, it would appear that
this criteria is met. 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%
<PAGE>
Board of Directors
_________ __, 199_
Page 20
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.
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 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 Internal Revenue 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 Internal Revenue Service no longer
issues merger rulings, they have issued numerous private letter rulings in which
it has held that the continuity interest requirement is met in the merger of
subsidiary banks following the merger of the parent bank holding companies. See
Private Letter Rulings ("PLRs") 9325026 (March 24, 1993), 9328042
<PAGE>
Board of Directors
_________ __, 199_
Page 21
(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 Internal Revenue Service, they do provide some indication
of the Internal Revenue Service's position regarding an issue.
It has also been represented that Commercial has no plan or intention to
otherwise dispose of the stock of Bank following its merger with First United.
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).
We have determined that the placing of Commercial shares in the Escrow Fund
under the terms of the Indemnity Agreement should not affect our conclusions
that the Acquisition Merger and the Bank Merger should qualify as
reorganizations described in Section 368(a)(1)(A). In Rev. Rul 84-42, 1984-1
C.B. 521, the Internal Revenue Service set forth guidelines regarding escrow
arrangements in the context of certain reorganizations, including those
qualifying under Section 368(a)(1)(A). The revenue procedure provides that, for
advance ruling purposes, a portion of the stock issued in the reorganization may
be placed in escrow by the exchanging shareholders for possible return to the
issuing corporation under specified conditions, provided that the terms of the
escrow are consistent with the following requirements:
. There must be a valid business reason for establishing the arrangement. It
has been represented that a business reason exists for establishing the
Indemnity Agreement.
. The escrowed stock issued and outstanding on the issuing corporation's
balance sheet and is legally outstanding under applicable state law. It has
been represented that the escrowed stock will be issued and outstanding
under the applicable Nebraska corporation statutes and will be so reported
on Commercial's balance sheet following the Acquisition Merger.
. All dividends paid on the escrowed stock will be distributed currently to
the exchanging shareholder. The Indemnity Agreement provides that all
dividend payments attributable to Commercial common stock held in escrow
are to be paid to Burcham.
<PAGE>
Board of Directors
_________ __, 199_
Page 22
. All voting rights of the escrowed stock are exercisable by or on behalf of
the shareholders or their authorized agent. The Indemnity Agreement
provides that Burcham will retain all voting rights with regard to
Commercial common stock held in escrow.
. No shares of escrowed stock are subject to restrictions requiring their
return to the issuing corporation because of death, failure to continue
employment, or similar restrictions. It has been represented that the
Commercial shares placed in the Escrow fund will not be subject to
restrictions requiring their return to Commercial because of death, failure
to continue employment, or similar restrictions.
. All escrowed stock is released from the arrangement within 5 years from the
date of consummation of the transaction (except where there is a bona fide
dispute as to whom the escrowed stock should be released). The Indemnity
Agreement provides that its term will end upon the later of the final
settlement of any tax claims attributable to Company's final income tax
returns or expiration of the applicable statute of limitations with regard
to income taxes. See, Carlberg, 281 F2nd 507 (8th Cir. 1960) and James C.
Hamrick, 42 TC 757 (1950).
. At least 50 percent of the number of shares of each class of escrowed stock
issued initially to the shareholders (exclusive of shares of escrowed stock
to be issued at a later date as described in 1 above) is not subject to the
arrangement. It has been represented that at least 50% of the number o
commercial common shares issued initially to Burcham will not be subject to
the Indemnity Agreement.
. The return of escrowed stock from the escrow will not be triggered by an
event the occurrence or nonoccurrence of which is within the control of the
shareholders. It has been represented that the return of escrowed shares to
Commercial will not be attributable to an event the occurrence or non-
occurrence of which is within the control of Commercial.
. The return of escrowed stock will not be triggered by the payment of
additional tax or reduction in tax paid as a result of an Internal Revenue
Service audit of the shareholders or the corporation either (a) with
respect to the reorganization, or (b) when the reorganization involves
persons related within the meaning of Section 267(c)(4). The Indemnity
Agreement applies to additional tax paid following the Acquisition Merger
which is attributable to
<PAGE>
Board of Directors
_________ __, 199_
Page 23
claims relating to Missouri Bank and income tax liabilities not reflected on the
Company's books and records as of the Acquisition Merger.
. The mechanism for the calculation of the number of shares of escrowed stock
to be returned is objective and readily ascertainable. It has been
represented that the mechanism for the calculation of the number of
Commercial shares to be returned to Commercial is objective and readily
ascertainable.
Based on the representations made by Commercial and Company with regard to the
Indemnity Agreement, our review of the Indemnity Agreement, our understanding of
the facts, and our assumption that the Escrow Fund will be managed as described
in the Indemnity Agreement, the guidelines set forth in Rev. Proc. 84-42 should
be substantially complied with, and as a result, the fact that shares of
Commercial common stock will be held in the Escrow Fund should not affect the
qualification of the Acquisition merger under 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, First United 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 24
Section 357(c) provides that in an exchange of property described under Section
368(a)(1)(D)(5), 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 First United and Bank 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 First
United 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 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
- ---------------------
(5) 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 First United and Commercial will be in control of First United and
Bank, thus, the transaction may also qualify as a reorganization under Section
368(a)(1)(D).
<PAGE>
Board of Directors
_________ __, 199_
Page 25
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 First
United 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, First United 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 First United.
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 First United 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 26
received by Bank should be the same as the basis of those assets in the hands of
First United 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 First United should be the basis of those assets in the hands of First
United immediately prior to the transfer, the holding period for the assets of
First United to be received by Bank should include the period during which such
assets were held by First United.
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 First United 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
First United 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 or loss shall be the same as that of the
property exchanged, decreased by (i) the fair market value
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Board of Directors
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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 First United 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 First United
stock canceled as a result of the Bank Merger.(6)
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 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 First
United common
- -----------------
(6) 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 First United. See
Regulation Section 1.358-6(b) and (c).
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Board of Directors
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stock, the holding period of Commercial in the Bank common stock constructively
received should include the period for which the First United 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 First
United 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 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
<PAGE>
Board of Directors
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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 First United 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 First United 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 First United 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.
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
<PAGE>
Board of Directors
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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 should 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.
* * * * * * * * *
Our opinion is based solely upon:
. The representations, information, documents, and facts
("representations") referred to in this letter;
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Board of Directors
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. 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 to Company
or its shareholders regarding the Spin-Off or the sale of Other Assets to
Burcham.
We express no opinion regarding the federal income tax consequences to Burcham
or any other Company shareholder of any payments made by Burcham or made by the
Escrow Fund under the terms of the Indemnity Agreement.
In providing 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.
<PAGE>
Board of Directors
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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), 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 filed of First National
Bank Shares, Ltd. on Form S-4 of our report dated December 15, 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
December 16, 1997
<PAGE>
REVOCABLE PROXY
FIRST NATIONAL BANK SHARES, LTD.
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 First National Bank Shares, Ltd. ("First National"), 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 First National into Commercial Federal
Corporation ("Commercial") with Commercial as the surviving corporation
(the "Acquisition Merger") and Adoption of the Reorganization and Merger
Agreement by and among Commercial, Commercial Federal Bank, a Federal
Savings Bank (the "Bank"), First National and First United National Bank
and Trust Company ("First United") dated September 11, 1997 (the "Merger
Agreement"), which sets forth the terms and conditions of the Acquisition
Merger and also provides for the subsequent merger of First United into the
Bank.
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 officers. All co-owners must sign.
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.
MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT [__]
Signature _________________________ Date _________
Signature _________________________ Date _________
