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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20579
---------------
FORM 8-K
CURRENT REPORT
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PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 3, 1997
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
(Exact name of registrant as specified in its charter)
DELAWARE 333-4026 13-3778550
- ---------------- ---------------- ----------------
(State or other (Commission File (I.R.S. Employer
jurisdiction of Number) Identification No.)
incorporation)
36 EAST 63RD STREET, NEW YORK, NEW YORK 10021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 527-6300
Not Applicable
(Former name or former address, if changed since last report)
Page 1 of 5 pages
Exhibit index on page 5
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On January 3, 1996, First Nationwide Bank, A Federal Savings Bank merged
with and into California Federal Bank, A Federal Savings Bank (the "Cal Fed
Acquisition"). Unless the context otherwise indicates, (i) "First Nationwide"
refers to First Nationwide Bank, A Federal Savings Bank prior to the
consummation of the Cal Fed Acquisition, (ii) "Cal Fed" and "California
Federal" refer to Cal Fed Bancorp Inc. and California Federal Bank, A Federal
Savings Bank, respectively, prior to the consummation of the Cal Fed
Acquisition and (iii) the "Bank" refers to California Federal Bank, A Federal
Savings Bank, the surviving entity after consummation of the Cal Fed
Acquisition. Other capitalized terms used and not defined herein have the
meaning ascribed to them in the Glossary of Terms that begins on page P-33 of
Exhibit 99.1.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) First Nationwide (Parent) Holdings Inc. ("(Parent) Holdings") owns
directly 80% of the voting common stock of First Nationwide Holdings Inc.
("Holdings"). On January 3, 1997, Holdings, the parent company of First
Nationwide consummated the Cal Fed Acquisition. The Cal Fed Acquisition was
effected pursuant to an Agreement and Plan of Merger (the "Merger Agreement")
dated as of July 27, 1996 between Holdings, Cal Fed and California Federal.
Following the consummation of the Cal Fed Acquisition, Holdings contributed
the capital stock of Cal Fed to First Nationwide. Cal Fed was then liquidated
and First Nationwide was merged with California Federal, with California
Federal being the surviving bank.
Under the Merger Agreement, each share of Cal Fed common stock outstanding
at the effective time of the merger (other than shares for which dissenter's
rights were perfected, shares held directly or indirectly by Holdings and
shares held as treasury stock) were converted into and became the right to
receive a cash payment of $23.50 and one-tenth of one Secondary Contingent
Litigation Recovery Participation Interest ("Secondary Litigation Interest").
The holders of options or warrants to purchase the common stock of Cal Fed
received, for each share subject to such options or warrants, the difference
between $23.50 and the applicable per share option price, one-tenth of one
Secondary Litigation Interest and, in certain circumstances, one-tenth of one
Contingent Litigation Recovery Participation Interest ("Litigation
Interest"). No fractional Secondary Litigation Interests were issued in the
merger. The stockholders of Cal Fed who would otherwise receive fractional
interests received their ratable share of the aggregate net cash proceeds
obtained (after deducting certain selling expenses) from aggregating the
fractional interests into the nearest whole number of Secondary Litigation
Interests and selling such Secondary Litigation Interests on the open market.
The aggregate cash consideration paid under the Merger Agreement was
approximately $1.2 billion. Holdings obtained the funds necessary to finance
the Cal Fed Acquisition and pay related fees and expenses from the following
sources:
(i) the net proceeds of approximately $555 million from the issuance of
$575 million of 10 5/8% Senior Subordinated Notes Due 2003 ("10 5/8% Notes")
by First Nationwide Escrow Corp., which was merged with and into Holdings in
connection with the Cal Fed Acquisition;
(ii) a $145 million investment, funded by borrowings under a credit
facility, by a newly formed Delaware corporation, all of the common stock of
which is owned by Gerald J. Ford, the Chairman of the Board, Chief Executive
Officer and a director of the Bank, in exchange for $150 million aggregate
liquidation value of Holdings' Cumulative Perpetual Preferred Stock
("Holdings Preferred Stock"); and
(iii) existing cash.
The net proceeds from the 10 5/8% Notes and the Holdings Preferred Stock
were contributed to First Nationwide concurrent with the Cal Fed Acquisition
in the Capital Contribution.
In connection with the merger of California Federal with First Nationwide,
each share of First Nationwide's 11 1/2% Noncumulative Perpetual Preferred
Stock ("11 1/2% Preferred Stock") was converted into and became one share of
preferred stock of the Bank, which preferred stock has the same relative
rights, terms and preferences as the 11 1/2% Preferred Stock.
(b) As of September 30, 1996, First Nationwide had approximately $16.8
billion in assets and approximately $8.8 billion in deposits, and operated
116 branches in California, Florida and Texas. After
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giving effect to the Cal Fed Acquisition and the Capital Contribution at
September 30, 1996, First Nationwide would have had approximately $31.0
billion in assets, approximately $17.6 billion in deposits, would have
operated approximately 227 branches and would have ranked at such date as the
fourth largest thrift in the United States in terms of assets, based on
published sources. As a result of the Cal Fed Acquisition, the Bank has a
substantial presence in Northern and Southern California.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
(i) The following financial statements for Cal Fed at December 31, 1995
and 1994, and for the years ended December 31, 1995, 1994 and 1993 are set
forth in Exhibit 99.3 hereto:
Independent Auditors' Report
Consolidated Statements of Financial Condition
Consolidated Statements of Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii) The following financial statements for Cal Fed at September 30, 1996
and for the nine months ended September 30, 1996 and 1995 are also set forth
in Exhibit 99.3 hereto:
Condensed Consolidated Statement of Financial Condition (Unaudited)
Condensed Consolidated Statements of Operations (Unaudited)
Condensed Condolidated Statements of Cash Flows (Unaudited)
Notes to Unaudited Consolidated Financial Statements
(b) Pro Forma Financial Information
The following unaudited pro forma condensed combined financial statements
at September 30, 1996 and for the nine months ended September 30, 1996 and
the year ended December 31, 1995 are set forth in Exhibit 99.1 hereto:
Pro Forma Condensed Combined Statement of Financial Condition at September
30, 1996 (unaudited)
Pro Forma Condensed Combined Statement of Operations for the nine months
ended September 30, 1996 (unaudited)
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1995 (unaudited)
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
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<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
July 27, 1996 between First Nationwide Holdings Inc., CFB
Holdings, Inc., Cal Fed Bancorp, Inc. and California Federal
Bank, A Federal Savings Bank.
99.1 Unaudited Pro Forma Financial Data of First Nationwide
(Parent) Holdings Inc. and Subsidiaries and Glossary of
Terms.
99.2 Press Release.
99.3 Cal Fed Bancorp Inc. financial statements listed in Item
7(a)(i) and (ii).
</TABLE>
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
FIRST NATIONWIDE (PARENT)
HOLDINGS INC.
Dated: January 15, 1997
By: /s/ Laurence Winoker
-------------------------------
Name: Laurence Winoker
Title: Vice President and
Controller
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EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT
- --------------- -------------------------------------------------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as of
July 27, 1996 between First Nationwide Holdings Inc., CFB
Holdings, Inc., Cal Fed Bancorp, Inc. and California Federal
Bank, A Federal Savings Bank.
99.1 Unaudited Pro Forma Financial Data of First Nationwide
(Parent) Holdings Inc. and Subsidiaries and Glossary of
Terms.
99.2 Press Release.
99.3 Cal Fed Bancorp Inc. financial statements listed in Item
7(a)(i) and (ii).
</TABLE>
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AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER, dated as of the 27th
day of July, 1996 (this "Plan"), by and among FIRST NATIONWIDE HOLDINGS INC.,
a Delaware corporation (the "Acquiror"), CFB HOLDINGS, INC., a Delaware
corporation ("Merger Sub"), CAL FED BANCORP INC., a Delaware corporation (the
"Company") and CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK (the "Bank").
RECITALS:
A. The Acquiror. The Acquiror has been duly incorporated and is an
existing corporation in good standing under the laws of the State of
Delaware.
B. Merger Sub. Merger Sub is a corporation in good standing under the laws
of the State of Delaware. All the shares of the capital stock of Merger Sub
are owned directly by the Acquiror.
C. The Company. The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware, with
its principal executive offices located in Los Angeles, California. The
Company has 100,000,000 authorized shares of common stock, par value $1.00
per share ("Company Common Stock"), of which 49,396,947 shares were
outstanding as of the date hereof, and 25,000,000 authorized shares of
preferred stock, par value $.01 per share, of which no shares were
outstanding as of June 30, 1996 (no other class of capital stock of the
Company being authorized). The Company is a savings and loan holding company
duly registered under the Home Owners' Loan Act of 1933, as amended ("HOLA"),
and owns 100% of the outstanding common stock of the Bank. As of the date
hereof, the Company had (i) an aggregate of 3,656,433 shares of Company
Common Stock reserved for issuance upon exercise of stock options, warrants
or other rights granted pursuant to its 1995 Employee Stock Incentive Plan,
its 1995 Non-Employee Director Stock Option Plan, the Bank's 1983 Stock
Incentive Plan, the Bank's 1993 Stock Incentive Plan and the Bank's 1994
Non-Employee Director Stock Option Plan (collectively, the "Company Stock
Plans"), (ii) 18,407 shares of Company Common Stock reserved for issuance
upon conversion of the 6 1/2% Convertible Subordinated Debentures Due 2001
(the "6 1/2% Subordinated Notes") of XCF Acceptance Corporation, a California
corporation and a wholly owned subsidiary of the Bank, and (iii) 100,000
shares of the Company's Series RP Preferred Stock reserved for issuance
pursuant to exercise of the Purchase Rights (as defined below). As of the
date hereof, the Bank has 5,075,549 authorized and 4,941,498 issued and
outstanding contingent litigation recovery participation interests (the
"Participation Interests"), each of which represents the right to receive in
cash five millionths of one percent (0.000005%) of the Litigation Recovery
(as defined in the certificates evidencing the Participation Interests) in
the Bank's litigation against the United States, California Federal Bank v.
United States, Civil Action No. 92-138C (the "Goodwill Litigation"). Unless
the context otherwise requires, all references herein to the Company Common
Stock shall be deemed to include the corresponding rights (the "Purchase
Rights") to purchase from the Company, for each share of Company Common Stock
held, one-thousandth of a share of the Company's Series RP Preferred Stock,
par value $.01 per share, pursuant to the terms and conditions of the Rights
Agreement (as defined below).
D. Rights, Etc. The Compay does not have any shares of its capital stock
reserved for issuance, any outstanding option, call or commitment relating to
shares of its capital stock or any outstanding securities, obligations or
agreements convertible into or exchangeable for, or giving any person any
right (including, without limitation, preemptive rights) to subscribe for or
acquire from it, any shares of its capital stock (collectively, "Rights")
except (i) pursuant to the Option Agreement (as defined below) which is being
entered into simultaneously with the execution and delivery of this Plan,
(ii) pursuant to the Rights Agreement, dated as of February 16, 1996, between
the Company and Chemical Bank, as Rights Agent (the "Rights Agreement"),
(iii) subject to Section 4.23 hereof, the 6 1/2% Subordinated Notes, and (iv)
pursuant to stock options or other rights granted pursuant to the Company
Stock Plans as previously disclosed to the Acquiror.
E. The Option Agreement. As an inducement to the willingness of the
Acquiror to enter into this Plan, the Company will, immediately after the
execution and delivery of this Plan by the parties hereto, enter into a Stock
Option Agreement with the Acquiror in the form set forth in Annex 1 (the
"Option Agreement"), pursuant to which the Company will grant to the Acquiror
an option to purchase
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authorized but unissued shares of Company Common Stock in an amount equal to
19.9% of the outstanding shares of Company Common Stock upon the terms and
conditions therein contained.
F. Bank Merger Agreement. It is the intention of the Acquiror that, unless
otherwise determined pursuant to Section 1.6 hereof, immediately following
the Effective Time (as defined in Section 7.1) of the Merger, (i) the
Acquiror will contribute all of the shares of capital stock of the Surviving
Corporation (as defined below) to its wholly-owned subsidiary, First
Nationwide Bank, a Federal Savings Bank ("FNB"), (ii) the Surviving
Corporation will be liquidated by FNB, and (iii) FNB will be merged with and
into the Bank (the "Bank Merger") immediately thereafter.
G. Board Approvals. The respective Boards of Directors of the Acquiror,
the Company and the Bank have duly approved this Plan and have duly
authorized its execution and delivery.
NOW, THEREFORE, in consideration of their mutual promises and obligations
hereunder, the parties hereto adopt and make this Plan and prescribe the
terms and conditions hereof and the manner and basis of carrying it into
effect, which shall be as follows:
ARTICLE I. THE MERGER
SECTION 1.1. Structure of the Merger. On the Effective Date, Merger Sub
will merge (the "Merger") with and into the Company, with the Company being
the surviving corporation (the "Surviving Corporation"), pursuant to the
provisions of, and with the effect provided in, the Delaware General
Corporation Law (the "State Corporation Law"). The separate corporate
existence of Merger Sub shall thereupon cease. The Surviving Corporation
shall continue to be governed by the State Corporation Law and its separate
corporate existence with all of its rights, privileges, immunities, powers
and franchises shall continue unaffected by the Merger. At the Effective
Time, the certificate of incorporation and by-laws of the Merger Sub, in
effect immediately prior to the Effective Time, shall become the certificate
of incorporation and by-laws of the Surviving Corporation. At the Effective
Time, the directors and officers of Merger Sub shall become the directors and
officers of the Surviving Corporation.
SECTION 1.2. Effect on Outstanding Shares. (a) By virtue of the Merger,
automatically and without any action on the part of the holders of Company
Common Stock, each share of Company Common Stock issued and outstanding at
the Effective Time (other than Excluded Shares (as defined below)) shall
become and be converted into the right to receive (i) $23.50 in cash without
interest and (ii) one-tenth of a Secondary Participation Interest (as defined
below), provided, however, that no fractional Secondary Participation
Interests shall be issued, holders of Company Common Stock who would
otherwise receive fractional Secondary Participation Interests shall not be
entitled thereto and such holders shall receive their respective pro rata
portion of the cash proceeds (net of aggregate commissions and any other
selling expenses) obtained from the Exchange Agent (as hereinafter defined)
batching such fractional Secondary Participation Interests together with the
fractional Secondary Participation Interests that would otherwise be received
by holders of options and warrants pursuant to Section 1.5 into the nearest
aggregate whole number of Secondary Participation Interests (collectively,
the "Batched Secondary Participation Interests") and effecting the sale (the
"Batched Sales") of the Batched Secondary Participation Interests on the open
market at prevailing prices in accordance with Section 1.3(c) (collectively
the consideration described in the foregoing clauses (i) and (ii), including
any cash payment from the proceeds of the Batched Sales, is referred to
herein as the "Merger Consideration"). As of the Effective Time, each share
of Company Common Stock held directly or indirectly by the Acquiror, other
than shares held in a fiduciary capacity or in satisfaction of a debt
previously contracted, and shares held as treasury stock of the Company,
shall be cancelled and retired and cease to exist, and no exchange or payment
shall be made with respect thereto.
(b) The shares of common stock of Merger Sub issued and outstanding
immediately prior to the Effective Time shall become shares of the Surviving
Corporation after the Merger and shall thereafter constitute all of the
issued and outstanding shares of the capital stock of the Surviving
Corporation.
(c) "Excluded Shares" shall mean (i) shares of Company Common Stock the
holder of which (the "Dissenting Stockholder"), pursuant to the State
Corporation Law providing for dissenters' or appraisal rights, is entitled to
receive payment in accordance with the provisions of such State Corporation
Law,
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such holder to have only the rights provided in such State Corporation Law
(the "Dissenters' Shares"), (ii) shares of Company Common Stock held directly
or indirectly by the Acquiror, other than shares held in fiduciary capacity
or in satisfaction of a debt previously contracted and (iii) shares of
Company Common Stock held as treasury stock by the Company.
SECTION 1.3. Exchange Procedures. (a) At and after the Effective Time,
each certificate (each a "Certificate") previously representing shares of
Company Common Stock shall represent only the right to receive the Merger
Consideration (without interest on the cash portion thereof).
(b) As of the Effective Time, (i) the Acquiror shall deposit, or shall
cause to be deposited, with ChaseMellon Shareholder Services, L.L.C., a New
Jersey limited liability company (the "Exchange Agent"), for the benefit of
the holders of shares of Company Common Stock, for exchange in accordance
with this Section 1.3, the amount constituting the cash portion of the Merger
Consideration to be paid pursuant to Section 1.2, and (ii) the Company shall
deposit, or shall cause to be deposited, with the Exchange Agent, for the
benefit of the holders of shares of Company Common Stock, one or more
certificates representing (x) the Secondary Participation Interests to be
distributed to holders of Company Common Stock in exchange for their
Certificates pursuant to this Section 1.3 and (y) the Batched Secondary
Participation Interests to be sold by the Exchange Agent on behalf of the
Company in the Batched Sales pursuant to Sections 1.2 and 1.3(c).
(c) As soon as practicable after the Effective Time, the Acquiror shall
cause the Exchange Agent to mail to each holder of record of a Certificate or
Certificates the following: (i) a letter of transmittal specifying that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon delivery of the Certificates to the Exchange Agent,
which shall be in a form and contain any other reasonable provisions as the
Acquiror may determine; and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the Merger Consideration. In
addition, as soon as practicable after the Effective Time, the Batched
Secondary Participation Interests shall be sold on the open market at
prevailing prices by means of the Batched Sales. The Exchange Agent shall be
instructed by the Surviving Corporation to effect the Batched Sales on behalf
of the Surviving Corporation, through the use of one or more broker-dealers,
over a period of time following the Effective Time and in a manner designed
not to adversely affect the market prices of the Secondary Participation
Interests. Upon the proper surrender of a Certificate to the Exchange Agent,
together with a properly completed and duly executed letter of transmittal,
the holder of such Certificate shall be entitled to receive in exchange
therefor a check representing the cash portion of the Merger Consideration
and a certificate representing such number of Secondary Participation
Interests which such holder has the right to receive in respect of the
Certificate surrendered pursuant to the provisions hereof, and the
Certificate so surrendered shall forthwith be cancelled. No interest will be
paid or accrued on the cash portion of the Merger Consideration. In the event
of a transfer of ownership of any shares of Company Common Stock not
registered in the transfer records of the Company, a check for the cash
portion of the Merger Consideration and a certificate representing the
applicable number of Secondary Participation Interests may be issued to the
transferee if the Certificate representing such Company Common Stock is
presented to the Exchange Agent, accompanied by documents sufficient, in the
reasonable discretion of the Acquiror and the Exchange Agent, (i) to evidence
and effect such transfer and (ii) to evidence that all applicable stock
transfer taxes have been paid.
(d) From and after the Effective Time, there shall be no transfers on the
stock transfer records of the Company of any shares of Company Common Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Acquiror or the Surviving
Corporation, they shall be cancelled and exchanged for the Merger
Consideration deliverable in respect thereof pursuant to this Plan in
accordance with the procedures set forth in this Section 1.3.
(e) Any portion of the aggregate Merger Consideration or the proceeds of
any investments thereof that remains unclaimed by the stockholders of the
Company for one year after the Effective Time shall be repaid or delivered,
as applicable, by the Exchange Agent to the Acquiror. Any stockholders of the
Company who have not theretofore complied with this Section 1.3 shall
thereafter look only to the Acquiror for payment of their Merger
Consideration deliverable in respect of each share of Company
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Common Stock such stockholder holds as determined pursuant to this Plan
without any interest on the cash portion of the Merger Consideration. If
outstanding Certificates are not surrendered or the payment for them not
claimed prior to the date on which such payments would otherwise escheat to
or become the property of any governmental unit or agency, the unclaimed
items shall, to the extent permitted by abandoned property and any other
applicable law, become the property of the Acquiror (and to the extent not in
its possession shall be paid over to it), free and clear of all claims or
interest of any person previously entitled to such claims. Notwithstanding
the foregoing, none of the Acquiror, the Surviving Corporation, the Exchange
Agent or any other person shall be liable to any former holder of Company
Common Stock for any amount delivered to a public official pursuant to
applicable abandoned property, escheat or similar laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Exchange Agent, the posting by such person of a bond in such amount as
the Exchange Agent may reasonably direct as indemnity against any claim that
may be made against it with respect to such Certificate, the Exchange Agent
will issue in exchange for such lost, stolen or destroyed Certificate the
Merger Consideration deliverable in respect thereof pursuant to this Plan.
SECTION 1.4. Dissenters' Rights. Any Dissenting Stockholder who shall be
entitled to be paid the "fair value" of his or her Dissenters' Shares, as
provided in Section 262 of the State Corporation Law, shall not be entitled
to the Merger Consideration, unless and until the holder thereof shall have
failed to perfect or shall have effectively withdrawn or lost such holder's
right to dissent from the Merger under the State Corporation Law, and shall
be entitled to receive only the payment to the extent provided for by Section
262 of the State Corporation Law with respect to such Dissenters' Shares. If
any Dissenting Stockholder shall fail to perfect or shall have effectively
withdrawn or lost the right to dissent, the Dissenters' Shares held by such
Dissenting Stockholder shall thereupon be treated as though such Dissenters'
Shares had been converted into the right to receive the Merger Consideration
pursuant to Section 1.2.
SECTION 1.5. Options. At the Effective Time, each option or warrant
granted by the Company pursuant to the Company Stock Plans to purchase shares
of Company Common Stock, which is outstanding and unexercised immediately
prior to the Effective Time, whether or not then vested and exercisable,
shall be terminated and each grantee thereof shall be entitled to receive
from the Company, in lieu of each share of Company Common Stock that would
otherwise have been issuable upon exercise, (A) an amount in cash computed by
multiplying (i) the difference between (x) $23.50 and (y) the per share
exercise price applicable to such option or warrant by (ii) the number of
such shares of Company Common Stock subject to such option or warrant, (B) to
the extent applicable, the number of Participation Interests reserved for
issuance upon exercise of such stock options, and (C) one-tenth of a
Secondary Participation Interest for each share of Company Common Stock
subject to such option or warrant, provided however, that no fractional
Secondary Participation Interests shall be issued, holders of such options or
warrants who would otherwise receive fractional Secondary Participation
Interests shall not be entitled thereto and such holders shall receive their
respective pro rata portion of the aggregate net cash proceeds (determined
under Section 1.2) obtained from the Batched Sales. The Company agrees to use
its best efforts to take or cause to be taken all action necessary under such
options to provide for such termination and payment, including obtaining any
necessary consents from grantees. The Company will make the payments required
to be made to grantees of options under this Section 1.5 immediately prior to
the Effective Time.
SECTION 1.6. Alternative Structure. Notwithstanding anything in this Plan
to the contrary, the Acquiror may specify that, before or after the Merger,
the Company, the Acquiror, the Bank and any other subsidiary or affiliate of
the Acquiror shall enter into transactions other than those described in
Article I hereof in order to effect the purposes of this Plan, and the
Company and the Acquiror shall take all action necessary and appropriate to
effect, or cause to be effected, such transactions; provided, however, that
no such specification may (i) materially and adversely affect the timing of
the consummation of the transactions contemplated herein or the tax effect or
economic benefits of the Merger to the holders of Company Common Stock,
Participation Interests or Secondary Participation Interests, or (ii) cause
any event or condition to exist which constitutes or, after notice or lapse
of time or both, would constitute a breach of Section 4.20 hereof.
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SECTION 1.7. Issuance of Secondary Participation Interests. Prior to the
Effective Date, the Bank shall have issued to the Company and the Company
shall have delivered to the Exchange Agent pursuant to Section 1.3,
certificates representing the secondary contingent litigation recovery
participation interests in substantially the form attached hereto as Annex
4.21(b) (the "Secondary Participation Interests").
ARTICLE II. CONDUCT PENDING THE MERGER
SECTION 2.1 Conduct of the Company's Business Prior to the Effective
Time. Except as expressly provided in this Plan or the Option Agreement or as
agreed to by the Acquiror, during the period from the date of this Plan to
the Effective Time, the Company shall, and shall cause its Subsidiaries (as
defined below) to, (i) conduct its business and maintain its books and
records in the usual, regular and ordinary course consistent with past
practice, (ii) use its commercially reasonable efforts to maintain and
preserve intact its business organization, properties, leases, employees and
advantageous business relationships and retain the servies of its officers
and key employees, (iii) except as required by applicable law, take no action
which would adversely affect or delay the ability of the Company, the Bank,
the Acquiror, or the Merger Sub to obtain any necessary approvals, consents
or waivers of any governmental authority required for the transactions
contemplated hereby or to perform its covenants and agreements on a timely
basis under this Plan and (iv) except as required by applicable law, take no
action that could be deemed to have a Material Adverse Effect (as defined in
Section 3.2 herefo) on the Company. As used in this Plan, the word
"Subsidiary" when used with respect to any party means any corporation,
partnership or other organization, whether incorporated or unincorporated,
which is consolidated with such party for financial reporting purposes.
SECTION 2.2. Forbearance by the Company. It is contemplated that during
the period from the date of this Plan to the Effective Time, the Company
shall continue to operate in accordance with the 1996 Cal Fed Bancorp Inc.
Business Plan as in effect on the date hereof, a copy of which has been made
available to Acquiror, or the 1997 Cal Fed Bancorp Inc. Business Plan when
such a plan is adopted and put into effect. Notwithstanding the foregoing,
during the period from the date of this Plan to the Effective Time, and
except as contemplated by this Plan (including, without limitation, Section
1.7 hereof) or the Option Agreement or as set forth in Section 2.2 of the
Company's Disclosure Letter, the Company shall not, and shall not permit any
of its Subsidiaries, without the prior written consent of the Acquiror, to:
(a) other than in the ordinary course of business consistent with past
practice, incur any indebtedness for borrowed money or assume, guarantee,
endorse or otherwise as an accommodation become responsible for the
obligations of any other person; provided, however, that neither the
Company nor any of its Subsidiaries shall incur any indebtedness for
borrowed money (including reverse repurchase agreements) with a final
maturity date on or after July 28, 1998.
(b) adjust, split, combine or reclassify any capital stock; make, declare
or pay any dividend or make any other distribution on, or directly or
indirectly redeem, purchase or otherwise acquire, any shares of its
capital stock (except for dividends paid by the Bank to the Company) or
any securities or obligations convertible into or exchangeable for any
shares of its capital stock, or grant any stock appreciation rights or
grant, sell or issue to any individual, corporation or other person any
right or option to acquire, or securities evidencing a right to convert
into or acquire, any shares of its capital stock (except for regular
quarterly cash dividends on the Series B Preferred Stock (as defined
below) at the rate set forth in the certificate of designation for such
stock and except pursuant to the Rights Agreement), or issue any
additional shares of capital stock except pursuant to (i) the exercise of
stock options or warrants outstanding as of the date hereof as previously
disclosed to the Acquiror and on the terms in effect on the date hereof,
(ii) the Option Agreement and (iii) the conversion of 6 1/2% Subordinated
Notes;
(c) other than in the ordinary course of business consistent with past
practice, sell, transfer, mortgage, encumber or otherwise dispose of any
of its properties, leases or assets to any person, or cancel, release or
assign any indebtedness of any person, except pursuant to contracts or
agreements in force at the date of this Plan and disclosed to Acquiror;
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(d) enter into, renew or amend any employment agremeent with any
employee or director, increase in any manner the compensation or fringe
benefits of any of its employees or directors, or create or institute, or
make any payments pursuant to, any severance plan, bonus plan, incentive
compensation plan, or package, or pay any pension or retirement allowance
not required by any existing plan or agreement to any such employees or
directors, or become a party to, amend or commit itself to, or otherwise
establish any trust or account related to, any Employee Plan (as defined
in Section 3.3(o)), with or for the benefit of any employee, other than
general increases in compensation in the ordinary course of business
consistent with past practice or any amendment to any Employee Plan
required by applicable law (provided that the Company shall use its best
efforts to minimize the cost of any such amendment as permitted under such
applicable law), or voluntarily accelerate the vesting of any stock
options or other compensation or benefit;
(e) other than in the ordinary couse of business consistent with past
practice, make any investment either by purchase of stock or securities,
contributions to capital, property transfers, or purchase of any property
or assets of any person; provided, however, that no investment or series
of related investments shall be made in an amount in excess of $1,000,000
except in (i) securities which would be reported under the caption "cash
and cash equivalents" on the Company's consolidated statement of financial
condition and (ii) federal government securities with a maturity of not
more than two (2) years, provided further, however, that in no event shall
the Company or any of its Subsidiaries make any acquisition of equity
securities or business operations without the Acquiror's prior consent;
(f) enter into, renew or terminate any contract or agreement, or make any
change in any of its leases or contracts, other than any lease, contract
or agreement involving aggregate payments of $250,000 or less per annum,
and either (i) having a term of less than or equal to one year or (ii)
which may be terminated with notice of thirty days without payment by the
Company or any of its Subsidiaries of a fee, penalty or other payment;
(g) settle any claim, action or proceeding involving any liability of the
Company or any of its Subsidiaries for money damages in excess of
$250,000, exclusive of contributions from insurers, or involving material
restrictions upon the business or operations of the Company or any of its
Subsidiaries;
(h) except in the ordinary course of business, waive or release any
material right or collateral or cancel or compromise any extension of
credit or other debt or claim;
(i) make, renegotiate, renew, increase, extend or purchase any loan,
lease (credit equivalent), advance, credit enhancement or other extension
of credit, or make any commitment in respect of any of the foregoing,
except for loans, advances or commitments in amounts (A) less than
$1,000,000 made in the ordinary course of business consistent with past
practice and made in conformity with all applicable policies and
procedures or (B) greater than $1,000,000 if such loans, advances or
commitments conform to the Company's present written loan underwriting
policies;
(j) except as contemplated by Section 4.2, change its method of
accounting as in effect at December 31, 1995, except as required by
changes in generally accepted accounting principles ("GAAP") as concurred
in by the Company's independent auditors, or as required by regulatory
accounting principles or regulatory requirements;
(k) enter into any new activities or lines of business, or cease to
conduct any material activities or lines of business that it conducts on
the date hereof, or conduct any material business activity not consistent
with past practice;
(l) amend its certificate of incorporation, by-laws or other similar
governing documents;
(m) make any capital expenditure other than (A) in accordance with the
1996 Cal Fed Bancorp Inc. Business Plan or the 1997 Cal Fed Bancorp Inc.
Business Plan, as applicable, or (B) as necessary to maintain its assets
in good repair; provided, however, that no capital expenditure (other than
expenditures in accordance with the 1996 Cal Fed Bancorp Inc. Business
Plan or the 1997 Cal Fed Bancorp Inc. Business Plan, as applicable) shall
be made which individually or in the aggregate with all other capital
expenditures exceeds $1,500,000;
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(n) settle, compromise, dismiss or cease prosecution of the Goodwill
Litigation; or sell, transfer, assign, distribute or convey all or part
of, or otherwise take any action that could reasonably be expected to
adversely affect the value of, its rights or interest in the Goodwill
Litigation;
(o) hold any formal meeting with the Appeals Office of the Internal
Revenue Service or any similar state taxing authority to settle or
compromise any audit, examination or other proceeding with respect to any
federal or state income tax liability of the Company or any of its
Subsidiaries without prior notification to Acquiror and allowing a
representative of Acquiror to attend, but not participate in, such formal
meeting;
(p) execute Form 870-AD or comparable document agreement to the finality
of any audit, examination or other proceeding with respect to any federal
or state income tax liability of the Company or any of its Subsidiaries;
or
(q) agree to, or make any commitment to, take any of the actions
prohibited by this Section 2.2.
SECTION 2.3 Cooperation. The Company shall cooperate with Acquiror and
Merger Sub in completing the transactions contemplated hereby and shall not
take, cause to be taken or agree or make any commitment to take any action;
(i) that is intended or may reasonably be expected to cause any of its
representations or warranties set forth in Article III hereof not to be true
and correct, or (ii) that is inconsistent with or prohibited by Section 2.1
or Section 2.2; except in any case as may be required by law, rule or
regulation.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
SECTION 3.1 Disclosure Letters. On or prior to the date hereof, the
Company has delivered to the Acquiror, and the Acquiror has delivered to the
Company, a letter (as the case may be, its "Disclosure Letter") setting
forth, among other things, facts, circumstances and events the disclosure of
which is required or appropriate in relation to any or all of its
representations and warranties (and making specific reference to the Section
of this Plan to which they relate); provided, however, that the mere
inclusion of a fact, circumstance or event in a Disclosure Letter shall not
be deemed an admission by a party that such item represents a material
exception or that such item is reasonably likely to result in a Material
Adverse Effect (as defined in Section 3.2).
SECTION 3.2 Definitions. As used in this Plan, (A) the term "Material
Adverse Effect" means an effect which (i) is material and adverse to the
business, properties, assets, liabilities, financial condition or results of
operations of the Company or the Acquiror, as the context may dictate, and
its Subsidiaries taken as a whole, or (ii) significantly and adversely
affects the ability of the Company or the Acquiror, as the context may
dictate, to consummate the Merger by March 31, 1997 (or such later date as
provided in Section 6.1(c)), or to perform its material obligations
hereunder, provided however, that any actions taken by the Company or any of
its Subsidiaries at the request of Acquiror with respect to the matters
described in Sections 4.2 or 4.24 of this Plan or the Benefits Letter (as
defined in Section 4.3 hereof) or any consequences of such actions shall not,
individually or in the aggregate, constitute a Material Adverse Effect on the
Company; and (ii) the term "to the best knowleddge of the Company" means the
actual knowledge of the following officers of the Company: the President and
Chief Executive Officer, the Executive Vice President, Controller and
Co-Principal Financial Officer, the Executive Vice President, Treasurer and
Co-Principal Financial Officer, the Executive Vice President, General Counsel
and Secretary, the Executive Vice Persident--Human Resources and
Administration and the Executive Vice President--Investor Relations; the
Executive Vice President--Retail Bank, the Executive Vice
President--Residential Lending and the Executive Vice President--Credit Cycle
Management.
SECTION 3.3 Representations and Warranties of the Company. The Company
represents and warrants to the Acquiror that:
(a) Recitals True. The facts set forth in the Recitals of this Plan with
respect to the Company are true and correct in all material respects.
(b) Capital Stock. All outstanding shares of capital stock of the Company
and its Subsidiaries are duly authorized, validly issued and outstanding,
fully paid and non-assessable, and subject to no
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preemptive rights. As of the date hereof, the Bank has 100,000,000
authorized shares of common stock, par value $1.00 per share, of which 100
shares are issued and outstanding, and 25,000,000 authorized shares of
preferred stock of which 3,800,000 shares have been designated and 150,403
formerly issued shares of 7 3/4% Noncumulative Convertible Preferred
Stock, Series A have been called, but are unexchanged, and 1,725,000
shares have been designated and 1,725,000 shares are issued and
outstanding as 10 5/8% Noncumulative Perpetual Preferred Stock, Series B
(the "Series B Preferred Stock"). Except for the Series B Preferred Stock,
the shares of capital stock of each of the Company's Subsidiaries are
owned directly or indirectly by the Company free and clear of all liens,
claims, encumbrances and restrictions on transfer, and there are no Rights
with respect to such capital stock.
(c) Qualification. Each of the Company and its Subsidiaries has the power
and authority, and is duly qualified in all jurisdictions where such
qualification is required, to carry on its business as it is now being
conducted and to own all its properties and assets, and it has all
federal, state, local, and foreign governmental authorizations necessary
for it to own or lease its properties and assets and to carry on its
business as it is now being conducted.
(d) Subsidiaries. The only Subsidiaries of the Company are those listed
on Section 3.3(d) of the Company's Disclosure Letter. The Bank is a
federal savings bank duly organized, validly existing and in good standing
under the laws of the United States of America. The deposit accounts of
the Bank are insured by the Federal Deposit Insurance Corporation (the
"FDIC") through the Savings Association Insurance Fund (the "SAIF") to the
fullest extent permitted by law, and all premiums and assessments required
to be paid in connection therewith have been paid when due by the Bank.
Each of the other Subsidiaries of the Company is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization. The minute books of the
Company and each of its Subsidiaries contain true, complete and accurate
records in all material respects of all meetings and other corporate
actions held or taken since December 31, 1993 of their respective
stockholders and Boards of Directors (including committees of their
respective Boards of Directors).
(e) Authority and Stockholder Approvals.
(i) Each of the Company and the Bank has the requisite corporate
power and authority to execute and deliver this Plan and, subject to
the receipt of all necessary stockholder and regulatory approvals,
consents or nonobjections, as the case may be, and to the receipt by
the Bank of board and stockholder approval (collectively, the "Bank
Merger Approval") to the definitive documents to be used to effect the
Bank Merger (the "Bank Merger Documents"), to consummate the
transactions contemplated hereby. Subject in the case of the Company
to the receipt of required stockholder approval of this Plan by the
holders of the Company Common Stock and in the case of the Bank to the
receipt of the Bank Merger Approval, the execution and delivery of
this Plan and consummation of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate
action of the Company and the Bank. This Plan has been duly and
validly executed and delivered by each of the Company and the Bank and
(assuming due authorization, execution and delivery by the Acquiror)
constitutes a valid and binding agreement of the Company and the Bank
enforceable against each entity in accordance with its terms, subject
as to enforcement to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(ii) The affirmative vote of at least a majority of the outstanding
shares of Company Common Stock entitled to vote on this Plan is the
only vote of holders of any of the capital stock of the Company or any
of its Subsidiaries required for approval of this Plan and
consummation of the Merger.
(f) No Violations; Consents and Approvals.
(i) Neither the execution, delivery and performance of this Plan by
the Company or the Bank nor the consummation by the Company or the
Bank of the transactions contemplated
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hereby will constitute (A) a breach or violation of, or a default
under, any law, rule or regulation or any judgment, decree, order,
governmental permit or license, or agreement, indenture or instrument
of the Company or any of its Subsidiaries or to which the Company or
any of its Subsidiaries (or any of their respective properties) is
subject, or enable any person to enjoin the Merger, the Bank Merger or
the other transactions contemplated hereby and thereby, (B) a breach or
violation of, or a default under, the certificate of incorporation or
by-laws or similar organizational documents of the Company or any of
its Subsidiaries or (C) a breach or violation of, or a default under
(or an event which with due notice or lapse of time or both would
constitute a default under), or result in the termination of,
accelerate the performance required by, or result in the creation of
any lien, pledge, security interest, charge or other encumbrance upon
any of the properties or assets of the Company or any of its
Subsidiaries under, any of the terms, conditions or provisions of any
note, bond, indenture, deed of trust, loan agreement or other
agreement, instrument or obligation to which the Company or any of its
Subsidiaries is a party, or to which any of their respective properties
or assets may be bound or affected, provided, however, that with
respect to the Bank and the Bank Merger, the foregoing representation
is subject to the execution and delivery of the Bank Merger Documents
and the receipt of Bank Merger Approval.
(ii) Except for (A) the filing of an application with the Office of
Thrift Supervision (the "OTS") and approval of such application, (B)
the filing with the Securities and Exchange Commission (the "SEC") of a
proxy statement in definitive form relating to the meeting of the
Company's stockholders to be held in connection with this Plan and the
transactions contemplated hereby (the "Proxy Statement"), (C) the
adoption of the agreement of merger (within the meaning of Section 251
of the State Corporation Law) contained in this Plan by the requisite
vote of the stockholders of the Company, (D) the filing of the
certificate of merger with the Secretary of State of the State of
Delaware pursuant to the State Corporation Law (the "Certification of
Merger"), (E) the consents and approvals set forth in Section 3.3
(f)(ii) of the Company's Disclosure Letter, (F) the filing with the OTS
of a registration statement covering the issuance and distribution of
the Secondary Participation Interests and the declaration of the
effectiveness of such registration statement, and (G) such consents and
approvals of third parties which are not Governmental Entities (as
defined below) the failure of which to obtain will not have and would
not be reasonably expected to have a Material Adverse Effect on the
Company, no consents or approvals of, or filings or registrations with,
any court, administrative agency or commission or other governmental
authority or instrumentality (each a "Governmental Entity") or with any
third party are necessary in connection with the execution and delivery
by the Company of this Plan and the Option Agreement and the
consummation by the Company of the Merger and the other transactions
contemplated hereby, and the Company knows of no reason why the
Requisite Regulatory Approvals (as defined in Section 5.1(b)) should
not be obtained.
(g) Financial Statements. The Company has previously made available to
the Acquiror copies of (i) the consolidated statements of financial
condition of the Bank and its Subsidiaries as of December 31 for the
fiscal years 1994 and 1995, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1995, as reported in the
Bank's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 filed with the OTS under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), in each case accompanied by the audit report
of KPMG Peat Marwick LLP, independent auditors with respect to the Bank,
(ii) the unaudited consolidated statements of financial condition of the
Company and its Subsidiaries as of March 31, 1995 and March 31, 1996 and
the related unaudited consolidated statements of operations and cash flows
for each of the three-month periods then ended, as reported in the
Company's Quarterly Report on Form 10-Q for the period ended March 31,
1996 filed with the SEC under the Exchange Act, and (iii) the unaudited
internal report to the Company's Board setting forth financial results for
the six months ended June 30, 1996. The December 31, 1995 consolidated
statement of financial condition of the Bank (including the related notes,
where applicable) fairly presents the consolidated financial position of
the Bank and its Subsidiaries as of the date thereof, and the other
financial statements
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referred to in this Section 3.3(g) (including the related notes, where
applicable) fairly present, and the financial statements referred to in
Section 4.17 hereof will fairly present (subject, in the case of the
unaudited statements, to recurring audit adjustments normal in nature and
amount), the results of the consolidated operations and changes in
shareholders' equity and consolidated financial position of the entity or
entities to which they relate for the respective fiscal periods or as of
the respective dates therein set forth. Each of such statements (including
the related notes, where applicable) complies, and the financial
statements referred to in Section 4.17 hereof will comply, in all material
respects, with applicable accounting requirements and with the published
rules and regulations of the OTS or the SEC, as applicable, with respect
thereto, and each of such statements (including the related notes, where
applicable) has been, and the financial statements referred to in Section
4.17 will be, prepared in accordance with GAAP consistently applied during
the periods involved, except in each case as indicated in such statements
or in the notes thereto or, in the case of unaudited statements, as
permitted by Form 10-Q.
(h) Company Reports.
(i) The Company has previously made available to the Acquiror an
accurate and complete copy of each (A) final registration statement,
prospectus, report, schedule and definitive proxy statement filed
since January 1, 1994 by the Company with the SEC, or filed by the
Bank with the OTS, as the case may be, pursuant to the Securities Act
of 1933, as amended (the "Securities Act") or the Exchange Act (the
"Company Reports") and (B) communications mailed by the Company or by
the Bank, as the case may be, to its stockholders since January 1,
1994, and no such registration statement, prospectus, report,
schedule, proxy statement or communication contained any untrue
statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances in which they were
made, not misleading, except that information as of a later date shall
be deemed to modify information as of an earlier date. Except as set
forth in Section 3.3(h)(i) of the Company's Disclosure Letter, each of
the Company and the Bank has timely filed all Company Reports and
other documents required to be filed by it under the Securities Act
and the Exchange Act, and, as of their respective dates, all Company
Reports complied in all material respects with the published rules and
regulations of the SEC or the OTS, as applicable, with respect
thereto.
(ii) The Company and each Company Subsidiary have each timely filed
all reports, registrations and statements, together with any
amendments required to be made with respect thereto, that it was
required to file since December 31, 1993 with (i) the SEC, (ii) the
OTS, (iii) the FDIC, (iv) the SAIF, (v) the Federal Housing Finance
Board ("FHFB"), (vi) the Federal Home Loan Bank of San Francisco
("FHLBSF"), (vii) any state banking commission or other regulatory
authority ("State Regulator"), and (viii) the National Association of
Securities Dealers, Inc. and any other self-regulatory organization
("SRO") (collectively, the "Regulatory Agencies"), and all other
material reports and statements required to be filed by them since
December 31, 1993, including, without limitation, any report or
statement required to be filed pursuant to the laws, rules or
regulations of the United States, the OTS, the FDIC, SAIF, FHFB,
FHLBSF, any State Regulator or any SRO, and have paid all fees and
assessments due and payable in connection therewith. Except for normal
examinations conducted by a Regulatory Agency in the regular course of
the business of the Company and its Subsidiaries, and except as set
forth in Section 3.3(h)(ii) of the Company's Disclosure Letter, no
Regulatory Agency has initiated any proceeding or, to the best
knowledge of the Company, investigation into the business or
operations of the Company or any of its Subsidiaries since December
31, 1995. Except as set forth on Section 3.3(h)(ii) of the Company's
Disclosure Letter, there is no unresolved material violation,
criticism, or exception by any Regulatory Agency with respect to any
report or statement relating to any examinations of the Company or any
of its Subsidiaries.
(i) Absence of Certain Changes or Events. Except as disclosed in the
Company Disclosure Letter or the Company Reports filed prior to the date
of this Plan, true and complete copies of which have been provided by the
Company to the Acquiror, since December 31, 1995, (A) the Company
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and its Subsidiaries have conducted their respective businesses only in
the ordinary and usual course of such businesses consistent with past
practice, and (B) there has not been any change in the assets,
liabilities, financial condition, properties, business, or results of
operations of the Company or its Subsidiaries, or any occurrence,
development or event of any nature (including without limitation any
earthquake or other Act of God), which, individually or in the aggregate,
has had or could reasonably be expected to have a Material Adverse Effect
on the Company.
(j) Taxes.
(i) Except as set forth in Section 3.3(j) of the Company Disclosure
Letter. (A) all material Tax Returns required to be filed by or on behalf of
the Company or any of its Subsidiaries have been timely filed or requests for
extensions have been timely filed and any such extension shall have been
granted and not have expired, and all such filed returns are complete and
accurate in all material respects; (B) all Taxes shown on such Tax Returns
have been paid in full or adequate provision has been made for any such Taxes
in the financial statements of the Company and its Subsidiaries (in
accordance with GAAP); (C) there is no audit examination, deficiency
assessment, or refund litigation currently pending with respect to any Taxes
of the Company or any of its Subsidiaries; (D) all Taxes due with respect to
completed and settled examinations or concluded litigation relating to the
Company or any of its Subsidiaries have been paid in full or adequate
provision has been made for any such amounts in the financial statements of
the Company and its Subsidiaries (in accordance with GAAP); (E) no extensions
or waivers of statutes of limitations have been given by or requested with
respect to any Taxes of the Company or any of its Subsidiaries; and (F) there
are no material liens for Taxes upon the assets or property of any of the
Company or its Subsidiaries except for statutory liens for current Taxes not
yet due.
