<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration File No.: 333-16609
18,000,000 SHARES
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
9 1/8% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
EXCHANGEABLE INTO PREFERRED STOCK OF
CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
Dividends on the 9 1/8% Noncumulative Exchangeable Preferred Stock, Series
A, par value $.01 per share (the "Series A Preferred Shares"), of California
Federal Preferred Capital Corporation, a Maryland corporation (the
"Company"), will be noncumulative and, if, as and when authorized and
declared by the Board of Directors of the Company, will be payable quarterly
in arrears on the last day of March, June, September and December of each
year, commencing March 31, 1997, at the rate of 9 1/8% per annum of the
initial liquidation preference (an amount equal to $2.28125 per annum per
share).
Dividends on the Series A Preferred Shares are not cumulative and, if for
any reason a dividend on the Series A Preferred Shares is not authorized and
declared for a dividend period, the Company will have no obligation to pay a
dividend for such period, whether or not dividends on the Series A Preferred
Shares are authorized and declared for any future dividend period.
(continued on next page)
SEE "RISK FACTORS" BEGINNING ON PAGE 14 OF THIS PROSPECTUS FOR A
DESCRIPTION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
PURCHASERS OF THE SERIES A PREFERRED SHARES OFFERED HEREBY. AMONG THE RISKS
THAT PROSPECTIVE INVESTORS SHOULD CONSIDER ARE THE FOLLOWING:
o Lack of prior operating history of the Company;
o Dependence on First Nationwide Mortgage Corporation ("FNMC") as servicer;
o A decline in the performance or capital levels of California Federal
Bank, A Federal Savings Bank (the "Bank") could, or the placement of the
Bank into conservatorship or receivership would, result in the automatic
exchange of the Series A Preferred Shares for Bank Preferred Stock, and
such investment in the Bank would have risks that are distinct from those
associated with an investment in the Company;
o Possibility that federal regulators of the Bank will impose restrictions
on the operations of the Company or the Company's ability to pay
dividends;
o Possibility that a significant decline in interest rates could have an
adverse effect on the Company's cash flow;
o Since dividends are not cumulative, if no dividend is declared on the
Series A Preferred Shares by the Company for a dividend period, holders
of the Series A Preferred Shares will have no right to receive a dividend
for that period;
o Risks associated with investments in real estate mortgages, including
changes in interest rates and geographic concentration;
o Possibility of conflicts of interest between the Company and the Bank and
affiliates of the Bank and that the ultimate beneficial owners of the
Bank's common stock may have investment goals and strategies that differ
from those of the holders of the Series A Preferred Shares;
o MacAndrews & Forbes will be able to direct and control the policies of
the Bank and the Company; 0
o Possibility that the Company will not qualify as a real estate investment
trust for federal income tax purposes; and
o Risk that shares held by any investor in excess of certain ownership
limits set forth in the Company's charter may be automatically
transferred to a trust.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
DEBT OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE
FUND, ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
INITIAL PUBLIC
OFFERING UNDERWRITING PROCEEDS TO
PRICE(1) DISCOUNT(2) COMPANY(3)
--------------- -------------- -------------
<S> <C> <C> <C>
Per Share . $25.00 $.7875 $24.2125
Total(4) .. $450,000,000 $14,175,000 $435,825,000
</TABLE>
<PAGE>
- ------------
(1) Plus accrued dividends, if any, from January 31, 1997.
(2) The Company and the Bank have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at
$1,600,000. See "Underwriting."
(4) The Company has granted the several Underwriters an option for 30 days
to purchase up to an additional 2,000,000 Series A Preferred Shares at
the initial public offering price per Series A Preferred Share, less
underwriting discounts, solely to cover over-allotments, if any. If
such option is exercised in full, the total initial public offering
price, underwriting discount and proceeds to Company will be
$500,000,000, $15,750,000 and $484,250,000, respectively. See
"Underwriting."
The Series A Preferred Shares are offered severally by the Underwriters,
as specified herein, subject to receipt and acceptance by them and subject to
their right to reject any order in whole or in part. It is expected that the
Series A Preferred Shares will be ready for delivery through the facilities
of The Depository Trust Company in New York, New York on or about January 31,
1997 against payment therefor in immediately available funds.
GOLDMAN, SACHS & CO. SMITH BARNEY INC.
The date of this Prospectus is January 24, 1997.
<PAGE>
The Series A Preferred Shares are not redeemable prior to January 31, 2002
(except upon the occurrence of a Tax Event or a Change of Control, each as
defined herein). On and after January 31, 2002, the Series A Preferred Shares
may be redeemed for cash at the option of the Company, in whole or in part,
at any time and from time to time, at the redemption prices per share set
forth herein, plus authorized, declared and unpaid dividends, if any, to the
date fixed for redemption, without interest. Upon a Change of Control, the
Series A Preferred Shares are redeemable at the option of the Company, in
whole, but not in part, at a price per share equal to (i) $25.00, plus (ii)
an amount equal to authorized, declared and unpaid dividends, if any, to the
date fixed for redemption, without interest, and, without duplication, an
additional amount equal to the amount of dividends that would be payable on
the Series A Preferred Shares in respect of the period from the first day of
the dividend period in which the date fixed for redemption occurs to the date
fixed for redemption (assuming all such dividends were to be authorized and
declared), plus (iii) the Applicable Premium (as defined herein). Any
redemption of Series A Preferred Shares is subject to the prior approval of
the Office of Thrift Supervision (the "OTS"). The Series A Preferred Shares
will not be subject to any sinking fund or mandatory redemption and will not
be convertible into any other securities of the Company.
Each Series A Preferred Share will be exchanged automatically (the
"Automatic Exchange") for one newly issued preferred share (the "Bank
Preferred Stock") of the Bank, if the appropriate federal regulatory agency
directs in writing (a "Directive") an exchange of the Series A Preferred
Shares for Bank Preferred Stock because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the Bank
is placed into conservatorship or receivership or (iii) the appropriate
federal regulatory agency, in its sole discretion, anticipates the Bank
becoming "undercapitalized" in the near term (the "Exchange Event").
CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES COULD BE REPLACED,
WITHOUT THE CONSENT OF THE INVESTOR, BY AN INVESTMENT IN BANK PREFERRED STOCK
AT A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR AT A TIME
WHEN THE BANK HAS BEEN PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL
INVESTORS IN THE SERIES A PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY
CONSIDER THE DESCRIPTION OF THE BANK SET FORTH IN THE OFFERING CIRCULAR
ATTACHED HERETO AS ANNEX I. In the event of an Automatic Exchange, the Bank
Preferred Stock would constitute a new series of preferred shares of the
Bank, would have the same dividend rights, liquidation preference, redemption
options and other attributes as the Series A Preferred Shares and would rank
pari passu in terms of cash dividend payments and liquidation preference with
any outstanding shares of preferred stock of the Bank. Holders of Series A
Preferred Shares cannot exchange their Series A Preferred Shares for Bank
Preferred Stock voluntarily, and, absent the occurrence of an Automatic
Exchange, holders of Series A Preferred Shares will have no dividend, voting,
liquidation preference or other rights with respect to the Bank or any
security of the Bank. See "Description of Series A Preferred
Shares--Automatic Exchange."
The Company has been formed for the purpose of acquiring, holding and
managing real estate mortgage assets. The Company expects that substantially
all of its mortgage assets will be acquired from the Bank and its affiliates.
The mortgage assets will be serviced by FNMC, an affiliate of the Bank. All
of the shares of the Company's common stock, par value $.01 per share (the
"Common Stock"), are owned by the Bank. The Bank currently intends that, so
long as any Series A Preferred Shares are outstanding, it will maintain
direct or indirect ownership of at least a majority of the outstanding shares
of Common Stock of the Company.
The Company expects to qualify as a real estate investment trust (a
"REIT") for federal income tax purposes, commencing with its taxable year
ending December 31, 1997, and, as a result, corporate holders of the Series A
Preferred Shares will not be entitled to a dividends received deduction with
respect to any income recognized with respect to the Series A Preferred
Shares. Under the charter of the Company (the "Charter"), subject to certain
exceptions, no individual or entity is permitted to directly or indirectly
own more than the lesser of 2.5% of the number of the issued and outstanding
shares of Preferred Stock, including the Series A Preferred Shares, or 1.25%
of the value of all of the classes of issued and outstanding shares of stock
of the Company.
i
<PAGE>
Prior to the Offering, there has been no market for the Series A Preferred
Shares. The Series A Preferred Shares have been approved for listing on the
New York Stock Exchange (the "NYSE"), subject to official notice of issuance,
under the trading symbol "CFP." The Bank has registered the Bank Preferred
Stock with the OTS and, if issued, will apply for listing of the Bank
Preferred Stock on the NYSE. However, there can be no assurance that an
active public market for the Series A Preferred Shares or the Bank Preferred
Stock, if issued, would develop or be maintained.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A
PREFERRED SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK
STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
PROSPECTUS SUMMARY ......................... 1
The Company ............................... 1
Risk Factors .............................. 2
Business and Strategy ..................... 4
The Bank .................................. 5
Benefits to the Bank ...................... 7
The Formation ............................. 7
Tax Status of the Company ................. 7
The Offering .............................. 8
RISK FACTORS ............................... 14
No Operating History; Dependence upon
Servicer ................................. 14
Risk Associated With Bank's Capital
Position and With Possible Receivership
of the Bank .............................. 14
Dividend and Other Regulatory Restrictions
on Operations of the Company ............. 15
Risk That a Significant Change in Interest
Rates Would Affect the Company's Ability
to Pay Dividends ......................... 15
Dividends Not Cumulative .................. 16
Risks Associated with Mortgage Loans
Generally ................................ 16
Negatively Amortizing Loans ............... 17
Concentration in California ............... 18
High Balance Mortgage Loans ............... 18
Ability of the Board of Directors to
Revise the Policies and Strategies of the
Company .................................. 18
Ability to Increase Leverage May Affect
the Company's Ability to Receive Interest
Income ................................... 18
Relationship with the Bank and Its
Affiliates; Conflicts of Interests ...... 18
No Third Party Valuation of the Mortgage
Loans; No Arm's-Length Negotiations with
Affiliates ............................... 19
Control by MacAndrews & Forbes ............ 19
Tax Risks ................................. 20
No Prior Market for Series A Preferred
Shares or for Bank Preferred Stock, if
Issued ................................... 21
THE COMPANY ................................ 22
USE OF PROCEEDS ............................ 23
CAPITALIZATION ............................. 24
BUSINESS AND STRATEGY ...................... 25
General ................................... 25
Dividend Policy ........................... 25
General Description of Mortgage Assets;
Investment Policy ........................ 26
Management Policies and Programs .......... 27
Acquisition of Initial Portfolio .......... 30
Description of Initial Portfolio .......... 31
Servicing ................................. 38
Employees ................................. 39
Competition ............................... 39
Legal Proceedings ......................... 39
CERTAIN INFORMATION REGARDING THE BANK .... 40
<PAGE>
The Bank .................................. 40
Summary Historical Financial Data ........ 40
Consolidated Capitalization ............... 43
Risk Factors .............................. 44
Payment of Dividends ...................... 45
MANAGEMENT ................................. 46
Directors and Executive Officers .......... 46
Independent Directors ..................... 47
Audit Committee ........................... 47
Compensation of Directors and Officers ... 47
Limitations on Liability and
Indemnification .......................... 48
CERTAIN TRANSACTIONS CONSTITUTING THE
FORMATION .................................. 49
The Formation ............................. 49
Benefits to the Bank ...................... 49
DESCRIPTION OF SERIES A
PREFERRED SHARES .......................... 50
General ................................... 50
Automatic Exchange ........................ 50
Rank ...................................... 51
Dividends ................................. 51
Voting Rights ............................. 52
Redemption ................................ 53
Rights Upon Liquidation ................... 56
Independent Director Approval ............. 56
Restrictions on Ownership and Transfer ... 56
DESCRIPTION OF CAPITAL STOCK ............... 57
Common Stock .............................. 57
Preferred Stock ........................... 57
Power to Issue Additional Shares of Common
Stock and Preferred Stock ................ 58
Restrictions on Ownership and Transfer ... 58
Business Combinations ..................... 60
Control Share Acquisitions ................ 60
FEDERAL INCOME TAX CONSIDERATIONS ........ 62
Taxation of the Company ................... 62
Failure to Qualify ........................ 66
Tax Treatment of Automatic Exchange ...... 66
Taxation of United States Stockholders ... 66
Taxation of Foreign Stockholders .......... 67
Information Reporting Requirements and
Backup Withholding Tax ................... 68
Other Tax Consequences .................... 69
ERISA CONSIDERATIONS ....................... 70
General ................................... 70
Plan Asset Regulation ..................... 70
Effect of Plan Asset Status ............... 71
Prohibited Transactions ................... 71
Unrelated Business Taxable Income ........ 72
EXPERTS .................................... 73
RATINGS .................................... 73
CERTAIN LEGAL MATTERS ...................... 73
GLOSSARY ................................... 74
INDEX TO FINANCIAL STATEMENT ............... F-1
UNDERWRITING ............................... U-1
ANNEX I--OFFERING CIRCULAR FOR BANK
PREFERRED SHARES ........................... OC-1
</TABLE>
iii
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part)
on Form S-11 (the "Registration Statement") under the Securities Act of 1933,
as amended (the "Securities Act"), with respect to the Series A Preferred
Shares offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement, certain portions of which have been
omitted as permitted by the rules and regulations of the Commission.
Statements contained in this Prospectus as to the content of any contract or
other document are not necessarily complete, and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all
respects by such reference. For further information regarding the Company and
the Series A Preferred Shares offered hereby, reference is made to the
Registration Statement and the exhibits thereto.
The Registration Statement and the exhibits forming a part thereof filed
by the Company with the Commission can be inspected at and copies can be
obtained from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Such material may also be
accessed electronically by means of the Commission's home page on the
Internet at http://www.sec.gov.
The Charter provides that the Company shall maintain its status as a
reporting company under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), for so long as any of the Series A Preferred Shares are
outstanding.
iv
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. See "Glossary" commencing
at page 74 for the definitions of certain terms used in this Prospectus. The
offering of 18,000,000 shares of 9 1/8% Noncumulative Exchangeable Preferred
Stock, Series A, par value $.01 per share, is referred to herein as the
"Offering." Unless otherwise indicated, all information in this Prospectus
assumes that the over-allotment option described in "Underwriting" is not
exercised. On January 3, 1997, First Nationwide Bank, A Federal Savings Bank
was 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.
THE COMPANY
The Company was incorporated under the laws of the State of Maryland on
November 19, 1996 for the purpose of acquiring, holding and managing Mortgage
Assets. The Company will elect to be taxed as a REIT under the Code (as
defined below) and will generally not be subject to federal income tax to the
extent that it distributes its earnings to its stockholders and maintains its
qualification as a REIT. All of the shares of the Company's Common Stock are
owned by the Bank. The Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain direct or indirect
ownership of at least a majority of the outstanding shares of Common Stock of
the Company.
Simultaneously with the consummation of the Offering, the Bank, as owner
of the Company's Common Stock, will make a capital contribution to the
Company equal to approximately $450 million. The Company will use the
aggregate proceeds of $900 million received in connection with both the
Offering and the capital contribution by the Bank to purchase a portfolio of
Residential Mortgage Loans (the "Initial Portfolio") from the Bank. If the
Underwriters exercise their option to purchase additional Series A Preferred
Shares to cover over-allotments, the Bank will make additional capital
contributions for a price equal to the aggregate public offering price of the
additional Series A Preferred Shares purchased pursuant to the Underwriters'
over-allotment option, and the Company will use the additional proceeds from
any such additional sales of Series A Preferred Shares and capital
contributions to purchase additional Residential Mortgage Loans (as defined
herein) of the types described in "Business and Strategy -- Description of
the Initial Portfolio." Simultaneously with the consummation of the Offering
(and upon the exercise by the Underwriters of their over-allotment option, if
any), the Bank will also make additional capital contributions to the Company
in an amount equal to the aggregate amount of underwriting discounts and
expenses incurred by the Company in connection with the Offering (including
without limitation any underwriting discounts associated with the exercise by
the Underwriters of their over-allotment option, if any) and all expenses
incurred by the Company in connection with its formation in order to provide
the Company with funds sufficient to pay such expenses. See "Use of
Proceeds."
The Company and the Bank are undertaking the Offering for two principal
reasons: (i) the Offering will strengthen the Bank's regulatory capital
position, as the Series A Preferred Shares will qualify as core capital of
the Bank under relevant regulatory capital guidelines as a result of the
treatment of the Series A Preferred Shares as a minority interest in a
consolidated subsidiary of the Bank and (ii) the dividends paid on the Series
A Preferred Shares will, as a result of the Company's qualification as a
REIT, be tax deductible in computing the REIT's taxable income. The net
proceeds to the Bank from the sale to the Company of the Initial Portfolio
will be utilized in part to reduce borrowings. It is expected that the
issuance of the Series A Preferred Shares, by increasing core capital, will
enable the Bank to retain a higher base of interest-earning assets, resulting
in incrementally higher related earnings. See "Certain Transactions
Constituting the Formation -- Benefits to the Bank."
