Omaha's Commercial Federal Corp. breathing easy after brush with disaster.

OMAHA -- It's easy these days for William Fitzgerald to feel good about the family business. But this wasn't always true.

Over the past five years, Commercial Federal Corp., the largest financial institution based in Nebraska, has stared disaster in the face and overcome the odds, while heading off shareholder pressure to sell.

At a time when thrifis across the nation were failing, Mr. Fitzgerald took the Omaha-basdd company his grandfather helped start and turned it into one of the nation's most efficient financial companies.

"It's back to being a fun business again," says Mr. Fitzgerald, Commercial Federal's 56-yearold chief executive. "We're back to building the franchise."

Not long ago, it wasn't fun at all. Tough economic times in Colorado and a tighter regulatory environment threatened to take Commercial Federal down the same disastrous path followed by so many other savings and loans.

In 1987, the company had acquired Denver-based Empire Savings, with $1.9 billion in assets. There were some bad loans on the books, but the company marked them down as goodwill.

Two years later, things took a turn for the worse. Colorado's economy headed south, while federal regulators imposed tighter capital restrictions which took away much of the goodwill.

The objective of regulators, Mr. Fitzgerald recalls, "was to see how many writedowns they could take to finally find the bottom in the value of a financial institution. Whether or not you agreed with them, it didn't matter."

The changes brought Commercial Federal from a slmngly capitalized position to no capital at all, and the message was clear: Move fast or lose the company.

"They had one foot in the grave," says Steve Schroll, a banking analyst for Piper Jaffray Inc. in Minneapolis. "On a tangible net worth basis, they were bankrupt."

Mr. Fitzgerald and his homegrown team of managers set to work cutting costs and reducing non-performing assets.

Within 15 months, they closed 20 branches and reduced assets from $6.8 billion to $4.8 billion. Nearly 400 employees were laid off, and the remainder took concessions.

"We didn't feel we had time to screw around, and the regulatory environment was such that trying to sell anything would have taken too much time," Mr. Fitzgerald says of the closings. "We didn't have many options."

At the same.time, the thrift radically altered its balance sheet and literally stopped lending. All assets were shifted to mortgage backed securities.

"We already had enough troubled assets on our books," Mr. Fitzgerald recalls. "Why add more uninsured ordinary loans? If any more go bad, you spend all your time working on problem ones."

Nonperforming assets - about $300 million worth of mostly commercial loans - were targeted for elimination. Automation was employed to improve the company's efficiency.

It was, by all accounts, a dark time for the thrift. Stock prices dipped below the $2 mark in 1990, attracting speculators. Management felt "about as low as the stock," Mr. Fitzgerald chuckles.

"But there was no question in my mind that, given the time, we could fix things," he adds. "We knew what we were doing."

The strategy worked. Today, Commemial Federal is a growing $5.5 billion-asset operation. Last year, it picked up 19 branches in Oklahoma and Kansas, boosting its total to 67.

The once-wretched economy in Denver, where it has 20 branches and a 6% deposit market share, has a full head of steam.

Nonperforming assets are down to $64 million, and the company's efficiency ratio stands at an impressive 47%, down from 88% in 1989.

Preliminary results from fiscal 1994 show operating earnings of $2.96 per share, about 20% higher than a. year earlier. Return on average assets still lagged at 0.72%; return on average equity, 12.6%.

Signs of resurgence can be seen both in ,the bank's stock price, (shares rec,ently traded for about $24), and in upbeat projections from financial analysts.

"They've done a lot of what they said they would do," says Piper Jaffray's Mr. Schroll. "They've cleaned up the balance sheet and have started to expand the franchise."

The confidence can also be felt in Commercial Federal's headquarters buildling, set in a row of restaurants and retail outlets a few miles west of downtown Omaha.

Mr. Fitzgerald's view from the 15th-floor window is of lush treetops and high-traffic strip malls, which bear testament to the region's vitality. Unemployment in all four of Commercial Federal's states stands below 4%.

"The goal now," says vice president Stan Blakey, "is to make yourself a little more profitable, to exceed the analysts' estimates by a little bit every quarter, and to do a little better than the rest of the guys out there ."

In 1992, with interest rates falling and the darkest of times behind it, Commercial Federal made a second dramatic shift in its balance sheet: Within six months, it sold off all of its $3.3 billion in mortgage-backed securities, and bought an equal amount of seasoned single-family loans. The move upped its yield by about 3/8 of 1%.

The bank followed that move with two offerings - one equity, the other subordinated notes - of about $40 million each, to improve its capital position and "get the regulators off our backs," Mr. Fitzgerald says.

It also began to originate mortgages again, seeking to build a banking operation that looks much like a traditional savings and loan, while capitalizing on computer-driven efficiencies.

Today, automation allows Commercial Federal to service 850 loans per agent, compared with an industry average of about 600.

"We're focusing on the basics," Mr. Fitzgerald says. "We're trying to keep it very simple. It's easier for our customers and our employees that way."

But the good times have brought sagas of different sorts. A healthy Midwest economy has made banking competition stiff. Mr. Blakey says that the cost of money here is about 50 basis points higher than in most other parts of the country, cutting into margins.

"We don't have a spread of 3.20 [percent] like they do other places," he explains. "Ours is closer to 2.50. But we make up for it by running at 47% eftmiency."

Success has also spurred acquisition talk. Last year, CAI Corp., a Dallas-based investor group that controls 9.7% of the company's stock, pushed for management to hire an investment banker to seek a buyer.

CAI reckoned that the time was right to sell the thrift, but Mr. Fitzgerald resisted. After negotiations and compromlse, CAI pulled its demand off the table, at least for the time being.

"Management is doing a pretty good job now," says Steven Ellis, a CAI partner.

"But we still believe that ultimately the highest reward for shareholders will be in the sale of the company."

The stock price has been at $26 for the past year," he continues. "If we're still sitting here a year from now, then management has to think about whether hanging on is best for shareholders."

Meanwhile, analysts are bullish on the company which once graced death's door. They say that even with higher share value, it may be difficult for holders to resist the siren call of acquisition money.

"Everybody says they want to hang on," says Mr. Schroll, who predicts earnings of $3.60 and share prices in the low-30s next year. "But when people start knocking on the door with money, it can be pretty attractive."

Mr. Fitzgerald says, predictably, that he's committed to independence. "We're going to prove to our stockholders, as we have over the last few years, that we're good at building a franchise."

But the price for his turnaround work may be just too attractive to pass up.

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