(ii) As used in this Plan, (A) the term "Tax" or "Taxes" means taxes and
other impost, levies, assessments, duties, fees or charges imposed or
required to be collected by any federal, state, county, local, municipal,
territorial or foreign governmental authority or subdivision thereof,
including, without limitation, income, excise, gross receipts, ad valorem,
profits, gains, property, sales, transfer, use, payroll, employment,
severance, withholding, duties, intangible, franchise, personal property, and
other taxes, charges, levies or like assessments, together with all penalties
and additions to tax and interest thereon, and (B) the term "Tax Return"
shall mean any return, report, information return or other document
(including elections, declarations, disclosures, schedules, estimates, and
other returns or supporting documents) with respect to Taxes.
(k) Absence of Claims; Undisclosed Liabilities.
(i) No litigation, proceeding or controversy before any court or
governmental agency is pending, and there is no pending claim, action or
proceeding against the Company or any of its Subsidiaries, or challenging the
validity or propriety of the transactions contemplated by this Plan or the
Option Agreement, and to the best knowledge of the Company, except as set
forth in Section 3.3 (k)(i) of the Company's Disclosure Letter, no such
litigation, proceeding, controversy, claim or action has been threatened, in
each case as to which there is a reasonable possibility of an adverse
determination and which, if adversely determined, would, individually or in
the aggregate have or be reasonably expected to have a Material Adverse
Effect on the Company. There are no claims (statutory or otherwise), demands,
proceedings or other actions pending or, to the best knowledge of the
Company, threatened against the Company or any of its Subsidiaries by (A) any
of their present or former employees or (B) any person who sought to become
employed by the Company or any of its Subsidiaries.
(ii) Except as set forth in Section 3.3(k)(ii) of the Company Disclosure
Letter, there is no injunction, order, judgment, decree, or regulatory
restriction imposed upon the Company, any of its Subsidiaries or the assets
of the Company or any of its Subsidiaries which has had, or could reasonably
be expected to have, a Material Adverse Effect on the Company.
(iii) Except (A) as set forth in Section 3.3(k)(iii) of the Company's
Disclosure Letter, (B) for those liabilities that are fully reflected or
reserved against on the consolidated statement of financial condition of the
Company as of March 31, 1996 and (C) for liabilities incurred in the ordinary
course of business consistent with past practice since March 31, 1996 that,
either alone or when combined with all similar
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liabilities, have not had, and could not reasonably be expected to have, a
Material Adverse Effect on the Company, neither the Company nor any of its
Subsidiaries has incurred any liabilities of any nature whatsoever (whether
absolute, accrued, contingent or otherwise and whether due or to become due).
(l) Absence of Regulatory Actions. Except as set forth in Section 3.3(l)
of the Company's Disclosure Letter, neither the Company nor any of its
Subsidiaries is a party to any cease and desist order, written agreement or
memorandum of understanding with, or a party to any commitment letter or
similar undertaking to, or is subject to any order or directive by, or is a
recipient of any extraordinary supervisory letter from, or has adopted any
board resolutions at the request of, federal or state governmental
authorities charged with the supervision or regulation of depository
institutions or depositary institution holding companies or engaged in the
insurance of bank and/or savings and loan deposits ("Government Regulators")
nor has it been advised by any Government Regulator that it is contemplating
issuing or requesting (or is considering the appropriateness of issuing or
requesting) any such order, directive, written agreement, memorandum of
understanding, extraordinary supervisory letter, commitment letter, board
resolutions or similar undertaking.
(m) Agreements.
(i) Except for the Option Agreement, the Company and its Subsidiaries are
not bound by any material contract (as defined in Item 601(b)(10) of
Regulation S-K) to be performed after the date hereof that has not been
filed with, or incorporated by reference in the Company Reports. Except as
disclosed in the Company Reports filed prior to the date of this Plan or
in Section 3.3(m)(i) of the Company's Disclosure Letter, neither the
Company nor any of its Subsidiaries is a party to an oral or written (A)
consulting agreement (including data processing, software programming and
licensing contracts) involving the payment of more than $250,000 per
annum, in the case of any such agreement with an individual, or $250,000
per annum, in the case of any other such agreement, (B) agreement with any
executive officer or other key employee of the Company or any of its
Subsidiaries the benefits of which are contingent, or the terms of which
are materially altered or any payments or rights are accelerated, upon the
occurrence of a transaction involving the Company or any of its
Subsidiaries of the nature contemplated by this Plan or the Option
Agreement and which provides for the payment of more than $150,000, (C)
agreement with respect to any executive officer of the Company or any of
its Subsidiaries providing any term of employment or compensation
guarantee extending for a period longer than one year and for the payment
of more than $100,000 per annum, (D) agreement or plan, including any
stock option plan, stock appreciation rights plan, restricted stock plan
or stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Plan or the
Option Agreement or the value of any of the benefits of which will be
calculated on the basis of any of the transactions contemplated by this
Plan or the Option Agreement or (E) except as set forth in Section
3.3(m)(i)(E) of the Company's Disclosure Letter, agreement containing
covenants that limit the ability of the Company or any of its Subsidiaries
to compete in any line of business or with any person, or that involve any
restriction on the geographic area in which, or method by which, the
Company (including any successor thereof) or any of its Subsidiaries may
carry on its business (other than as may be required by law or any
regulatory agency). Each contract, arrangement, commitment or
understanding with an aggregate annual payment by the Company or the Bank
of $250,000 or more, whether or not set forth in Section 3.3(m)(i) of the
Company's Disclosure Letter, is referred to herein as a "Material Company
Contract". The Company has previously delivered to Acquiror true and
correct copies of each Material Company Contract.
(ii) Except as set forth in Section 3(m)(ii) of the Company's Disclosure
Letter, (A) each Material Company Contract is a valid and binding
obligation of the Company or one of its Subsidiaries and is in full force
and effect, (B) the Company and each of its Subsidiaries have in all
material respects performed all obligations required to be performed by it
to date under each Material Company Contract, (C) no event or condition
exists which constitutes or, after notice or lapse of time or both, would
constitute a material default on the part of the Company or any of its
Subsidiaries under any
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such Material Company Contract, except where such default, individually
or in the aggregate, would not have or be reasonably likely to have a
Material Adverse Effect on the Company and (D) no other party to such
Material Company Contract is, to the best knowledge of the Company, in
default in any respect thereunder.
(n) Labor Matters. Neither the Company or any of its Subsidiaries is a
party to, or is bound by, any collective bargaining agreement, contract, or
other agreement or understanding with a labor union or labor organization,
nor is the Company or any of its Subsidiaries the subject of any proceeding
asserting that it has committed an unfair labor practice or seeking to compel
it or any such Subsidiary to bargain with any labor organization as to wages
and conditions of employment, nor, to the best knowledge of the Company, is
there any strike, other labor dispute or organizational effort involving the
Company or any of its Subsidiaries pending or threatened.
(o) Employee Benefit Plans. Section 3.3(o) of the Company Disclosure
Letter contains a complete list of all pension, retirement, stock option,
stock purchase, stock ownership, savings, stock appreciation right, profit
sharing, deferred compensation, consulting, bonus, group insurance,
employment, termination, severance, medical, health and other benefit plans,
contracts, agreements, arrangements, including, but not limited to, "employee
benefit plans", as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), incentive and welfare policies,
contracts, plans and arrangements and all trust agreements related thereto in
respect to any present or former directors, officers, or other employees of
the Company or any of its Subsidiaries (hereinafter referred to collectively
as the "Employee Plans"). (i) All of the Employee Plans comply in all
material respects with all applicable requirements of ERISA, the Code and
other applicable laws; neither the Company nor any of its Subsidiaries has
engaged in a "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the Code) with respect to any Employee Plan that, assuming
the taxable period of such transaction expired as of the date hereof, would
subject the Company to a material tax or penalty imposed by either Section
4975 or 4976 of the Code or Section 502 of ERISA; and all contributions
required to be made under the terms of any Employee Plan have been timely
made or have been reflected on the balance sheets contained or incorporated
by reference in the Reports; (ii) no liability to the Pension Benefit
Guaranty Corporation (the "PBGC") (except for payment of premiums) has been
incurred, and no condition exists that presents a material risk to the
Company or any ERISA Affiliate (as defined below) of incurring such a
liability, with respect to any Employee Plan which is subject to Title IV of
ERISA ("Pension Plan"), or with respect to any "single-employer plan" (as
defined in Section 4001(a)(15) of ERISA) currently or formerly maintained by
the Company or any entity (an "ERISA Affiliate") which is considered one
employer with the Company under Section 4001 of ERISA or Section 414 of the
Code (an "ERISA Affiliate Plan"); and no proceedings have been instituted to
terminate any Pension Plan or ERISA Affiliate Plan; (iii) no Pension Plan or
ERISA Affiliate Plan had an "accumulated funding deficiency" (as defined in
Section 302 of ERISA (whether or not waived)) as of the last day of the end
of the most recent plan year ending prior to the date hereof; the fair market
value of the assets of each Pension Plan and ERISA Affiliate Plan exceeds the
present value of the "benefit liabilities" (as defined in Section 4001(a)(16)
of ERISA) under such Pension Plan or ERISA Affiliate Plan as of the end of
the most recent plan year with respect to the respective Pension Plan or
ERISA Affiliate Plan ending prior to the date hereof, calculated on the basis
of the actuarial assumptions used in the most recent actuarial valuation for
such Pension Plan or ERISA Affiliate Plan prior to the date hereof, and there
has been no material change in the financial condition of any such Pension
Plan or ERISA Affiliate Plan since the last day of the most recent plan year;
and no notice of a "reportable event" (as defined in Section 4043 of ERISA)
for which the 30-day reporting requirement has not been waived has been
required to be filed for any Pension Plan or ERISA Affiliate Plan within the
12-month period ending on the date hereof; (iv) neither the Company nor any
ERISA Affiliate has provided or is required to provide security to any
Pension Plan or to any ERISA Affiliate Plan pursuant to Section 401(a)(29) of
the Code; (v) neither the Company nor any ERISA Affiliate has contributed to
any "multiemployer plan", as defined in Section 3(37) of ERISA, on or after
September 26, 1980; (vi) each Employee Plan which is an "employee pension
benefit plan" (as defined in Section 3(2) of ERISA), and which is intended to
be qualified under Section 401(a) of the Code, has received a favorable
determination letter from the Internal Revenue Service deeming such plan to
be so qualified (a "Qualified Plan"); and no condition exists that is likely
to result
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in revocation of any such favorable determination letter; (vii) all Employee
Plans covering current or former non-U.S. employees comply in all material
respects with applicable local law, and there are no material unfunded
liabilities with respect to any Employee Plan which covers such employees;
(viii) there is no pending or threatened material litigation, administrative
action or proceeding relating to any Employee Plan (other than benefit claims
made in the ordinary course); (ix) there has been no announcement or
commitment by the Company or any Subsidiary to create an additional Employee
Plan, or to amend an Employee Plan except for amendments required by
applicable law; (x) the Company and its Subsidiaries do not have any
obligations for retiree health and life benefits under any Employee Plan
except as set forth in Section 3.3(o) of the Company's Disclosure Letter, and
there are no such Employee Plans that cannot be amended or terminated without
incurring any liability thereunder; (xi) except as set forth in Section
3.3(o) of the Company Disclosure Letter, neither the execution and delivery
of this Plan nor the consummation of the transactions contemplated herein
will automatically accelerate, or give the Company or any Subsidiary the
right to accelerate, the time of payment or vesting, or increase the amount,
of compensation due to any employee; (xii) except as specificially identified
in Section 3.3(o) of the Company Disclosure Letter, and subject to the
conditions, limitations and assumptions specified therein, neither the
execution and delivery of this Plan nor the consummation of the transactions
contemplated hereby will result in any payment or series of payments by the
Company or any Subsidiary of the Company to any person which is an "excess
parachute payment" (as defined in Section 280G of the Code) under any
Employee Plan, increase or secure (by way of a trust or other vehicle) any
benefits or compensation payable under any Employee Plan, or accelerate the
time of payment or vesting of any such benefit or compensation, and (xiii)
with respect to each Employee Plan, the Company has supplied to the Acquiror
a true and correct copy, if applicable, of (A) the two most recent annual
reports on the applicable form of the Form 5500 series filed with the
Internal Revenue (the "IRS"), (B) such Employee Plan, including all
amendments thereto, (C) each trust agreement and insurance contract relating
to such Employee Plan, including all amendments thereto and the most recent
financial statements thereof, (D) the most recent summary plan description
for such Employee Plan, including all amendments thereto, if the Employee
Plan is subject to Title I of ERISA, (E) the most recent actuarial report or
valuation if such Employee Plan is a Pension Plan, (F) the most recent
determination letter issued by the IRS if such Employee Plan is a Qualified
Plan and (G) the most recent financial statements and auditor's report
relating to each Employee Plan, if applicable.
(p) Title to Assets. The Company and each of its Subsidiaries has good and
marketable title to its material properties and assets (including any
intellectual property asset such as, without limitation, any trademark,
service mark, trade name or copyright) other than (i) as reflected in the
Company Reports, (ii) property as to which it is lessee and (iii) real estate
owned as a result of foreclosure, transfer in lieu of foreclosure or other
transfer in satisfaction of a debtor's obligation previously contracted.
(q) Compliance with Laws. The Company and each of its Subsidiaries:
(i) holds and has at all times held all permits, licenses, certificates
of authority, orders and approvals of, and has made all filings,
applications and registrations with, federal, state, local and foreign
governmental or regulatory bodies that are required in order to permit it
to carry on its business as it is presently conducted, except where the
failure to hold or make any such permit, license, certificate of
authority, order, approval, filing, application or registration, as
applicable, individually or in the aggregate, would not have or be
reasonably likely to have a Material Adverse Effect on the Company; all
such permits, licenses, certificates of authority, orders and approvals
are in full force and effect, and, to the knowledge of the Company, no
suspension or cancellation of any of them is threatened; and
(ii) is in compliance, in the conduct of its business, with all
applicable federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable thereto or to
the employees conducting such business, including, without limitation, the
Equal Credit Opportunity Act, the Fair Housing Act, the Community
Reinvestment Act, the Home Mortgage Disclosure Act, the Americans With
Disabilities Act, all other applicable fair lending laws or other laws
relating to discrimination and the Bank Secrecy Act, except where the
failure to be in compliance with any of the foregoing would not,
individually or in the aggregate, have or be reasonably likely to have
Material Adverse Effect on the Company.
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(r) Fees. Other than financial advisory services performed for the
Company by CS First Boston Corporation in an amount and pursuant to an
agreement both previously disclosed to the Acquiror, neither the Company nor
any of its Subsidiaries, nor any of their respective officers, directors,
employees or agents, has employed any broker or finder or incurred any
liability for any financial advisory fees, brokerage fees, commissions, or
finder's fees, and no broker or finder has acted directly or indirectly for
the Company, its directors or any Subsidiary of the Company, in connection
with the Plan or the Option Agreement or the transactions contemplated
hereby.
(s) Environmental Matters.
(i) Except as set forth in Section 3.3.(s) of the Company Disclosure
Letter, with respect to the Company and each of its Subsidiaries:
(A) Each of the Company and its Subsidiaries and, to the best
knowledge of the Company, the Participation Facilities (as defined
below), to the extent of the Company's or any of its Subsidiaries'
direct management of such Participation Facility, are, and have been,
in substantial compliance with all Environmental Laws (as defined
below);
(B) There is no suit, claim, action, demand, executive or
administrative order, directive or proceeding pending or, to the best
knowledge of the Company, threatened, before any court, governmental
agency or board or other forum against it or any of its Subsidiaries
or, to the best knowledge of the Company, any Participation Facility
relating to the Company's or any of its Subsidiaries' direct
management of such Participation Facility (x) for alleged
noncompliance with, or liability under, any Environmental Law or (y)
relating to the presence of or release into the environment of any
Hazardous Material (as defined below), whether or not occurring at or
on a site owned, leased or operated by it or any of its Subsidiaries;
(C) To the best knowledge of the Company, the properties currently or
formerly owned or operated by the Company or any of its Subsidiaries
(including, without limitation, soil, groundwater or surface water on
or under the properties, and buildings thereon) are not and were not
contaminated with any Hazardous Material (as defined below) that would
reasonably be expected to give rise to a Material Adverse Effect on
the Company;
(D) None of it or any of its Subsidiaries has received any notice,
demand letter, executive or administrative order, directive or request
for information from any Federal, state, local or foreign Governmental
Entity or any third party indicating that it may be in violation of,
or liable under any Environmental Law.
(ii) The following definitions apply for purposes of this Section 3.3(s):
(x) "Participation Facility" means any facility in which the applicable party
(or a Subsidiary of it) participates in the management (including all
property held as trustee or in any other fiduciary capacity) and, where
required by the context, includes the owner or operator of such property; (y)
"Environmental Law" means (i) any federal, state or local law, statute,
ordinance, rule, regulation, code, license, permit, authorization, approval,
consent, order, directive, executive or administrative order, judgment,
decree, injunction, requirement or agreement with any Governmental Entity,
(A) relating to the protection, preservation or restoration of the
environment (which includes, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, structures, soil, surface land,
subsurface land, plant and animal life or any other natural resource), or to
human health or safety, or (B) the exposure to, or the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of, Hazardous Materials, in each
case as amended. The term "Environmental Law" includes, without limitation,
the federal Comprehensive Environmental Response, Compensation and Liability
Act of 1980, the Superfund Amendments and Reauthorization Act of 1986, the
federal Water Pollution Control Act of 1972, the federal Clean Air Act, the
federal Clean Water Act, the federal Resource Conservation and Recovery Act
of 1976 (including the Hazardous and Solid Waste Disposal Amendments
thereto), the federal Toxic Substances Control Act, the Federal Insecticide,
Fungicide and Rodenticide Act, the Federal Occupational Safety and Health Act
of 1970, the Federal Hazardous Materials Transportation Act (including,
without limitation, injunctive relief and tort doctrines such as negligence,
nuisance,
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trespass and strict liability) that may impose liability or obligations for
injuries or damages due to, or threatened as a result of, the presence of or
exposure to any Hazardous Material; and (z) "Hazardous Material" means any
substance in any concentration which is or could be detrimental to human
health or safety or to the environment, currently or hereafter listed,
defined, designated or classified as hazardous, toxic, radioactive or
dangerous, or otherwise regulated, under any Environmental Law, whether by
type or by quantity, including any substance containing any such substance as
a component. Hazardous Material includes, without limitation, any toxic
waste, pollutant, contaminant, hazardous substance, toxic substance,
hazardous waste, special waste, industrial substance, oil or petroleum or any
derivative or by-product thereof, radon, radioactive material, asbestos,
asbestos-containing material, urea formaldehyde foam insulation, lead and
polychlorinated biphenyl.
(t) Classified Loans. The Company has identified to Acquiror in writing
prior to the date hereof all non-residential loans, leases, advances, credit
enhancements, other extensions of credit, commitments and interest bearing
assets of the Company and its Subsidiaries with a current contractual balance
in excess of $500,000 (with respect to commercial loans) and $750,000 (with
respect to multi-family loans) that, as of June 30, 1996 have been criticized
or classified by it or any bank examiner as "Other Loans Specially
Mentioned", "Special Mention", "Substandard", "Doubtful", "Loss",
"Classified", "Criticized", "Credit Risk Assets", "Concerned Loans" or words
of similar import. The company and its subsidiaries shall, promptly after the
end of any quarter following the date of this Plan, inform the Acquiror of
any commercial or multifamily loan of the Company or any of its Subsidiaries
with a current contractual balance amount in excess of $500,000 or $750,000,
respectively, that becomes classified or criticized in a manner described in
the previous sentence or any non-residential loan disclosed to Acquiror
pursuant to the previous sentence the categorization of which shall have
changed, and also shall provide Acquiror with a quarterly schedule or report
indicating, by category, the aggregate amounts of all loans of the Company
and its subsidiaries so classified or criticized.
(u) Delaware Takeover Laws Inapplicable. The Board of Directors of the
Company has taken all actions required to be taken by it to provide that this
Plan and any amendment or revision thereto, and the transactions contemplated
hereby or thereby, shall be exempt from the requirements of Section 203 of
the State Corporation Law.
(v) Material Interests of Certain Persons. Except as disclosed in the
Company's Proxy Statement for its 1996 Annual Meeting of Stockholders, no
officer or director of the Company or any Subsidiary of the Company, or any
"associate" (as such term is defined in Rule 12b-2 under the Exchange Act) of
any such officer or director, has any material interest in any material
contract or property (whether real or personal, tangible or intangible) used
in or pertaining to the business of the Company or any of its Subsidiaries.
(w) Insurance. The Company and its Subsidiaries are presently insured, and
since December 31, 1993 have been insured, for reasonable amounts with
financially sound and reputable insurance companies, against such risks as
companies engaged in a similar business would, in accordance with prudent
banking practice, customarily be insured. All of the insurance policies and
bonds maintained by the Company and its Subsidiaries are in full force and
effect, the Company and its Subsidiaries are not in default thereunder and
all material claims thereunder have been filed in due and timely fashion. No
claim by the Company or any of its Subsidiaries on or in respect of an
insurance policy or bond has been declined or refused by the relevant insurer
or insurers. Between the date hereof and the Effective Time, the Company and
its Subsidiaries will use commercially reasonable efforts to maintain the
levels of insurance coverage in effect on the date hereof.
(x) Books and Records. The books and records of the Company and its
Subsidiaries have been, and are being, maintained in accordance with GAAP and
all applicable legal and accounting requirements.
(y) Corporate Documents. The Company has delivered to the Acquiror true
and complete copies of (i) its certificate of incorporation and by-laws and
(ii) the charter, by-laws or other similar governing documents of each of its
Subsidiaries, as each of them is in effect on the date hereof.
(z) Board Action. The Boards of Directors of each of the Company and the
Bank (at meetings duly called and held) have by the requisite vote of all
directors present (i) determined that the Merger is
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advisable and (ii) approved this Plan, the Merger and (in the case of the
Company's Board of Directors) the Option Agreement and the transactions
contemplated hereby and thereby, and at its respective meeting, the Board of
Directors of the Company has further determined that the Merger is in the
best interests of the Company and its stockholders and has directed that,
subject to the provisions of applicable law, this Plan be submitted for
consideration by the Company's stockholders at a meeting of such
stockholders.
(aa) Indemnification. Except as set forth in Section 3.3 (aa) of the
Disclosure Letter, neither the Company nor any of its Subsidiaries is a party
to any indemnification agreement with any of its present or future directors,
officers, employees, agents or other persons who serve or served in any other
capacity with any other enterprise at the request of the Company (a "Covered
Person"), and to the best knowledge of the Company, there are no claims for
which any Covered Person would be entitled to indemnification under Section
4.7 if such provisions were deemed to be in effect.
Loans. Each loan, other than any commercial or other loan the principal
amount of which does not exceed $500,000 or $750,000, respectively, reflected
as an asset on the consolidated statement of financial condition of the
Company and its Subsidiaries as of March 31, 1996, and as of each date
subsequent thereto for which the Company shall have delivered financial
statements to the Acquiror pursuant to Section 4.17 hereof, (i) is evidenced
by notes, agreements or other evidences of indebtedness which are true and
genuine, except where the failure of any such loan to be so evidenced, either
individually or in the aggregate, would not have or be reasonably likely to
have a Material Adverse Effect on the Company, and (ii) is the legal, valid
and binding obligation of the obligor named therein, enforceable in
accordance with its terms, subject to bankruptcy, insolvency, fraudulent
conveyance and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles. All such loans and
extensions of credit that have been made by the Bank and that are subject to
Section 11 of HOLA comply therewith. Section 3.3(bb) of the Company's
Disclosure Letter includes (i) a listing of all such loans referred to in the
first sentence of this Section 3.3(bb) the principal of which is past due or
will become due within six months or less of June 30, 1996 and (ii) a listing
of each loan, commitment or other borrowing management with any director,
executive officer or ten percent stockholder of the Company or any of its
Subsidiaries, or any person, corporation or enterprise controlling,
controlled by or under common control with any of the foregoing.
(cc) Derivatives Contracts; Structured Notes; Etc. Except as set forth in
Section 3.3 (cc) of the Company's Disclosure Letter, neither the Company nor
any of its Subsidiaries is a party to or has agreed to enter into an exchange
traded or over-the-counter equity, interest rate, foreign exchange or other
swap, forward, future, option, cap, floor or collar or any other contract
that is not included on the balance sheet and is a derivative contract
(including various combinations thereof) (each a "Derivative Contract") or
owns securities that (l) are referred to generically as "structured notes,"
"high risk mortgage derivatives," "capped floating rate notes" or "capped
floating rate mortgage derivatives" or (2) are likely to have changes in
value as a result of interest or exchange rate changes that significantly
exceed normal changes in value attributable to interest or exchange rate
changes, except for those Derivatives Contracts and other instruments legally
purchased or entered into in the ordinary course of business, consistent with
safe and sound banking practices and regulatory guidance, and listed (as of
the date hereof) in paragraph 3.3(cc) of its Disclosure Letter or disclosed
in the Company Reports filed on or prior to the date hereof. All of such
Derivative Contracts or other instruments are legal, valid and binding
obligations of the Company or one of its Subsidiaries enforceable in
accordance with their terms (except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity
and by bankruptcy, insolvency and similar laws affecting creditors' rights
and remedies generally), and are in full force and effect. The Company and
each of its Subsidiaries have duly performed in all material respects all of
their material obligations thereunder to the extent that such obligations to
perform have accrued; and, to the Company's knowledge, there are no breaches,
violations or defaults or allegations or assertions of such by any party
thereunder which would have or would reasonably be expected to have a
Material Adverse Effect on the Company.
(dd) Rights Agreement. The Company has taken all action (including, if
required, redeeming all of the outstanding Purchase Rights issued pursuant
to the Rights Agreement or amending or
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terminating the Rights Agreement) necessary to ensure that (i) the
execution and delivery of this Plan and the Option Agreement and the
consummation of the transactions contemplated hereby and thereby do not
and will not result in the grant of any rights to any person under the
Rights Agreement or enable or require the Purchase Rights to be exercised,
distributed or triggered, and (ii) except as disclosed in Section 3.3(dd)
of the Company's Disclosure Letter, the consummation of the Merger will
result in the expiration of the Purchase Rights.
SECTION 3.4. Representations and Warranties of the Acquiror. The Acauiror
represents and warrants to the Company that:
(a) Recitals True. The facts set forth in the Recitals of this Plan with
respect to the Acquiror and Merger Sub are true and correct in all
material respects.
(b) Corporate Qualification. Each of the Acquiror and the Merger Sub is
in good standing in its jurisdiction of organization and as a foreign
corporation in each jurisdiction where the properties owned, leased or
operated or the business conducted by it requires such qualification. Each
of the Acquiror and Merger Sub has the requisite corporate power and
authority (including all federal, state, local and foreign government
authorizations) to carry on its respective businesses as they are now
being conducted and to own its respective properties and assets.
(c) Corporate Authority.
(i) The Acquiror has the requisite corporate power and authority to
execute and deliver this Plan and, subject to the receipt of all
required regulatory approvals, consents or nonobjections, as the case
may be, to consummate the transactions contemplated hereby. The
execution and delivery of this Plan and consummation of the
transactions contemplated hereby have been duly and validly authorized
by all necessary corporate action of the Acquiror. This Plan has been
duly and validly executed and delivered by the Acquiror and (assuming
due authorization, execution and delivery by the Company) this Plan
constitutes a valid and binding agreement of the Acquiror, enforceable
against it in accordance with its terms, subject as to enforcement to
bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affection creditors' rights and to general equity principles.
(ii) Merger Sub has the requisite corporate power and authority to
execute and deliver this Plan and, subject to the receipt of all
required regulatory approvals, consents or nonobjections, as the case
may be, to consummate the transactions contemplated hereby. The
execution and delivery of this Plan and consummation of the
transactions contemplated hereby have been duly and validly authorized
by all necessary corporation action of Merger Sub and of the Acquiror
as sole stockholder of Merger Sub. This Plan has been duly and validly
executed and delivered by Merger Sub and (assuming due authorization,
execution and delivery by the Company) this Plan constitutes a valid
and binding agreement of Merger Sub, enforceable against it in
accordance with its terms, subject as to enforcement to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and
similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles.
(d) No Violations. The execution, delivery and performance of this Plan
by each of the Acquiror and Merger Sub do not, and the consummation of the
transactions contemplated hereby by the Acquiror and Merger Sub will not,
constitute (i) a breach or violation of, or a default under, any law, rule
or regulation or any judgment, decree, order, governmental permit or
license, or agreement, indenture or instrument of the Acquiror or any
Subsidiary of the Acquiror, or to which the Acquiror or any of its
Subsidiaries (or any of their respective properties) is subject, or enable
any person to enjoin the Merger, the Bank Merger or the other transactions
contemplated hereby and thereby, (ii) a breach or violation of, or a
default under, the certificate of incorporation or by-laws or similar
organizational documents of the Acquiror or any of its Subsidiaries or
(iii) a material breach or violation of, or a material default under (or
an event which with due notice or lapse of time or both would constitute a
material default under), or result in the termination of, accelerate the
performance required by, or result in the creation of any lien, pledge,
security interest, charge or other
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encumbrance upon any of the properties or assets of the Acquiror or any
of its Subsidiaries under, any of the terms, conditions or provisions of
any note, bond, indenture, deed of trust, loan agreement or the agreement,
instrument or obligation to which the Acquiror or any of its Subsidiaries
is a party, or to which any of their respective properties or assets may
be bound or affected.
(e) Consents and Approvals. Except for (A) the filing of an application
with the OTS and approval of such application, (B) the filing with the SEC
of the Proxy Statement, (C) the filing of the Certificate of Merger, (D)
the filings required in connection with the Bank Merger, and (E) the
consents and approvals set forth on Section 3.4(e) of the Acquiror's
Disclosure Letter, no consents or approvals of or filings or registrations
with any Governmental Entity or with any third party are necessary in
connection with the execution and delivery by the Acquiror and Merger Sub
of this Plan and the consummation by the Acquiror and Merger Sub of the
Merger and the other transactions contemplated hereby or the execution and
delivery by Acquiror of the Option Agreement and the consummation by the
Acquiror of the transactions contemplated thereby, and Acquiror knows of
no reason why the Requisite Regulatory Approvals (as defined in Section
5.1(b)) should not be obtained.
(f) Access to Funds. The Acquiror has, or on the Closing Date will have,
all funds necessary to consummate the Merger and pay the aggregate cash
portion of the Merger Consideration.
(g) Board Action. The Board of Directors of the Acquiror, by the
requisite vote, has (i) determined that the Merger is advisable and in the
best interests of the Acquiror and its stockholders and (ii) approved this
Plan, the Merger and the Option Agreement and the transactions
contemplated hereby and thereby.
ARTICLE IV. COVENANTS
SECTION 4.1. Acquisition Proposals. The Company agrees that neither it nor
any of its Subsidiaries shall authorize or permit any of its officers,
directors, employees, agents or representatives (including, without
limitation, any investment banker, attorney or accountant retained by it or
any of its Subsidiaries) to directly or indirectly, initiate, solicit,
encourage or otherwise facilitate any inquiries or the making of any proposal
offer (including, without limitation, any proposal, tender offer or exchange
offer to stockholders of the Company) with respect to a merger, consolidation
or similar transaction involving, or any purchase of all or any significant
portion of the assets, deposits or any equity securities of, the Company or
any of its Subsidiaries (any such proposal or offer being hereinafter
referred to as an "Acquisition Proposal") or, except to the extent legally
required for the discharge by the Company's board of directors of its
fiduciary duties as advised by such board's counsel with respect to an
unsolicited offer from a third party, engage in any negotiations concerning
or provide any confidential information or data to, or have any discussions
with, any person relating to an Acquisition Proposal, or otherwise facilitate
any effort or attempt to make or implement an Acquisiton Proposal. The
Company will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties (other than the
Acquiror) conducted heretofore with respect to any of the foregoing. The
Company will take the necessary steps to inform promptly the appropriate
individuals or entities referred to in the first sentence hereof of the
obligations undertaken in this Section 4.1. The Company agrees that it will
notify the Acquiror immediately if any such inquiries, proposals or offers
are received by, any such information is requested from, or any such
negotiations or discussions are sought to be initiated or continued with the
Company or any of its Subsidiaries, and the Company shall promptly thereafter
provide the details of any such communication to the Acquiror in writing. The
Company also agrees that it promptly shall request each other person (other
than the Acquiror) that has heretofore executed a confidentiality agreement
in connection with its consideration of acquiring the Company or any of its
Subsidiaries to return all confidential information heretofore furnished to
such person by or on behalf of the Company or any of its Subsidiaries and
enforce any such confidentiality agreements.
SECTION 4.2. Certain Policies of the Company. At the request of the
Acquiror, after the date on which all required federal depository institution
regulatory approvals are received and prior to the Effective Time, the
Company shall (i) to the extent consistent with GAAP and regulatory
accounting principles and requirements, in each case as applied to financial
institutions and not objected to by the
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Company's independent certified public accountants, modify its loan,
litigation and real estate valuation policies and practices (including
modifying its loan classifications and levels of reserves and establishing
specific reserves on loans and REO properties) and its other accounting
methods or periods so as to be consistent with those of the Acquiror, (ii)
pay or accrue certain expenses, (iii) dispose of certain assets, and (iv)
take any other action as Acquiror may reasonably request in order to
facilitate and effect the transfer of contractual and other rights to
Acquiror and the integration of the businesses and operations of the Company
and Acquiror; provided, however, that the Company shall not be required to
take such action unless (A) the Acquiror agrees in writing that all
conditions to the Acquiror's obligation to consummate the Merger set forth in
Article V hereof (other than the expiration of the 30-day statutory waiting
period following approval of the Merger by the OTS) have been satisfied or
waived, (B) the Company shall have received a written, irrevocable waiver by
the Acquiror of its rights to terminate this Agreement, (C) all of the
conditions to the Company's obligation to consummate the Merger (other than
the statutory waiting period described above) shall have been satisfied, and
(D) Acquiror shall have delivered to the Company documentary evidence
reasonably satisfactory to the Company certifying that Acquiror has
sufficient cash to pay the aggregate Merger Consideration. The Company's
representations, warranties and covenants contained in this Plan shall not be
deemed to be untrue or breached in any respect for any purpose as a
consequence of any modifications or changes undertaken solely on account of
this Section 4.2. Nothing contained herein shall be deemed to relieve the
Company of its obligation to deliver the documents referred to in Section 5.2
hereof on the Effective Date.
SECTION 4.3. Employees. Incorporated herein by this reference are the
terms of that certain letter of even date herewith from Acquiror to the
Company (the "Benefits Letter"), and in the event of any conflict between the
provisions of this Agreement and the terms of the Benefits Letter, the terms
of the Benefits Letter shall be controlling.
SECTION 4.4. Access and Information. Upon reasonable notice and subject to
applicable laws relating to the exchange of information, the Company shall,
and shall cause each of its Subsidiaries to, afford to the officers,
employees, accountants, counsel and other representatives of the Acquiror
access, during normal business hours during the time period from the date of
this Agreement to the Effective Time, to all its properties, books,
contracts, commitments, records, officers, employees, accountants, counsel
and other representatives and, during such period, the Company shall, and
shall cause its Subsidiaries to, make available to the Acquiror (i) a copy of
each report, schedule, registration statement and other document filed or
received by it during such period pursuant to the requirements of federal
securities laws or federal or state banking laws (other than reports or
documents which the Company is not permitted to disclose under applicable
law), and (ii) all other information concerning its business, properties and
personnel as the Acquiror may reasonably request. Neither the Company nor any
of its Subsidiaries shall be required to provide access to or to disclose
information where such access or disclosure would violate or prejudice the
rights of the Company's customers, jeopardize any attorney-client privilege
or contravene any law, rule, regulations, order, judgment, decree, fiduciary
duty or binding agreement entered into prior to the date of this Agreement.
The parties hereto will make appropriate substitute disclosure arrangements
under circumstances in which the restrictions of the preceding sentence
apply. The Acquiror will hold all such information in confidence in
accordance with the provisions of the confidentiality agreement, date July 1,
1996, between the Acquiror and the Company (the "Confidentiality Agreement").
No investigation by Acquiror or its representatives shall affect the
representations, warranties, covenants or agreements of the Company set forth
herein.
SECTION 4.5. Regulatory Matters. (a) The parties hereto shall cooperate
with each other and use their reasonable efforts to promptly prepare and file
all necessary documentation, to effect all applications, notices, petitions
and filings, and to obtain as promptly as practicable all permits, consents,
approvals and authorizations of all third parties and governmental
authorities which are necessary or advisable to consummate the transactions
contemplated by this Plan. The Company and the Acquiror shall have the right
to review in advance, and to the extent practicable each will consult the
other on, in each case subject to applicable laws relating to the exchange of
information, all the information relating to the Company or the Acquiror, as
the case may be, and any of their respective Subsidiaries, which appear in
any filing made with, or written materials submitted to, any third party or
any governmental
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authority in connection with the transactions contemplated by this Plan. In
exercising the foregoing right, each of the parties hereto shall act
reasonably and as promptly as practicable. The parties hereto agree that they
will consult with each other with respect to the obtaining of all permits,
consents, approvals and authorizations of all third parties and governmental
authorities necessary or advisable to consummate the transactions
contemplated by this Plan and each party will keep the other apprised of the
status of matters relating to completion of the transactions contemplated
herein.
(b) The Acquiror and the Company shall, upon request, furnish each other
with all information concerning themselves, their Subsidiaries, directors,
officers and stockholders and such other matters as may be reasonably
necessary or advisable in connection with the Proxy Statement or any other
statement, filing, notice or application made by or on behalf of the
Acquiror, the Company or any of their respective Subsidiaries to any
governmental authority in connection with the Merger and the other
transactions contemplated by this Plan.
(c) The Acquiror and the Company shall promptly furnish each other with
copies of written communications received by the Acquiror or the Company, as
the case may be, or any of their respective Subsidiaries, affiliates or
associates (as such terms are defined in Rule 12b-2 under the Exchange Act as
in effect on the date of this Plan) from, or delivered by any of the
foregoing to, any governmental authority in respect of the transactions
contemplated hereby.
SECTION 4.6. Antitakeover Statutes. The Company shall take all steps
necessary to exempt this Plan and the Option Agreement and the transactions
contemplated hereby and thereby from the requirements of any state
antitakeover law including, without limitations, Section 203 of the State
Corporation Law, by action of its board of directors or otherwise.
SECTION 4.7. Indemnification; Directors' and Officers' Insurance. (a) In
the event of any threatened or actual claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative,
including, without limitation, any such claim, action, suit, proceeding or
investigation in which any person who is now, or has been at any time prior
to the date of this Plan, or who becomes prior to the Effective Time, a
director or officer of the Company or any of its Subsidiaries (the
"Indemnified Parties") is, or is threatened to be, made a party based in
whole or in part on, or arising in whole or in part out of, or pertaining to
(i) the fact that he is or was a director, officer, or employee of the
Company, any of the Subsidiaries of the Company or any of their respective
predecessors or (ii) this Plan, the Option Agreement, or any of the
transactions contemplated hereby or thereby, including, without limitation,
any actions taken in accordance with Sections 4.2 or 4.19, whether in any
case asserted or arising before or after the Effective Time (collectively,
the "Matters"), the parties hereto agree to cooperate and use their best
efforts to defend against and respond thereto. From and after the Effective
Time, through the sixth anniversary of the Effective Date, the Acquiror
agrees to indemnify and hold harmless each Indemnified Party, against any
costs or expenses (including reasonable attorneys' fees and expenses in
advance of the final disposition of any claim, action, suit, proceeding or
investigation to each Indemnified Party to the fullest extent permitted by
law upon receipt of any undertaking rerquired by applicable law), judgments,
fines, losses, claims, damages or liabilities and amounts paid in settlement
(collectively, "Costs") incurred in connection with any threatened or actual
claim, action, suite, proceeding or investigation, whether civil, criminal,
administrative or investigative, arising out of any of the Matters, whether
asserted or claimed prior to, at or after the Effective Time, to the fullest
extent permitted by applicable law. The Acquiror agrees that it will also
indemnify for a period of six years from the Effective Date in accordance
with and subject to the terms and provisions of this Section 4.7(a) and
Section 4.7(b), the advisors of the Company solely for Claims arising out of
actions taken by them in accordance with Section 4.2 or 4.19 of this Plan.
Notwithstanding anything to the contrary contained herein, all rights to
indemnification in respect of any claim (a "Claim") asserted or made within
such six year period shall continue until the final disposition of such
Claim.
(b) An Indemnified Party wishing to claim indemnification under Section
4.7(a), upon learning of any such claim, action, suit, proceeding or
investigation, shall promptly notify the Acquiror thereof, but the failure to
so notify shall not relieve the Acquiror of any liability it may have to such
Indemnified Party except to the extent such failure to notify materially
prejudices the indemnifying party. In the event of any
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such claim, action, suit, proceeding or investigation (whether arising
before or after the Effective Time), the Indemnified Parties may retain
counsel reasonably satisfactory to them after consultation with the Acquiror;
provided, however, that (i) the Acquiror shall have the right to assume the
defense thereof and upon such assumption the Acquiror shall not be liable to
such Indemnified Parties for any legal expenses of other counsel or any other
expenses subsequently incurred by such Indemnified Parties in connection with
the defense thereof, except that if the Acquiror elects not to assume such
defense or counsel for the Indemnified Parties advises that there are issues
which raise conflicts of interest between the Acquiror and the Indemnified
parties, the Indemnified Parties may retain counsel satisfactory to them, and
the Acquiror shall pay the reasonable fees and expenses of such counsel for
the Indemnified Parties in any jurisdiction, (ii) the Indemnified Parties
will cooperate in the defense of any such matter and (iii) the Acquiror shall
not be liable for any settlement effected without its prior written consent
which consent shall not be unreasonably withheld; and provided further, that
the Acquiror shall not have any obligation hereunder to any Indemnified Party
when and if a court of competent jurisdiction shall ultimately determine, and
such determination shall have become final and nonappealable, that the
indemnification of such Indemnified Party in the manner contemplated hereby
is prohibited by applicable law.
(c) Prior to the Effective Time the Company shall purchase, and for a
period of six years after the Effective Time, Acquiror shall use its
commercially reasonable efforts to maintain, directors and officers liability
insurance "tail" or "runoff" coverage with respect to wrongful acts and/or
omissions committed or allegedly committed prior to the Effective Time. Such
coverage shall have an aggregate coverage limit over the term of such policy
in an amount no less than the annual aggregate coverage limit under the
Company's existing directors and officers liability policy, and in all other
respects shall be at least comparable to such existing policy.
(d) In the event Acquiror or any of its successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or
merger, or (ii) transfers or conveys all or substantially all of its
properties and assets to any person, then, and in each such case, to the
extent necessary, proper provision shall be made so that the successors and
assigns of the Acquiror assume the obligations set forth in this Section 4.7.
(e) The provisions of this Section 4.7 are intended to be for the benefit
of, and shall be enforceable by, each Indemnified Party and his or her heirs
and representatives.
SECTION 4.8. Actions. Subject to the terms and conditions herein provided,
each of the parties hereto agrees to use its reasonable efforts to take
promptly, or cause to be taken promptly, all actions and to do promptly, or
cause to be done promptly, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Plan as soon as practicable, including
using efforts to obtain all necessary actions or non-actions, extensions,
waivers, consents and approvals from all applicable governmental entities,
effecting all necessary registrations, applications and filings (including,
without limitation, filings under any applicable state securities laws) and
obtaining any required contractual consents and regulatory approvals.
SECTION 4.9. Publicity. The initial press release announcing this Plan
shall be a joint press release, and thereafter, subject to the provisions of
applicable law and the rules of the New York Stock Exchange, the Company and
the Acquiror shall consult with each other prior to issuing any press
releases or otherwise making any statements, public or otherwise, with
respect to the other or the transactions contemplated hereby and in making
any filings with any governmental entity or with any national securities
exchange with respect thereto.
SECTION 4.10. Proxy Statement. Promptly, but in any event no later than 60
days following the date hereof, the Company shall prepare and file with the
SEC the Proxy Statement. Thereafter, the Company shall respond to the
comments of the staff of the SEC promptly following receipt thereof, and
promptly thereafter shall mail the Proxy Statement to all holders of record
(as of the applicable record date) of shares of Company Common Stock. The
Company represents and covenants that the Proxy Statement and any amendment
or supplement thereto, at the date of mailing to stockholders of the Company
and the date of the meeting of the Company's stockholders to be held in
connection with the Merger, will be in compliance with all relevant rules and
regulations of the SEC and will not contain any untrue statement
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of a material fact or omit to state any material fact required to be stated
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Acquiror and
the Company shall cooperate with each other in the preparation of the Proxy
Statement. If requested by the Acquiror, the Company shall employ
professional proxy solicitors to assist it in contacting stockholders in
connection with the vote on the Merger.
SECTION 4.11. Stockholders' Meeting. The Company shall take all action
necessary, in accordance with applicable law and its articles of
incorporation and by-laws, to convene a meeting of the holders of Company
Common Stock as promptly as practicable for the purpose of considering and
taking action required by this Plan. Except to the extent legally required
for the discharge by the board of directors of its fiduciary duties as
advised by such board's counsel, the board of directors of the Company shall
recommend that the holders of the Company Common Stock vote in favor of and
approve the Merger and adopt this Plan.
SECTION 4.12. Notification of Certain Matters. The Company shall give
prompt notice to the Acquiror of: (a) any notice of, or other communication
relating to, a default or event that, with notice or lapse of time or both,
would become a default, received by it or any of its Subsidiaries subsequent
to the date of this Plan and prior to the Effective Time, under any contract
material to the financial condition, properties, businesses or results of
operations of the Company and its Subsidiaries taken as a whole to which the
Company or any such Subsidiary is a party or is subject; and (b) any material
adverse change in the financial condition, properties, business or results of
operations of the Company and its Subsidiaries taken as a whole or the
occurrence of any event which, so far as reasonably can be foreseen at the
time of its occurrence, is reasonably likely to result in any such change.