1
<PAGE>
Each Series A Preferred Share will be exchanged automatically for one
newly issued share of Bank Preferred Stock if the appropriate federal
regulatory agency directs in writing an exchange of the Series A Preferred
Shares for Bank Preferred Stock because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the Bank
is placed into conservatorship or receivership or (iii) the appropriate
federal regulatory agency, in its sole discretion, anticipates the Bank
becoming "undercapitalized" in the near term. CONSEQUENTLY, AN INVESTMENT IN
SERIES A PREFERRED SHARES COULD BE REPLACED, WITHOUT THE CONSENT OF THE
INVESTOR, BY AN INVESTMENT IN BANK PREFERRED STOCK AT A TIME WHEN THE BANK'S
FINANCIAL CONDITION IS DETERIORATING OR AT A TIME WHEN THE BANK HAS BEEN
PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE
SERIES A PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE
DESCRIPTION OF THE BANK SET FORTH IN THE OFFERING CIRCULAR ATTACHED HERETO AS
ANNEX I. See also "Description of Series A Preferred Shares -- Automatic
Exchange." Under the current prompt corrective action regulations of the OTS
implementing the requirements of Section 131 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (the "prompt corrective action
regulations"), the Bank will be considered to be "undercapitalized" if it has
(i) a core capital (or leverage) ratio of less than 4.0%, (ii) a Tier 1
risk-based capital ratio of less than 4.0%, or (iii) a total risk-based
capital ratio of less than 8.0%. Core capital essentially consists of common
stockholders' equity, noncumulative perpetual preferred stock and minority
interests in consolidated subsidiaries, less certain intangible assets. The
minimum risk-based capital requirement represents the ratio of total capital
(core capital plus supplementary capital) to risk-weighted assets (which
equals assets plus the credit risk equivalent of certain off-balance sheet
items, each multiplied by the appropriate risk weight). Supplementary capital
includes, among other things, certain qualifying subordinated debt and a
portion of general loan loss reserves. At September 30, 1996, First
Nationwide's core capital (or leverage) ratio was 6.71%, its Tier 1
risk-based capital ratio was 10.81% and its total risk-based capital ratio
was 12.93%. At September 30, 1996, after giving effect to the Cal Fed
Acquisition and the Offering, the Bank's core capital (or leverage) ratio
would have been 5.51%, its Tier 1 risk-based capital ratio would have been
9.20% and its total risk-based capital ratio would have been 11.06%. At
December 31, 1995 and 1994, First Nationwide's core capital (or leverage)
ratio was 5.84% and 5.50%, and its total risk-based capital ratio was 11.34%
and 11.01%, respectively. The Bank expects to maintain its capital ratios in
excess of "well capitalized" levels under current prompt corrective action
regulations.
The Bank Preferred Stock will only be issued upon the occurrence of the
Exchange Event. The Bank Preferred Stock will not be registered with the
Commission but is being registered with the OTS. A copy of the offering
circular filed with the OTS relating to the Bank Preferred Stock is attached
to this Prospectus (the "Offering Circular") as Annex I, together with the
documents incorporated by reference therein.
RISK FACTORS
Prospective purchasers of the Series A Preferred Shares should carefully
read all of the information set forth in this Prospectus and, in particular,
should evaluate the specific factors under "Risk Factors" commencing on page
14 for risks involved with an investment in the Series A Preferred Shares.
Among such risks are the following:
o The Company is a newly organized corporation with no operating
history.
o The Company will be dependent in virtually every phase of its
operations on the diligence and skill of the officers and employees of the
Bank and its affiliates, including FNMC as servicer.
o A decline in the performance or capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could lead to
the exchange of the Series A Preferred Shares for Bank Preferred Stock,
which would represent an investment in the Bank and not in the Company. An
investment in the Bank is subject to certain risks that are distinct from
the risks associated with an investment in the Company. For example, an
investment in the Bank would involve risks relating to the capital levels
of and other federal regulatory requirements applicable to the Bank, the
2
<PAGE>
performance of the Bank's loan portfolio and the Bank's reliance on
non-interest income. In the event of receivership of the Bank, the claims
of the Bank's depositors and of its secured, senior, general and
subordinated creditors will be entitled to a priority of payment over the
claims of holders of equity securities such as the Bank Preferred Stock.
As a result, if the Bank were to be placed into receivership after the
Automatic Exchange or if the Automatic Exchange were to occur after
receivership of the Bank, the holders of the Bank Preferred Stock likely
would receive, if anything, substantially less than holders of the Series
A Preferred Shares would have received had the Series A Preferred Shares
not been exchanged for Bank Preferred Stock. Potential investors in the
Series A Preferred Shares should carefully consider the risks with respect
to an investment in the Bank set forth in the Offering Circular attached
hereto as Annex I.
o As a subsidiary of the Bank, the Company is subject to the risk that
federal regulators of the Bank will restrict the ability of the Company to
transfer assets, to make distributions to stockholders, including
dividends to the holders of Series A Preferred Shares, or to redeem shares
of Preferred Stock. Under certain circumstances, certain of these
restrictions could result in the Company's failure to qualify as a REIT.
o Because the rate at which dividends are to be paid is fixed, and all
or substantially all of the Mortgage Loans that constitute the Initial
Portfolio are adjustable rate Mortgage Loans, a significant decline in
interest rates might adversely affect the Company's ability to pay
dividends on the Series A Preferred Shares. In addition, because the
interest rate adjustment date and payment adjustment date will not
necessarily coincide on all of the Mortgage Loans, any increase in
interest rates on the Mortgage Loans without a corresponding increase in
the borrower's monthly payment will cause the Mortgage Loans to negatively
amortize and might adversely affect the Company's ability to pay dividends
on the Series A Preferred Shares.
o Dividends are not cumulative. Consequently, if the Board of Directors
does not authorize and declare a dividend on the Series A Preferred Shares
for any quarterly period, including if prevented by federal regulators
from paying such dividend, the holders thereof would not be entitled to
recover such dividend whether or not funds are or subsequently become
available. The Board of Directors may determine, in its business judgment,
that it would be in the best interests of the Company to pay less than the
full amount of the stated dividends on the Series A Preferred Shares or no
dividends for any quarter, notwithstanding that funds are available. To
remain qualified as a REIT, however, the Company must distribute annually
at least 95% of its REIT taxable income to stockholders, and the Company
expects that the Board of Directors will authorize dividends on the Series
A Preferred Shares quarterly.
o Risks associated with Mortgage Loans generally, and particularly the
geographic concentration of the Company's Mortgage Loan portfolio in
California, could adversely affect the value of the Series A Preferred
Shares and the Mortgage Assets held by the Company.
o Because of the relationship between the Company and the Bank and its
affiliates, conflicts of interest may arise between the Company and the
Bank and its affiliates.
o MacAndrews & Forbes will be able to direct and control the policies of
the Bank and the Company, including mergers, sales of assets and similar
transactions, and the interests of the Bank and the Company may conflict
which could result in adverse consequences to the Company.
o If the Company fails to maintain its status as a REIT for federal
income tax purposes, it will be subject to corporate income tax.
o The Charter provides that, subject to certain exceptions, no
individual or entity may own, or be deemed to own by virtue of the
attribution rules of the Code (as defined herein), securities, including
the Series A Preferred Shares, representing more than the lesser of 2.5%
of the number of the issued and outstanding shares of Preferred Stock of
the Company or 1.25% of the value of all of the classes of issued and
outstanding shares of stock of the Company. Certain entities whose
interests are widely held (generally, an entity in which no Person
actually or constructively owns
3
<PAGE>
more than 9.9% of the value) will be permitted to own up to the lesser of
20% of the number of the issued and outstanding shares of preferred stock,
including the Series A Preferred Shares, or 10% of the value of all of the
classes of issued and outstanding shares of stock of the Company, if they
satisfy certain notification requirements. Any shares of stock of the
Company held by any individual or entity in violation of the foregoing
limits will be automatically transferred to a trust for the exclusive
benefit of a charity to be named by the Company.
BUSINESS AND STRATEGY
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to
stockholders. The Company expects that substantially all of its Mortgage
Assets will be acquired from the Bank and affiliates of the Bank as whole
loans secured by first mortgages or deeds of trust on single-family (one-to
four-unit) residential real estate properties, and could include stock
allocated to a dwelling unit in a residential cooperative housing corporation
("Residential Mortgage Loans"). The Company may also from time to time
acquire mortgage securities either issued or guaranteed by agencies of the
federal government or government sponsored agencies or rated by at least one
nationally recognized independent rating organization and representing
interests in or obligations backed by pools of Mortgage Loans
("Mortgage-Backed Securities"). Mortgage Loans underlying the Mortgage-Backed
Securities will be secured by single-family residential, multifamily or
commercial real estate properties located in the United States.
The Mortgage Loans expected to be included in the Initial Portfolio had an
aggregate outstanding principal balance of $901,125,418 (as of January 1,
1997). The Initial Portfolio consists entirely of Residential Mortgage Loans.
See "Business and Strategy -- Description of the Initial Portfolio --
Residential Mortgage Loans." The Bank, through its wholly-owned subsidiary,
FNMC, an affiliate of the Bank, will service the Residential Mortgage Loans
included in the Initial Portfolio and will be entitled to receive fees from
the Company in connection with the servicing of such Mortgage Loans. See
"Business and Strategy -- Servicing."
The Company and the Bank believe that the fair value of the Initial
Portfolio will equal the amount that the Company will pay for the Initial
Portfolio (approximately $900 million). However, no third-party valuations of
the Mortgage Loans constituting the Initial Portfolio have been or will be
obtained for purposes of the Offering. See "Risk Factors -- No Third Party
Valuation of the Mortgage Loans; No Arm's-Length Negotiations with
Affiliates."
The Company will initially have a Board of Directors composed of seven
members, two of whom will be Independent Directors. An "Independent Director"
is a director who is not a current officer or employee of the Company or a
current director, officer or employee of the Bank or any affiliate of the
Bank. The Charter provides that the Independent Directors will consider the
interests of the holders of both the Common Stock and the Preferred Stock,
including the Series A Preferred Shares, in determining whether any proposed
action requiring their approval is in the best interests of the Company. In
addition, although not restricted from doing so, the Board of Directors does
not currently intend to approve the following transactions without the
approval of a majority of the Independent Directors: (i) the modification of
the general distribution policy or the authorization or declaration of any
distribution in respect of Common Stock for any year if, after taking into
account any such proposed distribution, total distributions on the Series A
Preferred Shares and the Common Stock would exceed an amount equal to the sum
of 105% of the Company's REIT taxable income (excluding capital gains) for
such year plus net capital gains of the Company for that year, (ii) the
redemption of any shares of Common Stock, and (iii) any dissolution,
liquidation or termination of the Company prior to January 31, 2026. The
Company currently has four executive officers, each of whom is also an
employee of the Bank. See "Management."
The Company may from time to time purchase additional Mortgage Loans or
interests in Mortgage Loans out of proceeds received in connection with the
repayment or disposition of Mortgage Loans or the issuance of additional
shares of Common Stock or Preferred Stock. Additional shares of Preferred
Stock ranking senior to the Series A Preferred Shares may not be issued by
the Company without the
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approval of holders of at least two-thirds of the outstanding Series A
Preferred Shares. Additional shares of Preferred Stock ranking on a parity
with the Series A Preferred Shares may not be issued by the Company without
the approval of a majority of the Independent Directors. See "Description of
Series A Preferred Shares -- Voting Rights" and "--Independent Director
Approval." It is the Company's current policy that it will not issue any
additional shares of Preferred Stock unless it simultaneously receives
additional capital contributions from the Bank equal to the sum of the
aggregate offering price of such additional Preferred Stock and the Company's
expenses (including any underwriting discounts or placement fees) incurred in
connection with the issuance of such additional shares of Preferred Stock.
The Company currently anticipates that substantially all of the Mortgage
Loans that it may acquire in the future will be purchased from the Bank and
affiliates of the Bank. The Company expects that any such Mortgage Loans will
represent first lien positions, will be acquired on a basis consistent with
secondary mortgage market standards and will have been originated and
underwritten in conformity with standards generally applied by the Bank or
affiliates of the Bank at the time the Mortgage Loans were originated. The
Company currently intends to maintain 100% of its portfolio of Mortgage
Assets in either Residential Mortgage Loans or Mortgage-Backed Securities.
The Company's current policy is not to acquire any commercial Mortgage Loans.
In addition, the Company's current policy also prohibits the acquisition of
any Mortgage Loan or any interest in a Mortgage Loan (other than an interest
resulting from the acquisition of Mortgage-Backed Securities) if the Mortgage
Loan (i) is delinquent in the payment of principal or interest; (ii) is or
was at any time during the preceding 12 months (a) Classified (as defined
herein), (b) in Nonaccrual Status (as defined herein), or (c) renegotiated
due to financial deterioration of the borrower; or (iii) has been, more than
once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest.
As a newly-formed entity, the Company has no prior operating history.
Immediately after the issuance by the Company of the Series A Preferred
Shares to the public and the capital contributions by the Bank and the
purchase by the Company of the Initial Portfolio, the Company (assuming that
the Underwriters' over-allotment option is not exercised) will have
approximately $900 million in Mortgage Assets, $450 million of stated capital
attributable to the Series A Preferred Shares, $10.00 of stated capital
attributable to the Common Stock and approximately $450 million of additional
paid-in capital. See "Capitalization."
All of the Common Stock of the Company is owned by the Bank, and all of
the common stock of the Bank is owned by First Nationwide Holdings Inc.
("Holdings"). Holdings is a savings and loan holding company organized under
the laws of the state of Delaware in 1994 and is registered under the Home
Owners' Loan Act ("HOLA"). Holdings is 80% indirectly owned through Mafco
Holdings Inc. by Ronald O. Perelman and is 20% owned by Hunter's Glen/Ford,
Ltd., a limited partnership controlled by Gerald J. Ford, Chairman of the
Board and Chief Executive Officer of the Bank.
The principal executive offices of the Company are located at 200 Crescent
Court, Suite 1350 Dallas, Texas 75201, telephone number (214) 871-5131.
THE BANK
After giving effect to the Cal Fed Acquisition and the Offering, at
September 30, 1996, the Bank would have had approximately $31.0 billion in
assets and 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 total assets, based on
published sources. The Bank's principal business consists of operating retail
deposit branches and originating and/or purchasing residential real estate
loans and, to a lesser extent, certain consumer loans, and is conducted
primarily in California, Florida, Nevada and Texas. The Bank also actively
manages its portfolio of commercial real estate loans acquired through
acquisitions and is active in mortgage banking and loan servicing. These
operating activities are financed principally with customer deposits, secured
short-term and long-term borrowings,
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collections on loans, asset sales and retained earnings. As of September 30,
1996, First Nationwide, without giving effect to the Cal Fed Acquisition, had
approximately $16.8 billion in assets and approximately $8.8 billion in
deposits and operated 116 branches.
The Bank is chartered as a federal stock savings bank under the HOLA and
is regulated by the OTS and the Federal Deposit Insurance Corporation
("FDIC"), which, through the Savings Association Insurance Fund ("SAIF"),
insures the deposit accounts of the Bank, up to applicable limits. The Bank
is also a member of the Federal Home Loan Bank System ("FHLBS").
The Cal Fed Acquisition
Holdings entered into an Amended and Restated Agreement and Plan of
Merger, dated as of July 27, 1996 (the "Merger Agreement"), among Holdings,
Cal Fed, California Federal and CFB Holdings, Inc., a wholly owned subsidiary
of Holdings. On January 3, 1997 First Nationwide was merged with and into
California Federal, with California Federal being the surviving institution.
Prior to the consummation of the Cal Fed Acquisition, First Nationwide
received a capital contribution from Holdings totalling approximately $700
million (the "Capital Contribution"). For purposes of this Prospectus, the
Capital Contribution is considered part of the Cal Fed Acquisition. The
aggregate consideration paid to Cal Fed shareholders under the Merger
Agreement consisted of approximately $1.2 billion in cash and the issuance of
the Secondary Litigation Interests (as defined in the Offering Circular) by
California Federal. California Federal, headquartered in Los Angeles, was a
federal stock savings bank chartered under the HOLA, which operated 118
branches in California and Nevada. Cal Fed was a Delaware-chartered unitary
savings and loan holding company whose only significant asset was all of the
common stock of California Federal. Cal Fed was a publicly owned corporation
whose common shares were traded on the NYSE under the symbol "CAL."
The Bank's management believes that the Cal Fed Acquisition furthers its
strategy of building franchise value by expanding the Bank's retail branch
network in California. California Federal offers a broad range of consumer
financial services, including demand and term deposits, mortgage, consumer
and small business loans, and insurance and investment products. At September
30, 1996, California Federal had approximately $14.1 billion in assets and
$8.8 billion in deposits. The Bank's management believes that the Cal Fed
Acquisition substantially completes the strategy initiated in 1994 to expand
and focus its retail franchise in California.
The Cal Fed Acquisition significantly enhances the Bank's presence in
Southern California, which management believes is an attractive area for
expansion, and complements First Nationwide's existing branches in Northern
California. At September 30, 1996, First Nationwide had approximately $4.9
billion in retail deposits at 72 branches in Northern California and
approximately $.8 billion in retail deposits at 17 branches in Southern
California. After giving effect to the Cal Fed Acquisition, at September 30,
1996, the Bank would have had approximately $6.1 billion in retail deposits
at 89 branches in Northern California and $7.5 billion in retail deposits at
105 branches in Southern California.
