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[COMMERCIAL FEDERAL CORPORATION LETTERHEAD]
November 23, 2005
Via Edgar and Facsimile
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Mr. Donald Walker
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
Division of Corporate Finance
100 F Street, N. E.
Washington, D.C. 20549
Re: Mail Stop 4561
Commercial Federal Corporation
Form 10-K for the period ended December 31, 2004
File No. 1-11515
Dear Mr. Walker:
On behalf of Commercial Federal Corporation (the "Company"), this letter is in
response to comments addressed by the Securities and Exchange Commission staff
in a letter dated November 4, 2005 with respect to the Company's Annual Report
on Form 10-K for the year ended December 31, 2004. The SEC comments and the
responses from Commercial Federal Corporation are set forth below.
Commercial Federal Corporation acknowledges that (i) the Company is responsible
for the adequacy and accuracy of the disclosure in its Form 10-K for the period
ended December 31, 2004, (ii) SEC staff comments or changes to disclosure in
response to SEC staff comments do not foreclose the SEC from taking any action
with respect to the filing and (iii) the Company may not assert staff comments
as a defense in any proceeding initiated by the SEC or any person under the
federal securities laws of the United States.
Commercial Federal Corporation confirms to the Staff that no amendment to the
Proxy Statement on Schedule 14A filed by Commercial Federal Corporation on
September 20, 2005, or resolicitation of proxies with respect to the special
meeting of stockholders of Commercial Federal Corporation held on November 1,
2005 with respect to Commercial Federal Corporation's proposed merger with Bank
of the West, is required in connection with any of the SEC's comments or
Commercial Federal Corporation's responses.
Note 13 - Derivative Financial Instruments, page 86:
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For reference purposes, the following table reflects the hedging transactions
for the Company which qualified for hedge accounting under SFAS No. 133 as of
December 31, 2004:
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HEDGING HEDGING HEDGED TYPE OF DESIGNATED
STRATEGY INSTRUMENT ITEM HEDGE RISK
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1 Interest Rate Swap Variable interest Cash flow Benchmark Rate: 3-month US
(pay fixed, receive payments on High hedge Treasury Bill
floating) Performance Savings
(HPS) Deposits
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2 Interest Rate Swap Variable interest Cash flow Benchmark Rate: 3-month
(pay fixed, receive payments on FHLB hedge LIBOR
floating) (Federal Home Loan
Bank) advances with
3-month rate resets
and 3-month
renewable fixed rate
FHLB advances
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3 Swaptions Call options Fair value Changes in the fair value of
(option to enter into embedded in hedge call options embedded in
pay fixed, receive convertible fixed rate convertible fixed rate FHLB
floating swap) FHLB advances advances
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4 Swaps Fixed rate FHLB Fair value Changes in the fair value of
(pay floating, advances hedge fixed rate FHLB advances
receive fixed)
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5 Commitments to Sell Fixed Rate Fair value Changes in fair value of
Mortgage Loans Mortgage Loans hedge warehouse loans
("Forward Loan Held for Sale
Sales") ("Warehouse Loans")
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SEC Comment No. 1: Hedging Strategy 1
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We have reviewed your response to prior comment 1 of our letter dated September
21, 2005. We note that you use the long-haul method of assessing hedge
effectiveness for hedges of the variable interest payments on your high
performance savings deposits and have designated these hedges as cash flow
hedges under SFAS 133. Please provide us with the following additional
information regarding these hedges:
o tell us whether your hedged deposits have a fixed term to maturity or
if they can be withdrawn at anytime
Response: The hedged deposits may be withdrawn at anytime.
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o tell us if the maturity date of the deposit matches the maturity date
of the swap
Response: The maturities of the hedged deposits are indeterminable, and
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therefore, the maturity dates of the deposits do not match the maturity
date of the swap.
o tell us if the amount of the deposit matches the notional amount of the
swap
Response: The $100 million notional amount for each swap was tied to $100
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million cohorts of the total portfolio of deposits indexed to the 3-month
Treasury bill rate beginning with the bottom $100 million cohort and each
incremental $100 million layer thereafter. The total balance of related
deposits was always expected to exceed the notional amount of swaps, and in
all periods it actually did (by several hundred million dollars). The
aggregate level of deposits was compared to the aggregate notional amount
of the swaps outstanding on a weekly basis to ensure the total amount of
swaps did not exceed the total notional amount of hedged deposits and the
Company ensured there was a significant cushion between the total amount of
swaps and the level of hedged deposits.
o explain how you determined that this hedging relationship was expected
to be highly effective in achieving offsetting cash flows attributable
to the hedged risk during the term of the hedge.
Response: At the inception of the hedge and on a quarterly basis, the
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hedging relationship was expected to be highly effective in achieving
offsetting cash flows attributable to changes in the 3-month Treasury bill
rate during the term of the swaps. The assessment of hedge effectiveness
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was determined by regressing the 3-month Treasury Bill weekly auction
discount rate applied to the HPS deposits against the Treasury Bill auction
discount rate defined by the terms of the swap as the simple arithmetic
average of the weekly Treasury Bill auction discount rate for auctions held
within the swap reset period using a 52-week historical time frame.