Each of the Company and the Acquiror shall, and the Acquiror shall cause
Merger Sub, when duly incorporated, to, give prompt notice to the other party
of any notice or other communication from any third party alleging that the
consent of such third party is or may be required in connection with the
transactions contemplated by this Plan. Acquiror shall give prompt notice to
the Company of the occurrence or non-occurrence of any event which would or
(so far as reasonably can be foreseen at the time of such occurrence or
non-occurrence) is reasonably likely to, prevent Acquiror from obtaining the
funds necessary to consummate the Merger and pay the aggregate Merger
Consideration; provided, however, that the delivery of any notice pursuant to
this sentence shall not limit or otherwise affect the remedies available
hereunder or otherwise to the Company.
SECTION 4.13. Rights Agreement. The Company shall take all action
necessary to ensure that this Plan and the Option Agreement and the
transactions contemplated hereby and thereby do not and will not result in
the grant of any rights to any person under the Rights Agreement or enable or
require the Purchase Rights to be exercised, distributed or triggered.
SECTION 4.14. [INTENTIONALLY OMITTED]
SECTION 4.15. Advice of Changes. The Company shall promptly advise the
Acquiror of any change or event having a Material Adverse Effect on the
Company and each party shall promptly advise the other of any change or event
which such party believes would or would be reasonably likely to cause or
constitute a material breach of any of its representations, warranties or
covenants contained herein. From time to time prior to the Effective Time
(and on the date prior to the Effective Date), the Company will promptly
supplement or amend the Disclosure Letter delivered to the Acquiror in
connection with the execution of this Plan to reflect any matter which, if
existing, occurring or known at the date of this Plan, would have been
required to be set forth or described in such Disclosure Letter or which is
necessary to correct any information in such Disclosure Letter which has been
rendered inaccurate thereby. No supplement or amendment to such Disclosure
Letter shall have any effect for the purpose of determining satisfaction of
the conditions set forth in Section 5.2(b), hereof, or the compliance by the
Company with the covenants and agreements made by it herein.
SECTION 4.16. Current Information. During the period from the date of this
Plan to the Effective Time, the Company will make available one or more of
its designated representatives to confer on a regular and frequent basis (not
less than monthly) with representatives of the Acquiror and to report the
general status of the ongoing operations of the Company and its Subsidiaries.
The Company will promptly
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notify the Acquiror of any material change in the normal course of business
or in the operation of the properties of the Company or any of its
Subsidiaries and of any governmental complaints, investigations or hearings
(or communications indicating that the same may be contemplated), or the
institution or the credible threat of significant litigation involving the
Company or any of its Subsidiaries, and will keep the Acquiror fully informed
of such events.
SECTION 4.17. Subsequent Interim and Annual Financial Statements. As soon
as reasonably available, but in no event more than 45 days after the end of
each fiscal quarter ending after the date of this Plan, the Company will
deliver to the Acquiror its Quarterly Report on Form 10-Q as filed with the
SEC under the Exchange Act. As soon as reasonably available, but in no event
later than March 31, 1997, the Company will deliver to Acquiror its Annual
Report on Form 10-K for the fiscal year ended December 31, 1996, as filed
with the SEC under the Exchange Act.
SECTION 4.18. Additional Agreements. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Plan, or to vest the Surviving Corporation or the Bank with
full title to all properties, assets, rights, approvals, immunities and
franchises of any of the parties to the Merger or the Bank Merger,
respectively, the proper officers and directors of each party to this
Agreement and their respective Subsidiaries shall take all such necessary
action as may be reasonably requested by, and at the sole expense of, the
Acquiror.
SECTION 4.19. Cooperation in Financings. The Company agrees to cooperate
with, and provide reasonable assistance to, Acquiror, at Acquiror's expense,
in connection with any sale or distribution of securities (whether registered
or otherwise) made by Acquiror or any of its affiliates in connection with
the consummation of the transactions contemplated hereby including, without
limitation, using its reasonable best effects to (i) making available on a
timely basis such financial information of the Company and its Subsidiaries
as may reasonably be required in connection with any such sale or
distribution; (ii) obtaining "cold comfort" letters and updates thereof from
the Company's independent certified public accountants and opinion letters
from the Company's attorneys, with such letter to be in customary form and to
cover matters of the type customarily covered by accountants and attorneys in
such transactions; and (iii) making available representatives of the Company
and its accountants and attorneys in connection with any such sale or
distribution, including for purposes of due diligence and marketing efforts
related thereto.
SECTION 4.20. Goodwill Litigation. Following the Effective Time, the
Acquiror shall and shall cause the Bank (and, subject to clause (iii) hereof,
any permitted successor to the Bank), as applicable, to (i) take all actions
necessary or desirable to pursue the Bank's claims in the Goodwill
Litigation, (ii) file with applicable regulatory agencies such periodic and
other reports as are necessary to furnish and update information to holders
of the Participation Interests or Secondary Participation Interests, (iii)
refrain from taking any action that would violate the requirements of 31
U.S.C. Section 3727, including, without limitation, any action that would
cause an "assignment" (as defined therein) of the claims to the Goodwill
Litigation, and (iv) refrain from taking any action to dismiss, settle,
compromise or otherwise cease prosecution of Goodwill Litigation on terms
that do not result solely in the payment of cash or other readily monetizable
consideration by or on behalf of the United States to the Bank.
SECTION 4.21. Litigation Recovery. As soon as practicable after the
receipt of any payment from the United States in settlement of or in
satisfaction of a final judgment obtained in the Goodwill Litigation, the
Acquiror shall cause the Bank to distribute the applicable portion of such
payment in a manner consistent with the terms of the certificates governing
the rights of the holders of Participation Interests (a copy of which is
attached hereto as Annex 4.21(a)) and the certificates governing the rights
of the holders of the Secondary Participation Interests (which will be issued
substantially in the form of the certificate attached hereto as Annex
4.21(b)).
SECTION 4.22. Registration Statement. Promptly, but in any event no later
than 60 days following the date hereof, the Bank shall prepare and file with
the OTS a registration statement covering the issuance and distribution of
the Secondary Participation Interests (the "Registration Statement").
Thereafter, the Bank shall respond to the comments of the staff of the OTS
promptly following receipt thereof, and shall use its best efforts to have
the Registration Statement declared effective as soon as
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possible. The Bank represents and covenants that the Registration Statement
any amendment or supplement thereto, at the date of filing thereof, will be
in compliance with all relevant rules and regulations of the OTS and will 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 therein, in light of the circumstances under which they were made,
not misleading. Acquiror shall cooperate with the Bank in the preparation of
the Registration Statement and shall have the right to review the
Registration Statement and to provide comments thereon prior to the Bank's
filing of the Registration Statement or any amendment thereto with the OTS.
SECTION 4.23. XCF Acceptance Corporation. Prior to the Effective Time, the
Company and the Bank shall, and shall cause XCF Acceptance Corporation
("XCF") to use its best efforts to take all such actions as Acquiror may
reasonably request to ensure that after the Effective Date the 6 1/2%
Subordinated Notes are convertible solely into the Merger Consideration.
SECTION 4.24. First Citizens Bank Agreement. Promptly following the date
of this Plan, the Company shall, pursuant to its rights under the Agreement
and Plan of Merger, dated as of April 14, 1996, between the Company and First
Citizens Bank, restructure the acquisition by the Company of First Citizens
Bank as a branch purchase transaction, and take all other action necessary to
consummate such acquisition as restructured, including the amendment and/or
withdrawal, as applicable, of its pending applications with the Federal
Reserve Board and the Banking Department of the State of California with
respect to such transaction as previously structured.
ARTICLE V. CONDITIONS TO CONSUMMATION
SECTION 5.1. Conditions to Each Party's Obligations. The respective
obligations of the Acquiror, Merger Sub (when duly incorporated) and the
Company to effect the Merger shall be subject to the satisfaction prior to
the Effective Time of the following conditions:
(a) This Plan and Merger shall have been approved by the requisite vote
of the stockholders of the Company in accordance with applicable law.
(b) All regulatory approvals, consents and waivers required to consummate
the transactions contemplated by this Plan (including without limitation
the Merger, the Bank Merger and the registration, issuance and
distribution of the Secondary Participation Interests) shall have been
obtained and shall remain in full force and effect, and all applicable
statutory waiting periods in respect thereof shall have expired (all such
approvals and the expirations of all such waiting periods being referred
to herein as the "Requisite Regulatory Approvals").
(c) No party hereto shall be subject to any order, decree or injunction
of a court or agency of competent jurisdiction which enjoins or prohibits
the consummation of the Merger, the Bank Merger or any other transaction
contemplated by this Plan, and no litigation or proceeding shall be
pending against the
Acquiror or the Company or any of their Subsidiaries brought by any
Governmental Entity seeking to prevent consummation of the transaction
contemplated hereby.
(d) No stature, rule, regulation, order, injunction or decree shall have
been enacted, entered, promulgated, interpreted, applied or enforced by
any Governmental Entity which prohibits, restricts or makes illegal
consummation of the Merger, the Bank Merger or any other transaction
contemplated by this Plan.
SECTION 5.2. Conditions to the Obligations of the Acquiror. The
obligations of the Acquiror and, when duly incorporated, Merger Sub to effect
the Merger shall be subject to the satisfaction or waiver prior to the
Effective Time of the following additional conditions:
(a) The Acquiror shall have received from KPMG Peat Marwick LLP, the
Company's independent certified public accountants, "comfort" letters,
dated (i) the date of the mailing of the Proxy Statement to the Company's
stockholders and (ii) shortly prior to the Effective Date, with respect to
certain financial information regarding the Company in the form
customarily issued by such accountants at such time in connection with
transactions of this type.
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(b) (i) The representations and warranties of the Company set forth in
Sections 3.3(a), 3.3(b), 3.3(e), 3.3(g), 3.3(l), 3.3(u), 3.3(x), 3.3(z)
and 3.3(dd) of this Plan shall be true and correct in all respects as of
the date of this Plan and (except to the extent such representations and
warranties speak as of an earlier date and except to the extent modified
by actions taken in compliance with this Plan) as of the Effective Date as
though made on and as of the Effective Date and (ii) the representations
and warranties of the Company set forth in this Plan other than those
specifically enumerated in clause (i) hereof shall be true and correct in
all respects as of the date of this Plan and (except to the extent such
representations and warranties speak as of an earlier date) as of the
Effective Date as though made on and as of the Effective Date; provided,
however, that for purposes of determining the satisfaction of the
condition contained in this clause (ii), no effect shall be given to any
exception in such representations and warranties relating to the best
knowledge of the Company, materially or a Material Adverse Effect, and
provided further, however, that, for purposes of this clause (ii), such
representations and warranties shall be deemed to be true and correct in
all material respects unless the failure or failures of such
representations and warranties to be so true and correct, individually or
in the aggregate, results or would reasonably be expected to result in a
Material Adverse Effect on the Company. The Acquiror shall have received a
certificate signed on behalf of the Company by the Chief Executive Officer
and the Chief Financial Officer of the Company, dated the Effective Date,
to the foregoing effect.
(c) The Company shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or
prior to the Effective Date, and the Acquiror shall have received a
certificate signed on behalf of the Company by the Chief Executive Officer
and the co-Principal Financial Officers of the Company, dated the
Effective Date, to the foregoing effect.
(d) The Acquiror shall have received an opinion, dated the Effective
Date, from each of Irell & Manella LLP, counsel to the Company, and
Vedder, Price, Kaufman & Kammholz, special counsel to the Company,
covering the matters set forth on Annex 2 and Annex 3, respectively, and
containing in each case, such customary assumptions, qualifications and
limitations as are reasonably acceptable to the Acquiror. As to any matter
in such opinions which involves matters of fact or matters relating to
laws other than the law of the State of California, the General
Corporation Law of the State of Delaware or federal securities or banking
law, such counsel may rely upon the certificates of officers and directors
of the Company and of public officials (as to matters of fact) and
opinions of local counsel (as to matters of law), reasonably acceptable to
the Acquiror, provided a copy of each such certificate and reliance
opinion shall be attached as an exhibit to the opinion of such counsel.
(e) Acquiror shall have received from the Company, to the extent
necessary under the relevant option or warrant agreements, the written
consent, in form and substance reasonably satisfactory to Acquiror, of all
holders of options or warrants to purchase Company Common Stock (as set
forth in the Company Disclosure Letter) to the termination of such options
(to the extent not exercised prior to the Effective Time) in accordance
with the provisions of Section 1.5 hereof.
SECTION 5.3. Conditions to the Obligation of the Company. The obligation
of the Company to effect the Merger shall be subject to the satisfaction or
waiver prior to the Effective Time of the following additional conditions:
(a) The representations and warranties of the Acquiror set forth in this
Plan shall be true and correct in all material respects as of the date of
this Plan and (except to the extent such representations and warranties
speak as of an earlier date) as of the Effective Date as though made on
and as of the Effective Date. The Company shall have received a
certificate signed on behalf of the Acquiror by the Chief Executive
Officer and the Chief Financial Officer of the Acquiror, dated the
Effective Date, to the foregoing effect.
(b) The Acquiror shall have performed, in all material respects, each of
its covenants and agreements contained in this Plan. The Company shall
have received a certificate signed by the Chief
A-26
<PAGE>
Executive Officer and the Chief Financial Officer of the Acquiror, dated
the Effective Date, to the foregoing effect documentary evidence
reasonably satisfactory to the Company, dated the Effective Date,
certifying that the Acquiror has sufficient funds to pay the aggregate
Merger Consideration.
(c) The Registration Statement shall have been declared effective by the
OTS; and the OTS shall not have issued any order preventing or suspending
the use of the Registration Statement or the delivery of the Secondary
Participation Interests to the Exchange Agent or the holders of Company
Common Stock.
(d) The Company shall have received an opinion, dated the Effective Date,
from each of Skadden Arps Slate Meagher & Flom, counsel to the Acquiror
and Merger Sub, and in-house counsel to the Acquiror, covering the matters
set forth on Annex 4 and Annex 5, respectively, and containing in each
case such customary assumptions, qualifications and limitations as are
reasonably acceptable to the Company. As to any matter in such opinions
which involves matters of fact or matters relating to laws other than the
General Corporation Law of the State of Delaware or federal securities or
banking law, such counsel may rely upon the certificates of officers and
directors of the Acquiror or Merger Sub and of public officials (as to
matters of fact) and opinions of local counsel (as to matters of law),
reasonably acceptable to the Company, provided a copy of each such
reliance certificate and opinion shall be attached as an exhibit to the
opinion of such counsel.
ARTICLE VI. TERMINATION
SECTION 6.1. Termination. This Plan may be terminated, and the Merger
abandoned, prior to the Effective Date, either before or after its approval
by the stockholders of the Company:
(a) by the mutual consent of the Acquiror and the Company in writing, if
the board of directors of each so determines by vote of a majority of the
members of its entire board;
(b) by the Acquiror or the Company by written notice to the other party
if either (i) any request or application for a Requisite Regulatory
Approval shall have been denied or (ii) any Governmental Entity of
competent jurisdiction shall have issued a final, unappealable order
enjoining or otherwise prohibiting consummation of the transactions
contemplated by this Plan;
(c) by the Acquiror or the Company, if its board of directors so
determines by vote of a majority of the members of its entire board, in
the event that the Merger is not consummated by March 31, 1997 unless
failure to so consummate by such time is due to the breach of any material
representation, warranty or covenant contained in this Plan by the party
seeking to terminate; provided, however, that in the event the Merger is
not consummated by March 31, 1997, as a result of the failure to obtain
Requisite Regulatory Approval for reasons entirely unrelated to the
financing of the transaction, the capital structure of Acquiror or Merger
Sub, the adequacy or Merger Sub's financial condition and/or the
prospective effect or such financing, structure or condition on the Bank,
the Acquiror may extend the termination date set forth herein to June 30,
1997;
(d) by the Acquiror or the Company (provided that the Company shall not
be entitled to terminate this Plan pursuant to this paragraph (d) if it
shall be in material breach of any of its obligations under Section 4.11)
if any approval of the stockholders of the Company required for the
consummation of the Merger shall not have been obtained by reason of the
failure to obtain the required vote at a duly held meeting of such
stockholders or at any adjournment or postponement thereof;
(e) by the Acquiiror or the Company (provided that the terminating party
is not then in material breach of any representation, warranty, covenant
or other agreement contained herein) if there shall have been a material
breach of any of the representations or warranties set forth in this Plan
on the part of the other party, which breach is not cured within thirty
days following written notice to the party committing such breach, or
which breach, by its nature, cannot be cured prior to the Effective Time,
unless such breach is waived by the non-breaching party; provided,
however, that neither party shall have the right to terminate this Plan
pursuant to this Section 6.1(e) unless the breach of representation or
warranty, together with all other such breaches, would entitle the party
receiving such representation not to consummate the transactions
contemplated hereby pursuant to Section
A-27
<PAGE>
5.2(b) (in the case of a breach of representation or warranty by the
Company) or Section 5.3(a) (in the case of a breach of representation or
warranty by the Acquiror);
(f) by the Acquiror or the Company (provided that the terminating party
is not then in material breach of any representation, warranty, covenant
or other agreement contained herein) if there shall have been a material
breach of any of the covenants or agreements set forth in this Plan on the
part of the other party, which breach shall not have been cured or is
incapable of being cured within thirty days following receipt by the
breaching party of written notice of such breach from the other party
hereto; or
(g) by the Acquiror, if the Board of Directors of the Company does not
publicly recommend in the Proxy Statement that the Company's stockholders
approve and adopt this Plan or if, after recommending in the Proxy
Statement that stockholders approve and adopt this Plan, the Board of
Directors of the Company shall have withdrawn, modified or amended such
recommendation in any respect adverse to the Acquiror.
SECTION 6.2. Effect of Termination. In the event of the termination of
this Plan by either the Acquiror or the Company, as provided above, this Plan
shall thereafter become void and there shall be no liability on the part of
any party hereto or their respective officers or directors, except that (i)
the next to the last sentence of Section 4.4 and Sections 6.2, 8.2 and 8.6
shall survive any termination of this Agreement and (ii) notwithstanding
anything to the contrary contained in this Agreement, no party shall be
relieved or released from any liabilities or damage arising out if its
willful breach of any provisions of this Plan.
ARTICLE VII. EFFECTIVE DATE AND EFFECTIVE TIME
SECTION 7.1. Effective Date and Effective Time. On such date as Acquiror
selects, which shall be within 30 days after the last to occur of the
expiration of all applicable waiting periods in connection with the Requisite
Regulatory Approvals and the satisfaction or waiver of all other conditions
to the consummation of this Plan (other than those conditions relating to the
receipt of officer's certificates or attorneys' opinions), or on such earlier
or later date as may be agreed in writing by the parties, the Certificate of
Merger shall be executed in accordance with all appropriate legal
requirements and shall be filed as required by law, and the Merger provided
for herein shall become effective upon such filing or on such date as may be
specified in such Certificate of Merger. The date of such filing or such
later effective date is herein called the "Effective Date". The "Effective
Time" or the Merger shall be the time of such filing or such other time as
set forth in such Certificate of Merger.
ARTICLE VIII. OTHER MATTERS
SECTION 8.1. Interpretation. When a reference is made in this Plan to
Sections or Annexes, such reference shall be to a Section of, or Annex to,
this Plan unless otherwise indicated. The table of contents, tie sheet and
headings contained in this Plan are for ease of reference only and shall not
affect the meaning or interpretation of this Plan. Whenever the words
"included", or "including" are used in this Plan, they shall be deemed
followed by the words "without limitation". Any singular term in this Plan
shall be deemed to include the plural, and any plural term the singular.
SECTION 8.2. Survival. Only those agreements and covenants of the parties
that are by their terms applicable in whole or in part after the Effective
Time shall survive the Effective Time. All other agreements and covenants and
all representations and warranties shall be deemed to be conditions of the
Plan and shall not survive the Effective Time.
SECTION 8.3. Waiver. Prior to the Effective Time, any provision of this
Plan may be: (i) waived by the party benefited by the provision; or (ii)
amended or modified at any time by an agreement in writing between the
parties hereto approved by their respective boards of directors, except that,
after the vote by the stockholders of the Company, no amendment may be made
that would contravene any provision of the State Corporation Law.
A-28
<PAGE>
SECTION 8.4. Counterparts. This Plan may be executed in counterparts each
of which shall be deemed to constitute an original, but all of which together
shall constitute one and the same instrument.
SECTION 8.5. Governing Law. This Plan shall be governed by, and
interpreted in accordance with, the laws of the State of Delaware without
regard to the conflict of law principles thereof. The parties hereby
irrevocably submit to the jurisdiction of the courts of the State of Delaware
and the Federal courts of the United States of America located in the State
of Delaware solely in respect of the interpretation and enforcement of the
provisions of this Plan, the Option Agreement and of the documents referred
to in this Plan and the Option Agreement and in respect of the transaction
contemplated herein and therein, and hereby waive, and agree not to assert,
as a defense in any action, suit or proceeding for the interpretation or
enforcement hereof or of any such document, that is not subject thereto or
that such action, suit or proceeding may not be brought or is not
maintainable in said courts or that the venue thereof may not be appropriate
or that this Plan and the Option Agreement or any such document may not be
enforced in or by such courts, and the parties hereto irrevocably agree that
all claims with respect to such action or proceeding shall be heard and
determined in such a Delaware State or Federal court. The parties hereby
consent to and grant any such court jurisdiction over the person of such
parties and over the subject matter of such dispute and agree that mailing of
process or other papers in connection with any such action or proceeding in
the manner provided in Section 8.7 or in such other manner as may be
permitted by law, shall be valid and sufficient service thereof.
SECTION 8.6. Expenses. Without limiting or affecting the remedies
available to the parties hereunder, each party hereto will bear all expenses
incurred by it in connection with this Plan and the transactions contemplated
hereby.
A-29
<PAGE>
SECTION 8.7. Notices. (All notices, requests, acknowledgements and other
communications hereunder to a party shall be in writing and shall be deemed
to have been duly given when delivered by hand, telecopy, telegram or telex
(confirmed in writing) to such party at its address set forth below or such
other address as such party may specify by notice to the other party hereto.
If to the Company or the Bank, to:
Cal Fed Bancorp Inc.
5700 Wilshire Boulevard
Los Angeles, California 90036
(213) 932-2900
(213) 932-2869 (Fax)
Attention:
Edward G. Harshfield
President and Chief Executive Officer
With copies to:
Douglas J. Wallis, Esq.
Executive Vice President, General Counsel and Secretary
Cal Fed Bancorp Inc.
5700 Wilshire Boulevard
Los Angeles, California 90036
(213) 932-2900
(213) 932-2869 (Fax)
Kenneth Heitz, Esq.
Irell & Manella LLP
1800 Avenue of the Stars, Suite 900
Los Angeles, California 90067
(312) 277-1010
(310) 203-7199 (Fax)
Robert Stucker, Esq.
Vedder, Price, Kaufman & Kammholz
222 North LaSalle Street
Chicago, Illinois 60601
(312) 609-7500
(312) 609-5005 (Fax)
If to the Acquiror or Merger Sub, to:
First Nationwide Bank, A Federal Savings Bank
135 Main Street, 20th Floor
San Francisco, CA 94105
(415) 904-0167
(415) 904-0190 (Fax)
Attention:
Carl B. Webb
President and Chief Operating Officer
With a copy to:
Christie S. Flanagan, Esq.
Executive Vice President and General Counsel
First Nationwide Bank, A Federal Savings Bank
200 Crescent Court, Suite 1350
Dallas, TX 75201
(214) 871-5188
(214) 871-5199 (Fax)
A-30
<PAGE>
SECTION 8.8. Entire Agreement; Binding Agreement; Third Parties. This
Plan, together with the Option Agreement, the Benefits Letter and the
Disclosure Letters and all agreements referred to herein, including the
Confidentiality Agreement, represents the entire understanding of the parties
hereto with reference to the transactions contemplated hereby and supersedes
any and all other oral or written agreements heretofore made. All terms and
provisions of the Plan shall be binding upon and shall inure to the benefit
of the parties hereto and their respective successors and assigns. Except as
to Section 4.7 and Section 4.20(iii), nothing in this Plan is intended to
confer upon any other person any rights or remedies of any nature whatsoever
under or by reason of this Plan.
SECTION 8.9. Assignment. This Plan may not be assigned by any party hereto
without the written consent of the other parties.
SECTION 8.10. Severability. The provisions of this Plan shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Plan, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may
be valid and enforceable, the intent and purpose of such invalid or
unenforceable provision and (b) the remainder of this Plan and the
application of such provision to other persons or circumstances shall not be
affected by such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or
the application thereof, in any other jurisdiction.
SECTION 8.11. Captions. The Article, Section and paragraph captions herein
are for convenience of reference only, do not constitute part of this Plan
and shall not be deemed to limit or otherwise affect any of the provisions
hereof.
A-31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Plan to be
executed by their duly authorized officers as of the day and year first above
written.
FIRST NATIONWIDE HOLDINGS INC.,
a Delaware corporation
By: /s/ Glenn P. Dickes
-----------------------------------------
Name: Glenn P. Dickes
Title: Vice President
CFB HOLDINGS, INC.
By: /s/ Glenn P. Dickes
-----------------------------------------
Name: Glenn P. Dickes
Title: Vice President
CAL FED BANCORP INC.,
a Delaware corporation
By:
-----------------------------------------
Name: Edward G. Harshfield
Title: President and Chief Executive
Officer
By:
-----------------------------------------
Name: Douglas J. Wallis
Title: Executive Vice President,
Secretary
and General Counsel
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
By:
-----------------------------------------
Name: Edward G. Harshfield
Title: President and Chief Executive
Officer
By:
-----------------------------------------
Name: Douglas J. Wallis
Title: Executive Vice President,
Secretary
and General Counsel
A-32
<PAGE>
SECTION 8.9. Assignment. This Plan may not be assigned by any party
hereto without the written consent of the other parties.
SECTION 8.10. Severability. The provisions of this Plan shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof. If any
provision of this Plan, or the application thereof to any person or any
circumstance, is invalid or unenforceable, (a) a suitable and equitable
provision shall be substituted therefor in order to carry out, so far as may
be valid and enforceable, the intent and purpose of such invalid or
unenforceable provision and (b) the remainder of this Plan and the
application of such provision to other persons or circumstances shall not be
affected by such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of such provision, or
the application thereof, in any other jurisdiction.
SECTION 8.11. Captions. The Article, Section and paragraph captions herein
are for convenience of reference only, do not constitute part of this Plan
and shall not be deemed to limit or otherwise affect any of the provisions
hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Plan to be
executed by their duly authorized officers as of the day and year first above
written.
FIRST NATIONWIDE HOLDINGS INC.,
a Delaware corporation
By:
-----------------------------------------
Name: Glenn P. Dickes
Title: Vice President
CFB HOLDINGS, INC.
By:
-----------------------------------------
Name: Glenn P. Dickes
Title: Vice President
CAL FED BANCORP INC.,
a Delaware corporation
By: /s/ Edward G. Harshfield
-----------------------------------------
Name: Edward G. Harshfield
Title: President and Chief Executive Officer
By: /s/ Douglas J. Wallis
-----------------------------------------
Name: Douglas J. Wallis
Title: Executive Vice President,
Secretary
and General Counsel
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
By: /s/ Edward G. Harshfield
-----------------------------------------
Name: Edward G. Harshfield
Title: President and Chief Executive
Officer
By: /s/ Douglas J. Wallis
-----------------------------------------
Name: Douglas J. Wallis
Title: Executive Vice President,
Secretary
and General Counsel
A-33
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data gives effect to the Acquisitions,
the Branch Sales and the issuances of the Series A Preferred Shares, the
Holdings Preferred Stock, the Holdings 9 1/8% Senior Subordinated Notes, the
(Parent) Holdings 12 1/2% Senior Notes and the 10 5/8% Notes. The Branch
Purchases and the Home Federal Acquisition have not been reflected in the pro
forma financial data because such transactions are not material either
individually or in the aggregate.
The following pro forma financial data as of and for the nine months ended
September 30, 1996 are based on (i) the historical consolidated statement of
financial condition of (Parent) Holdings giving effect to the Cal Fed
Acquisition and the issuances of the Series A Preferred Shares and the 10
5/8% Notes as if such transactions occurred on September 30, 1996, and (ii)
the historical consolidated statement of operations of (Parent) Holdings for
the nine months ended September 30, 1996 giving effect to the Cal Fed
Acquisition, the SFFed Acquisition, the LMUSA 1996 Purchase, the Branch Sales
and the issuances of the Series A Preferred Shares, the Holdings Preferred
Stock, the Holdings 9 1/8% Senior Subordinated Notes, the (Parent) Holdings
12 1/2% Senior Notes and the 10 5/8% Notes as if such transactions occurred
on January 1, 1995. The following pro forma financial data for the year ended
December 31, 1995 is based on the historical consolidated statement of
operations of (Parent) Holdings for the year ended December 31, 1995 giving
effect to the Acquisitions, the Branch Sales and the issuances of the Series
A Preferred Shares, the Holdings Preferred Stock, the Holdings 9 1/8% Senior
Subordinated Notes, the (Parent) Holdings 12 1/2% Senior Notes and the 10
5/8% Notes as if such transactions occurred on January 1, 1995. The pro forma
adjustments are based on available information and upon certain assumptions
that management believes are reasonable under the circumstances. The
Acquisitions are accounted for under the purchase method of accounting. Under
this method of accounting, the purchase price has been allocated to the
assets and liabilities acquired based on preliminary estimates of fair value.
The actual fair value is determined as of the consummation of each of the
Acquisitions. The pro forma financial data do not necessarily reflect the
results of operations or the financial position of (Parent) Holdings that
actually would have resulted had the Acquisitions, the Branch Sales and the
issuances of the Series A Preferred Shares, the Holdings Preferred Stock, the
Holdings 9 1/8% Senior Subordinated Notes, the (Parent) Holdings 12 1/2%
Senior Notes and the 10 5/8% Notes occurred at the dates indicated, or
project the results of operations or financial position of (Parent) Holdings
for any future date or period.
The pro forma financial data should be read in conjunction with the notes
accompanying the Pro Forma Financial Data. In addition, the following pro
forma financial data should be read in conjunction with the Consolidated
Financial Statements of (Parent) Holdings and the notes thereto, the
Consolidated Financial Statements of SFFed and the notes thereto and the
Consolidated Financial Statements of Cal Fed and California Federal and the
notes thereto, as filed with each Company's Annual Report on Form 10-K.
Capitalized terms used but not defined herein have the meaning ascribed to
them in the Glossary of Terms which begins on P-33 to this Exhibit 99.1.
P-1
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAL FED ACQUISITION (A)
-------------------------------------------------------------
(PARENT)
HOLDINGS CAL FED VALUATION PRO FORMA CAL FED PRO
HISTORICAL HISTORICAL(i) ADJUSTMENTS(ii) ADJUSTMENTS(iii) FORMA
------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents . $ 271,218 $ 197,900 $ 0 $(992,839)(2) $ (794,939)
Securities ................. 572,210 1,444,400 (741)(1) (300,000)(2) 1,143,659
Mortgage-backed securities 3,360,527 2,040,800 4,768 (1) -- 2,045,568
Loans receivable, net ..... 11,307,216 10,055,100 (31,685)(1) -- 10,023,415
Office premises and
equipment, net ............ 92,088 64,000 (56,633)(1) -- 7,367
Mortgage servicing rights,
net ....................... 406,669 4,866 27,392 (1) -- 32,258
Core deposit and other
intangible assets ......... 144,782 14,580 (14,580)(1) 531,094 (1) 531,094
Other assets ............... 832,093 305,054 185,720 (1) 0 490,774
------------- ------------- --------------- -------------- -------------
Total assets ............... $16,986,803 $14,126,700 $114,241 $(761,745) $13,479,196
============= ============= =============== ============== =============
LIABILITIES AND
STOCKHOLDER'S EQUITY
Deposits ................... $ 8,799,990 $ 8,763,000 $ 3,839 (1) $ -- $ 8,766,839
Borrowings ................. 6,983,858 4,304,100 (2,043)(1) -- 4,302,057
Other liabilities .......... 430,364 232,500 5,300 (1) -- 237,800
------------- ------------- --------------- -------------- -------------
Total liabilities .......... 16,214,212 13,299,600 7,096 -- 13,306,696
------------- ------------- --------------- -------------- -------------
Minority interest .......... 613,547 172,500 -- -- 172,500
Stockholder's Equity:
Common stock .............. 1 49,400 -- (49,400)(3) --
Additional paid-in
capital .................. -- 841,000 -- (841,000)(3) --
Net unrealized holding
gain on securities ....... 28,069 -- -- -- --
Retained earnings
(deficit) ................ 130,974 (235,800) 107,145 (1) 128,655 (3) --
------------- ------------- --------------- -------------- -------------
Total stockholder's
equity ................... 159,044 654,600 107,145 (761,745) --
------------- ------------- --------------- -------------- -------------
Total liabilities, minority
interest and stockholder's
equity .................... $16,986,803 $14,126,700 $114,241 $(761,745) $13,479,196
============= ============= =============== ============== =============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
CAPITALIZATION(B) COMBINED
--------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . $ 555,000 (1) $ 31,279
Securities ................. -- 1,715,869
Mortgage-backed securities -- 5,406,095
Loans receivable, net ..... -- 21,330,631
Office premises and
equipment, net ............ -- 99,455
Mortgage servicing rights,
net ....................... -- 438,927
Core deposit and other
intangible assets ......... -- 675,876
Other assets ............... 20,000 (1) 1,342,867
--------------- -------------
Total assets ............... $ 575,000 $31,040,999
=============== =============
LIABILITIES AND
STOCKHOLDER'S EQUITY
Deposits ................... $ -- $17,566,829
Borrowings ................. (191,000)(2) 11,669,915
575,000 (1)
Other liabilities .......... -- 668,164
--------------- -------------
Total liabilities .......... 384,000 29,904,908
--------------- -------------
Minority interest .......... 200,000 (2) 986,047
Stockholder's Equity:
Common stock .............. -- 1
Additional paid-in
capital .................. (9,000)(2) (9,000)
Net unrealized holding
gain on securities ....... -- 28,069
Retained earnings
(deficit) ................ -- 130,974
--------------- -------------
Total stockholder's
equity ................... (9,000) 150,044
--------------- -------------
Total liabilities, minority
interest and stockholder's
equity .................... $ 575,000 $31,040,999
=============== =============
</TABLE>
- ------------
(A) See note (A) on page P-3.
(B) See note (B) on page P-6.
(i) Represents historical amounts obtained from Cal Fed's unaudited
financial statements.
(ii) Represents adjustments to (i) record Cal Fed's assets and liabilities
at preliminary estimates of their respective fair values and (ii) the
elimination of Cal Fed's historical intangible assets.
(iii) Represents adjustments to record (i) the purchase price of the Cal Fed
Acquisition, and (ii) the elimination of the equity of Cal Fed.
P-2
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION
(1) The Cal Fed Acquisition will be accounted for using the purchase method
of accounting. The total purchase cost will be allocated first to the
tangible and identifiable intangible assets and liabilities of Cal Fed
based on their respective fair values and the remainder will be allocated
to goodwill. The aggregate purchase price was determined as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price, as defined:
Shares outstanding at September 30, 1996 . 49,427,074
Options outstanding at September 30, 1996 1,355,140
------------
Total .................................. 50,782,214
Purchase price per share .................. $ 23.50
------------
Purchase price for outstanding shares .... $ 1,193,382
Exercise of options outstanding (a) ...... (10,800)
------------
Purchase price ............................ $ 1,182,582
Acquisition fees and expenses (b) ........ 110,257
------------
Total .................................. $ 1,292,839
============
</TABLE>
The following is a reconciliation of the common equity of Cal Fed to the
fair value of the net assets to be acquired by Holdings:
<TABLE>
<CAPTION>
<S> <C> <C>
Common equity of Cal Fed at September 30, 1996 .. $ 654,600
Fair value adjustments (c):
Securities ...................................... $ (741)
Mortgage-backed securities ...................... 4,768
Loans receivable, net ........................... (31,685)
Mortgage servicing rights ....................... 27,392
Office premises and equipment (d) ............... (56,633)
Litigation receivable, net (other assets) (e) .. 132,720
Other assets (f) ................................ 53,000
Deposit accounts ................................ (3,839)
Borrowings ...................................... 2,043
Other liabilities (g) ........................... (5,300)
Elimination of historical intangible assets .... (14,580)
----------
107,145 107,145
-----------
Fair value of net assets acquired ............... 761,745
Purchase cost ................................... 1,292,839
-----------
Excess of purchase cost over net assets acquired
("goodwill") ................................... $ 531,094
===========
</TABLE>
(a) Represents cash to be received by Cal Fed in settlement of stock
options and stock appreciation rights outstanding as of September 30,
1996 (1,355,140 options outstanding at an average price of $7.97 per
share).
P-3
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(A) CAL FED ACQUISITION (CONTINUED)
(b) Represents fees and costs consisting of the following:
<TABLE>
<CAPTION>
<S> <C>
Severance costs ....................................... $ 45,500
Pension plan termination costs ........................ 6,700
Conversion and contract termination costs ............. 33,257
Investment banking, legal and other professional costs 24,800
---------
$110,257
=========
</TABLE>
Severance costs were estimated based on (i) obligations assumed by
Holdings under Cal Fed's compensation agreements with eleven of its
executive officers; (ii) transaction bonuses to six Cal Fed executive
officers; (iii) severance benefits paid or payable pursuant to a letter
agreement between Cal Fed and Holdings for approximately 850 employees who
are not parties to separate employment agreements; and (iv) relocation
benefits for employees who have been offered employment opportunities in
northern California. The obligations of Holdings pursuant to items (i) and
(ii) above approximate $15.5 million and $10 million, respectively.
Non-contract employees are eligible to be paid three weeks of severance per
year of service, with a minimum payment of eight weeks severance. In
addition, 52 employees have guaranteed minimum severance payments, which
often exceed the three weeks per year of service. Holdings' termination
plan has been developed, and employees to be terminated have been so
notified. Termination dates are expected to fall within six months of the
consummation of the Cal Fed Acquisition.
Pension termination costs represent lump sum distributions which are
required under Cal Fed's defined benefit programs upon termination of such
plans. These amounts, totalling $4.2 million, have not been previously
accrued. In addition, the purchase agreement includes $2.5 million
allocated to an employee retention pool, established to provide additional
incentive to critical employees to remain with Cal Fed until the Cal Fed
Acquisition was consummated.
The majority of conversion and contract costs of $33.3 million represents
costs and penalties expected to be incurred by Holdings in connection with
the cancellation of outstanding contracts. Such contracts consist primarily
of data processing services and real property lease arrangements. This
amount also includes the transfer cost of mortgage loan servicing,
estimated at $40 per loan, based on the Bank's historical experience.
(c) Fair value adjustments are amortized against (accreted to) net income
as follows:
<TABLE>
<CAPTION>
PERIOD OF AMORTIZATION
ITEM METHOD OF AMORTIZATION (ACCRETION) (ACCRETION)
- ------------------------------ ------------------------------------------------ --------------------------
<S> <C> <C>
Mortgage-backed securities Level yield method over effective terms of such 6 to 9 years
assets, considering estimated prepayments
Loans receivable Level yield method over effective terms of such 2 to 12 years
assets, considering estimated prepayments
Mortgage servicing rights Level yield method over effective terms of such 2 to 7 years
assets, considering estimated prepayments
Goodwill Straight-line method 15 years
Deposit accounts Level yield method over stated terms of such 1 to 6 years
liabilities
Borrowings Level yield method over stated terms of such 1 to 9 years
liabilities
</TABLE>
P-5
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION (CONTINUED)
With respect to goodwill, representing the excess of the purchase price
over the fair value of tangible assets acquired and liabilities assumed
(the "Excess"), Holdings does not currently anticipate that any of the
Excess will be allocated to "identifiable intangible assets" (i.e., core
deposit intangible) in connection with the Cal Fed Acquisition. Based on
prior core deposit intangible studies, management estimates that the value
of California deposits would approximate $135 million, at September 30,
1996. The average life of this intangible, based on historical experience,
is approximately five years. On the other hand, goodwill related to
financial institutions is, by industry standards, typically amortized over
a 25 year period. Holdings has elected instead to amortize the Excess over
15 years. This treatment is predicated on the fact that 15 years is a
reasonable approximation of the combined lives of a separately determinable
core deposit intangible and the remaining Excess, and that non-segregation
of these assets would not have a significant effect on Holdings' financial
statements.
(d) Includes (i) $45.7 million in fair value adjustments to reflect
obligations assumed under master lease arrangements on Cal Fed's two
corporate facilities at market rental rates, net of sub-lease income;
(ii) fair value adjustments to reflect lease obligations on branch
facilities at market rates; and (iii) fair value adjustments related
to certain data processing hardware and software.
(e) Represents the estimated after-tax recovery that will inure to
Holdings from the California Federal Litigation, net of amounts
payable to holders of Litigation Interests and the Secondary
Litigation Interests. The estimated fair value of such litigation
asset was determined based on the following methodology:
CALCULATION OF ESTIMATED GROSS PROCEEDS (WHOLE DOLLARS)
<TABLE>
<CAPTION>
<S> <C>
CALGZ CLOSING PRICE AT SEPTEMBER 30, 1996 $ 11.375
CALGZ Shares Outstanding ................. 5,075,549
---------------
CALGZ Total Value ........................ $ 57,734,370
CALGZ Share of Litigation Proceeds ...... 25.37775%
---------------
Total Value, After-tax Proceeds .......... $227,499,955
Gross-up for Tax Effect (1-40.2%) ....... 59.80%
---------------
$380,434,708(i)
Subjective Discount (ii) ................. 57,065,206
---------------
Estimated Gross Proceeds ................. $323,369,502
===============
</TABLE>
(i) No adjustment for expenses included due to immateriality to total
proceeds.
(ii) Subjective discount of approximately 15% was applied in
consideration of the variability of the market prices of the CALGZ
interests over time (which may be attributed in part to the
market's assumptions concerning, among other things, the time
frame for the final settlement of the California Federal
Litigation, the related discount for the time value of money, and
past and future expenses incurred in pursuing the California
Federal Litigation). After discount, estimated gross proceeds
represent a CALGZ price of $9.67 per share.
P-5
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION (CONTINUED)
DISTRIBUTION OF PROCEEDS
<TABLE>
<CAPTION>
<S> <C>
Estimated Gross Proceeds .................... $ 323,370
Tax Liability, Estimated at 40.2% ........... 129,995
-----------
Total After-tax Proceeds .................... $ 193,375
===========
Distribution to Class A Certificate Holders $ 193,375
CALGZ Share of After-tax Proceeds ........... 25.37775%
-----------
Total Distribution to Class A Holders ...... $ 49,074
===========
Remaining After-tax Proceeds ................ $ 144,301
Holdings Initial Distribution ............... 125,000
-----------
Remainder for Secondary Distribution ....... $ 19,301
===========
Holdings--40% Distribution .................. $ 7,720
Class B Certificate Holders--60%
Distribution ............................... 11,581
-----------
Total Secondary Distribution ............... $ 19,301
===========
Holdings Distribution:
Initial Distribution ....................... $ 125,000
40% Secondary Distribution ................. 7,720
-----------
Total Holdings Distribution ............... $ 132,720
===========
</TABLE>
Once the allocation of purchase price has been made, Holdings will
incur periodic charges against earnings for any market value declines
in the carrying value of this asset. Market value will be determined
based upon the market value of the CALGZ and Secondary Litigation
Interests, and will also consider a decline in value related to
factors of which management is aware which may not be reflected in the
market values of these securities. Any increases in market value above
the original cost basis established through purchase accounting will
be deferred until the final realization of the settlement.
(f) Includes fair value adjustments to reflect (i) federal income tax and
interest receivable, net of California franchise tax and interest
payable, and (ii) investor advances accounts related to the loan
servicing operation.
(g) Includes fair value adjustments to deficit escrow accounts.
(2) Represents payment by Holdings in connection with the Cal Fed
Acquisition. The cash portion of the purchase price will be obtained by
liquidating certain of Cal Fed's assets at book value, as follows:
<TABLE>
<CAPTION>
<S> <C>
Existing cash .................................................... $ 992,839
Sale of securities available for sale and proceeds from
securities purchased under agreements to resell ................. 300,000
-----------
Purchase Price ................................................. $1,292,839
===========
</TABLE>
(3) Represents the elimination of the common equity components of Cal Fed of
$761,745.
<PAGE>
(B) CAPITALIZATION
(1) Represents the issuance of the 10 5/8% Notes:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the 10 5/8%
Notes ..................................... $575,000
Less: deferred issuance costs .............. (20,000)
----------
Net proceeds .............................. $555,000
==========
</TABLE>
(2) Represents the proceeds from the issuance of Series A Preferred Shares:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Series A Preferred Shares $200,000
Less: issuance costs (additional paid-in capital) ......... (9,000)
----------
Net proceeds .............................................. $191,000
==========
</TABLE>
Net proceeds will be used to reduce borrowings of the Bank.