In addition to significantly enhancing the Bank's statewide branch
network, the Cal Fed Acquisition is expected to contribute significant
earnings. The economies of scale resulting from the Cal Fed Acquisition will
enable the Bank to continue to improve the efficiency of its operations. The
Cal Fed Acquisition also adds approximately $3.5 billion to the loan
servicing portfolio, which will enable FNMC to realize continued operating
efficiencies.
The Cal Fed Acquisition adheres to First Nationwide's strategy of
protecting the credit quality of its assets. In 1994, California Federal
completed a significant restructuring, which included the sale of
approximately $1.3 billion of non-performing and high-risk performing assets.
At December 31, 1995, the California Federal loan portfolio consisted of
predominantly one-to four-unit residential mortgage loans (76.8% of total
loans) and 5+ unit residential mortgage loans (14.2% of total loans). The Cal
Fed Acquisition will be accounted for under the purchase method of accounting
and therefore the California Federal loan portfolio will be acquired at its
current fair market value. On a pro forma basis after giving
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effect to the Cal Fed Acquisition at September 30, 1996, 70.5% of the Bank's
loans would have consisted of residential mortgages, compared to 59.8% on an
historical basis, and 28.9% of the Bank's loans would have consisted of
commercial real estate loans, compared to 39.6% on an historical basis.
The principal executive offices of the Bank are located at 135 Main
Street, San Francisco, California 94105 and its telephone number is (415)
904-0110.
BENEFITS TO THE BANK
The Bank expects to realize the following benefits in connection with the
Offering and other transactions constituting the formation of the Company:
o The Bank has advised the Company that the Bank expects the Series A
Preferred Shares to qualify as core capital of the Bank under relevant
regulatory capital guidelines. The increase in the Bank's core capital
and risk-based capital levels that will result from the treatment of
the Series A Preferred Shares as core capital will enable the Bank to
retain a higher base of interest-earning assets, resulting in
incrementally higher related earnings.
o The dividends paid on the Series A Preferred Shares will be deductible
for income tax purposes as a result of the Company's qualification as a
REIT, which provides the Bank with a more cost-effective means of
obtaining regulatory capital than if the Bank were to issue preferred
stock.
o In exchange for the Initial Portfolio, the Bank will receive the $450
million aggregate amount of the net proceeds received by the Company in
connection with the Offering.
o FNMC, a subsidiary of the Bank, will receive service related
compensation pursuant to the Servicing Agreement.
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the
Company and the Bank will engage in the transactions described under "Certain
Transactions Constituting the Formation." These transactions are designed (i)
to facilitate the Offering, (ii) to transfer the ownership of the Initial
Portfolio to the Company, and (iii) to enable the Company to qualify as a
REIT for federal income tax purposes commencing with its taxable year ending
December 31, 1997.
The following diagram outlines the relationship between the Company and
the Bank following completion of the Offering:
CALIFORNIA FEDERAL BANK
A Federal Savings Bank
PUBLIC STOCKHOLDERS
Residential Mortgage
Purchase Agreement
100%
Common
Stock
100%
Series A
Preferred Shares
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
(the "Company")
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ending December 31, 1997. As a REIT, the Company
generally will not be subject to federal income tax on net income and capital
gains that it distributes to the holders of its Common Stock and Preferred
Stock, including the Series A Preferred Shares.
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<PAGE>
A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute to
stockholders at least 95% of its "REIT taxable income." Notwithstanding
qualification for taxation as a REIT, the Company may be subject to certain
state and/or local taxes on its income and property and federal income and
excise taxes on its undistributed income. See "Risk Factors -- Tax Risks" and
"Federal Income Tax Considerations."
THE OFFERING
For a more complete description of the terms of the Series A Preferred
Shares specified in the following summary, see "Description of Series A
Preferred Shares."
Issuer ................. California Federal Preferred Capital
Corporation, a newly-formed Maryland
corporation created for the purpose of
acquiring, holding and managing real estate
mortgage assets ("Mortgage Assets").
Securities Offered ..... 18,000,000 Series A Preferred Shares. The
Company has granted the Underwriters an
option for 30 days to purchase up to an
additional 2,000,000 Series A Preferred
Shares at the initial public offering price
solely to cover over-allotments, if any.
Ranking ................ With respect to the payment of dividends and
amounts upon liquidation, dissolution or
winding up of the Company, the Series A
Preferred Shares will rank senior to the
Company's Common Stock. So long as any
Series A Preferred Shares remain
outstanding, additional shares of preferred
stock, par value $.01 per share, of the
Company (the "Preferred Stock") ranking
senior to the Series A Preferred Shares may
not be issued without the approval of
holders of at least two-thirds of the Series
A Preferred Shares. So long as any Series A
Preferred Shares remain outstanding,
additional shares of Preferred Stock ranking
on a parity with the Series A Preferred
Shares may not be issued without the
approval of a majority of the Independent
Directors (as defined herein).
Use of Proceeds ........ The net proceeds to the Company from the
Offering, together with proceeds received as
capital contributions from the Bank, will be
used to purchase the Company's initial
portfolio of Mortgage Assets and to pay the
expenses of the Offering and the formation
of the Company (currently estimated by the
Company to be approximately $15.8 million in
the aggregate). See "Use of Proceeds."
Dividends .............. Dividends are noncumulative and will be
payable at the rate of 9 1/8% per annum of
the initial liquidation preference
(equivalent to $2.28125 per share per annum)
if, when and as authorized and declared by
the Board of Directors of the Company (the
"Board of Directors"). If the Board of
Directors does not authorize and declare a
dividend with respect to any quarterly
dividend period (each, a "Dividend Period"),
holders of the Series A Preferred Shares
will have no right to receive a dividend on
the Series A Preferred Shares in respect of
such Dividend Period. Dividends are payable,
if authorized and
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<PAGE>
declared, quarterly in arrears (prorated for
any Dividend Period that is other than three
full months based on a 360-day year of
twelve 30-day months) on March 31, June 30,
September 30 and December 31 (or, if any
such day is not a business day, on the next
business day) in each year (each such date,
a "Dividend Payment Date") beginning March
31, 1997. Quarterly Dividend Periods will
commence on and include the first day, and
end on and include the last day, of the
calendar quarter in which the corresponding
Dividend Payment Date occurs.
If any Series A Preferred Shares are
outstanding, no full dividends or other
distributions shall be authorized, declared
or paid or set apart for payment on any
Parity Stock or Junior Stock (each as
defined herein) for any Dividend Period
unless full dividends have been or
contemporaneously are authorized, declared
and paid, or authorized and declared and a
sum sufficient for the payment thereof is
set apart for such payments on the Series A
Preferred Shares for (i) the immediately
preceding Dividend Period, in the case of
Parity Stock, and (ii) the then-current
Dividend Period, in the case of Junior
Stock. When dividends are not paid in full
(or a sum sufficient for such full payment
is not so set apart) for any Dividend Period
upon the Series A Preferred Shares and the
shares of any Parity Stock, all dividends
authorized or declared on the Series A
Preferred Shares and the shares of Parity
Stock shall only be authorized or declared
pro rata based upon the respective amounts
that would have been paid on the Series A
Preferred Shares and any shares of Parity
Stock had dividends been authorized and
declared in full.
In addition to the foregoing restriction,
the Company shall not authorize, declare,
pay or set apart funds for any dividends or
other distributions (other than in Common
Stock or other Junior Stock) with respect to
any Common Stock or other Junior Stock or
repurchase, redeem or otherwise acquire, or
set apart funds for repurchase, redemption
or other acquisition of, any Common Stock or
other Junior Stock through a sinking fund or
otherwise, unless and until (i) full
dividends on the Series A Preferred Shares
for the four most recent preceding Dividend
Periods (or such lesser number of Dividend
Periods during which shares of Series A
Preferred Shares have been outstanding) are
authorized, declared and paid or a sum
sufficient for payment has been paid over to
the dividend disbursing agent for payment of
such dividends and (ii) the Company has
authorized and declared a cash dividend on
the Series A Preferred Shares at the annual
dividend rate for the then-current Dividend
Period, and sufficient funds have been paid
over to the dividend disbursing agent for
the payment of such cash dividend for such
then-current Dividend Period.
No dividend shall be paid or set aside for
holders of Series A Preferred Shares for any
Dividend Period unless full dividends
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<PAGE>
have been paid or set aside for the holders
of each class or series of equity
securities, if any, ranking prior to the
Series A Preferred Shares as to dividends
for such Dividend Period. See "Description
of Series A Preferred Shares -- Dividends."
For so long as the Company qualifies as a
REIT, corporate holders of the Series A
Preferred Shares will not be entitled to a
dividends received deduction with respect to
any income recognized with respect to the
Series A Preferred Shares.
Liquidation Preference . The liquidation preference for each Series A
Preferred Share is $25.00, plus an amount
equal to authorized and unpaid dividends, if
any, thereon, but without accumulation of
unpaid dividends for prior dividend periods.
See "Description of Series A Preferred
Shares -- Rights Upon Liquidation."
Redemption ............. The Series A Preferred Shares are not
redeemable prior to January 31, 2002 (except
upon the occurrence of a Tax Event or a
Change of Control). On and after January 31,
2002, the Series A Preferred Shares may be
redeemed for cash at the option of the
Company, in whole or in part, at any time
and from time to time, at the redemption
prices per share set forth herein, plus
authorized, declared and unpaid dividends,
if any, to the date fixed for redemption,
without interest.
Upon the occurrence of a Tax Event, the
Company will have the right at any time to
redeem the Series A Preferred Shares in
whole (but not in part) at a redemption
price of $25.00 per share, plus authorized,
declared and unpaid dividends, if any, to
the date fixed for redemption, without
interest. "Tax Event" means the receipt by
the Company of an opinion of a nationally
recognized legal counsel to the Company
experienced in such matters to the effect
that, as a result of (i) any amendment to,
clarification of, or change (including any
announced prospective change) in, the laws
or treaties (or any regulations thereunder)
of the United States or any political
subdivision or taxing authority thereof or
therein affecting taxation, (ii) any
judicial decision, official administrative
pronouncement, published or private ruling,
regulatory procedure, notice or announcement
(including any notice or announcement of
intent to adopt such procedures or
regulations) ("Administrative Action") or
(iii) any amendment to, clarification of, or
change in the official position or the
interpretation of such Administrative Action
or any interpretation or pronouncement that
provides for a position with respect to such
Administrative Action that differs from the
theretofore generally accepted position, in
each case, by any legislative body, court,
governmental authority or regulatory body,
irrespective of the manner in which such
amendment, clarification or change is made
known, which amendment, clarification, or
change is effective or such pronouncement or
decision is announced on or after the date
of issuance of the Series A Preferred
Shares, there is more than an insubstantial
risk that (a) dividends paid or to be paid
by the Company with
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<PAGE>
respect to the stock of the Company are not,
or will not be, fully deductible by the
Company for United States federal income tax
purposes or (b) the Company is, or will be,
subject to more than a de minimis amount of
other taxes, duties or other governmental
charges.
Upon a Change of Control, the Series A
Preferred Shares are redeemable on or prior
to January 31, 2002 at the option of the
Company, in whole, but not in part, at a
price per share equal to (i) $25.00 plus
(ii) an amount equal to authorized, declared
and unpaid dividends, if any, to the date
fixed for redemption, without interest, and,
without duplication, an additional amount
equal to the amount of dividends that would
be payable on the Series A Preferred Shares
in respect of the period from the first day
of the Dividend Period in which the date
fixed for redemption occurs to the date
fixed for redemption (assuming all such
dividends were to be authorized and
declared), plus (iii) the Applicable Premium
(as defined herein).
Any redemption of Series A Preferred Shares
is subject to compliance with applicable
regulatory and other restrictions, including
the prior approval of the OTS. See
"Description of Series A Preferred Shares --
Redemption."
The Series A Preferred Shares are not
subject to any sinking fund or mandatory
redemption and are not convertible into any
other securities of the Company.
Automatic Exchange ..... Each Series A Preferred Share will be
exchanged automatically for one newly issued
share of Bank Preferred Stock if the
appropriate federal regulatory agency
directs in writing an exchange of the Series
A Preferred Shares for Bank Preferred Stock
because of any of the following: (i) the
Bank becomes "undercapitalized" under prompt
corrective action regulations, (ii) the Bank
is placed into conservatorship or
receivership or (iii) the appropriate
federal regulatory agency, in its sole
discretion, anticipates the Bank becoming
"undercapitalized" in the near term. Upon
the Exchange Event, each holder of Series A
Preferred Shares shall be unconditionally
obligated to surrender to the Bank all
certificates representing the Series A
Preferred Shares of such holder, and the
Bank shall be unconditionally obligated to
issue to such holder, in exchange for such
certificate(s), a certificate or
certificates representing an equal number of
shares of Bank Preferred Stock.
Holders of Bank Preferred Stock would have
the same dividend rights, liquidation
preference, redemption options and other
attributes as to the Bank as holders of
Series A Preferred Shares have as to the
Company. Any accrued and unpaid dividends on
the Series A Preferred Shares as of the time
of exchange would be deemed to be accrued
and unpaid dividends on the Bank Preferred
Stock. The Bank Preferred Stock would rank
pari passu in terms of dividend payment and
liquidation preference with any outstanding
shares of preferred
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<PAGE>
stock of the Bank. Absent the occurrence of
the Exchange Event, however, the Bank will
not issue any Bank Preferred Stock, although
the Bank will be able to issue preferred
stock in series other than that of the Bank
Preferred Stock. See "Description of Series
A Preferred Shares -- Automatic Exchange."
Voting Rights .......... Except as described herein with respect to
certain voting rights in the Company,
holders of Series A Preferred Shares will
not have any voting rights. In any matter in
which the Series A Preferred Shares may vote
(as expressly provided herein), each Series
A Preferred Share will be entitled to one
vote. See "Description of Series A Preferred
Shares -- Voting Rights."
Independent Directors .. The Charter provides that, as long as any
Series A Preferred Shares are outstanding,
certain actions by the Company must be
approved by a majority of the Independent
Directors. As long as there are only two
Independent Directors, any action that
requires the approval of majority of
Independent Directors must be approved by
both Independent Directors. In order to be
considered "independent," a director must
not be a current employee or officer of the
Company or a current employee, officer or
director of the Bank or any other affiliate
of the Bank. In addition, any members of the
Board of Directors of the Company elected by
holders of Preferred Stock, including the
Series A Preferred Shares, will be deemed to
be Independent Directors for purposes of
approving actions requiring the approval of
a majority of the Independent Directors.
The actions which require approval of a
majority of the Independent Directors
include (i) the issuance of additional
Preferred Stock ranking on a parity with the
Series A Preferred Shares, (ii) the
incurrence of debt for borrowed money in
excess of 20% of the Company's total
stockholders' equity, (iii) the acquisition
of real estate assets other than Mortgage
Loans or Mortgage-Backed Securities (as
defined herein), (iv) the termination or
modification of, or the election not to
renew, the Servicing Agreement (as defined
herein) or the subcontracting of any duties
under the Servicing Agreement to third
parties unaffiliated with the Bank, (v) any
material amendment to or modification of any
of the Residential Mortgage Purchase
Agreement (as defined herein), and (vi) the
determination to revoke the Company's REIT
status. The Charter provides that the
Independent Directors will consider the
interests of holders of both the Common
Stock and the Preferred Stock, including the
Series A Preferred Shares, in determining
whether any proposed action requiring their
approval is in the best interests of the
Company.
Ownership Limits ....... In order to preserve the Company's status as
a REIT for federal income tax purposes,
subject to certain exceptions, no individual
or entity may own, or be deemed to own by
virtue of the
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<PAGE>
attribution rules of the Code (as defined
herein), more than the lesser of 2.5% of the
number of the issued and outstanding shares
of Preferred Stock, including the Series A
Preferred Shares, or 1.25% of the value of
all of the classes of issued and outstanding
shares of stock of the Company. Certain
entities whose interests are widely held
(generally, an entity in which no Person
actually or constructively owns up to 9.9%
of the value) will be permitted to own more
than the lesser of 20% of the number of the
issued and outstanding shares of preferred
stock, including the Series A Preferred
Shares, or 10% of the value of all of the
classes of issued and outstanding shares of
stock of the Company, if they satisfy
certain notification requirements. Any
shares of Preferred Stock, including the
Series A Preferred Shares, transferred in
violation of such ownership limits or which
would otherwise cause the Company to fail to
qualify as a REIT will automatically be
transferred to a trust for the exclusive
benefit of a charitable beneficiary to be
named by the Company. All rights to
dividends to such shares will be held by
such trust. See "Description of Capital
Stock -- Restrictions on Ownership and
Transfer."
Trading ................ The Series A Preferred Shares have been
approved for listing on the NYSE, subject to
official notice of issuance, under the
trading symbol "CFP."
Ratings ................ It is expected that the Series A Preferred
Shares will be rated ba2 by Moody's
Investors Service, Inc. and BB by Standard
and Poor's Ratings Group. A security rating
is not a recommendation to buy, sell or hold
securities and may be subject to revision or
withdrawal at any time by the assigning
rating organization.