SEC Comment No. 2: Hedging Strategies 3 & 4
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We note that you have assumed 100% effectiveness for hedges of your fixed-rate
convertible FHLB advances and the conversion options embedded within those
advances and have designated these hedges as fair value hedges under SFAS 133.
Please provide us with the following additional information regarding these
hedges.
o tell us how you considered the potential for ineffectiveness due to
differences in the discount rate used to determine the fair value of
the hedged item and the hedging instrument
Response: Since the hedged item and the hedging instrument had identical
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terms, and both counterparties trade to a AA credit rating or better, the
same discount rate was used in the determination of fair value and in the
assessment of effectiveness.
o tell us how you measured the change in time value associated with the
conversion option and how you treated it in measuring effectiveness
of the hedge
Response: Since the hedged item and the hedging instrument had identical
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terms, and therefore, the same time value associated with the conversion
option, it was not deemed necessary to separately consider the change in
time value associated with the conversion option in the determination of
fair value and in the assessment of effectiveness.
o fully support your assertion that the credit spread in the pricing of
the hedged FHLB advance is zero. For example, tell us how you believe
the credit spread in the advance is measured and what pricing reference
curve you used to determine that the credit spread is zero.
Response: The pricing reference used to measure the fair value of the
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hedged Federal Home Loan Bank of Topeka ("FHLB") advances is the FHLB's
pricing curve. The Company has verified with the FHLB, and it is apparent
when reviewing the pricing published by the FHLB, that there is no
consideration given to credit spread as a separate component of the FHLB's
pricing policies evidenced by standard pricing and collateral requirements
for all borrowers.
SEC Comment No. 3: Hedging Strategy 5
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We note that you have assumed 100% effectiveness for hedges of your fixed-rate
pools of mortgage loans and have designated these hedges as fair value hedges
under SFAS 133. Please tell us whether your hedged pools of mortgage loans are
collateralized by property in the same geographic region in accordance with DIG
Issue F11.
Response: The Company is using a strategy similar to that in DIG Issue G2
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in that the hedged items (the mortgage loans) are delivered into the
derivative (the TBA securities). The mortgage loans in the hedged pools are
newly originated mortgage loans collateralized by property located
throughout the United States. The value of these hedged pools is determined
by reference to the TBA security market (into which these mortgage loans
would be delivered) for newly originated mortgage loans. The loans are
pooled by loan type, maturity, type of collateral, and interest rate type.
The TBA mortgage securities are created without regard to the geographic
region of the mortgage loans within the United States, and therefore, the
geographic distribution of the loans has no impact on fair value. Since the
TBA mortgage security will be created by the pool of mortgage loans being
hedged, the fair value of each hedged loan in the pool will, by definition,
respond in a proportionate manner to any overall change in fair value of
the aggregate hedged pool of loans.
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SEC Comment No. 4: Hedging Strategies 3, 4 and 5
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Please confirm how you performed and documented an assessment of hedge
effectiveness on an ongoing basis as discussed in DIG Issue G9.
Response: DIG Issue G9, "Cash Flow Hedges: Assuming No Ineffectiveness When
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Critical Terms of Hedging Instruments and Hedged Transaction Match in a
Cash Flow Hedge," states that "based on the fact that, at inception, the
critical terms of the hedging instrument and the hedged forecasted
transaction are the same, the entity can conclude that changes in cash
flows attributable to the risk being hedged are expected to be completely
offset by the hedging derivative. Therefore, subsequent assessments can be
performed by verifying and documenting whether the critical terms of the
hedging instrument and the forecasted transaction have changed during the
period in review. Because the assessment of hedge effectiveness in a cash
flow hedge involves assessing the likelihood of the counterparty's
compliance with the contractual terms of the derivative designated as the
hedging instrument, the entity must also assess whether there have been any
adverse developments regarding the risk of counterparty default."
Hedging strategies 3 & 4 are fair value hedges, unlike cash flow hedges
addressed in DIG Issue G9. We determined that the critical terms of the
hedging instrument and the hedged item are the same since such terms are
contractually binding and could not be changed without the execution of a
new contract. In fact, as discussed in our response to Comment 2 above, the
changes in fair value of the derivative will always offset the changes in
the fair value of the hedged advances for the risk being hedged, absent
counterparty default. Also, the key personnel within the Company who
approve and execute such contractual changes are the same personnel who
monitor any changes to the critical terms of the hedging instrument and the
hedged item. Furthermore, counterparty creditworthiness is reviewed on a
quarterly basis by the Company's Credit Administration department as a
matter of safe and sound banking practice to ensure there are no adverse
developments regarding the risk of counterparty default if such
developments had occurred.
For hedging strategy 5, the critical terms of the mortgage loans being
hedged were matched with the critical terms of the TBA mortgage security
hedging such loans on a daily basis in conjunction with the daily
designation of hedges as evidenced by a daily position report.
Please direct any further comments or questions to Gary L. Matter, Senior Vice
President, Controller and Secretary at (402) 918 - 1382. Thank you.
Sincerely,
/s/ David S. Fisher
David S. Fisher
Executive Vice President and
Chief Financial Officer
cc: Sharon Johnson, SEC
William A. Fitzgerald, Chairman of the Board and Chief Executive Officer
Joel E. Rappoport, Esq.
Muldoon Murphy & Aguggia LLP
David E. Shapiro
Wachtell, Lipton, Rosen & Katz