P-6
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA 1996 CAL FED
(PARENT) ACQUISITION PURCHASE PRO ACQUISITION
HOLDINGS PRO FORMA FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B) TOTALS (C)
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .................. $716,523 $21,821 $ -- $579,125
Securities ........................ 24,875 1,017 -- 80,200
Mortgage-backed securities ........ 191,602 3,174 -- 127,000
Other interest income ............. 1,413 -- -- (21,792)
------------ ------------- ------------ -------------
Total interest income ............ 934,413 26,012 -- 764,533
INTEREST EXPENSE:
Deposits .......................... 323,246 12,401 -- 318,700
Borrowings ........................ 316,128 6,114 (848) 173,525
--
------------ ------------- ------------ -------------
Total interest expense ........... 639,374 18,515 (848) 492,225
Net interest income ............... 295,039 7,497 848 272,308
Provision for loan losses ......... 29,700 500 -- 30,800
------------ ------------- ------------ -------------
Net interest income after
provision for loan losses ........ 265,339 6,997 848 241,508
NONINTEREST INCOME:
Customer banking fees ............. 34,356 199 -- 36,300
Mortgage banking operations ...... 92,150 191 3,484 3,500
Net gain (loss) on sales of assets 414,413 (1,140) -- 1,800
Other ............................. 54,542 239 51 15,500
------------ ------------- ------------ -------------
Total noninterest income ......... 595,461 (511) 3,535 57,100
NONINTEREST EXPENSE:
Compensation and benefits ......... 155,976 1,257 2,070 50,994
Other ............................. 224,075 2,616 1,099 175,824
------------ ------------- ------------ -------------
Total noninterest expense ........ 380,051 3,873 3,169 226,818
------------ ------------- ------------ -------------
Income (loss) before income taxes
and minority interest ............ 480,749 2,613 1,214 71,790
Income tax (benefit) expense ..... (81,448) 369 120 11,439
------------ ------------- ------------ -------------
Income (loss) before minority
interest ......................... 562,197 2,244 1,094 60,351
MINORITY INTEREST ................. 143,535 449 219 27,190
------------ ------------- ------------ -------------
Net income (loss) ................. $418,662 $ 1,795 $ 875 $ 33,161
============ ============= ============ =============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
BRANCH SALES
PRO FORMA PRO FORMA PRO FORMA
TOTALS(D) ADJUSTMENTS (E) COMBINED
-------------- --------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable .................. $ (110) $ -- $1,317,359
Securities ........................ -- -- 106,092
Mortgage-backed securities ........ -- -- 321,776
Other interest income ............. -- -- (20,379)
-------------- --------------- ------------
Total interest income ............ (110) -- 1,724,848
INTEREST EXPENSE:
Deposits .......................... (40,742) -- 613,605
Borrowings ........................ 44,835 (7,819) (1) 595,748
63,813 (2)
-------------- --------------- ------------
Total interest expense ........... 4,093 55,994 1,209,353
Net interest income ............... (4,203) (55,994) 515,495
Provision for loan losses ......... -- -- 61,000
-------------- --------------- ------------
Net interest income after
provision for loan losses ........ (4,203) (55,994) 454,495
NONINTEREST INCOME:
Customer banking fees ............. (3,965) -- 66,890
Mortgage banking operations ...... -- -- 99,325
Net gain (loss) on sales of assets 10 -- 415,083
Other ............................. (163) -- 70,169
-------------- --------------- ------------
Total noninterest income ......... (4,118) -- 651,467
NONINTEREST EXPENSE:
Compensation and benefits ......... (4,337) -- 205,960
Other ............................. (3,387) 2,972 (3) 403,199
-------------- --------------- ------------
Total noninterest expense ........ (7,724) 2,972 609,159
-------------- --------------- ------------
Income (loss) before income taxes
and minority interest ............ (597) (58,966) 496,803
Income tax (benefit) expense ..... (59) (3,736)(4) (73,315)
-------------- --------------- ------------
Income (loss) before minority
interest ......................... (538) (55,230) 570,118 (6)
MINORITY INTEREST ................. (108) 13,227 (5) 184,512
-------------- --------------- ------------
Net income (loss) ................. $ (430) $(68,457) $ 385,606
============== =============== ============
</TABLE>
- ------------
(A) See note (A) on page P-8.
(B) See note (B) on page P-11.
(C) See note (C) on page P-13.
(D) See note (D) on page P-16.
(E) See note (E) on page P-18.
P-7
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
(A) SFFED ACQUISITION
- -----------------------------------
ONE MONTH ENDED JANUARY 31, 1996 (a)
-------------------------------------------------------------
SFFED
ACQUISITION
VALUATION PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS (b) ADJUSTMENTS (c) TOTALS
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ................... $20,524 $ 1,297 (1) $ -- $21,821
Securities ......................... 1,017 -- -- 1,017
Mortgage-backed securities ......... 2,976 198 (1) -- 3,174
Other interest income .............. -- -- -- --
------------ --------------- --------------- -------------
Total interest income ............. 24,517 1,495 -- 26,012
INTEREST EXPENSE:
Deposits ........................... 11,693 708 (1) -- 12,401
Borrowings ......................... 5,861 253 (1) -- 6,114
------------ --------------- --------------- -------------
Total interest expense ............ 17,554 961 -- 18,515
------------ --------------- --------------- -------------
Net interest income ................ 6,963 534 -- 7,497
Provision for loan losses .......... 500 -- -- 500
------------ --------------- --------------- -------------
Net interest income after provision
for loan losses ................... 6,463 534 -- 6,997
NONINTEREST INCOME:
Customer banking fees .............. 199 -- -- 199
Mortgage banking operations ....... 557 (366)(1) -- 191
Net gain (loss) on sales of assets (1,140) -- -- (1,140)
Other .............................. 239 -- -- 239
------------ --------------- --------------- -------------
Total noninterest income .......... (145) (366) -- (511)
NONINTEREST EXPENSE:
Compensation and benefits .......... 6,041 -- (4,784)(3) 1,257
Other .............................. 4,315 1,076 (2) (2,775)(4) 2,616
------------ --------------- --------------- -------------
Total noninterest expense ......... 10,356 1,076 (7,559) 3,873
------------ --------------- --------------- -------------
Income (loss) before income taxes
and minority interest ............. (4,038) (908) 7,559 2,613
Income tax (benefit) expense ...... (4,993) -- 5,362 (5) 369
------------ --------------- --------------- -------------
Net income (loss) before minority
interest .......................... 955 (908) 2,197 2,244
MINORITY INTEREST .................. -- -- 449 (6) 449
------------ --------------- --------------- -------------
Net income (loss) .................. $ 955 $ (908) $ 1,748 $ 1,795
============ =============== =============== =============
</TABLE>
- ------------
(a) The SFFed Acquisition was consummated on February 1, 1996. Historical
results represent unaudited results of operations of SFFed for the
month ended January 31, 1996.
(b) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization of
historical goodwill.
(c) Represents adjustments to reflect (i) the elimination of certain
noninterest expense due to consolidation of SFFed operations with First
Nationwide's and (ii) the elimination of certain historical noninterest
expense recorded by SFFed as a result of the acquisition by First
Nationwide, and (iii) income taxes relative to the SFFed Acquisition.
P-8
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
(A) SFFED ACQUISITION (CONTINUED)
IMPACT ON INCOME BEFORE
INCOME TAXES AND MINORITY
INTEREST INCREASE
(DECREASE)
-------------------------
<S> <C>
(1) Represents amortization or accretion of fair value adjustments for the one
month ended January 31, 1996 as follows:
Loans receivable, net ......................................................... $ 1,297
Mortgage-backed securities .................................................... 198
Deposits ...................................................................... (708)
Borrowings .................................................................... (253)
Mortgage servicing rights ..................................................... (366)
IMPACT ON INCOME
BEFORE INCOME TAXES
AND MINORITY INTEREST
INCREASE (DECREASE)
-------------------------
(2) Represents adjustments for the one month ended January 31, 1996 consisting of
the following:
Amortization of fair value adjustments--amortization of goodwill .............. $(1,131)
Elimination of amortization of SFFed's historical goodwill .................... 55
-------------------------
$(1,076)
=========================
(3) Represents adjustments to compensation and benefits expense for the one month ended January 31, 1996
relating to the consolidation of SFFed's operations into those of (Parent) Holdings:
Decrease in compensation and benefits due to the reduction in headcount from
620 at January 1, 1996 to approximately 260 after the consummation of the SFFed
Acquisition. Substantially all retained employees represent retail branch
personnel. ................................................................ $ 1,586
Elimination of certain nonrecurring expenses recorded by SFFed related to
the acquisition by (Parent) Holdings:
Accrual for severance for employees noticed for termination in January
1996 .................................................................... 2,459
Directors retirement plan and fees ...................................... 388
Expense related to restricted stock options ............................. 351
-------------------------
$ 4,784
=========================
</TABLE>
P-9
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
(4) Represents adjustments to other noninterest expense relating to the
consolidation of SFFed's operations into those of (Parent) Holdings.
Substantially all of SFFed's operations have been consolidated into the
existing operations of (Parent) Holdings, resulting in a reduction in
headcount of approximately 58% with the remaining personnel primarily
consisting of retail branch personnel. In addition, ten retail branches
have been closed. The estimates are based on the pro-rata portion of the
annual expense reduction computed for the year ended December 31, 1995.
<TABLE>
<CAPTION>
SFFED COST OF 1995
HISTORICAL ONGOING EXPENSE
COSTS OPERATIONS REDUCTION
------------ ------------ -----------
<S> <C> <C> <C>
Expense decreases due to consolidation:
Mortgage banking operations:
Occupancy expenses, including insurance ........... $ 1,329 $ 588 $ 741
Travel, automobile and employee dues .............. 282 67 215
Telecommunications, postage and supplies .......... 900 214 686
Other, net ........................................ 1,047 460 587
------------ ------------ -----------
Subtotal mortgage banking operations ............. $ 3,558 $ 1,329 $ 2,229
============ ============ ===========
Retail Banking operations--reductions due to
consolidation of ten retail branches and retail
operations center:
Occupancy expenses, including insurance ........... $11,220 $ 3,405 $ 7,815
SAIF assessment reduction based on lower historical
assessment rate for First Nationwide ............. 6,811 6,011 800
Travel, automobile and employee dues .............. 410 60 350
Telecommunications and data processing ............ 1,766 364 1,402
Postage and messenger costs ....................... 666 473 193
Other costs, net .................................. 216 108 108
------------ ------------ -----------
Subtotal retail banking operations ............... $21,089 $10,421 $10,668
============ ============ ===========
Overhead areas, including executive offices, legal,
human resources, information services, accounting,
and strategic planning areas:
Occupancy costs ................................... $ 1,316 $ -- $ 1,316
Data processing costs ............................. 2,848 1,000 1,848
Marketing and advertising expenses ................ 2,094 500 1,594
Other overhead costs .............................. 8,072 8,072 --
------------ ------------ -----------
Subtotal overhead areas .......................... $14,330 $ 9,572 $ 4,758
============ ============ ===========
Total decreases due to consolidation ............ $38,977 $21,322 $17,655
============ ============ ===========
Estimated impact on January 1996 (1/12 of 1995 Expense Reduction) ............... $ 1,471
Elimination of certain nonrecurring expenses recorded by SFFed related to the
acquisition by First Nationwide: ................................................
Retirement of office, premises and equipment ................................... 1,115
Directors and officers insurance premiums ...................................... 189
-----------
Total expense reduction for the month ended January 31, 1996 ................ $ 2,775
===========
(5) Represents amount necessary to adjust historical tax expense to the pro forma computation. Pro
forma tax expense for the month ended January 31, 1996 related to the SFFed Acquisition was
computed as follows:
Income before taxes ........................................................... $ 2,613
Add: permanent differences--amortization of goodwill .......................... 1,131
-----------
Taxable income ................................................................ $ 3,744
===========
Federal AMT, reduced, to the extent of 90%, by net operating loss carryovers .. $ 69
State taxes, at an assumed rate of 8% ......................................... 300
-----------
$ 369
===========
(6) Represents 20% minority interest relative to $2,244 in pro forma net income relating to the
SFFed Acquisition.
</TABLE>
P-10
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
(B) LMUSA 1996 PURCHASE
- ----------------------------------------------
ONE MONTH ENDED JANUARY 31, 1996(a)
---------------------------------------------------------------
LMUSA 1996
PRO FORMA PURCHASE PRO
HISTORICAL(a) ADJUSTMENTS(b) ADJUSTMENTS(c) FORMA TOTALS
------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .............................. $ -- $ -- $ -- $ --
Securities .................................... -- -- -- --
Mortgage-backed securities .................... -- -- -- --
Other interest income ......................... -- -- -- --
------------- -------------- -------------- ----------------
Total interest income ....................... -- -- -- --
INTEREST EXPENSE:
Deposits ...................................... -- -- -- --
Borrowings .................................... -- -- (848)(2) (848)
------------- -------------- -------------- ----------------
Total interest expense ...................... -- -- (848) (848)
------------- -------------- -------------- ----------------
Net interest income ........................... -- -- 848 848
Provision for loan losses ..................... -- -- -- --
------------- -------------- -------------- ----------------
Net interest income after provision for loan
losses ....................................... -- -- 848 848
NONINTEREST INCOME:
Customer banking fees ......................... -- -- -- --
Mortgage banking operations ................... 5,363 (1,879)(1) -- 3,484
Net gain (loss) on sales of assets ............ -- -- -- --
Other ......................................... 51 -- -- 51
------------- -------------- -------------- ----------------
Total noninterest income .................... 5,414 (1,879) -- 3,535
NONINTEREST EXPENSE:
Compensation and benefits ..................... 2,070 -- -- 2,070
Other ......................................... 1,940 -- (841)(3) 1,099
------------- -------------- -------------- ----------------
Total noninterest expense ................... 4,010 -- (841) 3,169
------------- -------------- -------------- ----------------
Income (loss) before income taxes and minority
interest ..................................... 1,404 (1,879) 1,689 1,214
Income tax (benefit) expense .................. -- -- 120 (4) 120
------------- -------------- -------------- ----------------
Net income (loss) before minority interest ... 1,404 (1,879) 1,569 1,094
MINORITY INTEREST ............................. -- -- 219 (5) 219
------------- -------------- -------------- ----------------
Net income (loss) ............................. $1,404 $(1,879) $1,350 $ 875
============= ============== ============== ================
</TABLE>
- ------------
(a) The LMUSA 1996 Purchase was consummated on January 31, 1996.
Accordingly, historical financial data relating to operations acquired
in the LMUSA 1996 Purchase is presented for the month ended January 31,
1996 (unaudited). Historical financial statements were not available;
accordingly, historical data presented reflects best estimates of
management.
(b) Represents adjustments to reflect (i) the amortization of the fair
value of mortgage servicing rights and (ii) the elimination of
amortization of historical mortgage servicing rights.
(c) Represents adjustments to reflect (i) the decrease in interest expense
resulting from the transfer of custodial accounts acquired to First
Nationwide, (ii) elimination of certain other noninterest expense due
to consolidation with the Bank's existing mortgage banking operations,
and (iii) income taxes relative to the LMUSA 1996 Purchase.
P-11
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(B) LMUSA 1996 PURCHASE (CONTINUED)
(1) Represents the difference between the amortization of pro forma recorded
balance of mortgage servicing rights and the historical amortization of
mortgage servicing rights as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME BEFORE
INCOME TAXES AND
MINORITY INTEREST
INCREASE/(DECREASE)
-----------------------
<S> <C>
Pro forma amortization .... $(2,284)
Historical amortization (i) 405
-----------------------
$(1,879)
=======================
</TABLE>
(i) Represents elimination of amortization of mortgage servicing
rights of $405 included in LMUSA's historical statement of
operations for the month ended January 31, 1996.
(2) Represents a decrease in interest expense resulting from the transfer of
custodial accounts acquired to First Nationwide.
(3) Represents the impact on other noninterest expense of (i) the elimination
of historical amounts related to LMUSA operations not included in the
LMUSA 1996 Purchase and (ii) the consolidation of the LMUSA 1996 Purchase
into the Bank's existing mortgage banking operations, as follows:
<TABLE>
<CAPTION>
DECREASE IN
LMUSA ESTIMATED OTHER
HISTORICAL FUTURE NONINTEREST
COSTS COSTS EXPENSE
------------ ----------- -------------
<S> <C> <C> <C>
Components of LMUSA historical noninterest
expense:
Facilities depreciation .......................... $ 128 $ -- (ii) $(128)
Data processing, document storage, administrative
services and management fees .................... 833 120 (iii) (713)
Other miscellaneous costs ........................ 979 979 --
------------ ----------- -------------
$1,940 $1,099 $(841)
============ =========== =============
</TABLE>
(ii) Represents historical amounts related to operations not included in
the LMUSA 1996 Purchase.
(iii) Represents amounts necessary to replace these services based on
(Parent) Holdings' historical annual cost per loan based on the
average number of loans serviced.
(4) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the month ended January 31,
1996 related to the LMUSA 1996 Purchase was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ........................ $ 23
State taxes, at an assumed rate of 8% ............. 97
-----
$120
=====
</TABLE>
(5) Represents 20% minority interest relative to $1,094 in pro forma net
income relating to the LMUSA 1996 Purchase.
P-12
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
(C) CAL FED ACQUISITION
- ---------------------------------------------------
CAL FED
ACQUISITION
CAL FED VALUATION PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS (a) ADJUSTMENTS (b) TOTALS
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ................................... $567,800 $ 11,325 (1) $ -- $579,125
Securities ......................................... 80,200 -- -- 80,200
Mortgage-backed securities ......................... 109,900 17,100 (1) -- 127,000
Other interest income .............................. 3,700 -- (25,492)(3) (21,792)
------------ --------------- --------------- -------------
Total interest income ............................. 761,600 28,425 (25,492) 764,533
INTEREST EXPENSE:
Deposits ........................................... 326,200 (7,500)(1) -- 318,700
Borrowings ......................................... 174,500 (975)(1) -- 173,525
------------ --------------- --------------- -------------
Total interest expense ............................ 500,700 (8,475) -- 492,225
------------ --------------- --------------- -------------
Net interest income ................................ 260,900 36,900 (25,492) 272,308
Provision for loan losses .......................... 30,800 -- -- 30,800
------------ --------------- --------------- -------------
Net interest income after provision for loan losses 230,100 36,900 (25,492) 241,508
NONINTEREST INCOME:
Customer banking fees .............................. 36,300 -- -- 36,300
Mortgage banking operations ........................ 8,300 (4,800)(1) -- 3,500
Net loss on sales of assets ........................ 1,800 -- -- 1,800
Other .............................................. 15,500 -- -- 15,500(6)
------------ --------------- --------------- -------------
Total noninterest income .......................... 61,900 (4,800) -- 57,100
NONINTEREST EXPENSE:
Compensation and benefits .......................... 72,300 -- (21,306)(4) 50,994
Other .............................................. 170,300 41,909 (2) (36,385)(4) 175,824
------------ --------------- --------------- -------------
Total noninterest expense ......................... 242,600 41,909 (57,691) 226,818
------------ --------------- --------------- -------------
Income (loss) before income taxes .................. 49,400 (9,809) 32,199 71,790
Federal and state income taxes ..................... 100 -- 11,339 (5) 11,439
------------ --------------- --------------- -------------
Net income (loss) .................................. 49,300 (9,809) 20,860 60,351
------------ --------------- --------------- -------------
Minority interest: ................................. 18,900 -- 8,290 (7) 27,190
------------ --------------- --------------- -------------
Net income (loss) available to common stockholders $ 30,400 $(9,809) $ (12,570) $ 33,161
============ =============== =============== =============
</TABLE>
- ------------
(a) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization or
accretion of Cal Fed's historical intangible assets.
(b) Represents adjustments to reflect (i) the reduction in interest income
relative to the loss in yield on the purchase price of the Cal Fed
Acquisition funded with existing cash, (ii) the elimination of certain
noninterest expense due to consolidation of Cal Fed's operations with
Holdings' and (iii) income taxes relative to the Cal Fed Acquisition.
See further discussion at Notes (3) and (4).
P-13
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(C) CAL FED ACQUISITION (CONTINUED)
(1) Represents amortization or accretion of fair value adjustments as
follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES
AND MINORITY INTEREST
INCREASE/(DECREASE)
---------------------
<S> <C>
Loans receivable, net ..... $11,325
Mortgage-backed securities 17,100
Deposits ................... 7,500
Borrowings ................. 975
Mortgage servicing rights . (4,800)
</TABLE>
(2) Represents adjustments consisting of the following:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES
AND MINORITY INTEREST
INCREASE/(DECREASE)
---------------------
<S> <C>
Amortization of fair value adjustment--amortization of
goodwill .................................................... $(44,465)
Elimination of amortization of Cal Fed's historical
intangible assets ........................................... 2,556
---------------------
$(41,909)
=====================
</TABLE>
(3) Represents the reduction in interest income relative to the loss in
yield on the purchase price of the Cal Fed Acquisition funded with
existing cash. The loss was estimated using an interest rate of 5.75%,
which approximates the average interest rate on short term investments
for the nine months ended September 30, 1996.
(4) Represents adjustments to other noninterest expense relating to the
consolidation of Cal Fed's operations into those of Holdings. A
substantial portion of Cal Fed's operations will be consolidated into
the existing operations of Holdings, resulting in a reduction in
headcount of 850, or approximately 36%, across all business areas. In
addition, seven retail branches and two administrative offices will be
closed. Expected savings from such consolidation include compensation,
occupancy, travel, telecommunications, data processing and marketing
expenses. The expense reduction for the nine months ended September 30,
1996 represents a 36% reduction over historical levels based on
management's current transition plan for the second year following the
consummation of the Cal Fed Acquisition:
<TABLE>
<CAPTION>
CAL FED COST OF ADJUSTMENT-
HISTORICAL ONGOING EXPENSE
BUSINESS AREA: COSTS OPERATIONS REDUCTION
- ----------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Compensation:
Retail Banking ........ $36,731 $36,245 $ 486
Information Technology 532 951 (419)
Commercial Real Estate 5,005 1,643 3,362
Mortgage Banking ...... 13,837 9,452 4,385
Legal ................. 1,371 618 753
Finance ............... 5,163 924 4,239
Internal Audit ........ 1,154 212 942
Executive and Other .. 4,014 243 3,771
Human Resources ....... 2,941 347 2,594
Corporate Services ... 1,571 378 1,193
------------ ------------ -------------
72,319 51,013 21,306
</TABLE>
P-14
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(C) CAL FED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
CAL FED COST OF ADJUSTMENT-
HISTORICAL ONGOING EXPENSE
BUSINESS AREA: COSTS OPERATIONS REDUCTION
- ------------------------------ ------------- ------------ -------------
<S> <C> <C> <C>
Occupancy & Other Expense:
Retail Banking ............... $ 48,397 $ 22,955 $ 25,442
Information Technology ...... 20,862 7,164 13,698
Commercial Real Estate ...... 2,306 381 1,925
Mortgage Banking ............. 2,809 3,363 (554)
Legal ........................ 1,919 5,145 (3,226)
Finance ...................... 4,410 570 3,840
Internal Audit ............... 317 33 284
Executive and Other .......... 4,935 458 4,477
Human Resources .............. 1,790 173 1,617
Corporate Services ........... 4,202 15,320 (11,118)
------------- ------------ -------------
91,947 55,562 36,385
SAIF Deposit Insurance Premium 75,778 75,778 --
------------- ------------ -------------
Total Noninterest Expense ... $240,044(i) $182,353 $ 57,691
============= ============ =============
</TABLE>
(i) Balance represents total historical noninterest expense of $242,600
less historical amortization of intangible assets already adjusted in
note 2 on page P-14.
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the nine months ended
September 30, 1996 related to the Cal Fed Acquisition was computed as
follows:
<TABLE>
<CAPTION>
<S> <C>
Income before taxes ............................................. $ 71,790
Add back: permanent differences--amortization of goodwill ...... 44,465
----------
Taxable income .................................................. $116,255
==========
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $ 2,139
State taxes, at an assumed rate of 8% ........................... 9,300
----------
$ 11,439
==========
</TABLE>
(6) Includes $12,000 gain on sale of California Federal's branches in San
Diego county.
(7) Represents 20% minority interest relative to $41,451 in pro forma net
income relating to the Cal Fed Acquisition after giving effect to the
Cal Fed preferred stock dividends of $18,900.
P-15
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
(D) BRANCH SALES
- --------------------------------------------
BRANCH SALES
OHIO SALE MICHIGAN SALE NORTHEAST SALE PRO FORMA
PRO FORMA PRO FORMA PRO FORMA TOTALS
------------ --------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ (6)(a) $ (27)(a) $ (77)(a) $ (110)
Securities .................................. -- -- -- --
Mortgage-backed securities .................. -- -- -- --
Other interest income ....................... -- -- -- --
------------ --------------- -------------- --------------
Total interest income ...................... (6) (27) (77) (110)
INTEREST EXPENSE:
Deposits .................................... (3,392)(a) (17,009)(a) (20,341)(a) (40,742)
Borrowings .................................. 3,522 (1) 19,560 (1) 21,753 (1) 44,835
------------ --------------- -------------- --------------
Total interest expense ..................... 130 2,551 1,412 4,093
------------ --------------- -------------- --------------
Net interest income ......................... (136) (2,578) (1,489) (4,203)
Provision for loan losses ................... -- -- -- --
------------ --------------- -------------- --------------
Net interest income after provision for loan
losses ..................................... (136) (2,578) (1,489) (4,203)
NONINTEREST INCOME:
Customer banking fees ....................... (256)(a) (2,147)(a) (1,562)(a) (3,965)
Mortgage banking operations ................. -- -- -- --
Net gain (loss) on sales of assets .......... -- 2 8 10
Other ....................................... (15)(a) (63)(a) (85)(a) (163)
------------ --------------- -------------- --------------
Total noninterest income ................... (271) (2,208) (1,639) (4,118)
NONINTEREST EXPENSE:
Compensation and benefits ................... (516)(a) (2,133)(a) (1,688)(a) (4,337)
Other ....................................... (265)(a) (1,456)(a) (1,666)(a) (3,387)
------------ --------------- -------------- --------------
Total noninterest expense .................. (781) (3,589) (3,354) (7,724)
------------ --------------- -------------- --------------
Income (loss) before income taxes and
minority interest .......................... 374 (1,197) 226 (597)
Income tax (benefit) expense ................ 37 (118) 22 (59)(2)
------------ --------------- -------------- --------------
Net income (loss) before minority interest . 337 (1,079) 204 (538)
MINORITY INTEREST ........................... 67 (216) 41 (108)(3)
------------ --------------- -------------- --------------
Net income (loss) ........................... $ 270 $ (863) $ 163 $ (430)
============ =============== ============== ==============
</TABLE>
- ------------
(a) Represents historical information for the six months ended June 30, 1996
related to the retail banking facilities in Ohio, Michigan and the
Northeast. Other noninterest expense includes occupancy, SAIF insurance
premiums, marketing, OTS assessments, data processing and
telecommunications directly attributable to the Ohio, Michigan and
Northeast retail branch operations. Amounts represent historical
information from January 1, 1996 through the date of sale.
P-16
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(D) BRANCH SALES (CONTINUED)
(1) Represents increase in interest expense on borrowings to fund the
Branch Sales, as follows:
<TABLE>
<CAPTION>
SALE DEPOSITS PRE-TAX AMOUNT PRO FORMA
DATE LOCATION SOLD ASSETS GAIN BORROWED RATE DAYS INTEREST EXPENSE
- --------- ------------ ------------ --------- ---------- ------------ ---------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1/19/96 Ohio $1,392,561 $20,480 $130,660 $1,241,417 5.45%(i) 19 $ 3,522
================
1/12/96 New York 416,476 5,997 32,991 377,512 5.45%(i) 12 $ 676
2/23/96 New York 270,046 1,838 17,027 251,154 5.45%(i) 54 2,025
3/15/96 New York 615,572 8,083 48,933 558,514 5.45%(i) 75 6,255
3/22/96 New Jersey 501,262 6,396 35,938 458,932 5.45%(i) 82 5,619
3/22/96 New York 637,045 9,465 41,286 586,269 5.45%(i) 82 7,178
----------------
Total Northeast $21,753
================
6/28/96 Michigan 799,226 15,060 56,177 727,755 5.45%(i) 180 $19,560
================
</TABLE>
-----------
(i) Rate represents the average rates paid on new borrowings used to
finance the Branch Sales during the nine months ended September
30, 1996.
(2) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the nine months ended
September 30, 1996 related to the Branch Sales was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $(11)
State taxes, at an assumed rate of 8% ........................... (48)
-------
$(59)
=======
</TABLE>
(3) Represents 20% minority interest relative to $538 in pro forma losses
relating to the Branch Sales.
P-17
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(E) PRO FORMA ADJUSTMENTS
(1) Represents the decrease in interest expense relative to the paydown of
securities sold under agreements to repurchase with proceeds from the
issuance of Series A Preferred Shares. The reduction in interest
expense was established using an interest rate of 5.458%, the weighted
average rate of these obligations during the nine months ended
September 30, 1996 using a one month LIBOR rate less five basis points.
(2) Represents interest expense as follows:
<TABLE>
<CAPTION>
<S> <C>
$575 million 10 5/8% Notes .............................. $45,820
$140 million Holdings 9 1/8% Senior Subordinated Notes
issued January 31, 1996 (expense for one month) ....... 1,065
$455 million (Parent) Holdings 12 1/2% Senior Notes
issued April 1, 1996 ................................... 16,928
---------
$63,813
=========
</TABLE>
(3) Represents the amortization of:
<TABLE>
<CAPTION>
<S> <C>
$20,000 in deferred debt issuance costs over the seven year
term of the 10 5/8% Notes ..................................... $ 2,143
$5,600 in deferred debt issuance costs over the seven year term
of the Holdings 9 1/8% Senior Subordinated Notes (for one
month) ........................................................ 67
$18,076 deferred debt issuance cost over the seven year term of
the (Parent) Holdings 12 1/2% Senior Notes from 1/1 to 4/16/96 762
-----------
$2,972
===========
</TABLE>
(4) Represents amounts necessary to adjust historical tax expense to the
pro forma computation. Pro forma tax expense for the nine months ended
September 30, 1996 related to the issuance of the Series A Preferred
Shares, the issuance of the Holdings 9 1/8% Senior Subordinated Notes
and the Notes was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ................................. $(1,127)
State, at an assumed rate of 4.425% ........................ (2,609)
----------
$(3,736)
==========
</TABLE>
(5) Represent adjustments to minority interest as follows:
(a) Preferred stock dividends on the $200,000 Series A Preferred Shares,
net of tax benefit, at an assumed rate of 9 1/4% per annum. The tax
benefit is due to the deductibility of the dividend for income tax
purposes as a result of California Federal Preferred Capital
Corporation's qualification as a real estate investment trust. Each 25
basis point change in the interest rate on the Series A Preferred
Shares would change interest expense, net of tax benefit, by $338. If
the underwriter's 15% over-allotment option is exercised in full,
dividends on the Series A Preferred Shares for that period would
increase $1,873;
(b) Dividends on Holdings Preferred Stock (estimated at 12% per annum),
including the compounding effect of dividends paid-in-kind; and
(c) Hunter's Glen 20% minority interest, net of tax, relative to the $575
million 10 5/8% Notes, the $140 million Holdings 9 1/8% Senior
Subordinated Notes and the decrease in interest expense relative to the
paydown of securities sold under agreements to repurchase with proceeds
from the issuance of the Series A Preferred Shares.
P-18
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(E) PRO FORMA ADJUSTMENTS (continued)
(6) Includes the following:
(a) gains of approximately $334.0 million (on an after-tax basis)
realized in connection with the Branch Sales consummated during
the nine months ended September 30, 1996;
(b) gain of approximately $10.8 million (on an after-tax basis)
representing California Federal's gain on branch sales consummated
during the nine months ended September 30, 1996;
(c) deferred tax benefit of the Bank of $125 million;
(d) after-tax gain on sale of Affiliated Computer Systems (ACS) common
stock of $36.4 million;
(e) expense of $106.4 million (on an after-tax basis) relating to the
Special SAIF Assessment;
(f) after-tax income of $23.0 million realized in connection with the
termination of the Assistance Agreement; and
(g) expense of $30.2 million (on an after-tax basis) relating to a
management incentive plan.
P-19
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA CAL FED
(PARENT) ACQUISITION PURCHASES ACQUISITION
HOLDINGS PRO FORMA PRO FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B) TOTALS(C)
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ 823,864 $230,713 $22,477 $ 722,000
Securities .................................. 28,396 10,685 -- 124,200
Mortgage-backed securities .................. 212,880 62,403 -- 192,600
Other interest income ....................... 10,705 -- -- (21,089)
------------ ------------- ----------- -------------
Total interest income ...................... 1,075,845 303,801 22,477 1,017,711
INTEREST EXPENSE:
Deposits .................................... 447,359 143,797 -- 396,200
Borrowings .................................. 287,456 74,587 2,018 245,400
------------ ------------- ----------- -------------
Total interest expense ..................... 734,815 218,384 2,018 641,600
Net interest income ......................... 341,030 85,417 20,459 376,111
Provision for loan losses ................... 37,000 11,094 -- 31,800
------------ ------------- ----------- -------------
Net interest income after provision for loan
losses ..................................... 304,030 74,323 20,459 344,311
NONINTEREST INCOME:
Customer banking fees ....................... 47,493 5,291 -- 42,100
Mortgage banking operations ................. 70,265 860 76,445 3,600
Net gain (loss) on sales of assets .......... 147 -- (1,851) 6,600
Other ....................................... 33,068 1,677 2,690 2,400
------------ ------------- ----------- -------------
Total noninterest income ................... 150,973 7,828 77,284 54,700
NONINTEREST EXPENSE:
Compensation and benefits ................... 154,288 11,141 19,500 69,408
Other ....................................... 178,265 34,896 38,081 158,283
------------ ------------- ----------- -------------
Total noninterest expense .................. 332,553 46,037 57,581 227,691
------------ ------------- ----------- -------------
Income (loss) before income taxes and
minority interest .......................... 122,450 36,114 40,162 171,320
Income tax (benefit) expense ................ (57,185) 4,890 3,952 22,692
------------ ------------- ----------- -------------
Income (loss) before minority interest ..... 179,635 31,224 36,210 148,628
MINORITY INTEREST ........................... 59,138 6,245 7,242 50,206
------------ ------------- ----------- -------------
Net income (loss) ........................... $ 120,497 $ 24,979 $28,968 $ 98,422
============ ============= =========== =============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
BRANCH SALES
PRO FORMA PRO FORMA PRO FORMA
TOTALS(D) ADJUSTMENTS(E) COMBINED
-------------- -------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ (623) $ -- $1,798,431
Securities .................................. -- -- 163,281
Mortgage-backed securities .................. -- -- 467,883
Other interest income ....................... -- -- (10,384)
-------------- -------------- ------------
Total interest income ...................... (623) -- 2,419,211
INTEREST EXPENSE:
Deposits .................................... (211,530) -- 775,826
Borrowings .................................. 280,671 (11,475) (1) 1,009,401
130,744 (2)
-------------- -------------- ------------
Total interest expense ..................... 69,141 119,269 1,785,227
Net interest income ......................... (69,764) (119,269) 633,984
Provision for loan losses ................... -- -- 79,894
-------------- -------------- ------------
Net interest income after provision for loan
losses ..................................... (69,764) (119,269) 554,090
NONINTEREST INCOME:
Customer banking fees ....................... (22,228) -- 72,656
Mortgage banking operations ................. -- -- 151,170
Net gain (loss) on sales of assets .......... -- -- 4,896
Other ....................................... (789) -- 39,046
-------------- -------------- ------------
Total noninterest income ................... (23,017) -- 267,768
NONINTEREST EXPENSE:
Compensation and benefits ................... (19,476) -- 234,861
Other ....................................... (25,823) 6,239 (3) 389,941
-------------- -------------- ------------
Total noninterest expense .................. (45,299) 6,239 624,802
-------------- -------------- ------------
Income (loss) before income taxes and
minority interest .......................... (47,482) (125,508) 197,056
Income tax (benefit) expense ................ (4,671) (7,953)(4) (38,275)
-------------- -------------- ------------
Income (loss) before minority interest ..... (42,811) (117,555) 235,331
MINORITY INTEREST ........................... (8,562) 15,458(5) 129,727
-------------- -------------- ------------
Net income (loss) ........................... $ (34,249) $(133,013) $ 105,604
============== ============== ============
</TABLE>
- ------------
(A) See note (A) on page P-21.
(B) See note (B) on page P-25.
(C) See note (C) on page P-27.
(D) See note (D) on page P-30.
(E) See note (E) on page P-32.
P-20
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(A) SFFED ACQUISITION
<TABLE>
<CAPTION>
SFFED
ACQUISITION
VALUATION PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS(a) ADJUSTMENTS(b) TOTALS
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .......................... $215,147 $ 15,566 (1) $ -- $230,713
Securities ................................ 10,685 -- -- 10,685
Mortgage-backed securities ................ 60,024 2,379 (1) -- 62,403
Other interest income ..................... -- -- -- --
------------ -------------- -------------- -------------
Total interest income .................... 285,856 17,945 -- 303,801
INTEREST EXPENSE:
Deposits .................................. 135,299 8,498 (1) -- 143,797
Borrowings ................................ 71,543 3,044 (1) -- 74,587
------------ -------------- -------------- -------------
Total interest expense ................... 206,842 11,542 -- 218,384
------------ -------------- -------------- -------------
Net interest income ....................... 79,014 6,403 -- 85,417
Provision for loan losses ................. 11,094 -- -- 11,094
------------ -------------- -------------- -------------
Net interest income after provision for
loan losses .............................. 67,920 6,403 -- 74,323
NONINTEREST INCOME:
Customer banking fees ..................... 5,291 -- -- 5,291
Mortgage banking operations ............... 5,255 (4,395)(1) -- 860
Net loss on sales of assets ............... -- -- -- --
Other ..................................... 1,677 -- -- 1,677
------------ -------------- -------------- -------------
Total noninterest income ................. 12,223 (4,395) -- 7,828
NONINTEREST EXPENSE:
Compensation and benefits ................. 35,518 -- (24,377)(3) 11,141
Other ..................................... 43,257 12,905 (2) (21,266)(4) 34,896
------------ -------------- -------------- -------------
Total noninterest expense ................ 78,775 12,905 (45,643) 46,037
------------ -------------- -------------- -------------
Income (loss) before income taxes and
minority interest ........................ 1,368 (10,897) 45,643 36,114
Income tax (benefit) expense .............. 1,568 -- 3,322 (5) 4,890
------------ -------------- -------------- -------------
Net income (loss) before minority interest (200) (10,897) 42,321 31,224
MINORITY INTEREST ......................... -- -- 6,245 (6) 6,245
------------ -------------- -------------- -------------
Net income (loss) ......................... $ (200) $(10,897) $ 36,076 $ 24,979
============ ============== ============== =============
</TABLE>
- ------------
(a) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization of
historical goodwill.
(b) Represents adjustments to reflect (i) the elimination of certain
noninterest expense due to consolidation of SFFed operations with First
Nationwide, (ii) the elimination of certain historical noninterest
expense recorded by SFFed as a result of the acquisition by First
Nationwide and (iii) income taxes relative to the SFFed Acquisition.
P-21
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
(1) Represents amortization or accretion of fair value adjustments as
follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND
MINORITY INTEREST
INCREASE/(DECREASE)
----------------------
<S> <C>
Loans receivable, net .... $15,566
Mortgage-backed securities 2,379
Deposits .................. (8,498)
Borrowings ................ (3,044)
Mortgage servicing rights (4,395)
</TABLE>
(2) Represents adjustments consisting of the following:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND
MINORITY INTEREST
INCREASE/(DECREASE)
----------------------
<S> <C>
Amortization of goodwill ................................. $(13,574)
Elimination of amortization of SFFed's historical
goodwill ................................................ 669
----------------------
$(12,905)
======================
</TABLE>
(3) Represents adjustments to noninterest expense relating to the
consolidation of SFFed's operations into those of (Parent) Holdings and
the elimination of nonrecurring historical expenses related to the SFFed
Acquisition:
<TABLE>
<CAPTION>
<S> <C>
Decrease in compensation and benefits due to the reduction in headcount from 620
at January 1, 1995 to approximately 260 after the consummation of the SFFed Acquisition.
Substantially all retained employees represent retail branch personnel ...... $19,037
Elimination of certain accruals recorded by SFFed related to the acquisition
by (Parent) Holdings:
Payments under employment contracts ......................................... 2,080
Accruals for benefit plans frozen by First Nationwide ....................... 3,260
---------
$24,377
=========
</TABLE>
(4) Represents adjustments to other noninterest expense relating to the
consolidation of SFFed's operations into those of (Parent) Holdings and
the elimination of nonrecurring historical expenses of SFFed.
Substantially all of SFFed's operations have been consolidated into the
existing operations of (Parent) Holdings, resulting in a reduction in
headcount of approximately 58% with the remaining personnel primarily
consisting of retail branch personnel. In addition, ten retail branches
have been closed.
P-22
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
SFFED COST OF ADJUSTMENT-
HISTORICAL ONGOING EXPENSE
COSTS OPERATIONS REDUCTION
------------ ------------ -------------
<S> <C> <C> <C>
Expense decreases due to consolidation:
Mortgage banking operations:
Occupancy expenses, including insurance ....... $ 1,329 $ 588 $ 741
Travel, automobile and employee dues .......... 282 67 215
Telecommunications, postage and supplies ...... 900 214 686
Other, net .................................... 1,047 460 587
------------ ------------ -------------
Subtotal mortgage banking operations ......... $ 3,558 $ 1,329 $ 2,229
============ ============ =============
Retail Banking operations -- reductions due to
consolidation of ten retail branches and retail
operations center:
Occupancy expenses, including insurance ....... $11,220 $ 3,405 $ 7,815
SAIF assessment reduction based on lower
historical assessment rate for First
Nationwide .................................. 6,811 6,011 800
Travel, automobile and employee dues .......... 410 60 350
Telecommunications and data processing ........ 1,766 364 1,402
Postage and messenger costs ................... 666 473 193
Other costs, net .............................. 216 108 108
------------ ------------ -------------
Subtotal retail banking operations ........... $21,089 $10,421 $10,668
============ ============ =============
Overhead areas, including executive offices,
legal, human resources, information services,
accounting, and strategic planning areas:
Occupancy costs ............................... $ 1,316 $ -- $ 1,316
Data processing costs ......................... 2,848 1,000 1,848
Marketing and advertising expenses ............ 2,094 500 1,594
Other overhead costs .......................... 8,072 8,072 --
------------ ------------ -------------
Subtotal overhead areas ...................... $14,330 $ 9,572 $ 4,758
============ ============ =============
Total decreases due to consolidation ........ $38,977 $21,322 $17,655
Elimination of certain nonrecurring expense
recorded by SFFed related to the acquisition by
First Nationwide:
Data processing termination fees .............. 875 -- 875
Investment banker fees related to the SFFed
Acquisition ................................. 2,311 -- 2,311
Legal fees related to the SFFed Acquisition ... 425 -- 425
------------ ------------ -------------
Total expense reduction ..................... $42,588(i) $21,322 $21,266
============ ============ =============
</TABLE>
- ------------
(i) Balance represents total historical noninterest expense of $43,257 less
historical amortization of goodwill already adjusted in note 2 on page
P-22.
P-23
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December 31,
1995 related to the SFFed Acquisition was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Income before taxes .............................................. $36,114
Add back: permanent differences--amortization of goodwill ...... 13,574
---------
Taxable income .................................................. $49,688
=========
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $ 915
State taxes, at an assumed rate of 8% ........................... 3,975
---------
$ 4,890
=========
</TABLE>
(6) Represents 20% minority interest relative to $31,224 in pro forma net
income relating to the SFFed Acquisition.
P-24
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(B) LMUSA PURCHASES
<TABLE>
<CAPTION>
PRO FORMA LMUSA PURCHASES
HISTORICAL(a) ADJUSTMENTS(b) ADJUSTMENTS(c) PRO FORMA TOTALS
------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ 22,477 $ -- $ -- $22,477
Securities .................................. -- -- -- --
Mortgage-backed securities .................. -- -- -- --
Other interest income ....................... -- -- -- --
------------- -------------- -------------- ----------------
Total interest income ..................... 22,477 -- -- 22,477
INTEREST EXPENSE:
Deposits .................................... -- -- -- --
Borrowings .................................. 38,358 -- (36,340)(2) 2,018
------------- -------------- -------------- ----------------
Total interest expense .................... 38,358 -- (36,340) 2,018
------------- -------------- -------------- ----------------
Net interest income ......................... (15,881) -- 36,340 20,459
Provision for loan losses ................... -- -- -- --
------------- -------------- -------------- ----------------
Net interest income after provision for loan
losses ..................................... (15,881) -- 36,340 20,459
NONINTEREST INCOME:
Customer banking fees ....................... -- -- -- --
Mortgage banking operations ................. 77,887 (1,442)(1) -- 76,445
Net gain (loss) on sales of assets .......... (1,851) -- -- (1,851)
Other ....................................... 2,690 -- -- 2,690
------------- -------------- -------------- ----------------
Total noninterest income .................. 78,726 (1,442) -- 77,284
NONINTEREST EXPENSE:
Compensation and benefits ................... 38,426 -- (18,926)(3) 19,500
Other ....................................... 300,091 -- (262,010)(4) 38,081
------------- -------------- -------------- ----------------
Total noninterest expense ................... 338,517 -- (280,936) 57,581
------------- -------------- -------------- ----------------
Income (loss) before income taxes and
minority interest .......................... (275,672) (1,442) 317,276 40,162
Income tax (benefit) expense ................ -- -- 3,952 (5) 3,952
------------- -------------- -------------- ----------------
Net income (loss) before minority interest . (275,672) (1,442) 313,324 36,210
MINORITY INTEREST ........................... -- -- 7,242 (6) 7,242
------------- -------------- -------------- ----------------
Net income (loss) ........................... $(275,672) $(1,442) $ 306,082 $28,968
============= ============== ============== ================
</TABLE>
- ------------
(a) The LMUSA 1995 Purchase was consummated on October 2, 1995.
Accordingly, historical financial data relating to operations acquired
in the LMUSA 1995 Purchase is presented for the nine months ended
September 30, 1995 (unaudited). Historical financial data relating to
operations acquired in the LMUSA 1996 Purchase is presented for the
year ended December 31, 1995 (unaudited). Historical financial
statements were not available; accordingly, historical data presented
reflects best estimates of management.
(b) Represents adjustments to reflect (i) the amortization of the fair
value of mortgage servicing rights and (ii) the elimination of
amortization of historical mortgage servicing rights.
(c) Represents adjustments to reflect (i) the decrease in interest expense
resulting from the transfer of custodial accounts acquired to First
Nationwide, (ii) decreases in compensation and benefits expense due to
reduction in staffing, (iii) elimination of certain other noninterest
expense due to consolidation with (Parent) Holdings' existing mortgage
banking operations, and (iv) income taxes relative to the LMUSA
Purchases.