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RISK FACTORS
Prospective investors should carefully consider the following information
in conjunction with the other information contained in this Prospectus before
purchasing Series A Preferred Shares in the Offering. For a description of
certain risk factors relating to the Bank and the Bank Preferred Stock,
prospective investors should carefully review and consider the information
contained in the section entitled "Risk Factors" in the attached Offering
Circular. This Prospectus contains certain forward-looking statements and
information relating to the Company that are based on the beliefs of
management as well as assumptions made by and information currently available
to management. In addition, in those and other portions of this document, the
words "anticipate," "believe," "estimate," "expect," "intend" and similar
expressions, as they relate to the Company or the Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including the risk factors
described in this Prospectus. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those described herein as
anticipated, believed, estimated, expected or intended. The Company does not
intend to update these forward-looking statements.
NO OPERATING HISTORY; DEPENDENCE UPON SERVICER
The Company is a newly organized corporation with no operating history and
has no revenues to date. The Company will be dependent on the diligence and
skill of its officers and the officers and employees of FNMC for the
selection, structuring and monitoring of its Mortgage Assets. See
"Management." In addition, the Company will be dependent upon the expertise
of FNMC for the servicing of its Mortgage Loans. FNMC may subcontract all or
a portion of its obligations under the Servicing Agreement (as defined
herein) to one or more affiliates, and under certain conditions to
non-affiliates, involved in the business of managing or servicing Mortgage
Assets, subject to approval of a majority of the Independent Directors. In
the event FNMC subcontracts its obligations in such a manner, the Company
will be dependent upon the subcontractor to provide services. See "Business
and Strategy -- Servicing."
RISK ASSOCIATED WITH BANK'S CAPITAL POSITION AND WITH POSSIBLE RECEIVERSHIP
OF THE BANK
The purchase of Series A Preferred Shares involves a high degree of risk
with respect to the performance and capital levels of the Bank. A decline in
the performance and capital levels of the Bank or the placement of the Bank
into conservatorship or receivership could result in the exchange of the
Series A Preferred Shares for Bank Preferred Stock, which would be an
investment in the Bank and not in the Company. An investment in the Bank is
also subject to certain risks that are distinct from the risks associated
with an investment in the Company. For example, an investment in the Bank
would involve risks relating to the capital level and other federal
regulatory requirements applicable to the Bank, the performance of the Bank's
loan portfolio and the Bank's reliance on non-interest income. An investment
in the Bank is also subject to the general risks inherent in equity
investments in depositary institutions. As a result, holders of Series A
Preferred Shares would become holders of preferred stock of the Bank at a
time when the Bank's financial condition was deteriorating or when the Bank
had been placed into conservatorship or receivership. In the event of
receivership of the Bank, the claims of depositors and secured, senior,
general and subordinated creditors of the Bank would be entitled to a
priority of payment over the claims of holders of equity interests such as
the Bank Preferred Stock. As a result of such subordination, either if the
Bank were to be placed into receivership after the Automatic Exchange or if
the Automatic Exchange were to occur after receivership of the Bank, the
holders of the Bank Preferred Stock likely would receive, if anything,
substantially less than the holders of the Series A Preferred Shares would
have received had the Series A Preferred Shares not been exchanged for Bank
Preferred Stock. Furthermore, there can be no assurance that the Bank would
be in a financial position, after the occurrence of the Automatic Exchange,
to make any dividend payments on the Bank Preferred Stock. Potential
investors in the Series A Preferred Shares should carefully consider the
information with respect to the Bank set forth under "Certain Information
Regarding the Bank." See also, "Description of Series A Preferred Shares --
Automatic Exchange."
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DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY
Because the Company is a subsidiary of the Bank, federal regulatory
authorities will have the right to examine the Company and its activities.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking
practice, such regulatory authorities will have the authority to restrict the
ability of the Company to transfer assets, to make distributions to its
stockholders (including dividends to the holders of Series A Preferred
Shares), or to redeem shares of Preferred Stock or even to require the Bank
to sever its relationship with or divest its ownership of the Company. Such
actions could potentially result in the Company's failure to qualify as a
REIT.
Payment of dividends on the Series A Preferred Shares could also be
subject to regulatory limitations if the Bank became "undercapitalized" for
purposes of the OTS prompt corrective action regulations, which is currently
defined as having a total risk-based capital ratio of less than 8.0%, a Tier
1 risk-based capital ratio of less than 4.0% and a core capital (or leverage)
ratio of less than 4.0%. At September 30, 1996, First Nationwide's total
risk-based capital ratio was 12.93%, its Tier 1 risk-based capital ratio was
10.81% and its leverage ratio was 6.71%. Such ratios, adjusted to give effect
to the sale of Series A Preferred Shares in the Offering, would be
approximately 14.20%, 12.07% and 7.50%, respectively. However, the Bank
significantly expanded its business and thus, its total assets, in the Cal
Fed Acquisition. After giving effect to the Cal Fed Acquisition and the
Offering, the Bank's risk-based capital ratio on a pro forma basis at
September 30, 1996 would be 11.06%, its Tier 1 risk-based capital ratio would
be 9.20%, and its leverage ratio would be 5.51%. In addition, federal
regulatory authorities would have the authority to restrict the ability of
the Company to pay dividends to its stockholders if such dividend payments
were inconsistent with the safe and sound operation of the Bank.
If the Automatic Exchange occurs and the Bank has not been placed into
conservatorship or receivership, the Bank would likely be prohibited from
paying dividends on the Bank Preferred Stock because the Bank would be
"undercapitalized." In addition, the Bank's ability to pay dividends should
its capital status improve would be subject to various restrictions under OTS
regulations, a resolution of the Bank's board of directors and certain
contractual provisions.
However, if the Automatic Exchange occurs after the Bank has been placed
into conservatorship or receivership, the Bank would not be able to pay
dividends on the Bank Preferred Stock, and the claims of the Bank's
depositors and of its secured, senior, general and subordinated creditors
would be entitled to a priority of payment over the claims of holders of
equity interests such as the Bank Preferred Stock issued pursuant to the
Automatic Exchange.
RISK THAT A SIGNIFICANT CHANGE IN INTEREST RATES WOULD AFFECT THE COMPANY'S
ABILITY TO PAY DIVIDENDS
The Company's income will consist primarily of interest payments on the
Mortgage Loans held by it. The Company anticipates that most of its Mortgage
Loans will bear interest at adjustable rates. If there is a decline in
interest rates (as measured by the indices upon which the interest rates of
the Mortgage Loans are based), then the Company will experience a decrease in
income available to be distributed to its stockholders. In such an interest
rate environment the Company may experience an increase in prepayments on its
Residential Mortgage Loans and may find it more difficult to purchase
additional Mortgage Loans bearing rates sufficient to support payment of the
dividends on the Series A Preferred Shares. In addition, certain Residential
Mortgage Loan products which the Company may purchase could allow borrowers
in such an interest rate environment to convert an adjustable rate mortgage
to a fixed rate mortgage, thus "locking in" a low fixed interest rate.
Because the rate at which dividends are required to be paid on the Series A
Preferred Shares is fixed, there can be no assurance that an interest rate
environment in which there is a significant decline in interest rates would
not adversely affect the Company's ability to pay dividends on the Series A
Preferred Shares.
In addition, as described below under "--Risks Associated with Mortgage
Loans Generally -- Structural Risks of Mortgage Loans," certain Residential
Mortgage Loans included in the Initial Portfolio have the potential to
negatively amortize. If there is an increase in interest rates on such
Mortgage Loans (as measured by the indices upon which the interest rates of
the Mortgage Loans are based), the Company may experience a decrease in
income available to be distributed to its stockholders where such increase in
the interest rates does not coincide with a corresponding adjustment of the
borrowers' monthly payments.
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DIVIDENDS NOT CUMULATIVE
Dividends on the Series A Preferred Shares are not cumulative.
Consequently, if the Board of Directors does not authorize and declare a
dividend on the Series A Preferred Shares for any period, including in the
event the Company is prevented from paying such dividend by the OTS, the
holders of the Series A Preferred Shares would not be entitled to recover
such dividend, whether or not funds are or subsequently become available. The
Board of Directors may determine, in its business judgment, that it would be
in the best interests of the Company to pay less than the full amount of the
stated dividends on the Series A Preferred Shares or no dividends for any
quarter notwithstanding that funds are available. Factors that would be
considered by the Board of Directors in making this determination are the
Company's financial condition and capital needs, the impact of legislation
and regulations as then in effect or as may be proposed, economic conditions,
and such other factors as the Board of Directors may deem relevant. To remain
qualified as a REIT, the Company must distribute annually at least 95% of its
REIT taxable income (as defined herein) to stockholders. See "--Tax Risks"
below and "Federal Income Tax Considerations -- Organizational Requirements."
RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY
An investment in the Series A Preferred Shares may be affected by, among
other things, a decline in real estate values. In the event a substantial
amount of the Mortgage Assets held by the Company becomes nonperforming, the
Company may not have funds sufficient to pay dividends on the Series A
Preferred Shares. Factors that could affect the value of the Mortgage Assets
held by the Company include the following:
Structural Risks of Mortgage Loans
The Company generally does not intend to obtain credit enhancements such
as mortgagor bankruptcy insurance or to obtain special hazard insurance for
its Mortgage Loans, other than standard hazard insurance, which will in each
case only relate to individual Mortgage Loans. The Bank also generally
requires flood insurance on any loan secured by real property if the property
lies within a U.S. Housing and Urban Development Department designated flood
hazard area. Accordingly, during the time it holds Mortgage Loans for which
third party insurance is not obtained, the Company will be subject to risks
of borrower defaults and bankruptcies and special hazard losses that are not
covered by standard hazard insurance (such as those occurring from
earthquakes). In addition, in the event of a default on any Mortgage Loan
held by the Company resulting from declining property values or worsening
economic conditions, among other factors, the Company would bear the risk of
loss of principal to the extent of any deficiency between (i) the value of
the related mortgaged property, plus any payments from an insurer and (ii)
the amount owing on the Mortgage Loan.
Real Estate Market Conditions
The results of the Company's operations will be affected by various
factors, many of which are beyond the control of the Company, such as local
and other economic conditions affecting real estate value, interest rate
levels and the availability of credit to refinance Mortgage Loans at or prior
to maturity. The results of the Company's operations depend on, among other
things, the level of interest income generated by the Company's Mortgage
Assets, the market value of such Mortgage Assets and the supply of and demand
for such Mortgage Assets. Further, no assurance can be given that the values
of the properties securing the Mortgage Loans included in the Company's
Initial Portfolio have remained or will remain at the levels existing on the
dates of origination of such Mortgage Loans.
Delays in Liquidating Defaulted Mortgage Loans
Even assuming that the mortgaged properties underlying the Mortgage Loans
held by the Company provide adequate security for such Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans, with corresponding delays in the receipt of related
proceeds by the Company. An action to foreclose on a mortgaged property
securing a Mortgage Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other
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lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a
mortgaged property. In the event of a default by a mortgagor, these
restrictions, among other things, may impede the ability of the Company to
foreclose on or sell the mortgaged property or to obtain proceeds sufficient
to repay all amounts due on the related Mortgage Loan. In addition, the
Servicer of the Company's Mortgage Loans will be entitled to deduct from
collections received all expenses reasonably incurred in attempting to
recover amounts due and not yet repaid on liquidated Mortgage Loans,
including a disposition fee equal to 1% of the aggregate proceeds obtained in
a sale of a defaulted Mortgage Loan, legal fees and costs of legal action,
real estate taxes and maintenance and preservation expenses, thereby reducing
amounts available to the Company. As used herein, unless the context
indicates otherwise, "mortgaged properties" includes shares in a cooperative
and the related proprietary leases and occupancy agreements that are
allocated to a dwelling unit in a residential cooperative housing
corporation.
Legal Considerations
Applicable state laws generally regulate interest rates and other charges
and require certain disclosures to borrowers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which
may apply to the origination, servicing and collection of the Mortgage Loans.
Certain states such as California also limit the remedies that may be
available to a lender in the event of default. Depending on the provisions of
the applicable law and the specific facts and circumstances involved, these
laws, policies and principles may limit the ability of the Company to collect
all or part of the principal of or interest on the Mortgage Loans, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the Company to damages and administrative sanctions.
Environmental Considerations
In the event that the Company is forced to foreclose on a defaulted
Mortgage Loan to recover its investment in such Mortgage Loan, the Company
may be subject to environmental liabilities in connection with the underlying
real property which could exceed the value of the real property. Although the
Company intends to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof
(as defined by state and federal laws and regulations) may be discovered on
properties during the Company's ownership or after a sale thereof to a third
party. If such hazardous substances are discovered on a property which the
Company has acquired through foreclosure or otherwise, the Company may be
required to remove those substances and clean up the property. There can be
no assurance that in such a case the Company would not incur full recourse
liability for the entire costs of any removal and clean-up, that the cost of
such removal and clean-up would not exceed the value of the property or that
the Company could recoup any of such costs from any third party. The Company
may also be liable to tenants and other users of neighboring properties. In
addition, the Company may find it difficult or impossible to sell the
property prior to or following any such clean-up.
NEGATIVELY AMORTIZING LOANS
An adjustment of the interest rates for Residential Mortgage Loans
representing 55.37% of the Initial Portfolio (calculated as of January 1,
1997) may not result in an adjustment of the borrower's monthly payment on
such interest adjustment date and/or may limit the amount of a monthly
payment adjustment. The difference between the amount of the monthly payment
made by the borrower and the full amount of interest owed for the month,
known as deferred interest or negative amortization, is added to the
principal balance of the Residential Mortgage Loan. Any resulting increase in
the borrower's monthly payment when the payment does adjust may exceed the
borrower's ability to pay, thereby increasing the possibility of default. In
addition, with respect to certain of those Residential Mortgage Loans that
have the potential to negatively amortize, the related borrower has the
option to limit the amount by which the Residential Mortgage Loan negatively
amortizes by making an "interest only" payment in an amount that
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would be sufficient to pay the full monthly interest cost of the Residential
Mortgage Loan. In those instances where the Residential Mortgage Loan is
negatively amortizing or the borrower is making an "interest only" payment,
the lender is permitted to reamortize the Residential Mortgage Loan and
require the borrower to make fully amortizing principal and interest payments
either (i) approximately every fifth semiannual or annual payment adjustment
date during the term of the Residential Mortgage Loan or (ii) when the
outstanding principal balance of the Residential Mortgage Loan equals or
exceeds a percentage ranging from 110% to 125% of the original loan balance.
Due to the extended period of time during which a borrower may not be
required to make fully amortizing principal and interest payments on a
Residential Mortgage Loan, any monthly payment adjustment that would require
fully amortizing principal and interest payments could be significant and
could exceed the borrower's ability to pay, thereby increasing the likelihood
of default.
CONCENTRATION IN CALIFORNIA
In addition to the foregoing, certain geographic regions of the United
States from time to time will experience natural disasters or weaker regional
economic conditions and housing markets and, consequently, may experience
higher rates of loss and delinquency on Mortgage Loans generally. Any
concentration of the Mortgage Loans in such a region may present risks in
addition to those generally present with respect to Mortgage Loans. The
Company currently anticipates that approximately 75.06% of the Residential
Mortgage Loans included in the Initial Portfolio will be secured by
residential properties located in California. These Mortgage Loans may be
subject to a greater risk of default than other comparable Mortgage Loans in
the event of adverse economic, political or business developments or natural
hazards, such as earthquakes, that may affect such region and the ability of
property owners in such region to make payments of principal and interest on
the underlying mortgages. See "Business and Strategy -- Description of
Initial Portfolio -- Geographic Distribution" herein for further information
regarding the geographic concentration of the Mortgage Loans in the Initial
Portfolio.
HIGH BALANCE MORTGAGE LOANS
As of January 1, 1997, the average original principal balance of the
Residential Mortgage Loans included in the Initial Portfolio was
approximately $201,403, and approximately 17.93% of the Initial Portfolio
(calculated as of January 1, 1997) had original principal balances in excess
of $500,000. Investors are urged to consider the risk that the loss and
delinquency experience on such higher balance loans may have a
disproportionate effect on the Initial Portfolio as a whole.
ABILITY OF THE BOARD OF DIRECTORS TO REVISE THE POLICIES AND STRATEGIES OF
THE COMPANY
The Board of Directors has established the investment policies and
operating policies and strategies of the Company, certain of which are
described in this Prospectus. These policies may be revised from time to time
at the discretion of the Board of Directors (in certain circumstances subject
to the approval of a majority of the Independent Directors) without a vote of
the Company's stockholders, including holders of the Series A Preferred
Shares. The ultimate effect of any change in the policies and strategies set
forth in this Prospectus on a holder of Series A Preferred Shares may be
positive or negative and may increase risks to the Company. See "Business and
Strategy -- Management Policies and Programs."
ABILITY TO INCREASE LEVERAGE MAY AFFECT THE COMPANY'S ABILITY TO RECEIVE
INTEREST INCOME
Although the Company does not currently intend to incur any indebtedness
in connection with the acquisition and holding of Mortgage Loans, the Company
may do so at any time, provided, that indebtedness in excess of 20% of the
Company's stockholders' equity may not be incurred without the approval of a
majority of the Independent Directors of the Company. To the extent the
Company were to change its policy with respect to the incurrence of
indebtedness, the Company would be subject to risks associated with leverage,
including, without limitation, changes in interest rates, prepayment risk and
risks of various hedging strategies.
RELATIONSHIP WITH THE BANK AND ITS AFFILIATES; CONFLICTS OF INTEREST
The Bank and its affiliates are involved in virtually every aspect of the
Company's existence. The Bank is the sole holder of the Common Stock of the
Company. FNMC will act as servicer of the
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Company's Mortgage Loans. In addition, other than the Independent Directors,
all of the officers and directors of the Company are also officers and
directors of the Bank or its affiliates. As the holder of all of the
outstanding voting stock of the Company, the Bank will have the right to
elect all directors of the Company, including the Independent Directors.
The Company is dependent on the diligence and skill of its officers and
the officers and employees of the Bank and of any of the Bank's affiliates
for the selection, structuring and monitoring of its Mortgage Assets. In
addition, the Company is dependent on FNMC (and any non-affiliates with which
it enters into sub-servicing agreements) for the servicing of its Mortgage
Loans. The Bank and its affiliates may have interests which are not identical
to those of the Company and the ultimate beneficial owners of the Bank's
common stock may have investment goals and strategies that differ from those
of the holders of the Series A Preferred Shares. Consequently, conflicts of
interest may arise with respect to transactions, including without limitation
the Company's acquisition of the Initial Portfolio; future acquisitions of
Mortgage Loans from the Bank or its affiliates; future dispositions of
Mortgage Loans to the Bank or any of its non-bank subsidiaries; and the
modification of the Servicing Agreement. It is the intention of the Company
and the Bank that any agreements and transactions between the Company, on the
one hand, and the Bank and its affiliates, on the other hand, be fair to all
parties and consistent with market terms, including the prices paid and
received for Mortgage Loans (including those in the Initial Portfolio) on
their acquisition or disposition by the Company. The requirement in the
Charter that certain actions of the Company be approved by a majority of the
Independent Directors is also intended to ensure fair dealings between the
Company, on the one hand, and the Bank and its affiliates, on the other hand.
However, there can be no assurance that such agreements or transactions will
be on terms as favorable to the Company as those that could have been
obtained from unaffiliated third parties. See "Business and Strategy --
Management Policies and Programs -- Conflict of Interest Policies."
NO THIRD PARTY VALUATION OF THE MORTGAGE LOANS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES
The Company and the Bank intend that the fair value of the Initial
Portfolio will approximately equal the amount that the Company will pay for
the Initial Portfolio (approximately $900 million). However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio were
obtained for purposes of the Offering, and there can be no assurance that the
fair value of the Initial Portfolio does not differ from the purchase price
payable by the Company.
In addition, it is not anticipated that third party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Loans even in circumstances where an affiliate of the Company is selling the
Mortgage Loans to, or purchasing the Mortgage Loans from, the Company.
Accordingly, although the Company and the Bank intend that future
acquisitions or dispositions of Mortgage Loans be on a fair value basis,
there can be no assurance that the consideration to be paid (or received) by
the Company to (or from) the Bank or any of its affiliates in connection with
future acquisitions or dispositions of Mortgage Loans will not differ from
the fair value of such Mortgage Loans.
CONTROL BY MACANDREWS & FORBES
As all of the Company's Common Stock is owned by the Bank, the ultimate
beneficial owners of the Bank's common stock will control the Company. All of
the Bank's common stock is owned by Holdings. Holdings is 80% indirectly
owned through MacAndrews & Forbes Holdings Inc., a corporation wholly owned
through Mafco Holdings Inc. (together with MacAndrews & Forbes Holdings Inc.,
"MacAndrews & Forbes") by Ronald O. Perelman and 20% indirectly owned by
Hunter's Glen/Ford Ltd. ("Hunter's Glen"), a limited partnership controlled
by Gerald J. Ford, the Chairman of the Board, Chief Executive Officer and a
director of the Bank and of the Company. First Nationwide (Parent) Holdings
Inc. owns 100% of the class A common stock of Holdings, representing 80% of
its voting common stock (representing approximately 85% of the voting power
of its voting common stock) and Hunter's Glen owns 100% of the class B common
stock of Holdings, representing 20% of its voting common stock (representing
approximately 15% of the voting power of its common stock). As a result,
MacAndrews & Forbes will be able to direct and control the policies of the
Bank and the Company, including mergers, sales of assets and similar
transactions, and the interests of the Bank and the Company may conflict
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which could result in adverse consequences to the Company. Except as
described herein with respect to certain voting rights of the Company,
holders of the Series A Preferred Shares will not have any voting rights.
TAX RISKS
Adverse Consequences of Failure to Qualify as a REIT
The Company intends to operate so as to qualify as a REIT under the Code,
commencing with its taxable year ending December 31, 1997. Although the
Company believes that it will be owned and organized and will operate in such
a manner, no assurance can be given that the Company will be able to operate
in such a manner so as to qualify as a REIT or to remain so qualified.
Qualification as a REIT involves the satisfaction of numerous requirements
(some on an annual and quarterly basis) established under highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within the Company's control.
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. In addition, unless entitled to relief under certain
statutory provisions, the Company would also be disqualified from treatment
as a REIT for the four taxable years following the year during which
qualification was lost. As a result, the amount available for distribution to
the Company's stockholders would be reduced for the year or years involved.
To the extent the Company fails to qualify as a REIT, the Bank has agreed to
indemnify the Company for such income tax liability. A failure of the Company
to qualify as a REIT would not by itself give the Company the right to redeem
the Series A Preferred Shares. See "Description of Series A Preferred Shares
- -- Automatic Exchange -- Redemption."
Notwithstanding that the Company currently intends to operate in a manner
designed to qualify as a REIT, future economic, market, legal, tax or other
considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its Common Stock and Preferred
Stock to revoke the REIT election. As long as any Series A Preferred Shares
are outstanding, any such determination by the Company may not be made
without the approval of a majority of the Independent Directors. The tax law
prohibits the Company from electing treatment as a REIT for the four taxable
years following the year of such revocation. See "Federal Income Tax
Considerations."
REIT Requirements with Respect to Stock Ownership
In order for the Company to qualify, and to continue to qualify, as a REIT
under the Code, not more than 50% of the value of its outstanding shares of
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year (the "Five or Fewer Test"). The Five or Fewer Test is
applied using certain constructive ownership rules. Immediately after the
Offering, certain significant shareholders of the Bank (i.e., Ronald O.
Perelman and Gerald J. Ford) will, through their constructive ownership of a
beneficial interest in the Bank, constitute two individuals for purposes of
this test and, under the applicable statutory rules for determining
percentages of ownership, will be deemed to own constructively approximately
39% of the value of the outstanding shares of stock in the Company (the
"Significant Shareholders"). Presently, there are no restrictions which
prevent (i) any Significant Shareholder from increasing or decreasing its
percentage ownership of the Company, (ii) any Significant Shareholder from
increasing or decreasing its percentage ownership of the Bank (and their
percentage ownership in the Company) or (iii) any other person from becoming
a significant constructive stockholder of the Company by acquiring an equity
interest in the Bank. Moreover, any increase or decrease in the value of the
Common Stock as compared to the value of the Preferred Stock will increase or
decrease the percentage of ownership held by the Significant Shareholders.
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Because the Company believes that it is essential to qualify, and to
continue to qualify, as a REIT, the Charter provides that, subject to certain
exceptions, no individual or entity other than a Significant Shareholder may
own, or be deemed to own by virtue of the attribution rules of the Code, more
than the lesser of 2.5% of the number of the issued and outstanding shares of
Preferred Stock, including the Series A Preferred Shares, or 1.25% of the
value of all of the classes of issued and outstanding shares of stock of the
Company (the "Ownership Limit"). However, certain entities whose interests
are widely held (generally, an entity in which no Person actually or
constructively owns more than 9.9% of the value) will be permitted to own up
to the lesser of 20% of the number of the issued and outstanding shares of
preferred stock, including the Series A Preferred Shares, or 10% of the value
of all of the classes of issued and outstanding shares of stock of the
Company, if they satisfy certain notification requirements. The Board of
Directors may (but will not be required to), upon the receipt of a ruling
from the Internal Revenue Service (the "IRS") or the advice of counsel
satisfactory to it, waive the Ownership Limit with respect to an individual
or entity if such individual's or entity's ownership will not then or in the
future jeopardize the Company's status as a REIT. The transfer of any shares
of Preferred Stock, including Series A Preferred Shares (including the
occurrence of events other than actual transfers of Preferred Stock that
result in changes in constructive ownership of Preferred Stock) in violation
of such Ownership Limit, or any other events (such as changes in the relative
values of the Common Stock and the Preferred Stock) which would cause an
individual or entity to own Preferred Stock in excess of the Ownership Limit
or otherwise cause the Company to fail to qualify as a REIT, will cause the
shares of any class or series of Preferred Stock owned, or deemed to be
owned, by or transferred to a stockholder in excess of the Ownership Limit
(the "Excess Shares") to be automatically transferred to a trust for the
exclusive benefit of a charity to be named by the Company. All rights to
dividends to such Excess Shares will be held by such trust. See "Description
of Capital Stock -- Restrictions on Ownership and Transfer."
REIT Requirements with Respect to Stockholder Distributions
To obtain favorable tax treatment as a REIT qualifying under the Code, the
Company generally will be required each year to distribute as dividends to
its stockholders at least 95% of its REIT taxable income. Failure to comply
with this requirement would result in the Company's income being subject to
tax at regular corporate rates. In addition, the Company will be subject to a
4% nondeductible excise tax on the amount, if any, by which certain
distributions considered as paid by it with respect to any calendar year are
less than the sum of 85% of its ordinary income for the calendar year, 95% of
its capital gains net income for the calendar year and any undistributed
taxable income from prior periods.
Redemption upon Occurrence of a Tax Event
At any time following the occurrence of a Tax Event (as defined herein),
even if such Tax Event occurs prior to January 31, 2002, the Company will
have the right to redeem the Series A Preferred Shares in whole but not in
part. See "Description of Series A Preferred Shares -- Redemption."
Automatic Exchange Upon Occurrence of the Exchange Event
Upon the occurrence of the Exchange Event, the outstanding Series A
Preferred Shares will be automatically exchanged on a one-for-one basis into
Bank Preferred Stock. See "Description of Series A Preferred Shares --
Automatic Exchange." The Automatic Exchange will be taxable, and each holder
of Series A Preferred Shares will have a gain or loss, as the case may be,
measured by the difference between the basis of such holder in the Series A
Preferred Shares and the fair market value of the Bank Preferred Stock
received in the Automatic Exchange. Provided that such holder's Series A
Preferred Shares were held as capital assets for more than one year prior to
the Automatic Exchange, any gain or loss will be long-term capital gain or
loss. See "Federal Income Tax Considerations -- Tax Treatment of Automatic
Exchange."
NO PRIOR MARKET FOR SERIES A PREFERRED SHARES OR FOR BANK PREFERRED STOCK, IF
ISSUED
Prior to the Offering, there has been no public market for the Series A
Preferred Shares. The Series A Preferred Shares have been approved for
listing on the NYSE, subject to official notice of issuance. However, there
can be no assurance that an active trading market will develop or be
sustained or that the Series A Preferred Shares may be resold at or above the
initial public offering price.
21
<PAGE>
In the event the Series A Preferred Shares are exchanged for Bank
Preferred Stock, application will be made to list the Bank Preferred Stock on
the NYSE. There can be no assurance as to the liquidity of the trading
markets for the Bank Preferred Stock, if issued, or that an active public
market for the Bank Preferred Stock would develop or be maintained.
THE COMPANY
The Company is a newly-formed Maryland corporation created for the purpose
of acquiring, holding and managing Mortgage Assets that will generate net
income for distribution to stockholders. The Company anticipates that its
portfolio of Mortgage Assets will consist entirely of interests in
Residential Mortgage Loans.
The Company expects that substantially all of its Mortgage Assets will be
acquired as whole loans from the Bank or affiliates of the Bank. FNMC will
service the loans under the Servicing Agreement between the Company and FNMC.
The Company will elect to be subject to tax as a REIT under the Code, and
will generally not be subject to federal income tax to the extent that it
distributes its earnings to its stockholders and maintains its qualification
as a REIT.
All of the Common Stock of the Company is owned by the Bank, and all of
the common stock of the Bank is owned by Holdings. Holdings is a savings and
loan holding company organized under the laws of the state of Delaware in
1994 and is registered under HOLA. Holdings is 80% indirectly owned through
Mafco Holdings Inc. by Ronald O. Perelman and is 20% owned by Hunter's
Glen/Ford, Ltd., a limited partnership controlled by Gerald J. Ford, Chairman
of the Board and Chief Executive Officer of the Bank.
At September 30, 1996, First Nationwide had approximately $16.8 billion in
assets and approximately $8.8 billion in deposits and was ranked at such date
as the seventh largest thrift in the United States, in terms of assets, based
on published sources. On July 27, 1996, Holdings entered into the Merger
Agreement to acquire Cal Fed, a savings and loan holding company, and its
wholly owned savings bank subsidiary, California Federal. After giving effect
to the Cal Fed Acquisition and the Offering, at September 30, 1996, the Bank
would have had approximately $31.0 billion in assets and would have ranked at
such date as the fourth largest thrift in the United States in terms of
assets, based on published sources. For a further description of the
operations of the Company, see "Business and Strategy," "Management," "Risk
Factors" and "Federal Income Tax Considerations."
The Series A Preferred Shares will be exchanged automatically on a
one-for-one basis for shares of Bank Preferred Stock upon the occurrence of
the Exchange Event. CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES
COULD BE REPLACED, WITHOUT THE CONSENT OF THE INVESTOR, BY AN INVESTMENT IN
BANK PREFERRED STOCK AT A TIME WHEN THE BANK'S FINANCIAL CONDITION IS
DETERIORATING OR AT A TIME WHEN THE BANK HAD BEEN PLACED INTO CONSERVATORSHIP
OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A PREFERRED SHARES,
THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET FORTH IN
THE OFFERING CIRCULAR ATTACHED HERETO AS ANNEX I. See also "Description of
Series A Preferred Shares -- Automatic Exchange."
22
<PAGE>
USE OF PROCEEDS
The gross proceeds to the Company from the sale of the Series A Preferred
Shares offered hereby are expected to be $450 million (assuming the
Underwriters' over-allotment option is not exercised). Simultaneously with
the consummation of the Offering, the Bank will make capital contributions to
the Company with respect to its Common Stock equal to approximately $450
million plus an amount equal to the underwriting discounts and the expenses
of the Offering and the formation of the Company (currently estimated by the
Company to be approximately $15.8 million in the aggregate). The Company will
use the aggregate net proceeds of $900 million received in connection with
both the Offering and the capital contributions by the Bank to purchase the
Initial Portfolio from the Bank. See "Business and Strategy."
If the Underwriters exercise their option to purchase additional Series A
Preferred Shares to cover any over-allotments in the Offering, the Bank will
make additional capital contributions equal to the aggregate initial public
offering price of such additional Series A Preferred Shares. The Company will
use the additional proceeds from any such additional sales of Series A
Preferred Shares and capital contributions to purchase additional Mortgage
Loans of the types described in "Business and Strategy -- Description of
Initial Portfolio." The Company expects that it will purchase any such
additional Mortgage Loans within six months from the exercise by the
Underwriters of their over-allotment option. Pending such purchase, the
Company will invest such additional proceeds in Mortgage-Backed Securities or
short-term money market investments.
The following table illustrates the source and use of funds in the
Offering assuming the Underwriters' over allotment option is not exercised.
SOURCE OF FUNDS
(IN MILLIONS)
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Series A Preferred Shares
(a) .......................................................... $450
Proceeds from the capital contributions from the Bank ........ 466
------
$916
======
</TABLE>
USE OF FUNDS
(IN MILLIONS)
<TABLE>
<CAPTION>
<S> <C>
Purchase of Residential Mortgage Loans $900
Expenses of the Offering .............. 16
------
$916
======
</TABLE>
- ------------
(a) Represents the estimated gross proceeds from the Offering. The Bank
will make capital contributions to the Company with respect to its Common
Stock equal to the expenses of the Offering.
23
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1996 and as adjusted to reflect (i) the consummation of the
Offering (assuming the Underwriters' over-allotment option is not exercised),
(ii) the transactions described in "Certain Transactions Constituting The
Formation" and (iii) the use of the net proceeds therefrom as described under
"Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED
-------- -------------
(IN THOUSANDS)
<S> <C> <C>
DEBT
Total long-term debt $-- $ --
-------- -------------
STOCKHOLDERS' EQUITY
Preferred Stock, par value $.01 per share; none authorized, none
issued and outstanding, actual; and 30,000,000 shares
authorized, 18,000,000 shares issued and outstanding, as
adjusted ........................................................ -- 450,000
--------
Common Stock, par value $.01 per share; 1,000 shares authorized,
1,000 shares issued and outstanding, actual; and 30,000,000
shares authorized, 1,000 shares issued and outstanding, as
adjusted ........................................................ -- --(1)
Additional paid-in capital ....................................... -- 450,000(1)
-------- -------------
Total stockholders' equity ..................................... _ 900,000
-------- -------------
TOTAL CAPITALIZATION ............................................. $-- $900,000
======== =============
</TABLE>
- ------------
(1) The Company was formed with an initial capitalization of $10.00.