P-25
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(B) LMUSA PURCHASES (CONTINUED)
(1) Represents the difference between the amortization of pro forma
recorded balance of mortgage servicing rights and the historical
amortization of mortgage servicing rights as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME BEFORE
INCOME TAXES, EXTRAORDINARY
ITEM AND MINORITY INTEREST
INCREASE (DECREASE)
---------------------------
<S> <C>
Pro forma amortization ... $(48,941)
Historical amortization(i) 47,499
---------------------------
$ (1,442)
===========================
</TABLE>
(i) Represents elimination of amortization of mortgage servicing
rights of $47,499 included in LMUSA's historical consolidated
statement of operations for the year ended December 31, 1995.
(2) Represents a decrease in interest expense resulting from a reduction in
funding costs due to the transfer of custodial accounts acquired to the
Bank.
(3) Represents the adjustment necessary to reduce compensation and benefits
expense to the level necessary for the incremental number
(approximately 650) of LMUSA employees retained by (Parent) Holdings as
a result of the LMUSA Purchases, with average annual compensation and
benefits per employee of $30.
(4) Represents the impact on other noninterest expense of (i) the
elimination of historical amounts related to LMUSA operations not
included in the LMUSA Purchases and (ii) the consolidation of the LMUSA
Purchases into the Bank's existing mortgage banking operations, as
follows:
<TABLE>
<CAPTION>
DECREASE IN
LMUSA OTHER
HISTORICAL ESTIMATED NONINTEREST
COSTS FUTURE COSTS EXPENSE
------------ ------------- -------------
<S> <C> <C> <C>
Components of historical noninterest expense:
Interest rate swap agreements ............... $ 6,615 $ -- (ii) $ (6,615)
Facilities charge-offs ...................... 38,559 -- (ii) (38,559)
Facilities depreciation ..................... 1,797 -- (ii) (1,797)
Provision for losses on assets held for sale 180,255 -- (ii) (180,255)
Reorganization items ........................ 16,892 -- (ii) (16,892)
Data processing, document storage,
administrative services and management
fees ....................................... 20,896 3,004 (iii) (17,892)
Other miscellaneous costs ................... 35,077 35,077 --
------------ ------------- -------------
$300,091 $38,081 $(262,010)
============ ============= =============
</TABLE>
(ii) Represents historical amounts related to operations not
included in the LMUSA Purchases.
(iii) Represents amounts necessary to replace these services based
on (Parent) Holdings' historical annual cost per loan based on
the average number of loans serviced.
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December
31, 1995 related to the LMUSA Purchases was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ................................. $ 739
State taxes, at an assumed rate of 8% ...................... 3,213
-------
$3,952
=======
</TABLE>
(6) Represents 20% minority interest relative to $36,210 in pro forma net
income relating to the LMUSA Purchases.
P-26
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(C) CAL FED ACQUISITION
<TABLE>
<CAPTION>
CAL FED
ACQUISITION
CAL FED VALUATION PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS (a) ADJUSTMENTS (b) TOTALS
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .............................. $ 706,900 $ 15,100 (1) $ -- $ 722,000
Securities .................................... 124,200 -- -- 124,200
Mortgage-backed securities .................... 164,000 28,600 (1) -- 192,600
Other interest income ......................... 12,900 -- (33,989)(3) (21,089)
------------ --------------- --------------- -------------
Total interest income ........................ 1,008,000 43,700 (33,989) 1,017,711
INTEREST EXPENSE:
Deposits ...................................... 441,600 (45,400)(1) -- 396,200
Borrowings .................................... 254,500 (9,100)(1) -- 245,400
------------ --------------- --------------- -------------
Total interest expense ....................... 696,100 (54,500) -- 641,600
------------ --------------- --------------- -------------
Net interest income ........................... 311,900 98,200 (33,989) 376,111
Provision for loan losses ..................... 31,800 -- -- 31,800
------------ --------------- --------------- -------------
Net interest income after provision for loan
losses ....................................... 280,100 98,200 (33,989) 344,311
NONINTEREST INCOME:
Customer banking fees ......................... 42,100 -- -- 42,100
Mortgage banking operations ................... 12,400 (8,800)(1) -- 3,600
Net gain (loss) on sales of assets ............ 6,600 -- -- 6,600
Other ......................................... 2,400 -- -- 2,400
------------ --------------- --------------- -------------
Total noninterest income ..................... 63,500 (8,800) -- 54,700
NONINTEREST EXPENSE:
Compensation and benefits ..................... 97,100 -- (27,692)(4) 69,408
Other ......................................... 152,800 55,811 (2) (50,328)(4) 158,283
------------ --------------- --------------- -------------
Total noninterest expense .................... 249,900 55,811 (78,020) 227,691
------------ --------------- --------------- -------------
Income (loss) before income taxes and minority
interest ..................................... 93,700 33,589 44,031 171,320
Income tax (benefit) expense .................. 100 -- 22,592 (5) 22,692
------------ --------------- --------------- -------------
Net income (loss) before minority interest ... 93,600 33,589 21,439 148,628
MINORITY INTEREST ............................. 25,600 -- 24,606 (6) 50,206
------------ --------------- --------------- -------------
Net income (loss) ............................. $ 68,000 $ 33,589 $ (3,167) $ 98,422
============ =============== =============== =============
</TABLE>
- ------------
(a) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization of Cal
Fed's historical intangible assets.
(b) Represents adjustments to reflect (i) the reduction in interest income
relative to the loss in yield on the purchase price of the Cal Fed
Acquisition funded with existing cash, (ii) the elimination of certain
noninterest expense due to consolidation of Cal Fed operations with
(Parent) Holdings' and (iii) income taxes relative to the Cal Fed
Acquisition.
P-27
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(C) CAL FED ACQUISITION (CONTINUED)
(1) Represents amortization or accretion of fair value adjustments as
follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES,
EXTRAORDINARY ITEM
AND MINORITY INTEREST
INCREASE/(DECREASE)
---------------------
<S> <C>
Loans receivable, net .... $15,100
Mortgage-backed securities 28,600
Deposits .................. 45,400
Borrowings ................ 9,100
Mortgage servicing rights (8,800)
</TABLE>
(2) Represents adjustments consisting of the following:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES,
EXTRAORDINARY ITEM
AND MINORITY INTEREST
INCREASE/(DECREASE)
---------------------
<S> <C>
Amortization of fair value adjustment--amortization of goodwill .... $(59,287)
Elimination of amortization of Cal Fed's historical intangible
assets ............................................................. 3,476
---------------------
$(55,811)
=====================
</TABLE>
(3) Represents the reduction in interest income relative to the loss in
yield on the purchase price of the Cal Fed Acquisition funded with
existing cash. The loss was estimated using an interest rate of 5.75%,
which approximates the average interest rate on short term investments
during 1995.
(4) Represents adjustments to other noninterest expense relating to the
consolidation of Cal Fed's operations into those of (Parent) Holdings.
A substantial portion of Cal Fed's operations will be consolidated into
the existing operations of (Parent) Holdings, resulting in a reduction
in headcount of 850, or approximately 35%, across all business areas.
In addition, seven retail branches and two administrative offices will
be closed. Expected savings from such consolidation include
compensation, occupancy, travel, telecommunications, data processing
and marketing expenses. The expense reduction for the year ended
December 31, 1995 represents a 32% reduction over historical levels
based on management's current transition plan:
P-28
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(C) CAL FED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
CAL FED COST OF ADJUSTMENT-
HISTORICAL ONGOING EXPENSE
BUSINESS AREA: COSTS OPERATIONS REDUCTION
- ------------------------------- ------------- ------------ -------------
<S> <C> <C> <C>
Compensation:
Retail Banking ................ $ 50,284 $ 50,913 $ (629)
Information Technology ........ 625 1,428 (803)
Commercial Real Estate ........ 8,248 1,851 6,397
Mortgage Banking .............. 18,426 12,545 5,881
Legal ......................... 1,930 880 1,050
Finance ....................... 6,412 875 5,537
Internal Audit ................ 1,383 212 1,171
Executive and Other ........... 5,932 -- 5,932
Human Resources ............... 2,818 300 2,518
Corporate Services ............ 1,071 433 638
------------- ------------ -------------
97,129 69,437 27,692
Occupancy & Other Expense:
Retail Banking ................ 12,166 27,555 (15,389)
Information Technology ........ 30,048 8,549 21,499
Commercial Real Estate ........ 3,739 379 3,360
Mortgage Banking .............. 7,055 4,788 2,267
Legal ......................... 3,364 7,420 (4,056)
Finance ....................... 7,819 481 7,338
Internal Audit ................ 560 -- 560
Executive and Other ........... 6,193 -- 6,193
Human Resources ............... 3,574 -- 3,574
Corporate Services ............ 48,782 23,800 24,982
------------- ------------ -------------
123,300 72,972 50,328
SAIF Deposit Insurance Premium 25,996 25,996 --
------------- ------------ -------------
Total Noninterest Expense .... $246,425(i) $168,405 $ 78,020
============= ============ =============
</TABLE>
(i) Balance represents total historical nonintereest expense of $249,900
less historical amortization of intangible assets already adjusted in
note 2 on page P-28.
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December
31, 1995 related to the Cal Fed Acquisition was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Income bfore taxes ............................................... $171,320
Add back: permanent differences--amortization of goodwill ...... 59,287
----------
Taxable income .................................................. $230,607
==========
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $ 4,243
State taxes, at an assumed rate of 8% ........................... 18,449
----------
$ 22,692
==========
</TABLE>
(6) Represents 20% minority interest relative to $123,028 in pro forma net
income relating to the Cal Fed Acquisition after giving effect to the
Cal Fed preferred stock dividends of $25,600.
P-29
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(D) BRANCH SALES
<TABLE>
<CAPTION>
BRANCH SALES
OHIO SALE PRO MICHIGAN SALE NORTHEAST SALE PRO FORMA
FORMA PRO FORMA PRO FORMA TOTALS
------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ....................... $ (119)(a) $ (64)(a) $ (440)(a) $ (623)
Securities ............................. -- -- -- --
Mortgage-backed securities ............. -- -- -- --
Other interest income .................. -- -- -- --
------------- --------------- -------------- --------------
Total interest income ................. (119) (64) (440) (623)
INTEREST EXPENSE:
Deposits ............................... (65,588)(a) (32,677)(a) (113,265)(a) (211,530)
Borrowings ............................. 86,565 (1) 45,869 (1) 148,237 (1) 280,671 (1)
------------- --------------- -------------- --------------
Total interest expense ................ 20,977 13,192 34,972 69,141
------------- --------------- -------------- --------------
Net interest income .................... (21,096) (13,256) (35,412) (69,764)
Provision for loan losses .............. -- -- -- --
------------- --------------- -------------- --------------
Net interest income after provision for
loan losses ........................... (21,096) (13,256) (35,412) (69,764)
NONINTEREST INCOME:
Customer banking fees .................. (7,076)(a) (5,673)(a) (9,479)(a) (22,228)
Mortgage banking operations ............ -- -- -- --
Net loss on sales of assets ............ -- -- -- --
Other .................................. (240)(a) (139)(a) (410)(a) (789)
------------- --------------- -------------- --------------
Total noninterest income .............. (7,316) (5,812) (9,889) (23,017)
NONINTEREST EXPENSE:
Compensation and benefits .............. (6,771)(a) (4,154)(a) (8,551)(a) (19,476)
Other .................................. (7,436)(a) (4,348)(a) (14,039)(a) (25,823)
------------- --------------- -------------- --------------
Total noninterest expense ............. (14,207) (8,502) (22,590) (45,299)
------------- --------------- -------------- --------------
Income (loss) before income taxes and
minority interest ..................... (14,205) (10,566) (22,711) (47,482)
Income tax (benefit) expense ........... (1,397) (1,039) (2,235) (4,671)(2)
------------- --------------- -------------- --------------
Net income (loss) before minority
interest .............................. (12,808) (9,527) (20,476) (42,811)
MINORITY INTEREST ...................... (2,561) (1,905) (4,096) (8,562)(3)
------------- --------------- -------------- --------------
Net income (loss) ...................... $ (10,247) $ (7,622) $ (16,380) $ (34,249)
============= =============== ============== ==============
</TABLE>
- ------------
(a) Represents historical information related to the retail banking
facilities in Ohio, Michigan and the Northeast. Other noninterest
expense includes occupancy, SAIF insurance premiums, marketing, OTS
assessments, data processing and telecommunications directly
attributable to the Ohio, Michigan and Northeast retail branch
operations.
P-30
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(D) BRANCH SALES (CONTINUED)
(1) Represents increase in interest expense on borrowings to fund the
Branch Sales, as follows:
<TABLE>
<CAPTION>
FUNDING ADDITIONAL INTEREST
SOURCE PERIOD BORROWINGS RATE EXPENSE
- --------------- ----------------------------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
FHLB advances January 1, 1995 - December 31, 1995 $2,000,000 7.72%(i) $154,400
Reverse repos January 1, 1995 - December 31, 1995 2,132,967 5.92%(ii) 126,271
------------ ----------
$4,132,967 $280,671
============ ==========
</TABLE>
The sales are assumed to be funded by a combination of a one-year FHLB
advance of $2 billion and reverse repurchase agreements, as these instruments
most closely meet the Bank's current interest rate risk management objectives
in conjunction with the borrowing capacities for the respective debt
instruments. Additional pro forma borrowings are computed as follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Deposit totals at January 1, 1995 .......... $1,431,872 $749,788 $2,369,728 $4,551,388
Less:
Carrying value of office premises and
equipment ................................ 8,591 6,510 13,397 28,498
Carrying value of loans receivable ....... 2,836 3,333 6,353 12,522
Carrying value of cash and cash
equivalents .............................. 9,395 3,830 8,150 21,375
Gain on sale (iii) ........................ 131,233 52,510 172,283 356,026
------------ ---------- ------------ ------------
Additional pro forma borrowings ............ $1,279,817 $683,605 $2,169,545 $4,132,967
============ ========== ============ ============
</TABLE>
(i) Represents rate for a one-year fixed rate FHLB advance as of January
1, 1995.
(ii) Represents average reverse repurchase rate for 1995.
(iii) Represents pro forma gain on Branch Sales, computed as follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Deposit totals at January 1, 1995 $1,431,872 $749,788 $2,369,728 $4,551,388
Premium percentage per contract . 9.10% 7.18% 7.30% 7.85%
------------ ---------- ------------ ------------
Total pro forma premium ......... 130,300 53,835 172,990 357,125
Adjustment of intangibles
related to deposits sold ....... 933 (1,325) (707) (1,099)
------------ ---------- ------------ ------------
Gain on sale of deposits (a) ... $ 131,233 $ 52,510 $ 172,283 $ 356,026
============ ========== ============ ============
</TABLE>
(a) The remaining assets and liabilities will be sold at their
respective carrying values, resulting in no gain or loss.
(2) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December
31, 1995 related to the Branch Sales was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ........................ $ (873)
State taxes, at an assumed rate of 8% ............ (3,798)
---------
$(4,671)
=========
</TABLE>
(3) Represents minority interest relative to $42,811 in pro forma losses
relating to the Branch Sales.
P-31
<PAGE>
FIRST NATIONWIDE (PARENT) HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(E) PRO FORMA ADJUSTMENTS
(1) Represents the decrease in interest expense relative to the paydown of
securities sold under agreements to repurchase with proceeds from the
issuance of Series A Preferred Shares. The reduction in interest
expense was established using an interest rate of 6.008%, the weighted
average rate of these obligations during the year ended December 31,
1995 using a one month LIBOR rate less five basis points.
(2) Represents interest expense as follows:
<TABLE>
<CAPTION>
<S> <C>
$575 million 10 5/8% Notes ..................... $ 61,094
$140 million 9 1/8% Senior Subordinated Notes . 12,775
$455 million (Parent) Holdings 12 1/2% Senior
Notes ......................................... 56,875
---------
$130,744
=========
</TABLE>
(3) Represents the amortization of:
<TABLE>
<CAPTION>
<S> <C>
$20,000 in deferred debt issuance costs over the seven year
term of the 10 5/8% Notes ..................................... $2,857
$5,600 in deferred debt issuance costs over the seven year term
of the Holdings 9 1/8% Senior Subordinated Notes .............. 800
$18,076 in deferred debt issuance costs over the seven year
term of the (Parent) Holdings 12 1/2% Senior Notes ........... 2,582
--------
$6,239
========
</TABLE>
(4) Represents amounts necessary to adjust historical tax expense to the
pro forma computation. Pro forma tax expense for the year ended
December 31, 1995 related to the issuance of the Series A Preferred
shares, the issuance of the Holdings 9 1/8% Senior Subordinated Notes
and the Notes was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ................................. $(2,399)
State, at an assumed rate of 4.425% ........................ (5,554)
----------
$(7,953)
==========
</TABLE>
(5) Represent adjustments to minority interest as follows:
(a) Preferred stock dividends on the $200,000 Series A Preferred
Shares, net of tax benefits, at an assumed rate of 9 1/4% per
annum. The tax benefit is due to the deductibility of the
dividend for income tax purposes as a result of Calfornia
Federal Preferred Capital Corporation's qualification as a real
estate investment trust. Each 25 basis point change in the
interest rate on the Series A Preferred Shares would change
interest expense, net of tax benefits, by $450. If the
underwriter's 15% over-allotment option is exercised in full,
dividends on the Series A Preferred Shares, net of tax
benefits, for the period would increase by $2,498.
(b) Dividends on Holdings Preferred Stock (estimated at 12% per
annum), including the compounding effect of dividends
paid-in-kind.
(c) Hunter's Glen 20% minority interest, net of tax, relative to
the $575 million Notes at 10 5/8%, the $140 million Holdings 9
1/8% Senior Subordinated Notes and the decrease in interest
expense relative to the paydown of securities sold under
agreements to repurchase with proceeds from the issuance of the
Series A Preferred Shares.
P-32
<PAGE>
GLOSSARY OF TERMS
"Acquisitions" means the Cal Fed Acquisition, the SFFed Acquisition and
the LMUSA Purchases.
"AMT" means federal alternative minimum tax.
"Assistance Agreement" means the amended agreement by and among the Bank,
FSLIC Resolution Fund (as successor to the Federal Savings and Loan Insurance
Corporation), First Gibraltar Holdings Inc. and MacAndrews & Forbes Holdings
Inc.
"Bank" means First Nationwide Bank, A Federal Savings Bank.
"Branch Purchases" means the acquisitions by the Bank of (i) in April 1995
of $13 million in deposits located in Tiburon, California from East-West
Federal Bank, a federal savings bank, (ii) in August 1995 of three retail
branches located in Orange County, California with deposit accounts totalling
approximately $356 million from ITT Federal Bank, fsb and (iii) on December
8, 1995 of four retail branches located in Sonoma County, California with
associated deposit accounts of approximately $144 million from Citizens
Federal Bank, a Federal Savings Bank.
"Branch Sales" means, collectively, the Ohio Branch Sale, the Northeast
Branch Sales and the Michigan Branch Sale.
"California Federal Litigation" means the claim by California Federal
against the United States in the lawsuit, California Federal Bank v. United
States, Civil Action No. 92-138C.
"Capital Contribution" means the net proceeds from the Notes and the net
proceeds from the issuance of the Holdings Preferred Stock, totalling
approximately $700 million which will be contributed by Holdings to First
Nationwide.
"Cash Payment" means the cash payment, if any, actually received by
California Federal pursuant to a final, nonappealable judgment in final
settlement of the California Federal Litigation.
"FHLB" means the Federal Home Loan Bank.
"FN Escrow Merger" means a merger agreement, dated September 19, 1996 by
and between Holdings and FN Escrow whereby FN Escrow will be merged with and
into Holdings.
"FNMC" means First Nationwide Mortgage Corporation, the Bank's mortgage
banking subsidiary.
"Holdings 9 1/8% Senior Subordinated Notes" means the $140 million
aggregate principal amount of 9 1/8% Senior Subordinated Notes Due 2003 and
issued by Holdings.
"Home Federal Acquisition" means the acquisition on June 1, 1996 by the
Bank of Home Federal Financial Corporation and its wholly owned federally
chartered savings association subsidiary, Home Federal Savings and Loan
Association of San Francisco, which had approximately $717 million in assets
and $646 million in deposits and operated 15 branches in Northern California.
"Litigation Interests" means the Contingent Litigation Recovery
Participation Interests distributed in July 1995 by California Federal to its
common shareholders, each entitling the holder thereof to receive an amount
(the aggregate of such amounts being referred to as the "Recovery Payment")
equal to five millionths of one percent (0.00005%) of the Cash Payment after
deduction of (i) the aggregate expenses incurred by California Federal in
prosecuting the California Federal Litigation and obtaining such Cash
Payment, (ii) any income tax liability of California Federal, computed on a
pro forma basis, as a result of California Federal's receipt of such Cash
Payment (net of any income tax benefit to California Federal from making the
Recovery Payment, and disregarding for purposes of this clause (ii) the
effect of any net operating loss carryforwards of other tax attributes held
by California Federal or any of its subsidiaries or affiliated entities) and
(iii) the expenses incurred by California Federal in connection with the
creation, issuance and trading of the Litigation Interests, including without
limitation, legal and accounting fees and the fees and expenses of the
certificate agent.
"LMUSA" means Lomas Mortgage USA, Inc.
33
<PAGE>
"LMUSA Purchases" means the LMUSA 1995 Purchase and the LMUSA 1996
Purchase.
"LMUSA 1995 Purchase" means the purchase of FNMC on October 2, 1995 from
LMUSA of a loan servicing portfolio of approximately $11.1 billion, a master
servicing portfolio of 2.9 billion and other assets.
"LMUSA 1996 Purchase" means the purchase of FNMC on January 31, 1996 from
LMUSA of its remaining loan servicing portfolio which, as of December 31,
1995, totalled $14.1 billion, a master servicing portfolio of $2.7 billion
and other assets.
"master serving portfolio" means a portfolio of mortgage servicing rights,
which are rights to service mortgages held by others, which mortgage
servicing rights are owned by third parties who have contracted with FNMC to
monitor the performance, and consolidate the reporting, of various other
services.
"Michigan Branch Sale" means the sale of the Bank's 21 retail branches in
Michigan that was consummated on June 28, 1996.
"Northeast Branch Sales" means the sales of the Bank's 30 retail branches
in New York and New Jersey that were consummated on March 22, 1996.
"Ohio Branch Sale" means the sale of the Bank's 28 retail branches in Ohio
that was consummated on January 19, 1996.
"OTS" means the Office of Thrift Supervision.
"(Parent) Holdings 12 1/2% Senior Notes" means the $455 million aggregate
principal amount of 12 1/2% Senior Notes due 2003 and issued by (Parent)
Holdings.
"SAIF" means the Savings Association Insurance Fund, which insures the
deposit accounts of First Nationwide, up to applicable limits.
"Secondary Litigation Interest" means a Secondary Contingent Litigation
Recovery Participation Interest which will entitle the holder thereof to
receive an amount equal to twenty millionths of one percent (0.000020%) of
the Secondary Recovery Payment, if any. Pursuant to the merger agreement
regarding the Cal Fed Acquisition, Cal Fed will distribute to common
shareholders entitled to receive the merger consideration one-tenth of a
Secondary Litigation Interest for each share of Cal Fed common stock held.
"Secondary Recovery Payment" means sixty percent (60%) of the amount
obtained from the following equation: (a) the Cash Payment, minus (b) the sum
of the following: (i) the aggregate expenses incurred by California Federal
in prosecuting the California Federal Litigation and obtaining such Cash
Payment, (ii) any income tax liability of California Federal, computed on a
pro forma basis, as a result of California Federal's receipt of such Cash
Payment (net of any income tax benefit to California Federal, computed on a
pro forma basis, from the payment of a portion of the Secondary Recovery
Payment to holders of Secondary Litigation Interests), (iii) the expenses
incurred by California Federal in connection with the creation issuance and
trading of the Litigation Interests and the Secondary Litigation Interests,
including without limitation, legal and accounting fees and the fees and
expenses of the interest agent, (iv) the payment due to holders of the
Litigation Interests and (v) one hundred twenty-five million dollars
($125,000,000). "Income tax liability of California Federal computed on a pro
forma basis" means the aggregate amount of any and all relevant items of
income, gain, loss, or deduction associated with the receipt by California
Federal of the Cash Payment multiplied by the highest, combined marginal rate
of federal, state and local income taxes in the relevant year and
disregarding for purposes of such computation the effect of any net operation
loss carryforwards or other tax attributes of California Federal or any of
its subsidiaries or affiliated entities. "Income tax benefit to California
Federal computed on a pro forma basis" means the aggregate amount of any and
all relevant items of income, gain, loss, or deduction associated with the
payment by California Federal of the Secondary Recovery Payment multiplied by
the highest, combined marginal rate of federal, state and local income taxes
in the relevant year and disregarding for purposes of such computation the
effect of any net operation loss carryforwards or other tax attributes of
California Federal or any of its subsidiaries or affiliated entities.
P-34
<PAGE>
"Series A Preferred Shares" means the $200 million aggregate liquidation
value of par value $.01 per share Preferred Stock of California Federal
Preferred Capital Corporation.
"SFFed" means SFFed Corp.
"SFFed Acquisition" means the acquisition by the Bank on February 1, 1996
of SFFed and its wholly owned subsidiary, San Francisco Federal Savings and
Loan Association, which had approximately $4.0 billion in assets and
approximately $2.7 in deposits and operated 35 branches in the Northern
California area.
"Special SAIF Assessment" means a special assessment related to the
recapitalization of the SAIF which was levied based on a rate of 65.7 cents
per $100 of SAIF-insured domestic deposits held as of March 13, 1995 as a
result of the Economic Growth and Regulatory Paperwork Reduction Act of 1996.
P-35
<PAGE>
Media Contact:
Janis Tarter, Cal Fed, (415) 904-1199
Mary Rische, Cal Fed, (415) 904-1203
Investor Contact:
Chase Mellon (800) 806-8035
FOR IMMEDIATE RELEASE
FIRST NATIONWIDE BANK COMPLETES MERGER
WITH CALIFORNIA FEDERAL BANK
COMBINED BANK KEEPS CAL FED NAME, FIRST NATIONWIDE'S HEADQUARTERS
SAN FRANCISCO, January 3, 1997 -- First Nationwide Holdings Inc., parent
company of First Nationwide Bank, today completed its purchase of Cal Fed
Bancorp Inc. and its subsidiary, California Federal Bank. The merged bank is
called California Federal Bank, A Federal Savings Bank, also known as Cal
Fed. (First Nationwide Holdings' name will not change, nor will that of the
bank's mortgage subsidiary, First Nationwide Mortgage Corporation.)
The combined institution has approximately $30 billion in assets, making
it the fourth largest thrift in the nation.
While the merger is effective today, First Nationwide Bank branches won't
adopt the Cal Fed name until the weekend of March 21, when all accounts from
both institutions will be converted to one system. Effective March 24,
customers of both the "old" California Federal Bank and the "old" First
Nationwide Bank will be able to conduct business at any of the "new" Cal Fed
locations. Prior to the conversion, customers of both institutions may make
automated teller machine (ATM) withdrawals at any First Nationwide or Cal Fed
branch without paying a "foreign" ATM fee.
Included in the Cal Fed acquisition are 119 retail branches with
approximately $9 billion in deposits. Effective March 24, three of the
acquired Cal Fed branches (in Palo Alto, Thousand Oaks and Culver City,
California) will be consolidated into nearby First Nationwide branches
(renamed Cal Fed), and four First Nationwide Bank branches (in San Rafael,
Oxnard, Ventura and Glendale, California) will be consolidated into nearby
Cal Fed branches.
Terms of the merger call for holders of Cal Fed Bancorp's common stock to
receive $23.50 in cash for each of their shares, for a total cash
consideration of approximately $1.2 billion, plus a new security representing
the right to participate in a portion of the net cash proceeds, if any,
recovered in California Federal Bank's pending breach of contract lawsuit
against the federal government. Shareholders will receive one Secondary
Contingent Litigation Recovery Participation Interest for each ten common
shares of Cal Fed Bancorp held at the time of the closing. This new security
is expected to be quoted and traded on the national market of NASDAQ (CALGL).
Within the next few days, Chase Mellon Shareholder Services, the transfer
agent for the common shares, will send shareholders a letter describing how
to exchange their shares for the merger consideration. Questions concerning
this process should be directed to Chase Mellon Shareholder Services at (800)
806-8035. (For others who want additional information on the security, a copy
of the offering circular for the security is on file with the Office of
Thrift Supervision.)
At September 30, 1996, First Nationwide Bank's assets totaled $16.8
billion and California Federal Bank's totaled $14.1 billion. After the branch
consolidations in March, the combined bank will have 229 retail branches: 101
in Southern California, 94 in Northern California, 24 in Florida, seven in
Nevada and three in Texas.
Based in San Francisco, the "new" California Federal Bank is a privately
held institution and an indirect subsidiary of MacAndrews and Forbes Holding
Inc. The bank and its subsidiaries employ approximately 5,500 people.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cal Fed Bancorp Inc.:
We have audited the accompanying consolidated statements of financial
condition of Cal Fed Bancorp Inc. and subsidiaries (the "Company") as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cal Fed
Bancorp Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 1 of the notes to the consolidated financial
statements, the Company adopted the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, in
1994, and No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in 1993.
KPMG Peat Marwick LLP
Los Angeles, California
January 18, 1996
F-1
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash ................................................................... $ 273.7 $ 292.8
Short-term liquid investments .......................................... 74.1 333.8
Securities purchased under agreements to resell ........................ 1,674.6 48.2
Securities available for sale (market value: $200.3 in 1995 and
$1,731.5 in 1994) ..................................................... 200.3 1,731.5
Securities held to maturity (market value $2,361.3 in 1995 and $2,437.2
in 1994) .............................................................. 2,366.7 2,525.1
Loans receivable held for sale (market value: $13.8 in 1995 and $1.3 in
1994) ................................................................. 13.6 1.3
Loans receivable held for investment ................................... 9,290.0 8,746.0
Federal Home Loan Bank stock ........................................... 135.7 134.1
Interest receivable .................................................... 79.5 79.6
Premises and equipment ................................................. 71.2 81.5
Real estate held for sale .............................................. 49.5 77.9
Prepaid expenses and other assets ...................................... 91.7 130.6
----------- -----------
Total Assets ....................................................... $14,320.6 $14,182.4
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ............................................................... $ 9,476.7 $ 8,360.9
Advances from Federal Home Loan Banks .................................. 2,671.0 2,526.0
Securities sold under agreements to repurchase ......................... 857.3 1,751.0
Student Loan Marketing Association advances ............................ 200.0 475.0
Subordinated debentures ................................................ 57.6 66.5
Interest payable ....................................................... 29.4 18.6
Other liabilities ...................................................... 141.1 186.1
----------- -----------
Total Liabilities .................................................. $13,433.1 $13,384.1
=========== ===========
Preferred stock of subsidiary .......................................... 266.0 266.0
Stockholders' equity
Common stock .......................................................... 49.2 49.2
Additional paid-in capital ............................................ 838.6 836.6
Net unrealized holding gains (losses) on securities available for sale -- (19.2)
Retained earnings (deficit) ........................................... (266.3) (334.3)
----------- -----------
Total Stockholders' Equity ......................................... 621.5 532.3
----------- -----------
Total Liabilities and Stockholders' Equity ......................... $14,320.6 $14,182.4
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable ................................................. $ 706.9 $ 630.4 $ 756.5
Securities held to maturity ...................................... 170.3 135.5 160.9
Securities purchased under agreements to resell .................. 68.5 44.0 30.5
Securities available for sale .................................... 49.4 75.2 61.7
Short-term liquid investments .................................... 12.9 23.0 4.3
--------- ---------- ----------
Total interest income ......................................... 1,008.0 908.1 1,013.9
--------- ---------- ----------
Interest expense:
Deposits ......................................................... 441.6 390.8 516.1
Borrowings ....................................................... 254.5 175.7 95.8
--------- ---------- ----------
Total interest expense ........................................ 696.1 566.5 611.9
--------- ---------- ----------
Net interest income ........................................... 311.9 341.6 402.0
Provision for loan losses ......................................... 31.8 74.9 163.5
--------- ---------- ----------
Net interest income after provision for loan losses .......... 280.1 266.7 238.5
Other income:
Fee income ....................................................... 54.5 62.4 64.3
(Loss) gain on sales of loans .................................... (0.3) 0.5 5.4
Gain on sales of securities ...................................... 6.9 0.2 --
Gain on sale of Southeast Division ............................... -- 135.0 --
Other ............................................................ 2.4 3.1 0.5
--------- ---------- ----------
Total other income ............................................ 63.5 201.2 70.2
--------- ---------- ----------
Other expenses:
Compensation ..................................................... 97.1 118.7 133.9
Office occupancy ................................................. 39.4 47.3 50.2
Other general and administrative ................................. 79.4 89.2 102.5
Federal deposit insurance premiums and special assessments ...... 26.0 35.1 36.7
--------- ---------- ----------
Total general and administrative expenses ..................... 241.9 290.3 323.3
Operations of real estate held for sale .......................... 8.0 45.9 118.3
Loss on assets held for accelerated disposition .................. -- 274.8 --
Amortization of goodwill ......................................... -- -- 15.5
--------- ---------- ----------
Total other expenses .......................................... 249.9 611.0 457.1
--------- ---------- ----------
Earnings (loss) before income tax expense (benefit) and cumulative
effect of change in accounting for goodwill ...................... 93.7 (143.1) (148.4)
Income tax expense (benefit) ...................................... 0.1 6.3 (2.9)
--------- ---------- ----------
Earnings (loss) before cumulative effect of change in accounting
for goodwill ..................................................... 93.6 (149.4) (145.5)
Cumulative effect of change in accounting for goodwill ........... -- (273.7) --
--------- ---------- ----------
Net earnings (loss) before dividends on preferred stock of
subsidiary ................................................... 93.6 (423.1) (145.5)
Dividends on preferred stock of subsidiary ........................ 25.6 16.9 3.8
--------- ---------- ----------
Net earnings (loss) available for common stockholders ............ $ 68.0 $(440.0) $ (149.3)
========= ========== ==========
Earnings (loss) per common share before the cumulative effect of
change in accounting for goodwill ................................ $ 1.36 $ (3.82) $ (5.98)
Loss per share of the cumulative effect of change in accounting
for goodwill ..................................................... $ -- $ (6.28) $ --
Net earnings (loss) per common share .............................. $ 1.36 $(10.10) $ (5.98)
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year ......................................... $ 49.2 $ 25.0 $ 25.0
Issuance of shares of common stock .................................. -- 21.6 --
Exercise of common stock warrants ................................... -- 2.6 --
--------- --------- ---------
Balance at end of year ............................................... 49.2 49.2 25.0
--------- --------- ---------
Additional paid-in capital:
Balance at beginning of year ......................................... 836.6 658.2 662.6
Issuance of shares of common stock .................................. -- 161.7 --
Exercise of common stock warrants ................................... -- 20.7 --
Long-term incentive stock options ................................... 2.0 4.3 0.1
Other ............................................................... -- (8.3) (4.5)
Balance at end of year ............................................... 838.6 836.6 658.2
--------- --------- ---------
Net unrealized holding (losses) gains on securities available for
sale:
Balance at beginning of year ......................................... (19.2) 8.3 (0.7)
Net unrealized holding gains (losses) ............................... 19.2 (27.5) 9.0
--------- --------- ---------
Balance at end of year ............................................... -- (19.2) 8.3
--------- --------- ---------
Retained earnings (deficit):
Balance at beginning of year ......................................... (334.3) 105.7 255.0
Net earnings (loss) available for common stockholders .............. 68.0 (440.0) (149.3)
--------- --------- ---------
Balance at end of year ............................................... (266.3) (334.3) 105.7
--------- --------- ---------
Total Stockholders' Equity ............................................ $ 621.5 $ 532.3 $ 797.2
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) available for common stockholders .......... $ 68.0 $ (440.0) $ (149.3)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Loss on assets held for accelerated disposition ................ -- 274.8 --
Cumulative effect of change in accounting principle ........... -- 273.7 --
Depreciation and amortization .................................. 13.0 14.8 33.1
Accretion of fees and discounts ................................ (13.5) (37.3) (21.0)
Provision for losses on loans receivable ....................... 31.8 74.9 163.5
(Recovery) provision for losses on real estate held for sale .. (7.4) 79.7 93.6
Loss (gain) on sales of loans .................................. 0.3 (0.5) (5.4)
Loans originated for sale ...................................... (117.2) (115.8) (648.3)
Gain on sales of securities .................................... (6.9) (0.2) --
Proceeds from sales of loans receivable held for sale ......... 183.2 1,099.4 940.1
Decrease in other assets ....................................... 39.0 7.3 46.3
(Decrease) increase in other liabilities ....................... (34.4) 17.0 (2.1)
Other items .................................................... (11.1) (20.5) (25.9)
----------- ----------- -----------
Net cash provided by operating activities ................... 144.8 1,227.3 424.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated for investment ................................ (2,128.9) (2,503.5) (2,020.1)
Purchases of securities available for sale ..................... (202.9) (1,519.2) (5.5)
Proceeds from sales of securities available for sale .......... 976.3 670.4 --
Proceeds from sales of loans held for investment ............... -- -- 65.1
Net (purchases) maturities of securities held to maturity ..... (54.2) 0.4 (145.7)
Principal collected on loans receivable held for investment ... 1,152.1 1,406.9 1,877.2
Principal collected on securities held to maturity ............ 435.8 533.5 597.4
Proceeds from maturities of securities ......................... 808.8 1.0 254.5
Net (increase) decrease in FHLB stock .......................... (1.6) (12.6) 29.0
Proceeds from sales of real estate held for sale, net ......... 136.8 398.2 522.7
Net (additions) dispositions of premises and equipment ........ (2.8) 8.3 2.3
Net decrease (increase) in short-term liquid investments ...... 259.7 (27.0) 123.9
Net (increase) decrease in securities purchased under
agreements to resell .......................................... (1,626.4) (18.0) 9.6
Proceeds from sale of California Thrift & Loan ................. -- -- 30.3
----------- ----------- -----------
Net cash (used) provided by investing activities ........... (247.3) (1,061.6) 1,340.7
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits ................................ 1,115.8 (4,239.9) (511.2)
Proceeds from Federal Home Loan Bank advances .................. 3,135.0 1,710.0 505.0
Payments on Federal Home Loan Bank advances .................... (2,990.0) (200.0) (1,328.7)
Net (decrease) increase in reverse repurchase agreements ...... (893.7) 1,501.2 (185.3)
Proceeds from other borrowings ................................. 3.0 202.0 317.5
Payments on other borrowings and subordinated debentures ...... (286.7) (41.4) (300.9)
Proceeds from the issuance of common shares .................... -- 210.9 --
Proceeds from the issuance of preferred shares of subsidiary .. -- 164.2 89.0
----------- ----------- -----------
Net cash provided (used) by financing activities ........... 83.4 (693.0) (1,414.6)
----------- ----------- -----------
Net (decrease) increase in cash ................................. (19.1) (527.3) 350.7
Cash at beginning of period ..................................... 292.8 820.1 469.4
----------- ----------- -----------
Cash at end of period ........................................... $ 273.7 $ 292.8 $ 820.1
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Cal Fed Bancorp Inc. was incorporated as a Delaware corporation to serve
as the holding company for California Federal Bank, F.S.B. ("California
Federal") During the 1995 fourth quarter, California Federal received both
regulatory and shareholder approval to reorganize into a holding company
structure. Prior to the effective date of the reorganization, Cal Fed Bancorp
Inc. was a wholly-owned subsidiary of California Federal. On December 22,
1995, as part of the reorganization into a holding company structure,
California Federal contributed $22 million in capital to Cal Fed Bancorp Inc.
On January 1, 1996, the reorganization was effected whereby each share of
California Federal, common stock was converted into one share of Cal Fed
Bancorp Inc. common stock. As a result of the reorganization, California
Federal, became a wholly-owned subsidiary of Cal Fed Bancorp Inc. The other
equity securities remain outstanding securities of California Federal.
However, while the 7 3/4% noncumulative convertible preferred stock, Series A
of California Federal remains an outstanding security of California Federal,
the Series A preferred stock will be convertible into shares of Cal Fed
Bancorp Inc. common stock if converted. The Bank may call the Series A
preferred stock at anytime on or after March 31, 1996 at its par value of
$25.00.
The consolidated financial statements include the accounts of Cal Fed
Bancorp Inc. and its subsidiaries ("the Bank"). The Bank maintains 125 full
service branches in California and Nevada and is one of the largest savings
associations in the United States. The Bank offers a broad range of consumer
financial services including demand and term deposits and mortgage and
consumer loans. Subsidiaries of the Bank sell insurance and investment
products to the Bank's customers, and have previously engaged in the real
estate investment and development and trust business. The Bank's deposit
gathering and loan production operations are concentrated in California,
particularly in Southern California.
It is the Bank's policy to consolidate all majority-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated
in consolidation. Certain reclassifications have been made to the 1994 and
1993 data in order to conform to the current presentation. The preparation of
the Bank's 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 operations of the Bank for the periods presented. Actual results
may differ from those estimates calculated by the Bank.
In December 1995, California Federal contributed approximately $22 million
in capital to Cal Fed Bancorp Inc. as part of the reorganization into a
holding company structure. Although the contribution did not impact
California Federal's consolidated regulatory capital at December 31, 1995,
California Federal's regulatory capital will be reduced by the amount of the
contribution in 1996.
SHORT-TERM LIQUID INVESTMENTS
The Bank's short-term liquid investments consist of federal funds sold and
certificates of deposit. These investments generally mature within 60 days.
The Bank invests in these assets as a means to maximize its return on
short-term funds that it holds for liquidity purposes.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank invests in securities purchased under agreements to resell
("repurchase agreements") to maximize the yield on its liquid assets. The
Bank obtains collateral for these agreements, which normally consists of U.S.
treasury securities or mortgage-backed securities ("MBS") guaranteed by
agencies of the U.S. government. The collateral is held in the custody of a
trustee, who is not a party to the transaction.
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CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The duration of these agreements is typically less than 30 days. The Bank
deals only with nationally recognized investment banking firms as the
counterparties to these agreements. The Bank's investment in repurchase
agreements solely consisted of securities purchased under agreements to
resell identical securities.
INVESTMENTS IN SECURITIES
The Bank's investment in securities principally consists of U.S. treasury
securities and mortgage-backed securities. The Bank has created MBS when it
exchanges pools of loans for mortgage-backed securities ("securitized
loans"). The Bank adopted Statement of Financial Accounting Standard No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115")
at December 31, 1993. In accordance with SFAS 115, the Bank classifies its
investment in securities as held to maturity securities, trading securities
and available for sale securities as applicable. The Bank did not hold any
trading securities at December 31, 1995 or 1994.
Available for Sale Securities
The Bank has classified certain securities as "available for sale". The
Bank classifies securities as available for sale based upon a determination
that such securities may be sold at a future date or if there are foreseeable
circumstances under which the Bank would sell such securities.
Securities designated as available for sale are recorded at market value.
Changes in the market value of debt securities held for sale are included in
shareholders' equity as unrealized holding gains or losses net of the related
tax effect, if any. Unrealized losses, on available for sale securities
reflecting a decline in value judged to be other than temporary, are charged
to income in the Consolidated Statement of Operations. Realized gains or
losses on available for sale securities are computed on a specific
identification basis.
Securities Held to Maturity
The Bank has classified certain securities as "held to maturity".
Securities are designated as held to maturity if the Bank has the positive
intent and the ability to hold the securities to maturity. Held to maturity
securities are carried at amortized cost, adjusted for the amortization of
any related premiums or the accretion of any related discounts into interest
income using a methodology which approximates a level yield of interest over
the estimated remaining period until maturity. Unrealized losses on held to
maturity securities, reflecting a decline in value, judged by the Bank to be
other than temporary, are charged to income and reported under the caption
"Gain (loss) on Sale of Securities" in the Consolidated Statements of
Operations.
LOANS RECEIVABLE
The Bank's principal interest earning asset is loans receivable. The Bank
primarily originates loans secured by residential property of 4 units or less
("residential 1-4 loans"). Prior to 1993, the Bank was active in the
origination of loans secured by residential properties of 5 or more units
("multifamily loans") and loans secured by office buildings, shopping
centers, industrial buildings, warehouses, marinas and hotels ("commercial
real estate loans.") The Bank currently limits its originations of
multifamily and commercial real estate loans to finance the sale of real
estate. Prior to 1993, the Bank was active in the origination of loans
secured by vehicles, mobile homes, boats and unsecured personal loans
("consumer loans"). Since 1993, the Bank has ceased originating consumer
loans for its own portfolio. However, the Bank does originate consumer loans
for other financial institutions for a fee. The Bank segregates its loan
portfolio into loans held for sale and loans held for investment. The Bank
normally designates a loan as held for sale at the time of origination. The
Bank's portfolio of residential 1-4 loans, multifamily loans and
F-7
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
commercial real estate loans are primarily secured by property located in
California. The Bank continues to focus its origination efforts in
California, particularly in Southern California. The Bank's ability to
originate loans is affected by economic conditions, competition and the
market for real estate in California. Likewise, the ability of the Bank's
borrowers to honor their contractual loan obligations to the Bank are also
affected by the strength of the California economy and particularly the
availability of employment and the pricing for residential housing. Should
the California economy, the market for real estate, and/or the availability
of employment experience a significant downturn over the near term, the Bank
may experience a reduction in the level of loan originations and/or an
increase in loan losses.
Loans Receivable Held for Sale
The Bank has designated certain of its loans receivable as "held for
sale". In determining the level of loans held for sale, the Bank considers
whether such loans would be sold in response to liquidity needs,
asset/liability management requirements, regulatory capital needs and other
factors. The Bank's current policy is to designate substantially all
originations of fixed-rate residential 1-4 loans that conform to the
underwriting criteria of Fannie Mae ("FNMA"), formerly known as the Federal
National Mortgage Association or Freddie Mac ("FHLMC"), formerly known as the
Federal Home Loan Mortgage Corporation, as held for sale.
Loans held for sale are recorded at the lower of cost or market value.
Unrealized losses are recorded as reduction in earnings and are included
under the caption "Gain (loss) on sale of loans" in the Consolidated
Statements of Operations. Realized gains and losses from the sale of loans
receivable are computed under the specific identification method.