Immediately prior to the consummation of the Offering, the Bank will
make capital contributions to the Company equal to $450 million plus an
amount sufficient to pay the aggregate offering and organization
expenses, currently estimated by the Company to be approximately $15.8
million.
24
<PAGE>
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold and manage
Mortgage Assets that will generate net income for distribution to
stockholders. The Company's Initial Portfolio will consist of Residential
Mortgage Loans purchased from the Bank for an aggregate purchase price of
approximately $900 million. See "Certain Transactions Constituting the
Formation."
In order to preserve its status as a REIT, substantially all of the assets
of the Company will consist of Mortgage Loans and other qualified REIT assets
of the type permitted by the Code. See "Federal Income Tax Considerations."
DIVIDEND POLICY
In order to remain qualified as a REIT, the Company must distribute
annually at least 95% of its REIT taxable income to its stockholders. The
Company currently expects to distribute annually dividends with respect to
its outstanding shares of stock equal to approximately 100% of the Company's
REIT taxable income.
The Company's income will consist primarily of interest payments on the
Mortgage Loans held by it. The Company anticipates that most of its Mortgage
Loans will bear interest at adjustable rates. If there is a decline in
interest rates (as measured by the indices upon which the interest rates of
the Mortgage Loans are based), then the Company will experience a decrease in
income available to be distributed to its stockholders. In addition, in such
an interest rate environment the Company may experience an increase in
prepayments on its Residential Mortgage Loans and may find it more difficult
to purchase additional Mortgage Loans bearing rates sufficient to support
payment of the dividends on the Series A Preferred Shares. In addition,
certain Residential Mortgage Loan products which the Company may purchase
could allow borrowers in such an interest rate environment to convert an
adjustable rate mortgage to a fixed rate mortgage, thus "locking in" a low
fixed interest rate. Because the rate at which dividends are required to be
paid on the Series A Preferred Shares is fixed, there can be no assurance
that an interest rate environment in which there is a significant decline in
interest rates would not adversely affect the Company's ability to pay
dividends on the Series A Preferred Shares. In addition, as described below
under "--Description of the Initial Portfolio -- Residential Mortgage Loans,"
certain Residential Mortgage Loans included in the Initial Portfolio have the
potential to negatively amortize. If there is an increase in interest rates
on such Mortgage Loans (as measured by the indices upon which the interest
rates of the Mortgage Loans are based), the Company may experience a decrease
in income available to be distributed to its stockholders where such increase
in the interest rates does not coincide with a corresponding adjustment to
the borrowers' monthly payments.
Dividends will be authorized and declared at the discretion of the Board
of Directors after considering the Company's distributable funds, financial
requirements, tax considerations and other factors. As indicated below under
"Description of Initial Portfolio," as of January 1, 1997, the weighted
average interest rate of the Residential Mortgage Loans included in the
Initial Portfolio was approximately 7.55% per annum. The weighted average
interest rate of the Initial Portfolio would have to be less than
approximately 5.06% for the Company to have less than $41.1 million of net
interest income, after payment of anticipated servicing fees. The $41.1
million would be sufficient to pay an annual dividend on the Series A
Preferred Shares at an assumed rate of 9.125%. Such calculation assumes that
(i) the Mortgage Assets included in the Initial Portfolio are held for the
12-month period following consummation of the Offering, (ii) principal
repayments are reinvested in additional Mortgage Assets with characteristics
similar to those of the Mortgage Assets included in the Initial Portfolio,
and (iii) interest rates remain constant during such 12-month period. At
current interest rates and based on the assumptions in the preceding
sentence, the Company anticipates that the Initial Portfolio will generate
interest income of approximately $63.53 million, after payment of anticipated
servicing fees, during such 12-month period. Because the aggregate annual
dividend payment on the Series A Preferred Shares is approximately $41.1
million, the Company anticipates, based on the foregoing, that approximately
$22.43 million would
25
<PAGE>
be available for payment of dividends on the shares of Common Stock held by
the Bank during such 12-month period. However, there are several limitations
which are described in the following paragraph that restrict the Company's
ability to pay dividends on the Common Stock.
First, under the Company's current dividend policy, no cash dividends or
other distributions may be paid on the Common Stock (i) unless and until the
Company has paid full dividends on the Series A Preferred Shares for the four
most recent Dividend Periods (or such lesser number of Dividend Periods
during which the Series A Preferred Shares have been outstanding) and has
declared a cash dividend on the Series A Preferred Shares at the annual
dividend rate for the current Dividend Period, and (ii) the terms of all
other stock of the Company ranking senior to the Common Stock have been
complied with. Second, the Maryland General Corporation Law ("MGCL") provides
that dividends and other distributions may not be paid by a corporation if,
after giving effect to the distribution (i) the corporation would not be able
to pay its indebtedness as it becomes due in the usual course of business or
(ii) the corporation's total assets would be less than the sum of the
corporation's total liabilities plus, unless the charter of the corporation
permits otherwise (which the Charter does not), the amount that would be
needed, if the corporation were to be dissolved at the time of the
distribution, to satisfy the preferential rights on dissolution of
stockholders whose preferential rights on dissolution are superior to those
receiving the distribution. Because upon the consummation of the Offering the
aggregate liquidation value of the Series A Preferred Shares will equal $450
million, the amount of dividends which the Company could legally pay on its
Common Stock cannot exceed an amount which would cause the Company's net
assets to be less than $450 million.
The federal thrift laws, including the regulations of the OTS, limit the
Bank's ability to pay dividends on its capital stock, including the Bank
Preferred Stock. The Bank generally may not declare dividends or make any
other capital distribution if, after the payment of such dividend or other
distribution, it would fall within any of the three undercapitalized
categories under the prompt corrective action standards of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). Other
limitations apply to the Bank's ability to pay dividends based on the current
income of the Bank and on the extent to which the Bank meets its regulatory
capital requirements. In addition, the HOLA requires every savings
association subsidiary of a savings and loan holding company to give the OTS
at least 30 days' advance notice of any proposed dividends to be made on its
guarantee, permanent or other non-withdrawable stock or else such dividend
will be invalid. Further, the OTS may prohibit any capital distribution that
it determines would constitute an unsafe or unsound practice.
As of September 30, 1996, First Nationwide met the capital requirements of
a "well capitalized" institution under the FDICIA prompt corrective action
standards. Although management expects the Bank to remain "well capitalized,"
there can be no assurance that the Bank will continue to be "well
capitalized" under applicable OTS regulations. If the Bank were only
"adequately capitalized," it would not be able to accept brokered deposits
unless it received a waiver from the FDIC.
The Exchange Event will only take place under circumstances in which the
Bank will not be considered "adequately capitalized" for purposes of the OTS'
prompt corrective action regulations. Thus, at the time of the Automatic
Exchange, by regulation, the Bank will not be permitted to pay dividends on
the Bank Preferred Stock. Further, the Bank's ability to pay dividends on the
Bank Preferred Stock even if the Bank were to return to "adequately
capitalized" status following the Automatic Exchange would be subject to
various restrictions. In the event that the Bank did pay dividends on the
Bank Preferred Stock, such dividends could be paid out of the Bank's legally
available capital surplus.
Under certain circumstances, including any determination that the Bank's
relationship to the Company results in an unsafe and unsound banking
practice, federal banking authorities will have the authority to issue an
order which restricts the ability of the Company to make dividend payments to
its stockholders.
GENERAL DESCRIPTION OF MORTGAGE ASSETS; INVESTMENT POLICY
Residential Mortgage Loans
The Company may from time to time acquire both conforming and
nonconforming Residential Mortgage Loans. Conventional conforming Residential
Mortgage Loans comply with the requirements
26
<PAGE>
for inclusion in a loan guarantee program sponsored by either the Federal
Home Loan Mortgage Corporation ("FHLMC") or the Federal National Mortgage
Association ("FNMA"). Under current regulations, the maximum principal
balance allowed on conforming Residential Mortgage Loans ranges from $214,600
($321,900 for Residential Mortgage Loans secured by mortgaged properties
located in either Alaska or Hawaii) for one-unit residential loans to
$412,450 ($618,675 for Residential Mortgage Loans secured by mortgaged
properties located in either Alaska or Hawaii) for four-unit residential
loans. Nonconforming Residential Mortgage Loans are Residential Mortgage
Loans that do not qualify in one or more respects for purchase by FNMA or
FHLMC. The Company expects that a majority of the nonconforming Residential
Mortgage Loans it purchases will be nonconforming because they have original
principal balances which exceed the requirements for FHLMC or FNMA programs
or generally because they vary in certain other respects from the
requirements of such programs other than the requirements relating to
creditworthiness of the mortgagors. A substantial portion of the Company's
nonconforming Residential Mortgage Loans are expected to meet the
requirements for sale to national private mortgage conduit programs or other
investors in the secondary mortgage market.
Each Residential Mortgage Loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one-to four-unit) residential
properties, including stock allocated to a dwelling unit in a residential
cooperative housing corporation. Residential real estate properties
underlying Residential Mortgage Loans consist of individual dwelling units,
individual cooperative apartment units, individual condominium units, two-to
four-family dwelling units, planned unit developments and townhouses. The
Company currently expects that substantially all of the Residential Mortgage
Loans to be acquired by it will be adjustable rate Mortgage Loans; however,
the Company may from time to time acquire fixed interest rate Residential
Mortgage Loans.
Mortgage-Backed Securities
While it is expected that no Mortgage-Backed Securities will be included
in the Initial Portfolio, the Company may from time to time acquire
fixed-rate or variable-rate Mortgage-Backed Securities representing interests
in or obligations backed by pools of Mortgage Loans. The Company intends to
acquire only investment grade Mortgage-Backed Securities issued or guaranteed
by agencies of the federal government or government sponsored agencies. A
portion of any Mortgage-Backed Securities that the Company purchases may
represent interests in Mortgage Loans that were originated by the Bank or its
predecessors in interest in exchange for securities issued or guaranteed by
agencies of the federal government or government sponsored agencies, such as
FHLMC, FNMA and the Government National Mortgage Association ("GNMA"). The
Mortgage Loans underlying the Mortgage-Backed Securities will be secured by
single-family residential, multifamily or commercial real estate properties
located throughout the United States.
The Company does not intend to acquire any interest-only, principal-only
or high-risk Mortgage-Backed Securities.
MANAGEMENT POLICIES AND PROGRAMS
In administering the Company's Mortgage Assets, FNMC has a high degree of
autonomy. The Board of Directors, however, has adopted certain policies to
guide administration of the Company and FNMC with respect to the acquisition
and disposition of assets, use of capital and leverage, credit risk
management and certain other activities. These policies, which are discussed
below, may be revised from time to time at the discretion of the Board of
Directors (in certain circumstances subject to the approval of a majority of
the Independent Directors) without a vote of the Company's stockholders,
including holders of the Series A Preferred Shares. See also " -- Dividend
Policy."
Asset Acquisition and Disposition Policies
Subsequent to the acquisition of the Initial Portfolio, the Company
anticipates that it may from time to time purchase additional Mortgage Loans
on a basis consistent with secondary market standards from
27
<PAGE>
the Bank or its affiliates pursuant to the Residential Mortgage Purchase
Agreement, although Mortgage Loans may be acquired from unaffiliated third
parties, out of proceeds received in connection with the repayment or
disposition of Mortgage Loans or the issuance of additional shares of Common
Stock or Preferred Stock. The Company currently anticipates that such
Mortgage Loans will be of the types described in " -- Description of Initial
Portfolio," although if the Bank or its affiliates develop additional
Mortgage Loan products, the Company may purchase such additional types of
Mortgage Loans. In addition, the Company may from time to time acquire
Mortgage-Backed Securities representing interests in or obligations backed by
pools of Mortgage Loans that will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the
United States. The Company will enter into the Servicing Agreement with FNMC
that contains fees and other terms consistent with secondary market
standards.
The Company currently intends to maintain 100% of its portfolio of
Mortgage Assets in Residential Mortgage Loans. The Company's current policy
is not to acquire any commercial Mortgage Loans. In addition, the Company's
current policy also prohibits the acquisition of any Mortgage Loan or any
interest in a Mortgage Loan (other than an interest resulting from the
acquisition of Mortgage-Backed Securities), which Mortgage Loan (i) is
delinquent in the payment of principal or interest at the time of proposed
acquisition; (ii) is or was at any time during the preceding 12 months (a)
Classified, (b) in Nonaccrual Status, or (c) renegotiated due to financial
deterioration of the borrower; or (iii) has been, more than once during the
preceding 12 months, more than 30 days past due in the payment of principal
or interest. Mortgage Loans that are in "Nonaccrual Status" are generally
loans that are past due 90 days or more in principal or interest, and
"Classified" Mortgage Loans are generally troubled loans which are deemed
substandard or doubtful with respect to collectibility.
The Company may choose to dispose of any Mortgage Loan which subsequent to
its acquisition by the Company (i) becomes Classified, (ii) falls into
Nonaccrual Status, (iii) has to be renegotiated due to the financial
deterioration of the borrower or (iv) is more than 30 days past due in the
payment of principal or interest more than once in any 12 month period. The
Bank has indicated to the Company that it does not intend to purchase any
Mortgage Loans of the Company that fall into any of the foregoing categories;
accordingly, the Company currently anticipates that any such Mortgage Loan
may be sold at its then current fair value by the Company only to a
subsidiary of the Bank or an unrelated third party. The Company does not
generally intend to dispose of any Mortgage Loans.
Capital and Leverage Policies
To the extent that the Board of Directors determines that additional
funding is required, the Company may raise such funds through additional
equity offerings, debt financing or retention of cash flow (after
consideration of provisions of the Code requiring the distribution by a REIT
of a certain percentage of taxable income and taking into account taxes that
would be imposed on undistributed taxable income), or a combination of these
methods.
The Company will have no debt outstanding following consummation of the
Offering, and the Company does not currently intend to incur any
indebtedness. However, the organizational documents of the Company do not
contain any limitation on the amount or percentage of debt, funded or
otherwise, the Company might incur, except that the incurrence by the Company
of debt for borrowed money in excess of 20% of the Company's total
stockholders' equity will require the approval of a majority of the
Independent Directors. Any such debt incurred may include intercompany
advances made by the Bank to the Company.
The Company may also issue additional series of Preferred Stock. However,
the Company may not issue additional shares of Preferred Stock senior to the
Series A Preferred Shares without the consent of holders of at least
two-thirds of the outstanding shares of Preferred Stock at that time,
including the Series A Preferred Shares, and the Company may not issue
additional shares of Preferred Stock on a parity with the Series A Preferred
Shares without the approval of a majority of the Company's Independent
Directors. In addition, the Company does not currently intend to issue any
additional series of Preferred Stock unless it simultaneously receives
additional capital contributions from the Bank equal to the aggregate
offering price of such additional Preferred Stock plus the Company's expenses
(including underwriting discounts or placement fees) in connection with the
issuance of such additional shares of Preferred Stock.
28
<PAGE>
Credit Risk Management Policies
The Company expects that each Mortgage Loan acquired from the Bank or one
of its affiliates in the future will represent a first lien position and will
be originated by the Bank or such affiliate or by financial institutions
acquired by the Bank by merger (including the Cal Fed Acquisition) in the
ordinary course of its or their real estate lending activities based on the
underwriting standards generally applied (at the time of origination) for the
originator's own account. See " -- Description of Initial Portfolio --
Underwriting Standards." In addition, the Company may choose to dispose of
any Mortgage Loan or any interest in a Mortgage Loan (other than an interest
through a Mortgage-Backed Security) held by it, which Mortgage Loan (i) is or
has been, at any time during the preceding 12 months, (a) Classified, (b) in
Nonaccrual Status or (c) renegotiated due to financial deterioration of the
borrower or (ii) has been, more than once during the preceding 12 months,
more than 30 days past due in the payment of principal and interest. The Bank
has indicated to the Company that it will not purchase any Mortgage Loans of
the Company that fall into any of the foregoing categories; accordingly, the
Company currently anticipates that any such Mortgage Loan would be sold at
its then current fair value by the Company only to a non-bank subsidiary of
the Bank or an unrelated third party.
Conflict of Interest Policies
Because of the nature of the Company's relationship with the Bank and its
affiliates, it is likely that conflicts of interest will arise with respect
to inter-affiliate transactions, including without limitation the Company's
acquisition of Mortgage Loans from, or disposition of Mortgage Loans to, the
Bank, FNMC or their respective affiliates and the modification of the
Servicing Agreement. It is the Company's policy that the terms of any
financial dealings with the Bank and its affiliates will be consistent with
those available from third parties in the mortgage lending industry. In
addition, the Servicing Agreement may not be modified or terminated without
the approval of a majority of the Independent Directors. Conflicts of
interest between the Company and the Bank and its affiliates may also arise
in connection with making decisions that bear upon the credit arrangements
that the Bank or one of its affiliates may have with the borrower. The
Servicing Agreement provides that servicing of the Mortgage Loans is
performed solely with a view to the interests of the Company as owner of the
Mortgage Loans and without regard to the interests of the Bank or its other
affiliates. Conflicts could also arise in connection with actions taken by
the Bank as a controlling person in the Company. It is the intention of the
Company and the Bank that any agreements and transactions between the
Company, on the one hand, and the Bank or one of its affiliates, on the other
hand, are fair to all parties and are consistent with market terms for such
types of transactions. The requirement in the Charter that certain actions of
the Company be approved by a majority of the Independent Directors is also
intended to promote fair dealings between the Company, on the one hand, and
the Bank and its affiliates, on the other hand. However, there can be no
assurance that any such agreement or transaction will be on terms as
favorable to the Company as would have been obtained from unaffiliated third
parties.