Gains and Losses from the Sale of Loans
The Bank sells whole loans and participations in mortgage loans to
institutional and private investors. Gains and losses resulting from the
sales of loans are determined on the specific identification method and
reflect the extent that the sales proceeds exceed or are less than the Bank's
investment in the loans (which includes adjusting the unpaid principal
balance of the loans for unearned discounts, premiums and deferred fees and
costs at the time of sale). In some cases, the Bank sells loans and continues
to service such loans for the investor. In these cases, the Bank recognizes a
gain or loss on the loan sale measured by the present value of the difference
between the yield on the loans and the yield to be paid to the buyer, reduced
by the normal servicing fees, over the estimated remaining lives of those
loans using market prepayment, default and discount rate assumptions. If
loans are sold with recourse, the estimated liability under the recourse
provisions is provided for in the computation of the gain or loss. The
resulting deferred discount or premium ("excess servicing") is amortized as
an addition to or deduction from income using the interest method, adjusted
for actual prepayments. The Bank periodically reviews the remaining premium
to ensure that it does not exceed the present value of the estimated excess
servicing fees, using current estimates of market prepayments and default. In
the event that actual prepayments exceed the assumptions used in determining
the gain or loss, the deferred premium is adjusted to reflect current
prepayment projections by a charge to operations. To the extent sales of
loans involve the sale of part of a loan or a pool of loans with
disproportionate credit and prepayment risks, the cost basis is allocated
based upon the relative fair market value of the portion sold and the portion
retained on the date such loans were acquired or, if that is not
determinable, the date of sale. The amount of excess servicing recorded by
the Bank was $3.9 million at both December 31, 1995 and 1994. Such amounts
were included in "Prepaid expenses and other assets" on the Consolidated
Statements of Financial Condition.
Loan Servicing
The Bank services its loan portfolio and real estate and consumer loans
which are owned by independent investors. Loans serviced by the Bank for
others are primarily the result of the Bank selling
F-8
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
loans while retaining the servicing of such loans. Loans which are serviced
for other parties are not included with loans receivable or any other asset
in the accompanying consolidated financial statements. Fees earned for
servicing loans for others are reported as income when the related loan
payments are collected. Loan servicing costs are charged to expense as
incurred.
Loans Receivable Held for Investment
The Bank's loan portfolio is comprised of residential 1-4 loans, loans
secured by income producing real estate ("income property loans") and
consumer loans. Since 1993, the Bank has not actively engaged in originating
income property loans, except to finance the sale of the Bank's real estate.
Loans receivable are generally recorded at the contractual amounts owed by
borrowers, less deferrals, unearned interest, the allowance for loan losses,
undisbursed funds and purchase premiums and discounts. Interest on loans is
credited to income as earned, to the extent deemed collectible. Discounts on
loans purchased and unearned interest on consumer loans is accreted into
interest income using the interest method over the contractual lives of the
loans, adjusted for actual prepayments.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an adjustment
of loan yield using the interest method. When a loan is paid off or sold, any
unamortized net deferred fee balance is credited to income. Commitment fees
received in connection with the purchase of loans are deferred and recognized
over the life of the resulting loans as an adjustment of yield, or if the
commitment expires unexercised, credited to income upon expiration of the
commitment. Any costs in connection with the purchase of loans are expensed
as incurred.
Impaired and Non-Performing Loans
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan ("SFAS 114"). Under SFAS 114, a loan is impaired
when it is "probable" that a creditor will be unable to collect all amounts
due (i.e., both principal and interest) according to the contractual terms of
the loan agreement. SFAS 114 excludes among other items, large groups of
smaller-balance homogenous loans that are collectively evaluated for
impairment. The Bank adopted SFAS 114 as of January 1, 1995. The Bank has
defined residential 1-4 loans, consumer loans, multifamily loans with an
outstanding balance of less than $750,000 and commercial real estate loans
with an outstanding balance of less than $500,000 as homogenous loans. All
homogenous loans that are 90 days or more delinquent or are in foreclosure
are automatically placed on non-performing status. Additionally, homogenous
loans that have had a modification of terms are individually reviewed to
determine if they meet the definition of a troubled debt restructuring. The
measurement of impairment may be based on (i) the present value of the
expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate; (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The amount by which the recorded investment of the
loan exceeds the measure of the impaired loan is recognized by recording a
valuation allowance with a corresponding charge to the provision for losses.
For all loans secured by real estate, the Bank measures impairment and
establishes specific valuation allowances by utilizing the fair value of the
property collateralizing the loan. Additionally, SFAS 114 eliminates the
requirement that a creditor account for certain loans as foreclosed assets
until the creditor has taken possession of the collateral. SFAS 114 became
effective for financial statements issued for fiscal years beginning after
December 15, 1994 and is required to be adopted prospectively.
All loans designated by the Bank as "impaired" are either placed on
non-accrual status or are designated as restructured and are included with
those loans reported as non-performing. The Bank did
F-9
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
not experience a material impact upon its financial condition or operations
from the implementation of SFAS 114. The Bank's non-performing loans consist
of loans on which the Bank has ceased the accrual of interest ("non-accrual
loans") and loans on which various concessions have been made with respect to
the interest rate or other terms due to the inability of the borrower to
service the obligation under the original terms of the agreement
("restructured loans"). It is the Bank's policy to place a loan on
non-accrual status in the event that the borrower is 90 days or more
delinquent or earlier if the timely collection of interest and/or principal
appears doubtful. When a loan is determined to be impaired and/or placed on
non-accrual status, the accrued and unpaid interest receivable is reversed.
All cash subsequently collected on non-accrual loans are used to reduce the
recorded investment in the loan until the loan is returned to performing
status. The Bank's policy allows for loans that are contractually performing
to be designated as impaired and to be placed on non-accrual status, if the
future collection of interest and or principal appears doubtful or the risk
of default is probable.
Allowance for Loan Losses
The Bank has established valuation allowances for estimated losses on
specific loans ("specific valuation allowances") and for the inherent risk in
the loan portfolio which has yet to be specifically identified ("general
valuation allowances").
The Bank maintains a loan monitoring system which provides a means for the
timely identification of impaired and potential problem loans and to permit
the evaluation of the adequacy of the allowances for losses. The Bank's loan
monitoring system has established specific policies relating to its
residential 1-4, income property, commercial banking and consumer loan
portfolios. Additionally, the Bank is required by various regulatory agencies
to monitor and classify its assets as Pass, Special Mention, Substandard,
Doubtful and Loss. The Bank's monitoring system further disaggregates loans
that are determined to be Pass into four separate grades. Additionally, the
Bank places loans on a watchlist if they exhibit certain credit
characteristics. These characteristics include dollar size, tenant
concentration and the timing of maturity.
The Bank's residential 1-4 loans and consumer loans are relatively
homogenous and no single residential 1-4 or consumer loan possesses the
potential for significant risk of loss. Therefore, the Bank normally
evaluates the risk of loss on these loans by analyzing their loss experience,
performance, default rates and other indicators of risk for the portfolios as
a whole. The Bank stratifies its income property loan portfolio by size and
by type and treats performing multi-family loans with outstanding principal
balances less than $750,000 and commercial real estate loans with balances
less than $500,000 as homogenous portfolios. Income property loans that are
below the homogenous threshold are evaluated for impairment based upon their
payment status and on a pool basis. For income property loans exceeding the
homogenous threshold, the Bank conducts a periodic review of each loan in
order to test each loan for impairment. The frequency and type of review is
dependent upon the inherent risk attributed to each loan. The level of risk
is measured by a scale which evaluates each loan on a continuum of multiple
grades. The frequency and intensity of the loan review is directly
proportionate to the adversity of the loan grade. The Bank evaluates the risk
of default and the risk of loss for each loan subject to individual
monitoring. During 1995, the Bank expanded the scope of its individual loan
monitoring to include commercial real estate loans with an outstanding
principal balance in excess of $500,000. Previously, the Bank had utilized a
threshold of $750,000 for all income property loans. The Bank expanded the
scope of its non-homogenous loans to ensure that a majority of its commercial
real estate loans were subject to individual review. Non-performing income
property loans and performing loans that have been graded substandard,
special mention, or watchlist are typically reviewed on a quarterly basis.
Current appraisals are generally obtained annually as long as the loan
continues to possess certain risk characteristics. These loans are monitored
throughout the year by a review of the collateral's operating performance and
the borrowers
F-10
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
indicated or demonstrated ability to continue to meet their obligations.
When necessary, the Bank utilizes operating statements of the collateral to
perform its own discounted cash flow analyses. These analyses provide the
basis for specific valuation allowances. Numerous other factors are
considered in the evaluation, including a review of certain individual
borrowers' current financial status, credit standing, available collateral,
the Bank's judgment regarding prevailing and anticipated economic conditions
and other relevant factors.
Specific valuation allowances are provided when an identified decline in
the value of an impaired loan (or the related collateral) is identified. The
determination of specific valuation allowances includes a periodic evaluation
of the financial status of certain individual borrowers or collateral
relating to loans specifically identified as containing elements of potential
risk in the loan portfolio. For loans that are impaired and secured by real
estate or other collateral, the Bank provides specific allowances based upon
the excess of the outstanding loan amount over the fair value of the related
collateral with consideration of holding and selling costs.
General valuation allowances are based upon the inherent risk in the loan
portfolio that has not been specifically identified. The general valuation
allowance is based upon a number of factors, including historical loss
experience, the level of non-performing and internally classified loans, the
composition of the loan portfolio, estimated remaining lives of the various
types of loans within the portfolio, prevailing and forecasted economic
conditions and the Bank's judgment. General allowances are provided for all
loans, regardless of any specific allowances provided. The determination of
the Bank's allowance for loan losses is based on estimates that are affected
by changes in the regional or national economy and market conditions. The
Bank believes that as of December 31, 1995 and 1994, the allowance for loan
losses is adequate based on current economic and market conditions. However,
in the course of evaluating the adequacy of the allowance for loan losses,
the Bank has assumed that the California economy and the market for real
estate will remain in the same relative condition that it was in at December
31, 1995. Should these factors experience a downturn in the near term or if
market interest rates increase significantly in the near term, the Bank could
experience a material increase in the level of loan defaults and charge-offs.
REAL ESTATE HELD FOR SALE
Real estate held for sale consists of real estate acquired in settlement
of loans ("REO") and real estate investments ("REI"). REO generally results
when property collateralizing a loan is foreclosed upon or otherwise acquired
by the Bank in satisfaction of the loan. REO is recorded at the lower of the
recorded investment in the loan satisfied, the fair value or the disposition
value of the related assets acquired less anticipated disposition costs. The
fair value of the assets is based upon a current appraisal adjusted for
estimated carrying and selling costs. The disposition value is based upon the
current market pricing of the asset. Net cash receipts on REO are recorded as
a reduction in the basis of the asset. Net cash payments are expensed as
incurred. The Bank's REI consist of properties that the Bank, through its
subsidiaries, acquired for purposes of development. The Bank has not been
actively involved in real estate investment or development for several years.
The Bank's REI consist of properties where the Bank is actively seeking to
dispose of the property in an expeditious manner. The Bank records its REI at
the lower of cost or fair value of the properties. The Bank determines fair
value by utilizing recent sales activity and deducting for holding and
disposition costs over the estimated remaining period to sell the projects.
The Bank has assumed an orderly disposition in estimating the holding period
to sale. Should the Bank be unable to sell the project at the projected
prices, or if the holding period is substantially longer than forecast, or if
the Bank's intent with respect to an orderly disposition were to change, the
fair value ultimately realized by the Bank could be materially lower than the
Bank's current forecast.
F-11
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT, DEPRECIATION AND CAPITALIZATION OF INTEREST
Maintenance and repairs on premises and equipment are charged to expense
in the year incurred. Depreciation and amortization of premises and equipment
are computed using the straight-line method over the estimated useful lives
of the assets. Interest incurred on amounts used to finance the construction
of such assets is capitalized and amortized over the depreciable lives of the
related assets.
GOODWILL
Goodwill, which represents the excess of cost over the fair value of
tangible and identifiable intangible net assets acquired, was amortized on a
straight-line basis over the expected periods to be benefited, ranging from
20 to 40 years. During 1994, the Bank applied Statement of Financial
Accounting Standards No. 72 Accounting for Certain Acquisitions of Banking or
Thrift Institutions ("SFAS 72") to acquisitions initiated, by the Bank, prior
to September 30, 1982. SFAS 72 requires, among other things, that to the
extent, the fair value of liabilities assumed exceeds the fair value of
identifiable assets acquired from a banking or thrift institution, the
unidentifiable intangible asset recognized (i.e., goodwill) generally shall
be amortized over a period no longer than the discount on the acquired
long-term interest earning assets. SFAS 72 was effective for acquisitions
initiated after September 30, 1982 with retroactive application permitted.
The Bank had been accounting for its acquisitions initiated subsequent to
September 30, 1982 in accordance with SFAS 72. The cumulative effect of the
retroactive application of SFAS 72 resulted in the acceleration of the Bank's
goodwill amortization arising from the Bank's thrift institution acquisitions
initiated prior to September 30, 1982. Under generally accepted accounting
principles, the cumulative effect from the retroactive application of SFAS 72
must be reflected as of the first day of the fiscal year in which it is
implemented. To that extent, $273.7 million of remaining unamortized goodwill
was eliminated effective January 1, 1994.
INCOME TAXES
The Bank files a consolidated federal income tax return and a combined
California franchise tax report with its subsidiaries.
The Bank has adopted financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109") and has applied the provisions of SFAS 109 retroactively to January 1,
1982. Under the asset and liability method of SFAS 109, deferred income tax
expense (benefit) is derived by establishing deferred tax assets and
liabilities as of the reporting date for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. The Bank's evaluation of the
realizability of deferred tax assets includes consideration of the amount and
timing of future reversals of existing temporary differences, as well as
available taxable income in carryback years. The Bank has not considered
income from future operations in evaluating the realizability of its deferred
tax assets. See Note 20 Income Taxes.
STOCKHOLDERS' EQUITY
The par value of the Bank's common stock was $1.00 per share at December
31, 1995 and at December 31, 1994. The number of shares issued and
outstanding were 49,200,444 and 49,199,044 at December 31, 1995 and 1994,
respectively. The authorized number of common shares were 100,000,000 at
December 31, 1995 and 1994.
F-12
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
During the 1995 fourth quarter, California Federal obtained regulatory
and shareholder approval to reorganize into a holding company structure. As a
result of the reorganization, on January 1, 1996, each share of California
Federal common stock was converted into one share of Cal Fed Bancorp Inc.
common stock. Consequently, California Federal became a wholly-owned
subsidiary of Cal Fed Bancorp Inc. The other equity securities remain
outstanding securities of California Federal. However, the 7 3/4%
noncumulative convertible preferred stock, Series A of California Federal is
convertible into shares of Cal Fed Bancorp Inc. common stock if converted.
The par value of the 7 3/4% noncumulative convertible preferred stock,
Series A of California Federal was $25.00 per share at both December 31, 1995
and December 31, 1994, respectively. The designated and outstanding number of
shares at December 31, 1995 were 3,800,000 and 3,740,000, respectively.
Preferred stock, Series A, dividends are not cumulative and are payable
quarterly when declared by the Board of Directors of California Federal
Quarterly dividend payments commenced May 15, 1993. The preferred stock,
Series A, is convertible by the holder into common stock at anytime, unless
previously redeemed by California Federal, at a conversion price of $20.16
per share of common stock, subject to adjustment. The preferred stock, Series
A, is not redeemable prior to March 31, 1996. The preferred stock, Series A,
is redeemable solely at the option of California Federal at any time on or
after March 31, 1996, in whole or in part, at par value plus declared but
unpaid dividends.
During 1994, California Federal issued 1,725,000 shares of 10 5/8%
noncumulative perpetual preferred stock, Series B ("Preferred Stock, Series
B"). Cash dividends on the Preferred Stock, Series B, are not cumulative and
are payable quarterly when declared by the Board of Directors of California
Federal. The Preferred Stock, Series B, has a liquidation preference and par
value of $100.00 per share. The par value of the Preferred Stock, Series B
was $100.00 per share at December 31, 1995 and 1994. Both the designated and
outstanding number of shares at December 31, 1995 and 1994 were 1,725,000.
The Preferred Stock, Series B, is generally not redeemable prior to April 1,
1999. The Preferred Stock, Series B, is redeemable at the option of
California Federal, in whole or in part, at $105.313 per share on or after
April 1, 1999 and prior to April 1, 2000, and at prices decreasing annually
thereafter to the liquidation preference of $100.00 per share on or after
April 1, 2003, plus declared but unpaid dividends. In addition, the Preferred
Stock, Series B, is redeemable at the option of California Federal or its
successor or any acquiring or resulting entity with respect to California
Federal on or after April 1, 1996 and prior to April 1, 1999 in whole, but
not in part, in the event of a change of control of California Federal at
$114.50 per share.
On February 28, 1993, California Federal completed a one-for-five reverse
stock split (the "Reverse Stock Split") of all classes of California Federal
common stock. The Reverse Stock Split has been reflected in the consolidated
financial statements of the Bank for and at all periods presented. Therefore,
the par value, the number of shares issued, the number of shares authorized,
the number of shares outstanding and the average number of shares at and for
all periods are presented as if the reverse stock split had occurred at the
first day of each fiscal year for all periods presented.
NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common share is computed by dividing net earnings
(loss) available to common stockholders by the weighted average number of
common shares outstanding, including the dilutive effect, if any, of common
stock equivalents. For the years ended December 31, 1995, 1994 and 1993, the
weighted average number of shares used to calculate primary earnings (loss)
per share were 49,855,150; 43,556,167 and 24,971,836, respectively. For the
years ended December 31, 1995, 1994 and 1993 the weighted average number of
shares used to calculate fully diluted earnings (loss) per share were
50,020,218; 43,556,167 and 24,971,836, respectively.
F-13
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 107 "Disclosures about Fair Value of Financial
Instruments" ("SFAS 107").
Financial instruments are defined under SFAS 107 as cash, evidence of an
ownership in an entity, or a contract that conveys or imposes on an entity
the contractual right or obligation to either receive or deliver cash or
another financial instrument.
A significant portion of the Bank's assets and liabilities are financial
instruments as defined under SFAS 107. The Bank is also a party to financial
instruments that are not reported on the Consolidated Statements of Financial
Condition ("off balance sheet financial instruments"). Such off-balance sheet
financial instruments include: commitments to originate loans, standby
letters of credit, recourse arrangements and interest rate exchange
agreements.
Risks Associated with Financial Instruments
Credit Risk
Credit risk of a financial instrument is the possibility that a loss may
result from the failure of another party to perform in accordance with the
terms of the contract. The most significant credit risk associated with the
Bank's financial instruments is concentrated in its loans receivable.
Additionally, the Bank is subject to credit risk on certain off-balance sheet
financial instruments. The Bank utilizes a loan monitoring system to evaluate
the level of credit risk on its loan portfolio and utilizes a similar process
for loans sold by the Bank with recourse and standby letters of credit. The
Bank's credit risk with respect to interest rate exchange agreements is
limited to the premium paid on interest rate cap and floor arrangements, and
the amount of interest due from the counterparty.
Market Risk
Market risk of a financial instrument is the possibility that future
changes in market prices may reduce the value of a financial instrument or
increase the contractual obligations of the Bank. The Bank's market risk is
concentrated in its portfolios of securities held for sale and loans
receivable. The Bank's securities held for sale are traded in active markets.
The values of these securities are susceptable to fluctuations in the general
market. When a borrower fails to meet the contractual requirements of his
loan agreement, the Bank is subject to the market risk of the collateral
securing the loan.
Interest Rate Risk
Financial instruments are subject to interest rate risk to the extent that
they reprice on a frequency, degree or basis that varies from market
repricing. The Bank is subject to interest rate risk to the degree that its
interest earning assets reprice on a different frequency or schedule than its
interest bearing liabilities. A majority of the Bank's loans receivable and
mortgage backed securities reprice based upon the eleventh district cost of
funds index ("COFI"). The repricing of COFI tends to lag market interest
rates. The Bank closely monitors the pricing sensitivity of its financial
instruments and, if deemed cost effective, utilizes hedging and other
asset/liability techniques to mitigate the impact of interest rate risk.
Concentrations of Credit Risk
The Bank's lending activities are principally conducted in California and
the Bank currently focuses on the origination of residential 1-4 loans. The
largest concentration of the Bank's loan portfolio is located
F-14
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
in the Los Angeles County area of California. The ability of the Bank's
borrowers to repay their commitments is contingent on several factors,
including the economic conditions in the borrower's geographic region,
primarily Southern California, market interest rates, and upon the individual
financial condition of the borrower.
Fair Value of Financial Instruments
SFAS 107 requires the disclosure of the fair value of financial
instruments, whether or not recognized on the statement of financial
condition, for which it is practicable to estimate the value. SFAS 107
requires that the Bank disclose estimated fair values for its financial
instruments. Fair values, estimates and assumptions are set forth in Note 21
Fair Value of Financial Instruments.
Derivative Financial Instruments
The Bank's derivative financial instruments are primarily limited to
interest rate exchange contracts and such contracts are predominantly
utilized for hedging activities for existing assets and liabilities.
The Bank uses several types of interest rate exchange contracts as an
integral part of its asset/liability management program including: (i)
interest rate swaps, (ii) interest rate caps and (iii) interest rate floors.
Interest rate exchange agreements have been utilized primarily to reduce
interest rate risk on certain interest bearing liabilities and interest
earning assets. Interest rate swap agreements are instruments in which the
Bank and another party agree to exchange interest payments on a notional
amount. When using interest rate cap agreements, the Bank pays another party
a premium in exchange for cash payments on a notional amount in the event
that a specified index exceeds a specified rate. When utilizing interest rate
floors, the Bank pays a premium in exchange for cash payments on a notional
amount in the event that a specified index is less than a specified rate.
These premiums are amortized over the duration of the agreement. The notional
amounts of interest rate exchange agreements are not reflected in the
Consolidated Statements of Financial Condition, but are disclosed in the
notes to these Consolidated Financial Statements. The Bank records interest
income and expense on the accrual method for its interest rate exchange
agreements. Changes in the value of interest rate exchange agreements that
are designated as held for a purpose other than trading are not reflected in
the Consolidated Financial Statements unless the Bank determined that it was
probable that the counterparty would default. Interest rate exchange
agreements that are designated as held for trading purposes are evaluated at
fair value, and in the event that such evaluation indicates a net liability
to the Bank, such liablility is reflected on the Consolidated Statements of
Financial Condition with corresponding charge reflected on the Consolidated
Statement of Operations. To the extent that the Bank is in a gain position,
the Bank records net cash flow as income upon receipt and typically does not
record unrealized gains as income.
NEWLY ENACTED AND PROPOSED ACCOUNTING PRONOUNCEMENTS
In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures" ("SFAS 118"). SFAS 118 amends SFAS 114 to
allow a creditor to use existing methods for recognizing interest income on
an impaired loan. Additionally, SFAS 118 requires, among other things,
additional disclosure, either in the body of the Financial Statements or in
the accompanying notes, about the recorded investment in certain impaired
loans and about how a creditor recognizes interest income related to those
impaired loans. SFAS 118 is effective for financial statements issued for
fiscal years beginning after December 15, 1994. The disclosures required by
SFAS 118 are reflected in the Notes to the Consolidated Financial Statements.
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" ("SFAS 121").
F-15
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In the event that a
long-lived asset is determined to be impaired, an impairment loss shall be
recognized. SFAS 121 prescribes that impairment losses for long-lived assets
shall be measured as the amount by which the carrying amount of the asset
exceeds its fair value. Additionally, SFAS 121 provides that long-lived
assets, to be disposed by sale or abandonment, shall be reported at the lower
of carrying amount or fair value less cost of disposition. This statement is
effective for financial statements for fiscal years beginning after December
15, 1995, earlier application is permitted. The Bank has not yet implemented
SFAS 121 and does not believe that it will have a material adverse effect on
its financial position or results of operations.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"), an
amendment of FASB Statement No. 65 "Accounting for Certain Mortgage Banking
Activities" ("SFAS 65"). SFAS 122 amends SFAS 65 to remove the distinction in
accounting for mortgage servicing rights resulting from originated loans and
those resulting from purchased loans. Additionally, SFAS 122 requires that a
mortgage banking enterprise assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights SFAS 122 is to be
applied prospectively to fiscal years beginning after December 15, 1995,
earlier application is permitted. The Bank has not yet implemented SFAS 122
and does not believe that it will have a material adverse effect on its
financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all arrangements
by which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on
the price of the employer's stock. Examples are stock purchase plans, stock
options, restricted stock, and stock appreciation rights. This Statement also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from nonemployees. Those transactions must be
accounted for, or at least disclosed in the case of stock options, based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. The accounting
requirements of SFAS 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995. The disclosure requirements
of SFAS 123 are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which SFAS 123 is
initially adopted for recognizing compensation cost. The Bank has not yet
implemented SFAS 123 and does not believe that it will have a material
adverse effect on its financial position or results of operation.
In November 1995, the FASB issued a Special Report as an aid in
understanding and implementing Statement of Financial Accounting Standards
No. 115. "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). The Special Report included such guidance that enabled the Bank
to reassess the appropriateness of the classifications of all securities held
and account for any resulting reclassifications at fair value in accordance
with SFAS 115. During the fourth quarter of 1995, the Bank, in accordance
with the Special Report, redesignated $17.2 million of MBS from "held to
maturity" to "available for sale". Prior to December 31, 1995, the Bank sold
the MBS for a loss of less than $0.1 million.
PROPOSED LEGISLATION
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") to a maximum of $100,000 for each insured depositor. The Federal
Deposit Insurance Corporation ("FDIC") administers
F-16
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
a separate Bank Insurance Fund ("BIF") applicable to commercial banks and
certain other non-SAIF insured institutions. Legislation is currently under
consideration by Congress which includes a one-time assessment for SAIF
members such as the Bank. Should legislation be enacted in its currently
contemplated form, the Bank's one-time assessment would be approximately $80
million, based upon the Bank's insured deposits at March 31, 1995 and an
assumed assessment rate of 85 basis points. Additionally, once the SAIF has
been recapitalized through the one-time assessment, the Bank's deposit
insurance premium assessments would be reduced from the current rate. The
currently proposed legislation has evolved significantly over recent months
and may continue to change until final legislation is enacted, if ever.
Moreover, there can be no assurance that a premium reduction will occur.
Assuming the proposed one-time special assessment became law in 1996 and
was immediately charged against results of operations, the one-time
assessment would, most likely, have a material adverse effect on the Bank's
1996 results of operations. However, the Bank believes that it has sufficient
regulatory capital to continue to be classified as "well-capitalized"
following such an assessment. In addition, the Bank would not face any
liquidity issues as a result of such a one-time assessment.
In addition, this proposed legislation would also significantly change the
federal income tax law affecting the bad debt reserves of savings
institutions. Although these proposed tax law changes are generally intended
to provide favorable tax results to savings institutions, there are unique
situations, such as in the case of the Bank, where the results may be
unfavorable in comparison to current tax law. The proposed legislation is
currently under review and may change significantly before final legislation
is enacted, if ever.
NOTE 2: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purposes of the Consolidated Statements of Cash Flows, the Bank
defines cash as currency on hand and demand deposits with other financial
institutions.
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash Paid (Received) During the Year for:
Interest expense ............................ $685.2 $ 557.8 $617.4
Income taxes refunded ....................... (1.6) (8.5) (41.1)
Non-Cash Investing and Financing activities:
Loan foreclosures ........................... 146.2 189.3 506.3
Loans exchanged for mortgage-backed
securities .................................. 239.7 424.0 411.9
Transfer of securities to available for sale 17.2(a) -- 578.0
Transfer of loans to held for sale(b) ....... 78.7 1,213.9 189.6
Transfer of loans to held for investment .... -- -- 127.4
</TABLE>
- ------------
(A) In November 1995, the FASB issued a Special Report as an aid to
understanding and implementing SFAS 115. During the fourth quarter of
1995, the Bank, in accordance with the Special Report, redesignated
$17.2 million of MBS from "held to maturity" to "available for sale"
and, prior to December 31, 1995, sold the MBS for a loss of less than
$0.1 million.
(B) During 1994, the Bank designated $1.2 billion of performing and
non-performing loans as assets held for accelerated disposition. This
designation was made during 1994 as an integral part of the bank's
program to improve its capital position, reduce non-performing assets
and improve its operating efficiency.
F-17
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SHORT-TERM LIQUID INVESTMENTS
The Bank's short-term liquid investments include certificates of deposit,
commercial paper and Federal funds sold. The amount of short-term liquid
investments held by the Bank at any point in time is a function of many
factors including: liquidity requirements, projected cash requirements and
cash flows.
The following table presents the Bank's short-term liquid investments at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------------------------------------- -----------------------------------------------
CARRYING WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG. WEIGHTED AVG.
VALUE RATE MATURITY (DAYS) CARRYING VALUE RATE MATURITY
(DAYS)
--------------- --------------- ------------------- --------------- --------------- ---------------
(DOLLARS IN (DOLLARS IN
MILLIONS) MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds
sold .......... $70.0 5.80% 2 $330.0 6.28% 3
Certificates of
deposit ....... 4.1 5.19 27 3.8 3.18 32
------------------- ----------------
$74.1 5.77 $333.8 6.25
=================== ===============
</TABLE>
At both December 31, 1995 and 1994 accrued interest and dividends
receivable related to short-term liquid investments held to maturity was $0.2
million.
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell are collateralized by
mortgage-backed securities at December 31, 1995 and by U.S. Treasury
securities at December 31, 1994. The following table provides additional
information on the agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Carrying value of agreements to resell .................... $1,674.6 $ 48.2
Market value of collateral ................................ 1,704.4 48.3
Maximum amounts of outstanding agreements to resell at any
month-end ................................................ 1,704.2 48.2
Average amounts of outstanding agreements to resell for
the year ................................................. 1,144.5 1,032.9
Weighted average interest rate for the year ............... 5.99% 4.26%
Weighted average interest rate on year-end balances ...... 6.01% 5.70%
Weighted average maturity of outstanding agreements to
resell (days) ............................................ 11 3
</TABLE>
F-18
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (Continued)
At December 31, 1995 and 1994, the Bank held only securities purchased
under agreements to resell the identical securities. The securities
collateralizing these agreements are held in the custodial accounts of a
trustee, who is not a party to the agreement for the Bank for the duration of
the agreements. The following table presents the Bank's securities purchased
under agreements to resell, by counterparty, at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
COUNTERPARTY 1995 1994
- ------------------ ---------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Lehman Brothers .. $ 700.7 $48.2
Nomura Securities 500.0 --
Bear Stearns ...... 473.9 --
---------- -------
$1,674.6 $48.2
========== =======
</TABLE>
Accrued interest related to securities purchased under agreements to
resell at December 31, 1995 and 1994 totaled $2.7 million and less than $0.1
million, respectively.
NOTE 5: SECURITIES AVAILABLE FOR SALE
The carrying values, market values and weighted average rate of securities
available for sale at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED
UNREALIZED UNREALIZED HOLDING WEIGHTED
HISTORICAL CARRYING HOLDING HOLDING GAINS MARKET AVERAGE
COST VALUE GAINS LOSSES (LOSSES) VALUE RATE
---------- ------------ ------------ ------------ ------------ -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year $150.0 $149.9 $ -- $(0.1) $(0.1) $149.9 4.00%
Maturing after 1 year
but within 5 years ... 50.3 50.4 0.1 -- 0.1 50.4 7.46
------------ ---------- ------------ ------------ ------------ --------
$200.3 $200.3 $0.1 $(0.1) $ -- $200.3 4.87%
============ ========== ============ ============ ============ ========
</TABLE>
The carrying values, market values and weighted average rate of securities
available for sale at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED UNREALIZED UNREALIZED WEIGHTED
HISTORICAL CARRYING HOLDING HOLDING HOLDING MARKET AVERAGE
COST VALUE GAINS LOSSES LOSSES VALUE RATE
---------- ------------ ------------ ------------ ---------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year $1,001.2 $ 997.5 $-- $ (3.7) $ (3.7) $ 997.5 4.64%
Maturing after 1 year
but within 5 years .... 749.5 734.0 -- (15.5) (15.5) 734.0 6.19
------------ ---------- ------------ ------------ ------------ ----------
$1,750.7 $1,731.5 $-- $(19.2) $(19.2) $1,731.5 5.30%
============ ========== ============ ============ ============ ==========
</TABLE>
F-19
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: SECURITIES AVAILABLE FOR SALE (Continued)
The table below presents the activity of securities available for sale
for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1, ... $1,731.5 $ 894.7 $ 546.0
Purchases .............. 202.9 1,519.2 5.5
Sales .................. (969.4) (670.2) --
Transfers .............. 17.2(a) -- 578.0(b)
Maturities(c) .......... (801.1) 22.2 (250.1)
Market value adjustment 19.2 (34.4) 15.3
---------- ---------- ----------
Balance, December 31, . $ 200.3 $1,731.5 $ 894.7
========== ========== ==========
</TABLE>
- ------------
(a) During 1995, the Bank transferred $17.2 million of mortgage-backed
securities held to maturity to securities available for sale. See
Note 6 Securities Held to Maturity for further information.
(b) During 1993, the Bank adopted SFAS 115 and accordingly $578.0 million
of securities held to maturity were transferred to securities
available for sale.
(c) Maturities include amortization of premiums and accretion of
discounts.
Accrued interest receivable on securities available for sale at December
31, 1995 and December 31, 1994 totaled $2.7 million and $15.0 million,
respectively.
Proceeds from sales of securities available for sale during the years
ended December 31, 1995, 1994 and 1993 were $976.3 million, $670.4 million
and zero, respectively.
The Bank has pledged certain securities, including those available for
sale, as collateral for advances from the Student Loan Mortgage Association
("SLMA") and various other borrowings. The following table presents the
outstanding balances at the Bank's carrying value of securities pledged as
collateral at December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Repurchase agreements .. $ -- $692.6
SLMA advances .......... 124.9 287.0
Other borrowings ....... 58.8 11.9
-------- --------
$183.7 $991.5
======== ========
</TABLE>
NOTE 6: SECURITIES HELD TO MATURITY
The Bank's securities held to maturity have primarily consisted of MBS.
The Bank had an investment in a guaranteed investment contract, which matured
in 1995. The Bank's portfolio of MBS consist of securities issued by agencies
of the United States, such as Fannie Mae ("FNMA"). The investments are
purchased or are obtained by exchanging pools of mortgage loans for the
securities ("securitized loans").
F-20
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: SECURITIES HELD TO MATURITY (Continued)
Summarized below are securities held to maturity at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
-------------------------------------------------- -----------------------------------------------
GROSS GROSS GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE VALUE GAINS LOSSES VALUE
------------ ------------ ---------- ---------- ------------ ------------ ----------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
FNMA .................... $1,192.7 $17.9 $ (0.2) $1,210.4 $1,359.5 $0.4 $(46.4) $1,313.5
California Federal
AA-rated mortgage
pass-through securities 802.3 1.3 (5.2) 798.4 787.1 -- (21.1) 766.0
Other ................... 371.7 1.5 (20.7) 352.5 367.1 -- (20.8) 346.3
---------- ------------ ------------ ---------- ---------- ------------ ------------ ---------
2,366.7 20.7 (26.1) 2,361.3 2,513.7 0.4 (88.3) 2,425.8
---------- ------------ ------------ ---------- ---------- ------------ ------------ ---------
Guaranteed investment
contracts ................. -- -- -- -- 11.4 -- -- 11.4
---------- ------------ ------------ ---------- ---------- ------------ ------------ ---------
$2,366.7 $20.7 $(26.1) $2,361.3 $2,525.1 $0.4 $(88.3) $2,437.2
========== ============ ============ ========== ========== ============ ============ ========
</TABLE>
The weighted average interest rates of MBS held to maturity were 6.93% and
6.08% at December 31, 1995 and 1994, respectively. Accrued interest
receivable related to MBS held to maturity outstanding at December 31, 1995
and 1994 totaled $13.8 million and $12.7 million, respectively. The Bank
utilizes MBS as collateral for various borrowings. At December 31, 1995 and
1994, $1,316.3 million and $1,710.6 million, respectively, of MBS, were
pledged as collateral for various borrowings as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
-------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Advances from FHLB ..... $ 255.9 $ 309.7
Repurchase agreements .. 908.9 1,080.3
SLMA advances .......... 108.6 269.9
Other obligations ...... 42.9 50.7
---------- ----------
$1,316.3 $1,710.6
========== ==========
</TABLE>
At December 31, 1995, the Bank had $1,064.5 million of securitized loans
with some form of recourse to the Bank. In the unanticipated event the
securitized loans are sold, purchasers would have varying forms of recourse
to the Bank. The recourse provisions subject the Bank to varying degrees of
liability in the event of loss. The Bank currently intends to hold its
portfolio of mortgage-backed securities until maturity. The following table
presents the composition of securitized loans with potential recourse, by
collateral type, at December 31, 1995:
<TABLE>
<CAPTION>
ORIGINAL LOAN
ORIGINAL LOAN TO VALUE RATIO
SECURITIZED LOANS ORIGINAL LOAN TO VALUE RATIO GREATER THAN
WITH RECOURSE TO VALUE RATIO GREATER THAN 80% WITHOUT
COLLATERALIZED BY LESS THAN =80% 80% WITH PMI(a) PMI(a) TOTAL
- --------------------- --------------- --------------- --------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Residential 1-4 units $ 636.1 $51.0 $10.1 $ 697.2
Multi-family property 365.7 -- 1.6 367.3
--------------- --------------- --------------- ---------
$1,001.8 $51.0 $11.7 $1,064.5
=============== =============== =============== =========
</TABLE>
- ------------
(a) Private mortgage insurance (PMI) provides limited insurance protection
to the Bank in the event of default.
F-21
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: SECURITIES HELD TO MATURITY (Continued)
The Bank periodically reviews the credit quality of its portfolio of MBS.
In the case of securitized loans with recourse provisions, the Bank makes an
assessment of the credit quality of the underlying loans. See Note 1 Summary
of Significant Accounting Policies for a discussion of the Bank's loan
monitoring policies.
In November 1995, the FASB issued a Special Report as an aid to
understanding and implementing SFAS 115. During the fourth quarter of 1995,
the Bank, in accordance with the Special Report, redesignated $17.2 million
of MBS from "held to maturity" to "available for sale" and, prior to December
31, 1995, sold the MBS for a loss of less than $0.1 million. There were no
sales of MBS during the year ended December 31, 1994.
NOTE 7: LOANS RECEIVABLE HELD FOR SALE
In order to manage its asset size, liquidity requirements, the composition
and interest rate sensitivity of its interest earning assets and other
factors; the Bank originates certain fixed rate residential 1-4 loans for
sale.
At December 31, 1995 and 1994, the historical cost bases of loans
receivable held for sale were $13.6 million and $1.3 million, respectively.
At December 31, 1995 and 1994, the market value of loans receivable held for
sale were $13.8 million and $1.3 million, respectively. Market values, at
December 31, 1995 and 1994, were based upon quotes of similar or identical
loans.
Gross unrealized gains on loans receivable held for sale were $0.2 million
and zero at December 31, 1995 and 1994, respectively. Gross unrealized losses
on loans receivable held for sale were zero at both December 31, 1995 and
1994. Proceeds from sales of loans receivable held for sale were $183.2
million, $1,099.4 million and $940.1 million for the years ended December 31,
1995, 1994 and 1993, respectively.
The following table summarizes the gains and losses recorded for the
periods presented for loans receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994 1993
------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Realized gains from sales of loans receivable ............. $ 0.3 $ 1.0 $ 6.6
Realized losses from sales of loans receivable ........... (0.6) (0.5) (4.4)
Net lower of cost or market adjustment for unrealized
gains .................................................... -- -- 3.2
-------- ------- -------
Net (losses) gains ........................................ $(0.3) $ 0.5 $ 5.4
======== ======= =======
</TABLE>
F-22
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Loans secured by real estate:
Residential 1-4 ........................... $7,277.6 $6,543.3
Equity .................................... 64.1 79.3
---------- ----------
7,341.7 6,622.6
Income property:
Multi-family ............................. 1,346.2 1,458.1
Shopping centers ......................... 81.8 94.5
Office buildings ......................... 168.9 192.1
Other income property .................... 291.3 278.5
---------- ----------
Total income property ................... 1,888.2 2,023.2
---------- ----------
Total loans secured by real estate(a) ... 9,229.9 8,645.8
Consumer:
Mobile homes ............................. 66.3 79.6
Vehicles ................................. 21.5 49.4
Equity creditline ........................ 137.8 168.7
Unsecured ................................ 14.6 16.1
Loans secured by deposits ................ 9.4 8.8
---------- ----------
Total consumer loans .................... 249.6 322.6
---------- ----------
9,479.5 8,968.4
Loss:
Undisbursed loan funds .................... 0.1 --
Deferred loan (costs) fees ................ (13.9) (4.3)
Allowance for loan losses ................. 181.0 211.6
Unearned interest on equity/consumer loans 1.3 4.1
Discount on acquired loans ................ 7.4 9.7
---------- ----------
Total loans receivable ..................... 9,303.6 8,747.3
Less: Loans held for sale (see Note 7) .... 13.6 1.3
---------- ----------
Loans receivable held for investment ...... $9,290.0 $8,746.0
========== ==========
</TABLE>
- ------------
(a) Includes construction loans of $1.4 million at both December 31, 1995
and 1994.
Certain of the Bank's adjustable loan programs allow the borrower to make
monthly payments which are lower than the amount required to amortize the
loan until its maturity in any particular month. In the event that the
monthly payment is not sufficient to pay the interest accruing during the
month, the deficiency is added to the loan's principal balance ("negative
amortization"). In the event that a loan incurs significant negative
amortization, there is an increased risk that the market value of the
underlying collateral on the loan may be insufficient to fully satisfy the
outstanding principal and interest, should the borrower default.
At December 31, 1995 and 1994, the Bank's loan portfolio included $4.7
billion and $4.6 billion, respectively, of loans with the potential to
negatively amortize, of which $1.4 billion and $1.0 billion of loans had some
amount of negative amortization.
F-23
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
Accrued interest receivable related to loans receivable including loans
held for sale at December 31, 1995 and 1994 totaled $60.1 million and $51.7
million, respectively.
The Bank has pledged certain loans as collateral for advances from the
FHLB, letters of credit, interest rate swaps, and capital lease obligations.
The following table presents the outstanding balance of loans pledged as
collateral at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Advances from FHLB ............ $3,322.1 $3,408.1
Letters of credit from FHLB .. 52.3 107.4
Interest rate swap agreements -- 6.9
Capital lease obligations .... 8.7 9.5
---------- ----------
$3,383.1 $3,531.9
========== ==========
</TABLE>
The Bank's loans are concentrated in (i) loans secured by residential
property of 1-4 units, (ii) loans with collateral located in California and
(iii) loans secured by residential property of five units or more. The
following table shows the concentrations of the gross real estate secured
portfolio by state and property type:
<TABLE>
<CAPTION>
INCOME PROPERTY
------------------------------------------
RESIDENTIAL 1-4 EQUITY MULTI-FAMILY COMMERCIAL
---------------------- ---------------- ---------------------- ------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------- ---------------- ---------------------- ------------------
STATE 1995 1994 1995 1994 1995 1994 1995 1994
- -------------- ---------- ---------- ------- ------- ---------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California .... $6,288.9 $5,574.7 $49.5 $24.8 $1,234.6 $1,338.1 $512.7 $530.3
Florida ....... 456.4 533.3 11.3 45.8 31.5 34.5 14.8 16.7
Nevada ........ 183.4 182.9 2.9 7.1 41.7 42.8 6.3 8.0
Georgia ....... 79.6 92.0 0.1 1.4 7.9 8.1 2.0 2.1
New York ...... 34.4 30.3 -- -- 0.1 0.2 -- --
Arizona ....... 16.1 5.9 0.1 0.1 15.3 16.5 1.6 1.7
New Jersey .... 32.5 27.9 -- -- -- -- -- --
Texas ......... 24.8 19.5 -- -- 2.5 4.1 0.6 1.4
Connecticut .. 21.0 23.0 -- -- -- -- -- --
Washington .... 13.5 4.5 -- -- 4.9 5.0 -- --
Colorado ...... 16.4 3.0 -- -- -- -- 1.6 2.7
Illinois ...... 11.3 1.3 0.1 -- 1.1 1.3 -- --
Other (1) ..... 99.3 45.0 0.1 0.1 6.6 7.5 2.4 2.2
---------- ---------- ------- ------- ---------- ---------- -------- --------
$7,277.6 $6,543.3 $64.1 $79.3 $1,346.2 $1,458.1 $542.0 $565.1
========== ========== ======= ======= ========== ========== ======== ========
</TABLE>
- ------------
(1) Includes states with totals less than $11 million.
The majority of the Bank's California real estate loans are secured by
property located in Los Angeles, Orange, and San Diego counties.
At December 31, 1995, the largest amount of loans to a single borrower
totaled $39.8 million. The collateral for the loan is a 224,840 square foot
office building occupied entirely by certain of the Bank's operating and
administrative departments and subject to a lease for the life of the loan.
F-24
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
Impaired and Non-Performing Loans
The Bank identifies impaired loans through its loss monitoring process.
See Note 1 Summary of Significant Accounting Policies for further information
about the Bank's loan monitoring process. The Bank stratifies its review
procedures by loans that are reviewed on an individual basis, and those that
are treated as homogeneous pools. Loans that are considered to be homogeneous
are evaluated on the basis of their payment record and/or on a pool basis.
All homogenous loans that are 90 days or more delinquent or are in
foreclosure are automatically placed on non-performing status. Additionally,
homogeneous loans that have had a modification of terms are individually
reviewed to determine if they meet the definition of a troubled debt
restructuring.
Loans that are individually monitored are determined to be impaired if it
is determined that it is probable that the Bank will be unable to collect the
contractual amount of principal and interest owed to the Bank. The Bank's
policy allows for a loan to be designated as impaired even if the borrower
has currently fulfilled his repayment obligations. Loans that are delinquent
90 days or more, in foreclosure or if the borrower has filed for bankruptcy
are normally designated as impaired. If a loan is designated as impaired, the
loan is either placed on non-accrual status or designated as a restructured
loan and is included as a non-performing loan. Cash collected on impaired
loans on non-accrual status is generally applied as a reduction to the
carrying value of the loan.