There are no provisions in the Charter limiting any officer, director,
security holder or affiliate of the Company from having any direct or
indirect pecuniary interest in any Mortgage Asset to be acquired or disposed
of by the Company or in any transaction in which the Company has an interest,
or from engaging in acquiring, holding and managing Mortgage Assets. As
described herein, it is expected that the Bank and its affiliates will have
direct interests in transactions with the Company (including without
limitation the sale of Mortgage Assets to the Company); however, it is not
currently anticipated that any of the officers or directors of the Company
will have any interests in such Mortgage Assets.
Other Policies
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
intend to (i) invest in the securities of other issuers for the purpose of
exercising control over such issuers, (ii) underwrite securities of other
issuers, (iii) actively trade in loans or other investments, (iv) offer
securities in exchange for property or (v) make loans to third parties,
including without limitation officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares and other shares
29
<PAGE>
of its stock in the open market or otherwise. The Company has no present
intention of causing the Company to repurchase any shares of its stock, and
any such action would be taken only in conformity with applicable federal and
state laws.
The Company intends to publish and distribute to stockholders, in
accordance with NYSE rules, annual reports containing financial statements
prepared in accordance with generally accepted accounting principles and
certified by the Company's independent public accountants. The Charter
provides that the Company shall maintain its status as a reporting company
under the Exchange Act for so long as any of the Series A Preferred Shares
are outstanding.
The Company currently intends to make investments and operate its business
at all times in such a manner as to be consistent with the REIT Requirements
in order to qualify as a REIT. However, future economic, market, legal, tax
or other considerations may cause the Company to fail to qualify as a REIT,
or the Board of Directors, subject to approval by a majority of Independent
Directors, may determine that it is in the best interests of the Company and
its stockholders to revoke the Company's REIT status. The Code prohibits the
Company from electing REIT status for the four taxable years following the
year of such revocation.
ACQUISITION OF INITIAL PORTFOLIO
Simultaneously with the consummation of the Offering, the Company will
acquire the Residential Mortgage Loans in the Initial Portfolio from the Bank
pursuant to the terms of the Mortgage Loan Purchase and Warranties Agreement
(the "Residential Mortgage Purchase Agreement") dated as of January 24, 1997.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit
to such Agreement (the "Mortgage Loan Schedule"). The Mortgage Loan Schedule
will specify, among other things, with respect to each Mortgage Loan: the
interest rate formula applicable to each Mortgage Loan, the original
principal balance and the unpaid principal balance as of the purchase date,
the current monthly payment, the maturity date, the mortgagor, the type of
the mortgaged property, the location of the mortgaged property and the
current interest rate.
At or as soon as practicable following the consummation of the Offering,
the Bank will deliver or cause to be delivered to the Company or its designee
all documents contained in the Mortgage Loan file, including but not limited
to: either the mortgage note (together with all amendments and modifications
thereto) endorsed in blank by the Bank or a lost-note affidavit, the original
or certified copy of the mortgage (together with all amendments and
modifications thereto) with evidence of recording indicated thereon, if
available; the original or a copy of all intervening assignments of mortgage,
if any, evidencing the assignment of the Mortgage Loan to the Bank (together
with all amendments and modifications thereto) with evidence of recording
indicated thereon, if available; an original blanket assignment of the
mortgages executed by the Bank; the original mortgagee title policy or, in
the event such original title policy is unavailable, a true copy of the
related policy binder or commitment for title; and all insurance policies
relating to the properties underlying the Mortgage Loans and the proceeds
thereof. Such documents initially will be held by FNMC acting as custodian
for the Company under the Servicing Agreement. At the time of the transfer of
the Residential Mortgage Loans to the Company, individual assignments of
mortgages evidencing such assignment of the Mortgage Loans will not be
prepared or recorded by the Bank; however, the Bank will be obligated at the
written request of the Company, or if deemed necessary by the Servicer in
connection with servicing any Mortgage Loan, to execute and record in the
appropriate jurisdiction an individual assignment of mortgage that reflects
of record the ownership of the Mortgage Loan by the Company.
The Bank will make certain representations and warranties in the
Residential Mortgage Purchase Agreement with respect to the Residential
Mortgage Loans in the Initial Portfolio for the benefit of the Company and
will be obligated to repurchase any Mortgage Loan sold by it to the Company
as to which there is a material breach of any such representation or
warranty, unless the Bank elects to substitute a qualified Mortgage Loan for
such Mortgage Loan. The repurchase price for any such Mortgage Loan will be
its outstanding principal amount plus accrued and unpaid interest to the date
of repurchase.
30
<PAGE>
DESCRIPTION OF INITIAL PORTFOLIO
Information is provided in this Prospectus regarding Residential Mortgage
Loans that were originated by the Bank (or one of its predecessors in
interest) and that are expected to constitute the Initial Portfolio actually
purchased by the Company contemporaneously with the consummation of the
Offering. To the extent the over-allotment option is exercised, the Company
expects to purchase additional Residential Mortgage Loans from the Bank
having approximately the same characteristics as those described in this
Prospectus. Any such additional Residential Mortgage Loans may have different
characteristics than the Residential Mortgage Loans that are intended to be
included in the Initial Portfolio, but the Company does not expect that any
such differences will be material.
Information with respect to the Residential Mortgage Loans in the Initial
Portfolio is presented as of January 1, 1997. The composition of the Initial
Portfolio actually purchased by the Company contemporaneously with the
consummation of the Offering will differ from the Initial Portfolio as
described in this Prospectus only to the extent it is discovered prior to the
consummation of the Offering that a Mortgage Loan included in the Initial
Portfolio described herein (i) is delinquent in the payment of principal or
interest; (ii) is or was at any time during the preceding 12 months (a)
Classified, (b) in Nonaccrual Status, or (c) renegotiated due to financial
deterioration of the borrower or (iii) has been, more than once during the
preceding 12 months, more than 30 days past due in the payment of principal
or interest. In such event, a Mortgage Loan similar in outstanding principal
balance and product type will be substituted for such non-purchased Mortgage
Loan.
References herein to percentages of Residential Mortgage Loans included in
the Initial Portfolio refer in each case to the percentage of the aggregate
outstanding principal balance of the Mortgage Loans in the Initial Portfolio
as of January 1, 1997, based on the outstanding principal balances of such
Mortgage Loans as of such date after giving effect to scheduled monthly
payments due on or prior to such date, whether or not received.
The detailed information set forth in this Prospectus with respect to the
Mortgage Loans applies only to the Initial Portfolio. The Company's portfolio
of Mortgage Assets may or may not have the characteristics described below at
future dates.
General
The Initial Portfolio contains 4,784 Residential Mortgage Loans, which on
January 1, 1997 had an aggregate outstanding principal balance of
approximately $901,125,418.
Substantially all of the Residential Mortgage Loans included in the
Initial Portfolio were originated by either the Bank or one of its
predecessors in interest in the ordinary course of their respective real
estate lending activities. Certain of the Residential Mortgage Loans included
in the Initial Portfolio may have been originated by mortgagees approved by
the Secretary of Housing and Urban Development or institutions (such as
banks, credit unions and insurance companies) subject to supervision and
examination by federal and state authorities and then sold to the Bank or one
of its predecessors. Substantially all of the Residential Mortgage Loans
included in the Initial Portfolio were originated generally in accordance
with the underwriting standards customarily employed by the Bank or its
predecessors in interest during the period in which such Mortgage Loans were
originated.
All of the Residential Mortgage Loans included in the Initial Portfolio
were originated between September 1975 and December 1996, and generally have
original terms to stated maturity of either 10, 15, 20, 25, 30, 35 or 40
years. In addition, for certain Residential Mortgage Loans the borrowers have
the option to extend the related Loan's stated maturity, generally to a term
not to exceed 40 years, in connection with an increase in such borrowers'
monthly payments resulting from adjustments in the interest rates of the
Residential Mortgage Loans. The weighted average number of months since
origination of the Residential Mortgage Loans included in the Initial
Portfolio (calculated as of January 1, 1997) was approximately 49 months. The
weighted average "Loan-to-Value Ratio" of the Residential Mortgage Loans
included in the Initial Portfolio is 74.58%. "Loan-to-Value Ratio" means the
ratio
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<PAGE>
(expressed as a percentage) of the original principal balance of a mortgage
loan to the lesser of (i) the appraised value at origination of the
underlying mortgaged property, and (ii) if the mortgage loan was made to
finance the acquisition of a mortgaged property, the purchase price of such
property.
Except as described below, upon transfer of the residential mortgaged
property underlying a Residential Mortgage Loan included in the Initial
Portfolio, the mortgage note generally will not preclude assumption of the
related Residential Mortgage Loan by the proposed transferee if the proposed
transferee satisfies certain criteria with respect to its ability to repay
the Residential Mortgage Loan. The mortgage notes with respect to certain of
the Mortgage Loans included in the Initial Portfolio contain "due-on-sale"
provisions which prevent the assumption of the Mortgage Loan by a proposed
transferee and accelerates the payment of the outstanding principal balance
of the Mortgage Loan. "Due-on-sale" provisions in adjustable rate Residential
Mortgage Loans may be applicable in the period prior to the first Rate
Adjustment Date (as defined herein) or following the exercise of a conversion
option fixing the interest rate.
None of the Residential Mortgage Loans included in the Initial Portfolio
(i) is currently delinquent in the payment of principal or interest; (ii) is
or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) was, more than once during the preceding 12 months, more
than 30 days past due in the payment of principal or interest. If, prior to
the acquisition of the Initial Portfolio, any Residential Mortgage Loan
included in the description of the Initial Portfolio herein falls within any
of the foregoing categories, the Company will not purchase such Mortgage Loan
but will instead purchase a Residential Mortgage Loan similar in outstanding
principal balance and product type which does not fall into any of these
categories.
Residential Mortgage Loans
The Company currently anticipates that the following different types of
Residential Mortgage Loan products, each of which is more fully described
below, will be included in the Initial Portfolio: Eleventh District Cost of
Funds ARM, One-Year Treasury Rate ARM and Six-Month Treasury Rate ARM.
The following table sets forth certain information with respect to each
type of Residential Mortgage Loan included in the Initial Portfolio as of
January 1, 1997:
TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT
<TABLE>
<CAPTION>
PERCENTAGE WEIGHTED AVERAGE
AGGREGATE OF INITIAL WEIGHTED AVERAGE EXPECTED
PRINCIPAL PORTFOLIO BY INITIAL REMAINING
BALANCE AGGREGATE PRINCIPAL LOAN TO VALUE MATURITY
TYPE (IN THOUSANDS) BALANCE RATIO (MONTHS)
- ------------------------------- -------------- ------------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Eleventh District Cost of Funds
ARM ........................... $637,689.5 70.77% 74.97% 332
One-Year Treasury Rate ARM .... 218,111.0 24.20 73.34 304
Six-Month Treasury Rate ARM ... 45,324.9 5.03 74.94 233
-------------- ------------------- ---------------- ----------------
Total .......................... $901,125.4 100.00% 74.58% 320
============== =================== ================ ================
</TABLE>
All of the Mortgage Loans included in the Initial Portfolio bear interest
at adjustable rates. The interest rate on an "adjustable rate mortgage" or an
"ARM" is typically tied to an index (such as the interest rate on United
States Treasury Bills), and is adjustable periodically. ARMs are typically
subject to lifetime interest rate caps and periodic interest rate caps on
each Rate Adjustment Date, as described below. As of January 1, 1997, the
interest rates of the Residential Mortgage Loans included in the Initial
Portfolio ranged from 3.75% per annum to 10.00% per annum and the weighted
average interest rate was approximately 7.55% per annum. The following table
contains certain additional data with respect to the interest rates of the
Residential Mortgage Loans included in the Initial Portfolio as of January 1,
1997:
32
<PAGE>
CURRENT INTEREST RATE OF ADJUSTABLE RATE RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE INITIAL PORTFOLIO
NUMBER OF PRINCIPAL BALANCE BY AGGREGATE
CURRENT INTEREST RATE MORTGAGE LOANS (IN THOUSANDS) PRINCIPAL BALANCE
- --------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
3.750%-3.999% ........ 29 $ 8,114.1 0.90%
4.000%-4.249% ........ 2 466.2 0.05
4.750%-4.999% ........ 7 2,928.9 0.33
5.000%-5.249% ........ 5 1,548.4 0.17
5.250%-5.499% ........ 8 3,784.2 0.42
5.500%-5.749% ........ 41 12,333.6 1.37
5.750%-5.999% ........ 46 12,926.4 1.43
6.000%-6.249% ........ 32 7,018.2 0.78
6.250%-6.499% ........ 19 4,246.2 0.47
6.500%-6.749% ........ 35 7,908.5 0.88
6.750%-6.999% ........ 75 14,767.9 1.64
7.000%-7.249% ........ 472 97,665.0 10.83
7.250%-7.499% ........ 1060 254,930.7 28.28
7.500%-7.749% ........ 860 179,755.7 19.95
7.750%-7.999% ........ 399 66,164.1 7.34
8.000%-8.249% ........ 301 37,714.3 4.19
8.250%-8.499% ........ 579 85,119.5 9.45
8.500%-8.749% ........ 438 59,901.7 6.65
8.750%-8.999% ........ 268 33,618.0 3.73
9.000%-9.249% ........ 69 6,769.5 0.75
9.250%-9.499% ........ 26 2,336.6 0.26
9.500%-9.749% ........ 6 716.5 0.08
9.750%-9.999% ........ 6 336.4 0.04
10.000%-10.249% ...... 1 54.8 0.01
- --------------------- -------------- ----------------- -----------------
Total .............. 4,784 $901,125.4 100.00%
============== ================= =================
</TABLE>
"Gross Margin," with respect to a Residential Mortgage Loan, means the
applicable fixed percentage which is added to the applicable index to
calculate the current interest rate paid by the borrower of such Residential
Mortgage Loan (without taking into account any lifetime interest rate caps,
periodic interest rate caps, minimum interest rates or payment adjustment
caps). As of January 1, 1997, the weighted average Gross Margin of the
Residential Mortgage Loans included in the Initial Portfolio was
approximately 2.66%.
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<PAGE>
The following table sets forth certain additional data with respect to the
Gross Margins of the Residential Mortgage Loans included in the Initial
Portfolio as of January 1, 1997:
GROSS MARGIN
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE INITIAL PORTFOLIO
NUMBER OF PRINCIPAL BALANCE BY AGGREGATE
GROSS MARGIN MORTGAGE LOANS (IN THOUSANDS) PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
less than 0% . 2 625.0 0.07%
Exactly 0% .... 10 885.1 0.10
0.000%-0.249% 1 203.6 0.02
0.250%-0.499% 1 188.9 0.02
0.500%-0.749% 1 30.3 0.00
0.750%-0.999% 18 3,665.1 0.41
1.000%-1.249% 11 864.9 0.10
1.250%-1.499% 5 351.1 0.04
1.500%-1.749% 13 831.4 0.09
1.750%-1.999% 10 827.3 0.09
2.000%-2.249% 80 13,680.5 1.52
2.250%-2.499% 850 196,180.4 21.77
2.500%-2.749% 1,238 269,457.3 29.90
2.750%-2.999% 1,587 281,040.4 31.19
3.000%-3.249% 549 77,691.2 8.62
3.250%-3.499% 324 45,535.2 5.05
3.500%-3.749% 53 6,046.6 0.67
3.750%-3.999% 24 1,964.7 0.22
4.000%-4.249% 7 1,056.4 0.12
-------------- ----------------- -----------------
Total ....... 4,784 $901,125.4 100.00%
============== ================= =================
</TABLE>
The interest rate of each type of ARM product included in the Initial
Portfolio adjusts at the times (each, a "Rate Adjustment Date") and in the
manner described below, subject on each Rate Adjustment Date to periodic
interest rate caps, maximum and minimum interest rates and payment adjustment
caps, in each case as specified in the related mortgage note. Information set
forth below regarding periodic interest rate caps, maximum and minimum
interest rates and payment adjustment caps applies to the Initial Portfolio
only. Mortgage Loans purchased by the Company after consummation of the
Offering may be subject to different periodic interest rate caps, maximum and
minimum interest rates or payment adjustment caps.