The Bank has identified two types of non-performing loans within its
portfolio: non-accrual loans and restructured loans. The following table
summarizes the Bank's gross non-performing loans by property type at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
1995 1994
--------------------------------------- ---------------------------------------
NON-ACCRUAL RESTRUCTURED TOTAL NON-ACCRUAL RESTRUCTURED TOTAL
------------- -------------- -------- ------------- -------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 ......... $ 99.6 $3.0 $102.6 $ 97.7 $5.8 $103.5
Income property:
Multi-family ........... 86.3 0.3 86.6 55.9 -- 55.9
Shopping centers ....... 1.3 -- 1.3 2.3 -- 2.3
Office buildings ....... 8.8 -- 8.8 6.7 -- 6.7
Hotels/motels .......... -- -- -- 0.2 -- 0.2
Other income property . 6.8 -- 6.8 13.5 -- 13.5
------------- -------------- -------- ------------- -------------- --------
Total income property 103.2 0.3 103.5 78.6 -- 78.6
------------- -------------- -------- ------------- -------------- --------
Consumer ................ 3.5 -- 3.5 1.9 -- 1.9
------------- -------------- -------- ------------- -------------- --------
$206.3 $3.3 $209.6 $178.2 $5.8 $184.0
============= ============== ======== ============= ============== ========
Interest not recognized $ 10.6 $ -- $ 10.6 $ 18.0 $0.1 $ 18.1
============= ============== ======== ============= ============== ========
</TABLE>
For the years ended December 31, 1995 and 1994, interest income of less
than $0.1 million and $0.6 million, respectively, was recorded on
restructured loans. This was less than $0.1 million and $0.1 million,
respectively, lower than what would have been recorded if the restructured
loans had been performing in accordance with their original contractual
terms.
F-25
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
The following table summarizes the Bank's concentration of gross
non-accrual and restructured loans by state as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
NON-ACCRUAL RESTRUCTURED
-------------------------------------- ----------------------------------
STATE 1995 1994 1995 1994
- ------------ ------------------ ------------------ ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California . $188.7 91.5% $162.8 91.4% $3.1 94.0% $5.8 100.0%
Florida ..... 8.5 4.1 9.7 5.4 -- -- -- --
Nevada ...... 3.5 1.7 1.5 0.8 0.2 6.0 -- --
Georgia ..... 1.2 0.6 0.9 0.5 -- -- -- --
Texas ....... 1.0 0.5 -- -- -- -- -- --
Arizona ..... 0.4 0.2 -- -- -- -- -- --
Other ....... 3.0 1.4 3.3 1.9 -- -- -- --
-------- -------- -------- -------- ------ -------- ------ --------
$206.3 100.0% $178.2 100.0% $3.3 100.0% $5.8 100.0%
======== ======== ======== ======== ====== ======== ====== ========
</TABLE>
The following table presents impaired loans with specific allowances and
impaired loans without specific allowances by property type and by the method
that impairment is determined at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------
GROSS SPECIFIC
AMOUNT ALLOWANCE NET AMOUNT
-------- ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Impairment Measured By Individual Review:
Impaired Loans with Specific Allowances:
Multi-family ...................................... $ 86.1 $18.7 $ 67.4
Commercial real estate:
Office buildings ................................. 8.8 2.0 6.8
Shopping centers ................................. 1.3 0.2 1.1
Industrial ....................................... 5.8 1.1 4.7
Other ............................................ 0.9 0.3 0.6
-------- ----------- ------------
Total commercial real estate ...................... 16.8 3.6 13.2
-------- ----------- ------------
Total impaired loans with specific allowances ..... 102.9 22.3 80.6
-------- ----------- ------------
Impaired Loans without Specific Allowances:
Residential 1-4 ................................... 3.0 -- 3.0
Multi-family ...................................... 0.5 -- 0.5
Commercial real estate ............................ 0.1 -- 0.1
-------- ----------- ------------
Total impaired loans without specific allowances .. 3.6 -- 3.6
-------- ----------- ------------
Total impaired loans measured by individual review 106.5 22.3 84.2
-------- ----------- ------------
Impairment Measured on a Pool Basis:
Residential 1-4 ................................... 99.6 -- 99.6
Consumer .......................................... 3.5 -- 3.5
-------- ----------- ------------
103.1 -- 103.1
-------- ----------- ------------
Total impaired loans ............................... $209.6 $22.3 $187.3
======== =========== ============
</TABLE>
F-26
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
The Bank has designated all impaired loans at December 31, 1995 as
non-accrual or as a troubled debt restructuring. For all impaired loans, the
Bank evaluates the need for a specific allowance by comparing the fair value
of the related collateral to the net recorded investment in the loan. For all
impaired loans where the fair value of the related collateral is less than
the net recorded investment in the loan, the Bank allocates a specific
allowance equal to the excess of the net recorded investment in the loan over
the fair value of the related collateral with consideration given to holding
and selling costs. All uncollected interest relating to impaired loans has
been fully reversed from income. At December 31, 1995, the Bank had
designated $81.3 million of loans as impaired that were performing in
accordance with their contractual terms. The Bank applies cash collections
from impaired loans as a reduction of the loan's carrying amount. The average
recorded investment in the impaired loans was $89.2 million for the year
ended December 31, 1995. During the year ended December 31, 1995, the Bank
did not recognize interest income on impaired loans.
Allowance for Loan Losses
The Bank's policies for providing the appropriate level of allowance for
loan losses are discussed further in Note 1 Summary of Significant Accounting
Policies.
The following table presents an analysis of the general and specific
allowances at the dates presented:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------- ---------------------------------
SPECIFIC GENERAL SPECIFIC GENERAL
ALLOWANCE ALLOWANCE TOTAL ALLOWANCE ALLOWANCE TOTAL
----------- ----------- -------- ----------- ----------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential 1-4 ..... $ -- $ 45.0 $ 45.0 $ 4.1 $ 44.0 $ 48.1
Income property .... 24.3 90.0 114.3 30.4 112.0 142.4
----------- ----------- -------- ----------- ----------- -------
Total real estate 24.3 135.0 159.3 34.5 156.0 190.5
Consumer ............. -- 11.7 11.7 -- 11.1 11.1
Unallocated .......... -- 10.0 10.0 -- 10.0 10.0
----------- ----------- -------- ----------- ----------- -------
Total ............. $24.3 $156.7 $181.0 $34.5 $177.1 $211.6
=========== =========== ======== =========== =========== =======
</TABLE>
F-27
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
Activity in the allowance for loan losses for the years ended December
31, 1995, 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1, .......... $211.6 $ 254.3 $ 324.0
Provision for losses ......... 31.8 74.9 163.5
Charge-offs:
Real estate:
Residential 1-4 ............ (24.8) (19.5) (44.1)
Income property:
Multi-family .............. (30.2) (56.1) (64.9)
Shopping centers .......... (4.9) (0.9) (17.3)
Office buildings .......... (5.5) (15.2) (20.4)
Hotels/motels ............. -- (11.6) (16.0)
Other income property .... (1.6) (6.2) (4.1)
-------- --------- ---------
Total income property ... (42.2) (90.0) (122.7)
-------- --------- ---------
Total real estate .......... (67.0) (109.5) (166.8)
Commercial banking ......... -- (6.8) (61.0)
Consumer ................... (5.4) (7.0) (12.7)
-------- --------- ---------
Total Charge-offs ......... (72.4) (123.3) (240.5)
-------- --------- ---------
Recoveries:
Real estate:
Residential 1-4 ............ 3.1 0.9 1.2
Income property:
Multi-family .............. 5.2 0.9 4.7
Shopping centers .......... 0.1 -- 2.0
Office buildings .......... 0.4 0.3 3.3
Hotels/motels ............. -- -- 0.3
Other income property .... -- 0.4 0.9
-------- --------- ---------
Total income property ... 5.7 1.6 11.2
-------- --------- ---------
Total real estate ........... 8.8 2.5 12.4
Commercial banking .......... -- 2.1 0.3
Consumer .................... 1.2 1.1 1.7
-------- --------- ---------
Total recoveries ........... 10.0 5.7 14.4
-------- --------- ---------
Net charge-offs .............. (62.4) (117.6) (226.1)
-------- --------- ---------
Allowances of sold subsidiary -- -- (7.1)
-------- --------- ---------
Balance, December 31, ........ $181.0 $ 211.6 $ 254.3
======== ========= =========
</TABLE>
During the normal course of business, the Bank has securitized and/or sold
certain loans with recourse. Estimated probable loan losses and related costs
of collection and repossession are provided for at the time of such sales and
are periodically reevaluated. The Bank evaluates the credit risk of loans
sold with recourse in the same manner as it reviews its own portfolio of
loans. The Bank has accrued an allowance for potential future losses on loans
sold with recourse. Such allowance is included with "Other liabilities" on
the Consolidated Statements of Financial Condition.
F-28
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
A summary of the outstanding balance of loans sold with recourse at
December 31, 1995 follows:
<TABLE>
<CAPTION>
RESIDENTIAL INCOME
1-4 PROPERTY TOTAL
------------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Loans with original loan to value ratio less than or
equal to 80% ........................................... $125.4 $253.6 $379.0
Loans with original loan to value ratio greater than
80%:
With PMI ............................................... 2.2 -- 2.2
Without PMI ............................................ 28.8 26.3 55.1
------------- ---------- --------
$156.4 $279.9 $436.3
============= ========== ========
</TABLE>
The Bank has obtained credit insurance for $390.3 million of residential
loans sold with recourse not included in the amounts above. The amount of the
Bank's liability on these loans was limited to $2.8 million at December 31,
1995. The insurance was obtained to limit the Bank's risk of loss on these
loans. The fair value of the Bank's potential obligation for recourse or
guarantees on loans sold with recourse at December 31, 1995 and 1994 was
determined to approximate the value of the liability established by the Bank
for the potential cost of such obligations, which totaled $11.5 million and
$11.4 million at December 31, 1995 and December 31, 1994, respectively.
At December 31, 1995, $3.8 billion of loans owned by others were serviced
by the Bank (virtually all of which were originated by the Bank) compared to
$4.5 billion and $5.3 billion at December 31, 1994 and 1993, respectively.
Loan servicing fees, which are included as a component of "Fee income" on
the Consolidated Statements of Operations, totaled $12.4 million, $14.6
million and $18.5 million for the years ended December 31, 1995, 1994 and
1993, respectively.
During 1993, the Bank sold $5.9 million of loan servicing, and recorded
gains on the sales of $0.2 million. Such gains have been included with "Other
income" on the Consolidated Statements of Operations. During 1995 and 1994,
the Bank had no sales of loan servicing.
F-29
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
Fair Value of Loans Receivable
The fair value information presented below represents the Bank's estimate
of the fair value of its loans held for investment. The assumptions inherent
in these fair value estimates may be found in Note 21 Fair Value of Financial
Instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------- ----------------------------
BOOK VALUE (a) FAIR VALUE BOOK VALUE (a) FAIR VALUE
-------------- ------------ -------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Residential 1-4 loans:
Fixed ........................... $ 994.1 $ 996.6 $ 688.6 $ 664.0
Adjustable ...................... 6,295.3 6,293.1 5,888.5 5,700.0
-------------- ------------ -------------- ------------
Total residential 1-4 loans ... 7,289.4 7,289.7 6,577.1 6,364.0
Multi-family loans ............... 1,269.7 1,230.6 1,336.3 1,255.8
Commercial real estate loans .... 494.3 485.0 525.3 505.2
Consumer loans ................... 236.6 240.8 307.3 305.4
-------------- ------------ -------------- ------------
Total loans held for investment $9,290.0 $9,246.1 $8,746.0 $8,430.4
============== ============ ============== ============
</TABLE>
- ------------
(a) Book value is presented net of undisbursed loan funds, discounts,
deferred items and allowances for loan losses.
NOTE 9: REAL ESTATE HELD FOR SALE
The Bank's real estate held for sale is comprised of REO and REI.
A summary of real estate held for sale, net of allowance for losses,
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Residential 1-4 ...... $47.3 $58.6
Multi-family ......... 1.5 5.1
Office buildings .... 0.3 5.6
Hotels/motels ........ -- 6.1
Other income property 0.4 2.5
------- -------
$49.5 $77.9
======= =======
</TABLE>
F-30
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: REAL ESTATE HELD FOR SALE (Continued)
The following table presents the Bank's real estate held for sale by
state and property type at December 31, 1995:
<TABLE>
<CAPTION>
RESIDENTIAL OFFICE COMMERCIAL/
1-4 UNITS MULTIFAMILY BUILDINGS INDUSTRIAL TOTAL
------------- ------------- ----------- ------------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California . $45.6 $1.5 $0.3 $0.3 $47.7
Florida ..... 1.2 -- -- -- 1.2
Georgia ..... 0.3 -- -- -- 0.3
Nevada ...... 0.2 -- -- -- 0.2
Alabama ..... -- -- -- 0.1 0.1
------------- ------------- ----------- ------------- -------
Total ....... $47.3 $1.5 $0.3 $0.4 $49.5
============= ============= =========== ============= =======
REO ......... $20.0 $1.5 $0.3 $0.4 $22.2
REI ......... 27.3 -- -- -- 27.3
------------- ------------- ----------- ------------- -------
Total ....... $47.3 $1.5 $0.3 $0.4 $49.5
============= ============= =========== ============= =======
</TABLE>
The operating results of real estate held for sale are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
(Losses) gains from the sale of real estate and other
net operating income ................................... $(15.4) $ 33.8 $ (24.7)
Recoveries of (provision for) losses on real estate .... 7.4 (79.7) (93.6)
--------- --------- ---------
$ (8.0) $(45.9) $(118.3)
========= ========= =========
</TABLE>
During the second quarter of 1995, the Bank provided an allowance with
respect to certain litigation involving loans made in 1989 and 1990 to
California Communities, Inc. ("CCI"), a currently inactive subsidiary of the
Bank formerly engaged in real estate development activities. During the
second quarter of 1995, an Orange County California Superior Court jury
rendered a verdict in which it determined that the Bank was financially
liable for two loans made to CCI by the plaintiff on which CCI had defaulted.
The jury awarded the plaintiff $6.5 million in compensatory damages and
punitive damages of $20.0 million against the Bank and $5.0 million against
CCI. The Bank has began the process of appealing the judgment. While the Bank
believes that its liability from this litigation, if any, will be less than
the amount awarded by the jury, there can be no assurance that the ultimate
outcome of this litigation will result in an amount less than the amount
determined by the jury and it is possible that the Bank and its subsidiary
could ultimately be found liable for an amount in excess of the allowance
that the Bank has established. The provision for this allowance has been
included in 1995 real estate operations.
The following table presents the activity in the allowance for losses on
real estate held for sale:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1, ................. $ 95.7 $ 121.6 $ 136.6
(Recoveries of) provision for losses (7.4) 79.7 93.6
Net charge-offs ..................... (49.2) (105.6) (108.6)
-------- --------- ---------
Balance, December 31, ............... $ 39.1 $ 95.7 $ 121.6
======== ========= =========
</TABLE>
F-31
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: REAL ESTATE HELD FOR SALE (Continued)
Amounts charged off against the allowance for losses are shown net of
recoveries. During 1995, the Bank reduced its allowance for losses on real
estate held for sale. The reduction resulted from a decrease in the Bank's
portfolio of real estate held for sale and a decrease in the level of
charge-offs during 1995. The 1994 bulk sales transactions reduced the level
of delinquent loans which has resulted in lower levels of foreclosures and
losses. The Bank did not experience a material level of recoveries during
1994 or 1993.
NOTE 10: FEDERAL HOME LOAN BANK STOCK
The Bank's investment in Federal Home Loan Bank of San Francisco ("FHLB")
stock at December 31, 1995 and 1994 was $135.7 million and $134.1 million,
respectively. The FHLB provides a central credit facility for member
institutions. As a member of the FHLB system, the Bank is required to own
capital stock in the FHLB in an amount at least equal to the greater of 1% of
the aggregate principal amount of its unpaid home loans, home purchase
contracts and similar obligations at the end of each calendar year, assuming
for such purposes that at least 30% of its assets were home mortgage loans,
or 5% of its advances (borrowings) from the FHLB. The Bank was in compliance
with this requirement at December 31, 1995. The fair value of the Bank's FHLB
stock approximates book value due to the Bank's ability to redeem such stock
with the FHLB at par value.
NOTE 11: PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Land ......................... $ 12.0 $ 12.2
Buildings .................... 103.8 110.6
Furniture and equipment ..... 102.6 103.4
--------- ---------
218.4 226.2
Less accumulated depreciation (147.2) (144.7)
--------- ---------
$ 71.2 $ 81.5
========= =========
</TABLE>
The Bank has operating lease commitments on certain premises and
equipment. Lease expense, net of sublease income, totaled $25.5 million,
$30.7 million and $33.2 million for the years ended December 31, 1995, 1994
and 1993, respectively. Sublease income totaled $9.8 million, $10.3 million
and $10.5 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
Annual minimum lease commitments at the dates presented were:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Within one year .. $ 22.3 $ 22.6
Within two years . 21.7 22.3
Within three years 20.2 21.7
Within four years 23.4 20.5
Within five years 22.9 23.8
Thereafter ........ 160.2 194.2
-------- -------
$270.7 $305.1
======== =======
</TABLE>
F-32
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: ACCELERATED DISPOSITION OF ASSETS
During 1994, the Bank completed the accelerated disposition of $1.3
billion of performing and non-performing assets (the "1994 Bulk Sales"). The
assets included in the 1994 Bulk Sales included loans receivable and REO. The
loans receivable were transferred from the portfolio of loans held for
investment to "held for accelerated disposition" as an integral part of the
Bank's 1994 program to raise capital, reduce non-performing assets and
improve operating efficiency. The 1994 Bulk Sales were designed to reduce the
Bank's non-performing assets and reduce the Bank's exposure to certain
performing loans with higher risk profiles than the Bank wished to retain in
its portfolio. In selecting performing loans for the 1994 Bulk Sales, the
Bank considered the credit risk inherent in the loan, the concentration that
certain loans possessed because of the geographic location of the collateral,
the size of the loan and/or the overall relationship with certain borrowers.
A substantial amount of the performing loans sold as part of the 1994 Bulk
Sales were classified as substandard or designated as special mention. The
Bank recorded a $274.8 million loss from the 1994 Bulk Sales. The Bank
recorded $60.4 million of charge-offs, relating to previously established
specific allowances, on loans receivable included in the 1994 Bulk Sales.
The table below presents the composition of the assets sold in the 1994
Bulk Sales:
<TABLE>
<CAPTION>
PERFORMING NON-ACCRUAL RESTRUCTURED
LOANS LOANS LOANS REO TOTAL
------------ ------------- -------------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Residential 1-4 ....... $ 62.4 $121.8 $ -- $ 47.0 $ 231.2
Multi-family .......... 487.3 183.5 7.6 34.7 713.1
Commercial real estate 272.4 113.9 -- 20.6 406.9
------------ ------------- -------------- -------- ---------
$822.1 $419.2 $7.6 $102.3 $1,351.2
============ ============= ============== ======== =========
</TABLE>
During 1993, the Bank completed the sale of a pool of $232.1 million of
non-performing assets and collected $52.4 million of payoffs on
non-performing assets (the "1993 Bulk Sale"). Those transactions resulted in
a $228.7 million reduction in non-accrual loans and a $55.8 million reduction
in REO. The 1993 Bulk Sale resulted in $80.0 million of charge-offs. The
charge-offs related to the 1993 Bulk Sale were primarily related to
previously established specific valuation allowance.
NOTE 13: DEPOSITS
The Bank obtains deposits primarily through a network of full service
branches located in California and Nevada. Deposits obtained by the Bank are
insured by the SAIF of the FDIC up to a maximum of $100,000 for each
depositor.
F-33
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: DEPOSITS (Continued)
A summary of deposit balances and weighted average rates at the dates
indicated follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- -------------------
BALANCE RATE BALANCE RATE
---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Passbook accounts .............. $ 509.7 2.22% $ 578.2 2.22%
Money market and NOW accounts . 2,008.4 2.65 2,121.1 2.38
Non-interest bearing commercial 216.9 -- 184.9 --
---------- ----------
2,735.0 2,884.2
Certificate accounts:
2.00% to 2.99% ................ 16.5 2.86 28.9 2.86
3.00% to 3.99% ................ 22.5 3.34 861.0 3.85
4.00% to 4.99% ................ 208.2 4.61 2,352.4 4.53
5.00% to 5.99% ................ 2,545.3 5.49 1,605.3 5.51
6.00% to 6.99% ................ 3,630.4 6.26 296.9 6.70
7.00% to 7.99% ................ 293.0 7.13 322.9 7.29
8.00% to 8.99% ................ 23.3 8.45 3.4 8.15
9.00% to 9.99% ................ 2.5 9.29 4.6 9.20
10.00% to 10.99% .............. -- -- 0.8 10.51
11.00% to 11.99% .............. -- -- 0.5 11.55
---------- ----------
Total certificate accounts .. 6,741.7 5.95 5,476.7 4.99
---------- ----------
$9,476.7 4.87% $8,360.9 4.02%
========== ==========
</TABLE>
Deposit maturities are summarized as follows at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Maturing within one year ........................ $8,216.6 $7,392.3
Maturing after one year and within two years ... 946.6 521.7
Maturing after two years and within three years 196.2 178.9
Maturing after three years and within four years 53.6 182.8
Maturing after four years and within five years 26.6 44.4
Thereafter ...................................... 37.1 40.8
---------- ----------
$9,476.7 $8,360.9
========== ==========
</TABLE>
Jumbo certificates and other deposit accounts with balances of $100,000 or
greater included in the above table had the following remaining contractual
maturities:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1995 1994
---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
3 months or less .................. $ 789.5 $ 681.1
Over 3 months but within 6 months 247.2 132.6
Over 6 months but within 12 months 369.9 249.3
Over 12 months .................... 112.2 70.1
---------- ---------
$1,518.8 $1,133.1
========== =========
</TABLE>
F-34
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: DEPOSITS (Continued)
At December 31, 1995, the Bank had $273.8 million of brokered deposits.
At December 31, 1994, the Bank had no brokered deposits. Accrued interest
payable on deposits at December 31, 1995 and 1994 was $10.8 million and $2.7
million, respectively, which is included in "Interest payable" on the
Consolidated Statements of Financial Condition.
On August 4, 1994, the Bank completed the sale of 44 branches located in
Florida and Georgia ("Southeast Division"). At the time of the sale, the
Southeast Division had deposits totaling approximately $3.9 billion. The Bank
received a 4.10% deposit premium from the sale which contributed to a net
gain of $135.0 million recorded from the sale. The $135.0 million net gain
from the sale of the Southeast Division is included with "Other income" in
the Consolidated Statements of Operations for 1994.
A summary of interest expense by deposit type is summarized in the table
below for the years indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Passbook accounts ............. $ 11.1 $ 14.9 $ 18.8
Money market and NOW accounts 55.3 60.2 83.3
6-Month certificates .......... 26.2 27.8 41.0
9-Month to 1-Year certificates 133.5 113.5 154.4
Other certificates ............ 215.5 174.4 218.6
-------- -------- -------
$441.6 $390.8 $516.1
======== ======== =======
</TABLE>
Savings deposit fees, which are included as a component of "Fee income" in
the Consolidated Statements of Operations, totaled $25.4 million, $25.2
million and $26.1 million for the years ended December 31, 1995, 1994 and
1993, respectively.
NOTE 14: ADVANCES FROM FEDERAL HOME LOAN BANK
FHLB advances totaling $2,671.0 million at December 31, 1995 and $2,526.0
million at December 31, 1994, principally adjustable rate, fixed term, with
interest rates ranging from 5.77% to 9.71% are secured by MBS and certain
mortgage loans aggregating $3.6 billion and $3.7 billion at December 31, 1995
and 1994, respectively. The rates of the FHLB advances primarily reprice
based upon the LIBOR index and therefore are sensitive to its volatility.
Accrued interest payable on FHLB advances was $16.6 million and $9.5 million
at December 31, 1995 and 1994, respectively. The accrued interest on FHLB
advances is included with "Interest payable" on the Consolidated Statements
of Financial Condition.
A summary of maturities of FHLB advances and weighted average interest
rates at December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
------------------- -------------------
AMOUNT RATE AMOUNT RATE
---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Maturing in one year .. $ 880.0 6.16% $2,015.0 6.21%
Maturing in two years . 1,780.0 5.98 500.0 6.36
Maturing in three years -- -- -- --
Maturing in four years 11.0 9.71 -- -
Maturing in five years -- -- 11.0 9.71
---------- ----------
$2,671.0 6.06% $2,526.0 6.25%
========== ==========
</TABLE>
F-35
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
At December 31, 1995, the Bank had credit availability with the FHLB
which allows borrowings up to 30% of the Bank's assets, subject to the
balance of pledged collateral, with terms up to ten years in the form of FHLB
Advances and Letters of Credit.
During 1995, $1.6 billion of the Bank's FHLB advances, utilized as a
funding source for the sale of the Southeast Division, matured. Those
borrowings bore an interest rate based upon the 1 month LIBOR plus 0.27%.
When those borrowings matured, the FHLB offered to renew them. In order to
reduce the cost of those borrowings, the Bank entered into an interest rate
swap agreement which reduces the cost of the advances to approximately the
one month LIBOR plus 0.20%. The interest rate swap agreement was established,
such that the index which determines the interest that the Bank receives is
identical to the index that the Bank pays relative to the FHLB Advances. The
notional amount of the swaps totaled $1.5 billion at December 31, 1995 and
the maturity of the swaps is identical to that of the FHLB advances. The
counterparty to the interest rate swaps is an internationally recognized
broker-dealer.
NOTE 15: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The securities sold under agreements to repurchase ("reverse repurchase
agreements") were collateralized by MBS at December 31, 1995 and by MBS and
U.S. Treasury securities at December 31, 1994. The following table provides
additional information on the agreements:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Carrying value of agreements to repurchase ............... $ 857.3 $1,751.0
Carrying value of collateral ............................. 908.9 1,772.9
Market value of collateral ............................... 907.5 1,783.5
Maximum amounts of outstanding agreements
at any month-end ........................................ 1,336.8 1,751.0
Average amounts of outstanding agreements ................ 1,098.9 1,493.0
Weighted average interest rate for the year .............. 5.91% 4.52%
Weighted average interest on year-end balances .......... 5.56% 5.87%
Weighted average maturity of outstanding agreements
(days) .................................................. 148 53
</TABLE>
The securities collateralizing these agreements are held in the custodial
account of a trustee that is not a party to the agreements, until the
maturities of the agreements. For all of the agreements, the dealers have
agreed to resell the identical securities to the Bank. The following table
presents reverse repurchase agreements by counterparty:
<TABLE>
<CAPTION>
COUNTERPARTY DECEMBER 31, 1995 DECEMBER 31, 1994
- --------------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Lehman Brothers ...... $780.9 $ 674.5
Bear Stearns ......... 76.4 --
Morgan Stanley ....... -- 700.1
FHLB of San Francisco -- 326.5
Smith Barney ......... -- 49.9
----------------- -----------------
$857.3 $1,751.0
================= =================
</TABLE>
Accrued interest related to reverse repurchase agreements at December 31,
1995 and 1994 totaled $1.2 million and $4.7 million, respectively.
F-36
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STUDENT LOAN MARKETING ASSOCIATION ADVANCES
The advance from the Student Loan Marketing Association ("SLMA Advances")
was $200.0 million at December 31, 1995 and was secured by MBS with a
carrying value of $108.6 million and government securities with a carrying
value of $124.9 million and had a weighted average interest rate of 5.86%. At
December 31, 1994, the advances totaled $475.0 million and were secured by
MBS with a carrying value of $269.9 million and government securities with a
carrying value of $287.0 million and had a weighted average interest rate of
6.43%. The SLMA Advance outstanding at December 31, 1995 is scheduled to
mature on September 18, 1996.
Accrued interest related to SLMA Advances at December 31, 1995 and 1994
totaled $0.4 million and $0.9 million, respectively.
NOTE 17: SUBORDINATED DEBENTURES
The Bank's subordinated debentures consist of (i) a senior subordinated
note, (ii) subordinated debentures issued in connection with the 1992
corporate restructuring and (iii) convertible subordinated debentures.
Senior Subordinated Note. The Bank has outstanding a $50.0 million, 10.68%
unsecured senior subordinated note which is scheduled to mature on December
22, 1998.
1992 Subordinated Debentures. On December 16, 1992, the Bank issued $13.6
million of 10.0% unsecured subordinated debentures due 2003. The Bank
repurchased $8.7 million of these debentures during 1995 for no material gain
or loss.
Convertible Subordinated Debentures. The debentures were issued in 1986 by
CalFed Inc., the Bank's former holding company, which as a result of the 1992
corporate restructuring was merged with and into XCF Acceptance Corporation
("XCF"), a subsidiary of the Bank. The debentures are unsecured obligations
of XCF, bear an annual interest rate of 6.5%, and, effective January 1, 1996,
are convertible into the common stock of Cal Fed Bancorp Inc. at a conversion
price of $143.95 per share. The debentures are redeemable at the option of
the holders on February 20, 2000, at 123% of their principal amount.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- DATE OF INTEREST
1995 1994 MATURITY RATE
------- ------- --------------- ----------
(DOLLARS
IN MILLIONS)
<S> <C> <C> <C> <C>
Senior Subordinated Note ........... $50.0 $50.0 Dec. 22, 1998 10.68%
1992 Subordinated Debt ............. 4.9 13.6 Jan. 3, 2003 10.00
Convertible Subordinated Debentures 2.7 2.9 Feb. 20, 2001 6.50%
------- -------
$57.6 $66.5
======= =======
</TABLE>
Accrued interest related to subordinated debentures at December 31, 1995
and 1994 totaled $0.4 million and $0.8 million, respectively.
F-37
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: INTEREST EXPENSE ON BORROWINGS
Interest expense on borrowings is comprised of the following for the years
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Securities sold under agreements to repurchase
(short-term) ............................................. $ 64.9 $ 68.5 $14.6
FHLB advances (short-term) ................................ 14.7 7.4 2.3
Other ..................................................... -- -- 0.6
-------- -------- -------
Interest expense on short-term borrowings ................ 79.6 75.9 17.5
-------- -------- -------
Securities sold under agreements to repurchase (long-term) -- -- 8.3
FHLB advances (long-term) ................................. 139.4 76.2 52.4
Medium-term notes ......................................... -- -- 0.4
Convertible subordinated debentures ....................... 0.2 0.2 0.2
Subordinated debentures ................................... 0.7 1.4 1.4
SLMA advances (long-term) ................................. 29.2 16.5 9.5
Other ..................................................... 5.4 5.5 6.1
-------- -------- -------
Interest expense on long-term borrowings ................. 174.9 99.8 78.3
-------- -------- -------
Total Interest Expense on Borrowings ...................... $254.5 $175.7 $95.8
======== ======== =======
</TABLE>
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS
The Bank's use of derivative financial instruments is limited to interest
rate exchange agreements. The Bank utilizes interest rate exchange agreements
as an integral part of its asset/liability management program.
The primary focus of the Banks' asset/liability management program is to
measure and monitor the sensitivity of net interest income under varying
interest rate scenarios. On a quarterly basis, the Bank simulates the level
of net interest income expected to be earned over a twelve month period
following the date of the simulation. The simulation is based on a projection
of market interest rates at varying levels and estimates the impact of such
market rates on the levels of interest earning assets and interest bearing
liabilities during the measurement period. Also, any periodic or lifetime
caps that contractually limit the repricing of any interest earning asset is
considered.
Based upon the outcome of the simulation analysis, the Bank may consider
the use of interest rate exchange agreements as a means of reducing the
volatility of projected net interest income within certain ranges of
projected changes in interest rates. The Bank evaluates the effectiveness of
entering into any interest rate exchange agreements by measuring the cost of
such agreements in relation to the reduction in net interest income
volatility within an assumed range of interest rates.
F-38
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
The following tables present the Bank's interest rate exchange agreements
which were designated as hedges at December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE YIELD
TYPE OF INTEREST RATE NOTIONAL MONTHS TO AVERAGE YIELD PAYABLE BY THE DESCRIPTION OF ASSET OR
EXCHANGE AGREEMENT AMOUNT MATURITY DUE TO THE BANK BANK LIABILITY HEDGED
-------------------- ------------------ ------------ --------------- -------------- ---------------------------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest rate swap .. $ 25.0 5 5.74% 8.77% FHLB advances
Interest rate swap .. 500.0 10 5.94 5.63 FHLB advances
Interest rate swap .. 100.0 3 5.45 5.94 2-year fixed rate CDs
Interest rate swap .. 100.0 4 7.45 5.75 18-month fixed rate CDs
Interest rate swap .. 100.0 3 6.36 5.60 1-year fixed rate CDs
Interest rate swap .. 1,540.0 15 5.83% 5.91% FHLB advances (a)
-------------------
Total .............. $2,365.0
===================
</TABLE>
- ------------
(a) Please refer to Note 14 Advances from Federal Home Loan Bank for
further information about this interest rate swap.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------------------------------------------
WEIGHTED
WEIGHTED AVERAGE YIELD
TYPE OF INTEREST RATE NOTIONAL MONTHS TO AVERAGE YIELD PAYABLE BY THE DESCRIPTION OF ASSET
EXCHANGE AGREEMENT AMOUNT MATURITY DUE TO THE BANK BANK OR LIABILITY HEDGED
- ------------------------- ---------------- ----------- --------------- --------------- ------------------------------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest rate swap .. $191.5 9 4.19% 8.38% Fixed rate loans
Interest rate swap .. 25.0 17 6.31 8.77 FHLB advances
Interest rate swap .. 50.0 9 5.07 6.13 2-year fixed rate CDs
Interest rate swap .. 100.0 15 5.45 6.13 2-year fixed rate CDs
Interest rate swap .. 75.0 8 3.86 6.08 FHLB advances
Interest rate swap .. 50.0 10 5.07% 6.13% 2-year fixed rate CDs
-------------------
Total .............. $491.5
===================
</TABLE>
The estimated fair value of swaps designated as hedges at December 31,
1995 and 1994 were gains (losses) of $7.1 million and $(6.6) million,
respectively.
At December 31, 1995 and 1994, the Bank had an index amortizing interest
rate swap which was designated as held for trading with a notional balance of
$50.0 million, with interest payable at a variable rate determined by a
specified index (3 month LIBOR) in exchange for interest receivable at a
fixed rate. At December 31, 1995, this agreement had a weighted average rate
to be paid by the Bank of 5.94% and the weighted average rate to be received
was 4.82%. At December 31, 1994, this agreement had a weighted average rate
to be paid by the Bank of 5.63% and the weighted average rate to be received
was 4.82%. The agreement has an expiration date of April 1999. It is
partially collateralized by MBS and a letter of credit amounting to
approximately $5.4 million at December 31, 1995. The fair value of the index
amortizing swap at December 31, 1995 was a liability of $0.3 million. Such
liability has been reflected on the Consolidated Statements of Financial
Condition. The average fair value of the index amortizing swap during 1995
was a liability of $1.0 million. The fair value of the index amortizing swap
at December 31, 1994 was a liability of $2.2 million. Such liability has been
reflected on the Consolidated Statements of Financial Condition.
F-39
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
At December 31, 1995 and 1994, the Bank was also a party to an interest
rate floor contract maturing September 1998. In addition, the Bank was a
party to an interest rate floor contract that matured in June 1995. The Bank
paid the counterparties premiums in exchange for cash payments in the event
that a specified index (e.g., 5-year CMT, 1-year CMT) falls below the strike
price. At December 31, 1995, the notional amount of the remaining interest
rate floor was $100.0 million, the strike price was 3.38% and the monthly
floating rate was 5.29%. At December 31, 1994, the notional amount of the
interest rate floors was $150.0 million, the weighted average strike price
was 4.51% and the monthly floating rate for the interest rate floor was based
on the 1-year Treasury Constant Maturity Rate for the floor contract maturing
September 1998 and the 5-year Treasury Constant Maturity Rate for the floor
contract that matured in June 1995. The unamortized premium on the interest
rate floors was zero and $0.3 million at December 31, 1995 and 1994,
respectively. At December 31, 1995, the floating rate exceeded the strike
price by 1.91%. At December 31, 1994, the floating rate exceeded the strike
price by an average of 2.79%.
The Bank adheres to credit guidelines when entering into interest rate
exchange agreements in order to minimize its exposure to credit loss in the
event of non-performance by the counterparties to the agreements. In the
event that a counterparty to an interest rate swap does not perform in
accordance with the terms of the agreement, the Bank would be at risk for the
amount of the net interest receivable due from the counterparty. At December
31, 1995, the Bank was at risk for $11.9 million of net interest receivable
from its counterparties on its aggregate interest rate exchange portfolio.
NOTE 20: INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current Tax Expense (Benefit):
Federal ............................................ $ -- $ -- $ 2.9
State .............................................. 0.1 -- 0.5
-------- -------- --------
0.1 -- 3.4
-------- -------- --------
Deferred Tax Expense (Benefit):
Federal ............................................ 41.1 (49.0) (20.8)
State .............................................. 11.4 (12.3) (10.0)
-------- -------- --------
52.5 (61.3) (30.8)
Change in valuation allowance for deferred tax asset (52.5) 61.3 30.8
-------- -------- --------
Net change in net deferred taxes ................... -- -- --
-------- -------- --------
Total income tax expense (benefit) ................. $ 0.1 $ -- $ 3.4
======== ======== ========
Total allocated to continuing operations .......... $ 0.1 $ 6.3 ($ 2.9)
Total allocated to shareholders' equity ............ -- (6.3) 6.3
-------- -------- --------
Total tax expense (benefit) ....................... $ 0.1 $ -- $ 3.4
======== ======== ========
</TABLE>
F-40
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (Continued)
The table below sets forth the significant components of the net deferred
tax asset/liability at December 31, 1995 and December 31, 1994 (as adjusted
and restated for 1994 and prior year tax returns filed through 1995):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
--------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Components of the deferred tax asset:
Bad debt reserve ............................... $ (87.1) $(152.8)
Real estate and partnerships ................... (38.8) (37.7)
Prior year affirmative adjustments, net ....... (48.0) (48.0)
Depreciation ................................... (10.3) (8.6)
Net operating loss carryforward ................ (30.9) (24.8)
Alternative minimum tax credit carryforward ... (27.8) (27.8)
Other .......................................... (11.7) (12.5)
--------- ----------
(254.6) (312.2)
Valuation allowance ............................ 146.3 198.8
--------- ----------
Deferred tax asset, net of valuation allowance (108.3) (113.4)
Components of the deferred tax liability:
Loan fees, interest and discount, net ......... 51.9 54.3
FHLB stock ..................................... 36.9 36.4
Accrued interest income ........................ 12.7 13.2
Prepaid expense ................................ 2.5 6.5
Other .......................................... 10.6 9.3
--------- ----------
Deferred tax liability ........................ 114.6 119.7
--------- ----------
Net deferred tax liability .................... $ 6.3 $ 6.3
========= ==========
Net state deferred tax liability ................ $ 6.3 $ 6.3
Net federal deferred tax liability .............. -- --
--------- ----------
Net deferred tax liability .................... $ 6.3 $ 6.3
========= ==========
</TABLE>
The change in the valuation allowance from December 31, 1994 relates to
the decrease in the net deductible temporary difference in 1995 that cannot
be realized through carryback to prior periods. The valuation allowance of
$146.3 million at December 31, 1995 includes $11.0 million related to a $31.5
million acquired federal net operating loss expiring in 2002 and 2003 and
$19.9 million attributable to the Bank's tax losses occurring in 1993, 1994
and 1995. In the event the $31.5 million net operating loss is utilized, 65%
of the tax benefits may at some time be payable to the FDIC pursuant to the
acquisition agreement.
Although the Bank has reported net earnings since the quarter ended June
1994, significant regulatory and tax law changes have been proposed that
could adversely affect future earnings for both financial reporting and
income tax purposes. See Proposed Legislation in Note 1 -- Summary of
Significant Accounting Policies for further information. In addition, even
though the Bank has reported net earnings for financial reporting purposes
during this period, it has continued to generate losses for income tax
purposes, thus raising uncertainty regarding the realizability of its net
operating loss carryforward and other deferred tax assets. Accordingly, the
Bank has recorded a valuation allowance equal to its net deductible temporary
difference at December 31, 1995 as well as at December 31, 1994.
F-41
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (Continued)
The Bank generated net operating losses in 1993, 1994 and 1995 for
federal income tax purposes of $5.7 million, $21.3 million and $16.5 million
expiring in 2008, 2009 and 2010, respectively. In addition, the Bank has
adjusted net operating loss carryforwards from 1993, 1994 and 1995 for
California franchise tax purposes of $16.7 million, $23.9 million and $0.8
million expiring in 1998, 1999 and 2000, respectively. The Bank also has
alternative minimum tax credit carryforwards of $19.6 million for federal
income tax purposes and $8.2 million for California franchise tax purposes
which have no expiration date.
For federal income tax purposes, savings institutions that meet certain
definitional and other tests may compute a bad debt deduction based on either
the percentage of taxable income method or the experience method. For years
subsequent to 1986, the Bank has computed its deduction for qualifying real
property loans based on the experience method. The experience method allows a
deduction for an amount necessary to increase a savings institution's tax bad
debt reserve, adjusted for net charge-offs during the current year, up to the
greater of the adjusted base year reserve amount or an amount based on the
savings institution's actual 6 year moving average experience. For years
subsequent to 1987, the adjusted base year reserve amount at the end of any
year is the tax bad debt reserve amount at the end of 1987 proportionately
decreased by any reduction in the aggregate related loan base at the end of
the current year relative to the end of 1987.
The consolidated financial statements at December 31, 1995 and 1994 do not
include a potential federal income tax liability of $25.3 million and zero,
respectively, attributable to the Bank's tax bad debt reserves. Circumstances
that may require an accrual of this unrecorded tax liability are: a failure
to meet the tax definition of a savings institution and, if the currently
proposed tax law changes are enacted, dividend payments in excess of tax
earnings and profits and other distributions in dissolution, liquidation or
redemption of stock.
A reconciliation of total income tax expense (benefit) and the amount
computed by applying the statutory federal corporate income tax rate to
earnings (loss) from continuing operations before income tax expense
(benefit) follows:
<TABLE>
<CAPTION>
PERCENT OF PRETAX EARNINGS
------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Statutory federal corporate income tax rate 35.0% (35.0)% (35.0)%
State tax, net of federal income tax effect 0.1 0.7 (0.5)
-------- --------- ---------
35.1 (34.3) (35.5)
Increase (decrease) resulting from:
Valuation allowance ........................ (43.9) 34.2 14.0
Bad debt deduction ......................... 0.7 3.4 14.7
Amortization of goodwill ................... -- -- 3.6
Distribution of Participation Interests ... 8.4 -- --
Rate change ................................ -- -- (1.5)
Other, net ................................. (0.2) 1.1 2.7
-------- --------- ---------
0.1% 4.4% (2.0)%
======== ========= =========
</TABLE>
The Internal Revenue Service ("IRS") and the California Franchise Tax
Board ("FTB") have completed examinations of the Bank's consolidated federal
income tax returns through 1988 and combined California franchise tax reports
through 1985, respectively, and have proposed certain adjustments primarily
related to timing differences as to the recognition of taxable income and
expense. The Bank previously filed formal protests with both the IRS and the
FTB to take exception to these
F-42
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (Continued)
proposed adjustments and has filed claims for refund to recover its payment
of the assessed federal deficiencies. The Bank currently intends to pursue
most of the positions set forth in its federal and California protests as
well as in its federal refund claims.
In addition, the IRS has completed its examination of the consolidated
federal income tax returns filed by the Bank's former life insurance company
affiliate, Beneficial Standard Life Insurance Company ("BSLIC"), through 1989
and in December 1993, assessed certain deficiencies against BSLIC. In March
1994, the Bank filed a Tax Court petition on behalf of BSLIC, and in November
1995, the Tax Court rendered its decision affirming the Bank's position on
most of the issues contested by the Bank on behalf of BSLIC.
The Bank's current income tax receivables at December 31, 1995 and 1994
were $7.9 million and $9.6 million, respectively.
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Bank's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Bank's financial
instruments, active markets do not exist. Therefore, considerable judgments
were required in estimating fair value for certain items. The subjective
factors include, among other things, the estimated timing and amount of cash
flows, risk characteristics, credit quality and interest rates, all of which
are subject to change. Since the fair value is estimated as of December 31,
1995 and December 31, 1994, the amounts that will actually be realized or
paid at settlement or maturity of the instruments could be significantly
different.
Cash and Short-Term Investments
The book value of cash and short-term investments approximates the fair
value of such assets because of the short maturity of such investments.
Securities Purchased Under Agreements to Resell
The book value of securities purchased under agreements to resell
approximates the fair value of such securities due to the short term maturity
of such investments.
Securities Available for Sale and Securities Held to Maturity
The Bank has utilized market quotes for similar or identical securities in
an actively traded market, where such a market exists, or has obtained quotes
from independent security brokers or dealers to determine the fair value of
its securities available for sale and securities held to maturity.
Loans Receivable
The fair value of loans receivable was computed as follows: (i) for loans
held for sale, quotes were obtained from independent brokers or dealers; (ii)
for performing residential loans held for investment, the Bank aggregated the
loans into pools based upon secondary market requirements for mortgage-backed
securities and utilized market quotes for similar securities; (iii) for
performing consumer, commercial banking and income property, the fair value
was determined by a discounted cash flow analysis and (iv) the fair value of
impaired income property loans was determined on an individual basis, based
upon the fair value of the related collateral, reduced by an estimate of the
cost and timing of dispositions. For impaired residential 1-4 and consumer
loans, fair value was estimated based on a discounted cash flow analysis,
adjusted for the Bank's estimate of excess credit risk.
F-43
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Deposits
The fair value of deposits was determined as follows: (i) for demand
deposits, passbook accounts, money market accounts and other deposits
immediately withdrawable, fair value was determined to approximate the amount
payable on demand and (ii) for fixed maturity deposits, the fair value was
estimated by discounting expected cash flows using an average of rates
offered by other institutions combined with the Bank's current offering rates
of term deposits with similar maturities. In accordance with SFAS 107, no
value has been assigned to the Bank's long-term relationships with its
deposit customers (core deposit intangible) since it is not a financial
instrument as defined under SFAS 107.
Borrowings
The fair value of the Bank's borrowings was determined as follows: (i) the
fair value of FHLB advances was based upon current rates for advances with
similar terms and maturities; (ii) the fair value of student loan marketing
advances was estimated to approximate the amounts due as the rates on these
borrowings fluctuate with a market index; (iii) the fair value of reverse
repurchase agreements was based upon the current pricing for such agreements
and (iv) the fair value of the Bank's various other borrowings was based upon
alternative borrowing costs.
Off-Balance Sheet Financial Instruments
The fair value of the Bank's off-balance sheet financial instruments was
determined as follows: (i) the fair value of interest rate exchange
agreements that do not have an active market was determined by computing the
net present value of the estimated interest due to the Bank as compared to
the estimated interest due to the counterparties of the interest rate
exchange agreements; (ii) the fair value of the Bank's recourse arrangements
on assets sold was determined to approximate the value of the liability
currently recorded for such recourse arrangements; and (iii) the Bank's
standby letters of credit and commitments to originate or sell loans have
terms that are consistent with current market terms. Therefore, the Bank
estimates that the face amount of these commitments approximates book value.
F-44
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table presents fair value estimates and carrying amounts
for financial instruments at December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENT ASSETS:
Cash ............................................ $ 273.7 $ 273.7 $ 292.8 $ 292.8
Short-term liquid investments ................... 74.1 74.1 333.8 333.8
Securities purchased under agreements to resell 1,674.6 1,674.6 48.2 48.2
Securities available for sale ................... 200.3 200.3 1,731.5 1,731.5
Securities held to maturity ..................... 2,366.7 2,361.3 2,525.1 2,437.2
Loans receivable held for sale .................. 13.6 13.8 1.3 1.3
Loans receivable held for investment(a) ........ 9,290.0 9,246.1 8,746.0 8,430.4
Accrued interest receivable and other ........... 83.4 98.4 83.5 95.5
FINANCIAL INSTRUMENT LIABILITIES:
Savings deposits(b) ............................. 9,476.7 9,534.6 8,360.9 8,425.0
Advances from federal home loan banks ........... 2,671.0 2,676.0 2,526.0 2,548.7
Securities sold under agreements to repurchase . 857.3 852.2 1,751.0 1,750.6
Student loan marketing association advances .... 200.0 193.9 475.0 461.0
Other borrowings ................................ 58.1 65.3 66.8 72.3
Interest payable ................................ 29.4 29.4 18.6 18.6
Other liabilities ............................... 140.6 140.6 185.8 185.8
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate floors(c) ......................... -- -- -- --
Interest rate swaps (designated as a hedge) .... -- 7.1 -- (6.6)
Interest rate swaps (designated as held for
trading)(c) .................................... (0.3) (0.3) (2.2) (2.2)
Loans sold with recourse(d) ..................... $ 11.5 $ 11.5 $ 11.4 $ 11.4
</TABLE>
- ------------
(a) Please see Note 8 Loans Receivable Held for Investment for additional
detail.
(b) The fair value does not include any amount that relates to core
deposit intangibles, since they are not defined as financial
instruments under SFAS 107.
(c) The estimated fair values represent either a net gain or a net
(loss). The net loss has been reflected in the Consolidated Statement
of Financial Position as a component of "other liabilities."
(d) These amounts represent the Bank's estimate of its credit exposure
with respect to loans sold with recourse.
F-45
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22: COMMITMENTS AND CONTINGENCIES
The Bank is a party to various outstanding commitments and contingent
liabilities in the normal course of business which are not reflected in the
accompanying consolidated financial statements. The following is a summary of
such commitments and contingencies:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Standby letters of credit ................. $ 57.9 $ 63.6
Commitments to sell loans ................. 15.7 1.8
Commitments to fund fixed rate loans ..... 232.0 231.6
Commitments to fund adjustable rate loans 98.3 208.2
</TABLE>
The Bank makes contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. The Bank does not anticipate any material
loss as a result of these transactions. The Bank applies the same credit
standards used in the lending process when extending these commitments, and
periodically reassesses the customers' creditworthiness through ongoing
credit reviews.
The fair value of the Bank's commitments at December 31, 1995 and 1994 was
based upon (i) the contractual terms of the commitment as compared to market
terms, (ii) the period of time that the commitments could be exercised and
(iii) the inherent credit risk of the commitments. The fair value of the
Bank's commitments approximates the amount of the outstanding commitment at
December 31, 1995 and 1994.
During the second quarter of 1995, the Bank provided an allowance with
respect to certain litigation involving loans made in 1989 and 1990 to
California Communities Inc. ("CCI"), a currently inactive subsidiary of the
Bank formerly engaged in real estate development activities. During the
second quarter of 1995, an Orange County, California Superior Court jury
rendered a verdict in which it determined that the Bank was financially
liable for two loans made to CCI by the plaintiff. CCI subsequently defaulted
on the loans. The jury awarded the plaintiff $6.5 million in compensatory
damages and punitive damages of $20.0 million against the Bank and $5.0
million against CCI. The Bank has begun the process of appealing the
judgment. While the Bank believes that its liability from this litigation, if
any, will be less than the amount awarded by the jury, there can be no
assurance that the ultimate outcome of this litigation will result in an
amount less than the amount determined by the jury and it is possible that
the Bank and its subsidiary could ultimately be found liable for an amount in
excess of the allowance that has been established. The provision for this
allowance has been included in 1995 real estate operations.
The Bank is involved as a defendant in certain legal proceedings
incidental to its business. The Bank has established an accrual for its
estimate of the potential liability that it believes it may be found liable
for. However, it is possible that the Bank's actual liability may be
substantially higher or lower than the amount of the established allowance.
The Bank does not believe that the litigation to which it is a party, if
adversely decided, in the aggregate would have a material adverse effect upon
the Bank's financial condition. However, adverse decisions in such matters
could have a material adverse effect upon the Bank's results of operations
for the relevant period or periods in which they occur.
F-46
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL
Common Stock
The Bank's common stock at December 31, 1995 and 1994 is summarized in the
table below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Par value ............................... $ 1.00 $ 1.00
Number of shares authorized ............. 100,000,000 100,000,000
Number of shares issued and outstanding 49,200,444 49,199,044
</TABLE>
During the 1995 fourth quarter, California Federal obtained regulatory and
shareholder approval to reorganize into a holding company structure, which
will provide greater flexibility for meeting future financial and competitive
needs. As a result of the reorganization, on January 1, 1996, each share of
the California Federal's common stock was converted into one share of Cal Fed
Bancorp Inc. common stock. Consequently, California Federal became a
wholly-owned subsidiary of Cal Fed Bancorp Inc.
Preferred Stock of Subsidiary
In March 1993, California Federal issued 3,740,000 shares of 7 3/4%
noncumulative convertible preferred stock at its liquidation preference of
$25.00 per share (the "Preferred Stock, Series A"). The issuance of the
Preferred Stock, Series A, resulted in an $89.0 million increase in the
equity capital of California Federal, after deducting issue costs of $4.5
million. Effective January 1, 1996, the Preferred Stock, Series A, is
convertible by the holders into the common stock of Cal Fed Bancorp Inc. at
any time at a conversion price of $20.16 per share, subject to adjustment.
The Preferred Stock, Series A, is not redeemable prior to March 31, 1996. At
or after March 31, 1996, the Preferred Stock, Series A, is redeemable at the
option of California Federal, in whole or in part, at par value plus declared
but unpaid dividends.
In March 1994, California Federal issued 1,725,000 shares of 10 5/8%
noncumulative perpetual preferred stock at its liquidation preference of
$100.00 per share (the "Preferred Stock, Series B"). The issuance of the
Preferred Stock, Series B resulted in an $164.2 million increase in the
equity capital of California Federal, after deducting issue costs of $8.3
million. The Preferred Stock, Series B, is generally not redeemable prior to
April 1, 1999. The Preferred Stock, Series B, is redeemable at the option of
California Federal, in whole or in part, at $105.313 per share on or after
April 1, 1999 and prior to April 1, 2000, and at prices decreasing annually
thereafter to the liquidation preference of $100.00 per share on or after
April 1, 2003, plus declared but unpaid dividends. In addition, the Preferred
Stock, Series B, is redeemable at the option of California Federal or its
successor or any acquiring or resulting entity with respect to California
Federal on or after April 1, 1996 and prior to April 1, 1999 in whole, but
not in part, in the event of a change of control of California Federal at
$114.50 per share. The preferred stock of subsidiary is accounted for as a
minority interest in the accompanying financial statements. Dividends on
preferred stock of subsidiary are accounted for as expense in the audited
financial statements.
Common Stock Warrants
In December 1992, California Federal issued 13,879,865 warrants to
purchase California Federal common stock during June 1994. Throughout June
1994, warrant holders were entitled to purchase one share of the common stock
of California Federal for $9.00 and five warrants. Approximately 93% of the
warrants were exercised. Warrants not exercised by June 30, 1994 became
worthless and no longer entitled the holders to purchase any shares of the
common stock of California Federal. The exercised warrants provided
California Federal with $23.3 million of additional equity capital during
1994.
F-47
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL (Continued)
Participation Interests
During 1995, California Federal registered contingent litigation recovery
participation interests ("Participation Interests") to be issued to its
common shareholders. The Participation Interests represent a right to receive
an amount equal to up to 25.377745% of the cash payment, if any, actually
received by California Federal, resulting from the pending goodwill lawsuit
of California Federal against the federal government. In the lawsuit,
California Federal Bank, alleges that the United States breached certain
contractual commitments regarding the computation of its regulatory capital
and deprived California Federal of certain of its property without just
compensation in violation of the United States constitution. The claims of
California Federal arose from changes, mandated by FIRREA, with respect to
the rules for computing the regulatory capital of California Federal. The
Bank's stockholders of record on July 14, 1995, received one Participation
Interest for every ten shares of common stock owned on the record date. The
Participation Interests were distributed on July 28, 1995 and began trading
on the NASDAQ Small Cap Market under the symbol "CALGZ" on August 1, 1995.
Regulatory Capital
As a savings institution which is regulated by the OTS, California Federal
is required to comply with the capital requirements of the OTS. The
regulations of the OTS require savings institutions to maintain certain
minimum levels of regulatory capital. An institution that fails to comply
with its regulatory capital requirements must obtain OTS approval of a
capital plan and can be subject to a capital directive and certain
restrictions on its operations. An institution that fails to obtain OTS
approval of its capital plan is deemed to be in an unsafe and unsound
condition and could be the subject of the appointment of a conservator or a
receiver. At December 31, 1995, the industry-wide minimum regulatory capital
requirements were:
o Tangible capital of 1.5% of adjusted total assets, consisting
generally of stockholders' equity, but excluding most intangible
assets such as goodwill.
o A leverage ratio requiring core capital of 3.0% of adjusted total
assets, consisting of tangible capital plus supervisory goodwill
(certain goodwill arising as a result of the acquisition of troubled
institutions and regulatory assisted acquisitions).
o Total risk-based capital consisting of core capital plus certain
subordinated debt and other capital instruments and general valuation
allowances on loans receivable equal to 8.0% of the value of
risk-weighted assets plus off-balance sheet items.
The table below presents the capital ratios of California Federal as
compared to the industry-wide minimum capital requirements at December 31,
1995:
<TABLE>
<CAPTION>
REGULATORY EXCESS
CALIFORNIA FEDERAL REQUIREMENT CAPITAL
------------------ ---------------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Tangible Capital . $845.3 5.91% $214.5 1.50% $630.8
Core Capital ...... $845.3 5.91% $429.0 3.00% $416.3
Risk-based Capital $961.4 12.36% $623.0 8.00% $338.4
</TABLE>
The OTS has implemented a system requiring regulatory sanctions against
institutions that are not adequately capitalized, with the sanctions growing
more severe the lower the institution's capital. The OTS has established
specific capital ratios for five separate capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
F-48
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL (Continued)
Under the OTS regulations, an institution is treated as well capitalized
if its ratio of total capital to risk-weighted assets is 10.0% or more, its
ratio of core capital to risk-weighted assets is 6.0% or more, its ratio of
core capital to total assets is 5.0% or greater and it is not subject to any
order or directive by the OTS to meet a specific capital level.
At December 31, 1995, (i) the total risk-based capital ratio of California
Federal was 12.36 percent, $183.3 million in excess of "well-capitalized"
requirements, (ii) the Tier I risk-based capital ratio of California Federal
was 10.90 percent, $380.1 million in excess of "well-capitalized"
requirements, and (iii) the leverage ratio of California Federal was 5.91
percent, $130.2 million in excess of "well-capitalized" requirements.
Therefore, at December 31, 1995, California Federal met and exceeded all of
the requirements of a well capitalized institution.
An institution is undercapitalized if its ratio of total capital to
risk-weighted assets is less than 8.0%, its ratio of core capital to
risk-weighted assets is less than 4.0% or its ratio of core capital to total
assets is less than 4.0% (3.0% if the institution receives the highest rating
on the CAMEL examination rating system). An institution whose capital falls
between the well capitalized and undercapitalized levels is treated as
adequately capitalized. An institution is treated as significantly
undercapitalized if the above capital ratios are less than 6.0%, 3.0%, or
3.0% respectively. An institution is treated as critically undercapitalized
if its ratio of tangible equity (core capital, plus cumulative preferred
stock, minus intangible assets other than qualifying supervisory goodwill and
certain purchased mortgage servicing rights) to total assets is equal to or
less than 2.0%. The OTS can apply to an institution in a particular capital
category the sanctions that apply to the next lower capital category if the
OTS determines, after providing the institution notice and opportunity for a
hearing, that (1) the institution is in an unsafe and unsound condition, or
(2) the institution received, in its most recent report of examination, a
less-than-satisfactory rating for asset quality, management, earnings, or
liquidity, and the deficiency has not been corrected. The OTS cannot,
however, use this authority to require an adequately capitalized institution
to file a capital restoration plan, or to subject a significantly
undercapitalized institution to the sanctions applicable to critically
undercapitalized institutions.
Following is a reconciliation of the shareholder's equity of California
Federal Bank, F.S.B. to regulatory capital as of December 31, 1995:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
----------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Shareholders' Equity of California Federal .............. $887.5 $887.5 $887.5
Non-allowable capital:
Intangible assets .................................... (17.1) (17.1) (17.1)
Investment in non-permissible subsidiaries ........... (25.1) (25.1) (25.1)
Tier II capital items:
Allowable subordinated debt .......................... -- -- 19.2
Allowable general valuation allowance on loans
receivable
(limited to 1.25% of risk-weighted assets) .......... -- -- 96.9
---------- --------- ------------
Regulatory capital of California Federal ................ 845.3 845.3 961.4
Bank's minimum regulatory capital requirement .......... 214.5 429.0 623.0
---------- --------- ------------
Excess over minimum regulatory capital requirements .. $630.8 $416.3 $338.4
========== ========= ============
</TABLE>
With certain limited exceptions, California Federal's investments in and
extensions of credit to any subsidiary engaged in activities not permissible
for a national bank ("non-includable subsidiaries") must be deducted from
capital over a phase-in period.
F-49
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL (Continued)
The table below presents the amount of investments in and extensions of
credit to non-includable subsidiaries which may be included in regulatory
capital for the periods indicated:
<TABLE>
<CAPTION>
AMOUNT WHICH
MAY BE INCLUDED
FOR THE PERIOD IN CAPITAL
- --------------------------------- -------------------
<S> <C>
July 1, 1994 to June 30, 1995 ... 60%
July 1, 1995 to June 30, 1996 ... 40%
After June 30, 1996 .............. 0%
</TABLE>
At December 31, 1995, California Federal had $16.7 million included in the
regulatory capital relating to such investments and extensions of credit.
Restriction on Shareholder's Equity and Dividends
The payment of dividends, stock repurchases, and other capital
distributions by California Federal are subject to regulation by the OTS. The
OTS requires 30 days' prior notice of any capital distribution. On December
5, 1994, the OTS proposed various amendments to its rules on capital
distributions to conform them to the prompt corrective action system
established by the Federal Deposit Insurance Corporation Improvement Act of
1991. Under the proposed regulation, those institutions that have the CAMEL
ratings of 1 or 2 and are not controlled by a holding company would no longer
be required to notify OTS before capital distributions. Most other savings
institutions could make capital distributions upon giving notice to OTS
provided that, following the distribution, the institution would remain at
least adequately capitalized as defined by the prompt corrective action
system. The proposed amendments are pending.
Pursuant to statutes, savings institutions that do not meet their current
capital requirements generally may not make any capital distributions.
Tax Bad Debt Reserves
For federal income tax purposes, savings institutions meeting certain
definitional and other tests are allowed special bad debt reserve deductions.
If amounts appropriated to these tax bad debt reserves in excess of an
allowable offset computed under the experience method ("excess tax bad debt
reserves") are used for the payment of nontaxable dividends or other
distributions to stockholders (including distributions in dissolution,
liquidation or redemption of stock), an amount will generally be includable
in taxable income. The amount includable in taxable income is equal to the
distribution plus the federal income tax attributable thereto, up to the
aggregate amount of excess tax bad debt reserves. At December 31, 1995, the
Bank's total tax bad debt reserves of approximately $76 million did not
include any amount which may represent excess tax bad debt reserves.
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS
Retirement Plans
The Bank has two defined benefit plans: one covering its employees
("retirement income plan") and one for the non-employee directors ("outside
directors plan"). Prior to 1995, the bank had two outside directors plans.
During 1995, one of the outside directors plans was terminated and
subsequently liquidated. Effective May 31, 1993, the retirement income plan
was frozen and all accrued benefits were automatically 100% vested. The plan
froze all accrued benefits, however; credited service will continue to accrue
for purposes of determining eligibility for early retirement (and the
applicable early retirement reduction factors).
F-50
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (Continued)
The Bank's funding policy for the retirement income plan is to contribute
an amount equal to the minimum required contribution under the Employee
Retirement Income Security Act of 1974. The Bank from time to time may
increase its contribution beyond the minimum reflecting the tax and cash
position of the Bank and the funded status of the plan. The outside directors
plan is unfunded. Additionally, the Bank had a supplemental defined benefit
retirement plan for key employees (the "supplemental plan") which was
terminated on December 31, 1993. The Bank has recorded a liability of $0.1
million as of December 31, 1995 related to the supplemental plan.
The following tables set forth the pension plan's funded status and
amounts recognized in the Bank's consolidated statements for the years
indicated:
<TABLE>
<CAPTION>
RETIREMENT INCOME PLAN
-------------------------------------------
ASSETS ASSETS ASSETS
EXCEED EXCEED EXCEED
ACCUMULATED ACCUMULATED ACCUMULATED
BENEFITS BENEFITS BENEFITS
------------- ------------- -------------
1995 1994 1993
------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $34.4 million in 1995, $30.9 million in 1994, $39.1
million in 1993 ........................................... $35.3 $30.1 $39.0
============= ============= =============
Projected benefit obligation for service rendered to date . $35.3 $30.1 $39.0
Plan assets at fair value, primarily listed stock and fixed
income securities ......................................... 35.5 33.3 40.5
------------- ------------- -------------
Excess of projected benefit obligation under plan assets .. (0.2) (3.2) (1.5)
Unrecognized net gain (loss) from past experience different
from that assumed ......................................... (7.7) (3.3) (4.5)
Transition amount from initial application of SFAS 87 ..... -- -- --
Unrecognized prior service cost ............................ -- -- --
Adjustment required to recognize minimum liability ........ -- -- -
------------- ------------- -------------
Pension (asset) included in other liabilities ............... $(7.9) $(6.5) $(6.0)
============= ============= =============
Net pension expense included the following components:
Service cost -benefits earned during the period .......... $ -- $ -- $ 2.0
Interest cost on projected benefit obligation ............... 2.0 2.4 2.9
Actual return on plan assets ................................ (5.7) (1.5) (3.2)
Other, net .................................................. 3.3 (1.3) 0.5
------------- ------------- -------------
Net periodic pension (income) expense ....................... $(0.4) $(0.4) $ 2.2
============= ============= =============
</TABLE>
F-51
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED ACCUMULATED
BENEFITS BENEFITS BENEFITS
EXCEED EXCEED EXCEED
ASSETS ASSETS ASSETS
------------- ------------- -------------
1995(a) 1994(a) 1993(b)
------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $34.4 million in 1995, $30.9 million in 1994, $39.1
million in 1993 ........................................... $0.1 $ 2.3 $ 2.7
============= ============= =============
Projected benefit obligation for service rendered to date . $0.1 $ 2.3 $ 2.7
Plan assets at fair value, primarily listed stock and fixed
income securities ......................................... -- -- --
------------- ------------- -------------
Excess of projected benefit obligation over plan assets ... 0.1 2.3 2.7
Unrecognized net gain (loss) from past experience different
from that assumed ......................................... -- (0.9) (1.2)
Transition amount from initial application of SFAS 87 ..... -- (0.2) (0.2)
Unrecognized prior service cost ............................ -- -- --
Adjustment required to recognize minimum liability ........ -- 1.1 1.4
------------- ------------- -------------
Pension (asset) liability included in other liabilities .... $0.1 $ 2.3 $ 2.7
============= ============= =============
Net pension expense included the following components:
Service cost -benefits earned during the period .......... $ -- $ 0.1 $ 0.1
Interest cost on projected benefit obligation ............... -- 0.2 0.2
Actual return on plan assets ................................ -- -- --
Other, net .................................................. -- 0.1 0.1
------------- ------------- -------------
Net periodic pension expense ................................ $ -- $ 0.4 $ 0.4
============= ============= =============
</TABLE>
(a) These amounts relate to both the supplemental plan and the outside
directors plan.
(b) These amounts relate to the outside directors plan.
Average assumptions used for all plans were:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Discount rate .................................. 7.25% 8.00% 7.25%
Rate of increase in compensation levels ....... N/A(c) N/A(c) N/A(c)
Expected long-term rate of return on assets ... 8.50% 8.50% 8.50%
</TABLE>
(c) Not applicable due to a freeze in accrued benefits of the plan.
The FASB has issued Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106"). SFAS 106 became effective for fiscal years beginning after December
15, 1992. SFAS 106 establishes accounting standards for all employers'
postretirement benefits other than pensions; however, it focuses on
postretirement health care benefits. SFAS 106 changes the current practice of
accounting for postretirement benefits on a cash basis by accruing the cost
of these benefits during the years the employee renders the necessary
service. The Bank has a defined benefit postretirement plan which provides
for postretirement medical benefits to eligible retired employees.
F-52
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (Continued)
The following table sets forth the postretirement benefits plans funded
status and amount recognized in the Bank's consolidated statements for the
years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------- -------
(DOLLARS
IN MILLIONS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Current Retirees ........................................................ $ 2.1 $ 2.2
Current Actives ......................................................... 1.0 1.5
------- -------
$ 3.1 $ 3.7
======= =======
Accumulated Postretirement Benefit Obligation ............................ $ 3.1 $ 3.7
Plan assets at fair value ................................................ -- --
------- -------
Excess of accumulated postretirement benefit obligations under plan
assets .................................................................. 3.1 3.7
Unrecognized transition obligation ....................................... (4.0) (4.3)
Unrecognized net gain .................................................... 3.1 2.4
------- -------
Net postretirement benefit liability included in other liabilities ..... $ 2.2 $ 1.8
======= =======
Net Periodic Postretirement Benefit Cost:
Service cost ............................................................ $ 0.2 $ 0.3
Interest cost ........................................................... 0.3 0.4
Amortization of transition obligation ................................... 0.2 0.3
Other, net .............................................................. (0.2) 0.4
------- -------
Net periodic postretirement benefit cost ............................... $ 0.5 $ 1.4
======= =======
Effect of one percent increase in trend rates:
Service and interest cost ............................................... $ 0.1 $ 0.1
======= =======
Accumulated postretirement benefit obligation ........................... $ 0.4 $ 0.5
======= =======
</TABLE>
The cost of inflation for health care and medical costs of plan
participants (the "health care trend rate") was assumed to start at 11.5% and
gradually trend downward over 11 years to 6%. The assumed discount rate, in
determining postretirement benefits, was 7.25% and 8.00% at December 31, 1995
and 1994, respectively. At December 31, 1995 and 1994, there were no plan
assets related to this plan.
F-53
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (Continued)
Investment Plus Plan
The Investment Plus Plan (the "Plan") is a defined contribution plan that
is available to substantially all employees. The Plan is a qualified plan
under Section 401(k) of the Internal Revenue Code. Employee contributions are
voluntary, as employees may elect to defer from one to ten percent of
compensation, exclusive of overtime, bonuses or other special payments
("qualifying compensation"). Participants vest immediately in their own
contributions and they vest in the Bank's contributions based on years of
service. Up to 4% of participants' contributions are matched by the Bank on a
schedule that is determined by the participants' years of service with the
Bank. The table below presents the Bank's matching contributions as
determined by the participants' years of service.
<TABLE>
<CAPTION>
BANK'S MATCHING
OF PARTICIPANTS' PARTICIPANTS'
CONTRIBUTIONS UP VESTING IN THE
TO 4% OF QUALIFIED BANK'S
YEARS OF SERVICE COMPENSATION CONTRIBUTION
- ---------------------------------------- ------------------ --------------
<S> <C> <C>
Less than 1 year ........................ 0% 0%
At least 1 year but less than 2 years .. 125 0
At least 2 years but less than 3 years . 125 25
At least 3 years but less than 4 years . 125 50
At least 4 years but less than 5 years . 125 75
At least 5 years, but less than 10 years 150 100
10 or more years ........................ 200% 100%
</TABLE>
The Bank's contributions may be made without regard to current or
accumulated profits, provided that the Plan is designed to qualify as a
profit sharing plan for purposes of Section 401(a), et seq. of the Internal
Revenue Code. For the years ended December 31, 1995, 1994 and 1993, the
Bank's pre-tax plan expense was $3.9 million, $4.2 million and $3.3 million,
respectively.
NOTE 25: STOCK INCENTIVE PLANS
In December 1995, the Bank's stockholders approved the 1995 Employee Stock
Incentive Plan for Cal Fed Bancorp Inc. Under the 1995 Employee Stock
Incentive Plan, 2,000,000 shares of common stock of Cal Fed Bancorp Inc. may
be issued pursuant to grants of options or other stock based awards, subject
to certain adjustments to prevent dilution. The 1995 Employee Stock Incentive
Plan became effective upon its adoption by the stockholders. As of December
31, 1995, no options were granted or exercised under the 1995 Employee Stock
Incentive Plan.
In addition, in December 1995, the stockholders also approved the 1995
Non-Employee Director Stock Option Plan for Cal Fed Bancorp Inc. Under the
1995 Non-Employee Director Stock Option Plan, 170,000 shares of common stock
of Cal Fed Bancorp Inc. may be issued pursuant to grants of options, subject
to certain adjustments to prevent dilution. The 1995 Non-Employee Director
Stock Option Plan became effective upon its adoption by the stockholders and
these options generally became exercisable over a twenty year period from the
date of grant. The first date of grant is the day after the 1997 Annual
Meeting of Stockholders of Cal Fed Bancorp Inc. As of December 31, 1995, no
options of the 1995 Non-Employee Directors Plan were granted or exercised.
In 1983, the Bank's stockholders approved the 1983 Stock Incentive Plan
under which 1,500,000 shares of common stock could have been granted as
options or sold as restricted stock to eligible employees. Those options
generally became exercisable over a four year period from the date of grant.
All options granted under the 1983 Stock Incentive Plan were vested on
December 16, 1992. Option
F-54
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: STOCK INCENTIVE PLANS (Continued)
activity, giving effect for the one-for-five reverse stock split which
occurred on February 28, 1993, during 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- ---------------------------- ----------------------------
NUMBER NUMBER NUMBER
OF RANGE OF OF RANGE OF OF RANGE OF
SHARES OPTION PRICES SHARES OPTION PRICES SHARES OPTION PRICES
--------- ---------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1 . 1,200 $15.63-$172.50 43,200 $15.63-$172.50 104,554 $15.63-$172.50
Granted ............. -- -- -- -- -- --
Canceled or expired (1,200) 86.875 (42,000) 21.25- 163.75 (61,354) 15.63- 172.50
Exercised ........... -- -- -- -- -- --
--------- ---------------- ---------- ---------------- ---------- ----------------
Balance, December 31 -- -- 1,200 $15.63-$172.50 43,200 $15.63-$172.50
========= ================ ========== ================ ========== ================
</TABLE>
There were no 1983 Stock Incentive Plan options exercised during 1995,
1994 or 1993.
In 1993, the Bank's stockholders approved the 1993 Employee Stock
Incentive Plan under which 1,600,000 shares of common stock may be granted
subject to certain adjustments to prevent dilution. Option activity during
1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------- ----------------------------- -----------------------------
NUMBER NUMBER NUMBER
OF RANGE OF OF RANGE OF OF RANGE OF
SHARES OPTION PRICES SHARES OPTION PRICES SHARES OPTION PRICES
----------- ---------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1 . 1,411,450 $ 1.000-$15.875 1,318,500 $1.000-$15.875 -- --
Granted ............. 35,000 9.875- 12.750 287,200 9.375- 13.625 1,655,900 $ 1.000-$15.875
Canceled or expired (12,850) 12.125- 15.750 (194,250) 7.300- 15.750 (337,400) 13.875- 15.875
Exercised ........... (1,400) 12.125 -- -- -- --
----------- ---------------- ----------- ---------------- ----------- ----------------
Balance, December 31 1,432,200 $ 1.000-$15.875 1,411,450 $1.000-$15.875 1,318,500 $ 1.000-$15.875
=========== ================ =========== ================ =========== ================
</TABLE>
At December 31, 1995, there were 166,400 shares available for future
grant. At December 31, 1995, the weighted average option prices for shares
under option and for shares exercisable were $7.21 and $6.51, respectively.
The weighted average option prices of shares exercised was $12.125 at
December 31, 1995. On the date of the 1993 grant, the market price of the
Bank's common stock exceeded the exercise price such that $8.0 million of
deferred compensation expense was recorded at the date of grant. These
options generally vest and become exercisable to the participants over a 36
month period. During 1995 and 1994, approximately $2.0 million and $4.3
million, respectively, was charged to compensation expense. The Bank has a
total of $1.7 million of deferred compensation expense scheduled to be
recorded between January 1, 1996 and December 31, 1996.
In 1994, the Bank's stockholders approved the 1994 Non-Employee Director
Stock Option Plan under which 161,000 shares of common stock may be granted
subject to certain adjustments to prevent dilution.
Option activity for the 1994 Non-Employee Director Stock Option Plan
follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
NUMBER OF RANGE OF NUMBER OF RANGE OF
SHARES OPTION PRICES SHARES OPTION PRICES
------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Balance, January 1 ...... 120,000 $10.00 -- $ --
Granted ................. -- -- 120,000 10.00
Canceled or expired .... -- -- -- --
Exercised ............... -- -- -- --
------------- ----------------- ------------- -----------------
Balance, December 31 ... 120,000 $10.00 120,000 $10.00
============= ================= ============= =================
</TABLE>
F-55
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: STOCK INCENTIVE PLANS (CONTINUED)
At December 31, 1995, there were 41,000 shares available for future grant.
The weighted average exercise price for shares under option was $10.00 at
December 31, 1995.
NOTE 26: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
---------- --------- -------------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income ............................... $245.6 $252.1 $249.9 $260.4
Interest expense .............................. 172.8 175.7 170.0 177.6
----------- ---------- --------------- --------------
Net interest income ........................... 72.8 76.4 79.9 82.8
Provision for loan losses ..................... 8.3 8.6 7.6 7.3
Other income .................................. 14.5 14.3 21.5(a) 13.2
Other expenses ................................ 64.3 60.3 61.9 63.4
Income tax expenses ........................... -- 0.1 -- --
Dividends on Preferred Stock of Subsidiary ... 6.4 6.4 6.4 6.4
----------- ---------- --------------- --------------
Net earnings available for common stockholders $ 8.3 $ 15.3 $ 25.5 $ 18.9
=========== ========== =============== ==============
Net earnings per share ........................ $ 0.17 $ 0.31 $ 0.50 $ 0.38
=========== ========== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
---------- --------- -------------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income ................................ $ 224.1 $229.6 $222.3 $232.1
Interest expense ............................... 133.1 139.0 139.6 154.8
----------- ---------- --------------- --------------
Net interest income ............................ 91.0 90.6 82.7 77.3
Provision for loan losses ...................... 43.9 11.4 11.2 8.4
Other income ................................... 17.4 17.5 151.4(b) 14.9
Other expenses ................................. 381.1(c) 85.7 73.4(d) 70.8
Income tax expense ............................. 5.8 0.5 -- --
Dividends on Preferred Stock of Subsidiary .... 1.8 2.3 6.4 6.4
----------- ---------- --------------- --------------
(Loss) earnings before the cumulative effect of
change in accounting for goodwill ............. (324.2) 8.2 143.1 6.6
Cumulative effect of change in accounting for
goodwill ...................................... (273.7) -- -- --
----------- ---------- --------------- --------------
Net (loss) earnings available for common
stockholders .................................. $(597.9) $ 8.2 $143.1 $ 6.6
=========== ========== =============== ==============
Net (loss) earnings per share before the
cumulative effect of change in accounting for
goodwill ...................................... $(11.39) $ 0.17 $ 2.87 $ 0.13
Net (loss) earnings per share of the cumulative
effect of change in accounting for goodwill .. (9.62) -- -- --
----------- ---------- --------------- --------------
Net (loss) earnings per share .................. $(21.01) $ 0.17 $ 2.87 $ 0.13
=========== ========== =============== ==============
</TABLE>
- ------------
(a) Includes a $6.8 million gain on the sale of $729.3 million of Treasury
securities.
(b) Includes $135.0 million gain from the sale of Southeast Division.
(c) Includes $280.0 million provision for estimated losses on assets held
for accelerated disposition.
(d) Includes $5.2 million recovery upon consummation of the sale of assets
held for accelerated disposition.
F-56
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 27: PARENT COMPANY FINANCIAL INFORMATION
The following financial statements are for Cal Fed Bancorp Inc., the
parent company, on a stand-alone basis. These financial statements should be
read in conjunction with the other Notes to the consolidated financial
statements.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Cash ............................. $ 22.1 $ --
Investment in California Federal 599.4 532.3
-------- --------
$621.5 $532.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities ................ $ -- $ --
-------- --------
Total stockholders' equity ...... 621.5 532.3
-------- --------
$621.5 $532.3
======== ========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ---------- ----------
<S> <C> <C> <C>
Equity in undistributed net earnings (loss) of
subsidiaries available for common stockholders .......... $68.0 $(440.0) $(149.3)
------- ---------- ----------
Net earnings (loss) available to common stockholders ..... $68.0 $(440.0) $(149.3)
======= ========== ==========
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ---------- ----------
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:
Net earnings (loss) available to common stockholders ..... $ 68.0 $(440.0) $(149.3)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Equity in undistributed net (earnings) loss of
subsidiaries available for common stockholders ........ (68.0) 440.0 149.3
-------- ---------- ----------
Net cash provided by operating activities .............. -- -- --
Cash Flows from Investing Activities: ..................... -- -- --
-------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from initial capitalization ..................... 22.1 -- --
-------- ---------- ----------
Net increase in cash ...................................... $ 22.1 $ -- $ --
Cash at beginning of year ................................. -- -- --
-------- ---------- ----------
Cash at end of year ....................................... $ 22.1 $ -- $ --
======== ========== ==========
</TABLE>
F-57
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Cash ......................................................... $ 197.9 $ 273.7
Short-term liquid investments ................................ -- 74.1
Securities purchased under agreements to resell .............. 1,438.4 1,674.6
Securities available for sale ................................ 6.0 200.3
Securities held to maturity .................................. 2,040.8 2,366.7
Loans receivable held for sale ............................... 32.2 13.6
Loans receivable held for investment ......................... 10,022.9 9,290.0
Federal Home Loan Bank stock ................................. 164.3 135.7
Interest receivable .......................................... 74.9 79.5
Premises and equipment ....................................... 64.0 71.2
Real estate held for sale .................................... 15.2 49.5
Prepaid expenses and other assets ............................ 70.1 91.7
--------------- --------------
Total Assets ............................................... $14,126.7 $14,320.6
=============== ==============
LIABILITIES AND STOCKHOLDER'S EQUITY
Deposits ..................................................... $ 8,763.0 $ 9,476.7
Advances from Federal Home Loan Banks ........................ 3,261.0 2,671.0
Securities sold under agreements to repurchase ............... 962.7 857.3
Student Loan Marketing Association advances .................. -- 200.0
Subordinated debentures ...................................... 57.0 57.6
Interest payable ............................................. 23.4 29.4
Other liabilities ............................................ 232.5 141.1
--------------- --------------
Total Liabilities .......................................... 13,299.6 13,433.1
--------------- --------------
Preferred stock of subsidiary ................................ 172.5 266.0
Stockholders' equity
Common stock ................................................ 49.4 49.2
Additional paid-in capital .................................. 841.0 838.6
Net unrealized holding gains (losses) on securities
available for sale .......................................... -- --
Retained (deficit) .......................................... (235.8) (266.3)
--------------- --------------
Total Stockholders' Equity ................................. 654.6 621.5
--------------- --------------
Total Liabilities and Stockholders' Equity ................. $14,126.7 $14,320.6
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-58
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Interest income:
Loans receivable ........................................... $567.8 $520.7
Securities held to maturity ................................ 109.9 128.3
Securities purchased under agreements to resell ........... 71.0 41.8
Securities available for sale .............................. 9.2 46.0
Short-term liquid investments .............................. 3.7 10.8
-------- --------
Total interest income ..................................... 761.6 747.6
-------- --------
Interest expense:
Deposits ................................................... 326.2 322.8
Borrowings ................................................. 174.5 195.7
-------- --------
Total interest expense .................................... 500.7 518.5
-------- --------
Net interest income ....................................... 260.9 229.1
Provision for loan losses ................................... 30.8 24.5
-------- --------
Net interest income after provision for loan losses ...... 230.1 204.6
Other income:
Fee income ................................................. 44.6 40.3
Gain (loss) on sales of loans .............................. 0.7 (0.3)
Gain on sales of securities held for sale .................. 1.1 6.8
Other ...................................................... 15.5 3.5
-------- --------
Total other income ........................................ 61.9 50.3
-------- --------
Other expenses:
Compensation ............................................... 72.3 72.8
Office occupancy ........................................... 27.9 29.5
Other general and administrative ........................... 58.6 57.5
Federal deposit insurance premiums ......................... 17.7 19.4
-------- --------
Total general and administrative expenses ................. 176.5 179.2
Savings Association Insurance Fund special assessment ..... 58.1 --
Operations of real estate held for sale .................... 8.0 7.3
-------- --------
Total other expenses ...................................... 242.6 186.5
-------- --------
Earnings before income tax expense .......................... 49.4 68.4
Income tax expense .......................................... 0.1 0.1
-------- --------
Earnings before dividends on preferred stock of subsidiary 49.3 68.3
Dividends on preferred stock of subsidiary .................. 18.9 19.2
-------- --------
Net earnings available for common stockholders .............. $ 30.4 $ 49.1
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-59
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings before dividends on preferred stock of subsidiary ................ $ 49.3 $ 68.3
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization ............................................ 8.7 9.8
Accretion of fees and discounts .......................................... (0.9) (12.8)
Provision for losses on loans receivable ................................. 30.8 24.5
Provision for losses (recoveries) on real esate held for sale ........... 5.0 (7.2)
Savings Association Insurance Fund special assessment .................... 58.1 --
(Gain) loss on sales of loans ............................................ (0.7) 0.3
Loans originated for sale ................................................ (191.5) (81.5)
Gain on sales of securities .............................................. (1.1) (6.8)
Proceeds from sales of loans receivable held for sale .................... 219.8 149.1
Decrease in other assets ................................................. 26.2 23.8
Increase (decrease) in other liabilities ................................. 27.6 (13.1)
Other items .............................................................. (12.5) 0.7
----------- -----------
Net cash provided by operating activities ............................... 218.8 155.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated for investment .......................................... (1,894.6) (1,634.6)
Purchases of securities available for sale ............................... (211.0) (152.5)
Proceeds from sales of securities available for sale ..................... 250.4 952.2
Purchases of mortgage-backed securities held to maturity ................. -- (65.7)
Principal collected on loans receivable held for investment ............. 1,026.9 804.5
Principal collected on securities held to maturity ....................... 325.1 310.2
Proceeds from maturities of securities ................................... 156.0 807.8
Net (increase) decrease in FHLB stock .................................... (28.6) 13.1
Proceeds from sales of real estate held for sale, net .................... 103.7 91.3
Net additions of premises and equipment .................................. (1.3) (1.3)
Net decrease in short-term liquid investments ............................ 74.1 99.7
Net decrease (increase) in securities purchased under agreements to
resell ................................................................... 236.2 (1,382.4)
----------- -----------
Net cash provided (used) by investing activities ........................ 36.9 (157.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits .......................................... (713.7) 1,077.1
Proceeds from Federal Home Loan Bank advances ............................ 2,030.0 1,235.0
Payments on Federal Home Loan Bank advances .............................. (1,440.0) (1,385.0)
Net increase (decrease) in reverse repurchase agreements ................. 105.4 (949.7)
Proceeds from other borrowings ........................................... 0.3 3.0
Payments on other borrowings and subordinated debentures ................. (201.1) (9.7)
Redemption of preferred stock of subsidiary .............................. (93.5) --
Payment of dividends on preferred stock of subsidiary .................... (18.9) (19.2)
----------- -----------
Net cash (used) by financing activities ................................. (331.5) (48.5)
----------- -----------
Net (decrease) in cash .................................................... (75.8) (51.1)
----------- -----------
Cash at beginning of period ............................................... 273.7 292.8
----------- -----------
Cash at end of period ..................................................... $ 197.9 $ 241.7
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-60
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(1) PRESENTATION OF FINANCIAL INFORMATION
In the opinion of Cal Fed Bancorp Inc. and its subsidiaries (the
"Company"), the accompanying unaudited consolidated financial statements,
prepared from the Company's books and records, contain all adjustments
(consisting of only normal recurring accruals) necessary for a fair
presentation of the Company's financial condition as of September 30, 1996
and December 31, 1995, and the results of operations and statements of cash
flows for the nine months ended September 30, 1996 and 1995.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do
not include all information and footnotes necessary to present the financial
position, results of operations and statements of cash flows in conformity
with generally accepted accounting principles.
Included in the preparation of such statements are certain material
estimates related to determining the allowances for potential losses on
loans, real estate and the impairment of other assets. Additionally, the
Company has made certain estimates relating to various legal proceedings in
which the Company has been named as a defendant and has established
allowances in accordance with its estimates. In the event that actual losses
materially exceed the allowances established, the Company may realize a
material adverse impact on its financial condition and results of operations.
During the 1995 fourth quarter, California Federal Bank, F.S.B. (the
"Bank") obtained regulatory and shareholder approval to reorganize into a
holding company structure to provide greater flexibility for meeting future
financial and competitive needs. As a result of the reorganization, on
January 1, 1996, each share of the Bank's common stock was converted into one
share of Cal Fed Bancorp Inc. common stock and the Bank became a wholly-owned
subsidiary of Cal Fed Bancorp Inc. In order to present comparative financial
statements and other financial information, the Company's financial
statements and other financial information reported herein for periods prior
to the reorganization into a holding company structure are presented on an
"as if" pooling-of-interests basis.
In March 1993, the Bank issued 3,740,000 shares of 7 3/4% noncumulative
convertible preferred stock at a liquidation preference of $25.00 per share
(the "Preferred Stock, Series A"). Effective January 1, 1996, the Preferred
Stock, Series A, was convertible by the holders into the common stock of Cal
Fed Bancorp Inc. at any time at a conversion price of $20.16 per share,
subject to adjustment.
During the second quarter of 1996, the Bank called for redemption all
3,740,000 shares of the Preferred Stock, Series A. Except for the conversion
of 18,820 shares into 23,336 shares of the Company's common stock, the Series
A shares were redeemed effective June 14, 1996 at a redemption price of
$25.00 per share, plus a dividend of $0.398264 per share.
In March 1994, the Bank issued 1,725,000 shares of 10.625% noncumulative
perpetual preferred stock at its liquidation preference of $100.00 per share
(the "Preferred Stock, Series B"). The issuance of the Preferred Stock,
Series B is generally not redeemable prior to April 1, 1999. The Preferred
Stock, Series B, is redeemable at the option of the Bank, in whole or in
part, at $105.313 per share on or after April 1, 1999 and prior to April 1,
2000, and at prices decreasing annually thereafter to the liquidation
preference of $100.00 per share on or after April 1, 2003, plus declared but
unpaid dividends. In addition, the Preferred Stock, Series B, is redeemable
at the option of the Bank or its successor or any acquiring or resulting
entity with respect to the Bank on or after April 1, 1996 and prior to April
1, 1999 in whole, but not in part, in the event of a change of control of the
Bank at $114.50 per share.
The Preferred Stock, Series A and Series B are presented on the Company's
Consolidated Statements of Financial Condition as "Preferred stock of
subsidiary."
The following material under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is written with
the presumption that the users of the interim
F-61
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financial statements have read or have access to the most recent report on
Form 10-K which contains the latest audited financial statements and notes
thereto, together with the Management's Discussion and Analysis of Financial
Condition and Results of Operations as of December 31, 1995 and for the year
then ended.
(2) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purposes of the Consolidated Statements of Cash Flows, the Company
defines cash as currency on hand and demand deposits with other financial
institutions.
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED SEPTEMBER
30,
------------------
1996 1995
-------- --------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Cash Paid (Received) During the Period for:
Interest expense .............................................. $506.7 $514.7
Income taxes .................................................. (11.4) (1.6)
Non-Cash Investing and Financing Activities:
Additions to real estate acquired in settlement of loans ..... 97.0 110.0
Loans exchanged for mortgage-backed securities ................ -- 239.7
Change in unrealized gain on securities available for sale ... -- 18.5
Transfers (from) to loans held for sale (to) from loans held
for investment ............................................... $ 47.1 $ 78.5
</TABLE>
F-62