Each Residential Mortgage Loan in the Initial Portfolio bears interest at
its initial interest rate until its first Rate Adjustment Date. Effective
with each Rate Adjustment Date, and except as described below with respect to
certain Residential Mortgage Loans that have the potential for negative
amortization, the monthly principal and interest payment on each Residential
Mortgage Loan will be adjusted on each Rate Adjustment Date to an amount that
will fully amortize the then-outstanding principal balance of such
Residential Mortgage Loan over its remaining term to stated maturity and that
will be sufficient to pay interest at the adjusted interest rate. The
remaining Residential Mortgage Loans, or approximately 55.37% of the Initial
Portfolio (calculated as of January 1, 1997), require periodic interest rate
adjustments on Rate Adjustment Dates, but may not provide for an adjustment
of the borrower's monthly payment on such Rate Adjustment Date and/or may
limit the amount of a monthly payment adjustment. The difference between the
amount of the monthly payment made by the borrower and the full amount of
interest owed for the month, known as deferred interest or negative
amortization, is added to the principal balance of the Residential Mortgage
Loan. With respect to certain of those Residential Mortgage Loans that have
the potential to negatively amortize, however, the related borrower has the
option to limit the amount by which the Residential Mortgage Loan negatively
amortizes by making an
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<PAGE>
"interest only" payment in an amount that would be sufficient to pay the full
monthly interest cost of the Residential Mortgage Loan. In those instances
where the Residential Mortgage Loan is negatively amortizing or the borrower
is making an "interest only" payment, the lender is permitted to reamortize
the Residential Mortgage Loan and require the borrower to make fully
amortizing principal and interest payments either (i) approximately every
fifth semiannual or annual payment adjustment date during the term of the
Residential Mortgage Loan or (ii) when the outstanding principal balance of
the Residential Mortgage Loan equals or exceeds a percentage ranging from
110% to 125% of the original loan balance.
In addition, certain types of Residential Mortgage Loans included in the
Initial Portfolio may contain an option, which may be exercised by the
mortgagor, to convert the ARM into a fixed rate loan for the remainder of the
mortgage term. If a Residential Mortgage Loan is converted into a fixed rate
loan, the interest rate will be determined at the time of conversion as
specified in the mortgage note relating to such Mortgage Loan and will remain
fixed at such rate until the stated maturity of such Residential Mortgage
Loan.
Substantially all of the Residential Mortgage Loans included in the
Initial Portfolio allow the borrower to prepay at any time some or all of the
outstanding principal balance of the Mortgage Loan without a fee or penalty.
Eleventh District Cost of Funds ARM. The interest rate with respect to
each Eleventh District Cost of Funds ARM generally is fixed at an initial
rate for the first one, three, six or twelve monthly payments and adjusts
monthly, semi-annually or annually thereafter on the dates specified in the
related mortgage note to a rate equal to the then-current Eleventh District
Cost of Funds Index (as defined below) plus the Gross Margin set forth in
such mortgage note, subject, in the case of certain Eleventh District Cost of
Funds ARMs, to a maximum monthly, semi-annual or annual interest rate
increase or decrease of between 0.25% and 6.50% per annum, a lifetime
interest rate cap equal to the initial interest rate with respect to such
Residential Mortgage Loan plus the percentage specified in the related
mortgage note and a minimum rate no less than the Gross Margin. The sum of
the Eleventh District Cost of Funds Index and the Gross Margin is generally
rounded to the nearest 0.125%; however, certain mortgage notes may provide
for the sum to be rounded upwards to the nearest 0.125%. Approximately 76.97%
of the Eleventh District Cost of Funds ARMs permit negative amortization,
generally to the extent described in the third preceding paragraph, and such
ARMs represent 54.47% of the Initial Portfolio (calculated as of January 1,
1997). The "Eleventh District Cost of Funds Index" with respect to each
Eleventh District Cost of Funds ARM is the monthly weighted average cost of
funds for savings institutions in Arizona, California and Nevada that are
member institutions of the Eleventh Federal Home Loan Bank District (the
"Eleventh District"). The Eleventh District Cost of Funds Index for a
particular month reflects the interest costs paid on all types of funds held
by Eleventh District member institutions and is calculated by dividing the
cost of funds by the average of the total amount of those funds outstanding
at the end of that month and of the prior month and annualizing and adjusting
the result to reflect the actual number of days in the particular month. If
necessary, before these calculations are made, the component figures are
adjusted by the Federal Home Loan Bank of San Francisco to neutralize the
effect of events such as member institutions leaving the Eleventh District or
acquiring institutions outside the Eleventh District. The Eleventh District
Cost of Funds Index is weighted to reflect the relative amount of each type
of funds held at the end of the relevant month. Should the Eleventh District
Cost of Funds Index not be published or become otherwise unavailable, FNMC
will select a comparable alternative index over which it has no control and
which is readily available.
One-Year Treasury Rate ARM. The interest rate with respect to One-Year
Treasury Rate ARMs generally is fixed at an initial rate for the first six or
twelve monthly payments and adjusts annually thereafter on the date specified
in the related mortgage note to a rate equal to the then-current One-Year
Treasury Index (as defined herein) plus the Gross Margin set forth in such
mortgage note, subject in certain instances to a maximum semi-annual or
annual interest rate increase or decrease of between 1.00% and 6.00%, a
lifetime interest rate cap equal to the initial interest rate with respect to
such Residential Mortgage Loan plus the percentage specified in the related
mortgage note and to a minimum interest rate no less than the Gross Margin.
The sum of the One-Year Treasury Index and the Gross Margin is generally
rounded to the nearest 0.125%; however, certain mortgage notes may provide
for the
35
<PAGE>
sum to be rounded upwards to the nearest 0.125%. Approximately 2.59% of the
One-Year Treasury Rate ARMs permit negative amortization, generally to the
extent provided in the fourth preceding paragraph, and such ARMs represent
0.63% of the Initial Portfolio (calculated as of January 1, 1997). The
"One-Year Treasury Index" with respect to each One-Year Treasury Rate ARM is
the weekly average yield on U.S. Treasury securities adjusted to a constant
maturity of one year as published by the Federal Reserve Board in Statistical
Release H.15 (519) or any similar publication or, if not so published, as
reported by any Federal Reserve Bank or by any U.S. Government department or
agency and made available to the Advisor. Should the Treasury Index not be
published or become otherwise unavailable, FNMC will select a comparable
alternative index over which it has no control and which is readily
available.
Six-Month Treasury Rate ARM. The interest rate with respect to each
Six-Month Treasury Rate ARM generally is fixed at an initial rate for the
first six monthly payments and adjusts semi-annually thereafter on the dates
specified in the related mortgage note to a rate equal to the then-current
Six-Month Treasury Index (as defined herein) plus the Gross Margin as set
forth in such mortgage note, subject to a maximum semi-annual interest rate
increase or decrease of between 0.38% and 5.00%, a lifetime interest rate cap
equal to the initial interest rate with respect to such Residential Mortgage
Loan plus the percentage specified in the related mortage note and to a
minimum interest rate no less than the Gross Margin. The sum of the Six-Month
Treasury Index and the Gross Margin is generally rounded to the nearest
0.125%; however, certain mortgage notes may provide for the sum to be rounded
upwards to the nearest 0.125%. Approximately 5.44% of the Six Monthly
Treasury Rate ARMs permit negative amortization, generally to the extent
provided in the fifth preceding paragraph, and such ARMs represent 0.27% of
the Initial Portfolio (calculated as of January 1, 1997). The "Six-Month
Treasury Index" with respect to each Six-Month Treasury Rate ARM is either
the weekly auction average (investment) rate on U.S. Treasury securities with
a six-month maturity or the cumulative average over a 26-week period of the
weekly auction average rate on U.S. Treasury securities with a six-month
maturity, in each case as published by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") in Statistical Release H.15(519)
or any similar publication or, if not so published, as reported by any
Federal Reserve Bank or by any U.S. Government department or agency and made
available to FNMC. Should the Six-Month Treasury Index not be published or
become otherwise unavailable, FNMC will select a comparable alternative index
over which it has no control and which is readily available.
Underwriting Standards
The Bank has represented to the Company that all of the Residential
Mortgage Loans included in the Initial Portfolio (including those which were
not actually originated by the Bank or one of its predecessors in interest)
were originated generally in accordance with the underwriting policies
customarily employed by the Bank or one of its predecessors in interest
during the period in which the Residential Mortgage Loans in the Initial
Portfolio were originated. A limited number of Residential Mortgage Loans
included in the Initial Portfolio may have been made to employees of
predecessors in interest to the Bank. Concessions generally were not made to
the underwriting policies of the Bank's predecessors in interest, although in
certain instances employees were given concessions on the margin rate to be
applied to the loan.
The underwriting standards applied at origination of the Residential
Mortgage Loans were intended to evaluate the borrower's credit standing and
repayment ability, and the value and adequacy of the underlying mortgaged
property as collateral. Initially, each prospective borrower was required to
provide a current balance sheet describing assets and liabilities and a
statement of income and expenses, as well as, to the extent required by
applicable state law, an authorization to apply for a credit report which
summarized the borrower's credit history with merchants and lenders and any
record of bankruptcy. While a credit report was always required for a
prospective borrower, the extent of the report and other documentation
requested varied among different origination programs.
Except for certain Residential Mortgage Loans originated under a "no
income verification" program, for any prospective borrower, employment was
verified by submission of evidence (such as pay stubs) satisfactory to the
Bank (or its predecessor), or by contacting the borrower's employer directly
whereby the employer reported the length of employment with the employer and
the employee's current salary.
36
<PAGE>
For a self-employed prospective borrower, the borrower was generally required
to submit copies of personal and business federal income tax returns for the
previous two years. For certain prospective borrowers, the borrower
authorized verification of all deposits at financial institutions at which
the borrower had demand or savings accounts. The Bank estimates that
approximately 30% of the Residential Mortgage Loans included in the Initial
Portfolio were originated under a "no income verification" program.
Once the credit report and the employment and deposit verifications were
received by the underwriting officer considering the loan application, a
determination was made as to whether the prospective borrower had sufficient
monthly income available (i) to meet the borrower's monthly obligations on
the proposed Residential Mortgage Loan (determined on the basis of the
monthly payments due in the year of origination) and other expenses related
to the home (such as property taxes and hazard insurance) and (ii) to meet
other financial obligations and monthly living expenses. In all instances,
the Bank's and its predecessors' underwriting policies (including those
applied in originating the Mortgage Loans in the Initial Portfolio) may be
varied in cases deemed appropriate by its underwriting officers.
In determining the adequacy of the property as collateral, an independent
appraisal was made of each property considered for financing. Each appraiser
was selected in accordance with predetermined guidelines established for
appraisers. The appraiser was required to inspect the property and verify
that it was in good condition and that construction, if new, had been
completed. If the appraiser reported any exceptions to the verification, the
Bank (or its predecessor) or its agent determined that such property had been
substantially completed to its satisfaction. The appraisal was based on the
appraiser's judgment of value giving appropriate weight to both the market
value of comparable properties and the cost of replacing the property and
other factors as appropriate. The Bank's or its predecessors' underwriting
standards also required a search of the public records relating to a
mortgaged property for liens and judgments against such mortgaged property,
as well as fire and casualty insurance and customary title insurance.
Geographic Distribution
The Company currently anticipates that approximately 75.06% of the
residential real estate properties underlying the Company's Residential
Mortgage Loans included in the Initial Portfolio will be located in
California. Consequently, these Residential Mortgage Loans may be subject to
a greater risk of default than other comparable Residential Mortgage Loans in
the event of adverse economic, political or business developments and natural
hazards (earthquakes and mud slides, for example) in California that may
affect the ability of residential property owners in California to make
payments of principal and interest on the underlying mortgages.
Loan-to-Value Ratios; Insurance
Approximately 62.86% of the Residential Mortgage Loans in the Initial
Portfolio (calculated as of January 1, 1997) having Loan-to-Value Ratios
(i.e., the ratio (expressed as a percentage) of the original principal amount
of such Mortgage Loan to the lesser of (i) the appraised value at origination
of the underlying mortgaged property and (ii) if the Mortgage Loan was made
to finance the acquisition of property, the purchase price of the mortgaged
property) of greater than 80% are insured under primary mortgage insurance
policies. Not more than approximately 4.81% of the Residential Mortgage Loans
are insured by any one primary mortgage insurance policy issuer. At the time
of origination of the Residential Mortgage Loans, each of the primary
mortgage insurance policy insurers was approved by FNMA or FHLMC. A standard
hazard insurance policy is required to be maintained by the mortgagor in an
amount equal to the maximum insurable value of the improvements securing such
Residential Mortgage Loan or the principal balance of such Residential
Mortgage Loan, whichever is less. The remainder of the Residential Mortgage
Loans in the Initial Portfolio having Loan-to-Value Ratios of greater than
80% at the time of origination were not insured under any primary mortgage
insurance policy. Although predecessors in interest to the Bank had a program
of self-insuring the risk on these Mortgage Loans by charging a premium on
the Mortgage Loan's interest rate, such premium payments have not been
consistently collected when required.
37
<PAGE>
If the residential real estate property underlying a Residential Mortgage
Loan is located in a flood zone, such Residential Mortgage Loan may also be
covered by a flood insurance policy as required by law. No special hazard
insurance policy or mortgagor bankruptcy insurance will be maintained by the
Company with respect to the Residential Mortgage Loans in the Initial
Portfolio, nor will any Residential Mortgage Loan be insured by the Federal
Housing Administration or guaranteed by the Veterans Administration.
SERVICING
The Mortgage Loans included in the Initial Portfolio will be sold by the
Bank to the Company on a servicing released basis. FNMC and the Company will
enter into the Mortgage Loan Servicing Agreement (the "Servicing Agreement")
providing for the servicing of the Mortgage Loans in the Initial Portfolio.
FNMC in its role as servicer is referred to herein as the "Servicer." The
Servicer will receive fees generally ranging from 1/4% to 1/2% per annum on
the principal balances of the loans serviced and a disposition fee equal to
1% of the aggregate proceeds obtained in the sale of a defaulted Mortgage
Loan.
The Servicing Agreement requires the Servicer to service the Company's
Mortgage Loans in a manner generally consistent with accepted secondary
market practices, with any servicing guidelines promulgated by the Company
and with FNMA guidelines and procedures. The Servicer will collect and remit
principal and interest payments, administer mortgage escrow accounts, submit
and pursue insurance claims and initiate and supervise foreclosure
proceedings on the Mortgage Loans it services. The Servicer will also provide
accounting and reporting services required by the Company for such Mortgage
Loans. The Servicer will be required to follow such collection procedures as
are customary in the industry. The Servicer may, in its discretion, arrange
with a defaulting borrower a schedule for the liquidation of delinquencies,
provided that any primary mortgage insurance coverage is not adversely
affected. The Servicer may from time to time subcontract all or a portion of
its servicing obligations under the Servicing Agreement to other affiliates
of the Bank, or to an unrelated third party subject to approval of a majority
of the Independent Directors. At September 30, 1996, FNMC serviced
residential mortgage loans having an aggregate principal balance of
approximately $42.7 billion. FNMC will not be discharged or relieved in any
respect from performing its obligations under the Servicing Agreement in
connection with subcontracting any of the obligations thereunder.
The Servicer will be required to pay all expenses related to the
performance of its duties under the Servicing Agreement. The Servicer will be
required to make advances of principal and interest, taxes and required
insurance premiums that are not collected from borrowers with respect to any
Mortgage Loan, unless it determines that such advances are nonrecoverable
from the borrower, insurance proceeds or other sources with respect to such
Mortgage Loan. If such advances are made, the Servicer generally will be
reimbursed prior to the Company out of proceeds related to such Mortgage
Loan. The Servicer also will be entitled to reimbursement by the Company for
expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and in connection with the restoration of mortgaged property.
If claims are not made or paid under applicable insurance policies or if
coverage thereunder has ceased, the Company will suffer a loss to the extent
that the proceeds from liquidation of the mortgaged property, after
reimbursement of the servicer's expenses in the sale, are less than the
outstanding principal balance of the related Mortgage Loan. The Servicer will
be responsible to the Company for any loss suffered as a result of such
Servicer's failure to make and pursue timely claims or as a result of actions
taken or omissions made by the Servicer which cause the policies to be
cancelled by the insurer.
The Servicer may institute foreclosure proceedings, exercise any power of
sale contained in any mortgage or deed of trust, obtain a deed in lieu of
foreclosure or otherwise acquire title to a mortgaged property underlying a
Mortgage Loan by operation of law or otherwise in accordance with the terms
of the Servicing Agreement.
The Company may terminate the Servicing Agreement upon the happening of
one or more events specified in the Servicing Agreement. Such events relate
generally to the servicer's proper and timely performance of its duties and
obligations under the Servicing Agreement. In addition, the Company may also
terminate the Servicing Agreement without cause upon 30 days' notice and
payment of a termination
38
<PAGE>
fee that is competitive with that which is generally payable in the industry.
The termination fee will be based on the aggregate outstanding principal
amount of the loans then serviced under the Servicing Agreement. The Company
also will be required to pay a termination fee to the Servicer in the event
the Company transfers any Mortgage Loans being serviced by the Servicer and
the Servicer is not retained to service the loans by the transferee, which
fee will be based on the aggregate outstanding principal amount of the loans
so transferred. As long as any Series A Preferred Shares remain outstanding,
the Company may not terminate, or elect not to renew, the Servicing Agreement
without the approval of a majority of the Independent Directors.
As is customary in the mortgage loan servicing industry, the Servicer will
be entitled to retain any late payment charges, prepayment fees or penalties,
assumption fees and ARM conversion fees collected in connection with the
Mortgage Loans. The Servicer will receive any benefit derived from interest
earned on collected principal and interest payments between the date of
collection and the date of remittance to the Company and, to the extent
permitted under applicable law, from interest earned on tax and insurance
impound funds with respect to Mortgage Loans. The Servicer will be required
to remit to the Company no later than the 20th day of each month (or the next
business day if such 20th day is not a business day) all principal and
interest due from borrowers of Mortgage Loans (unless deemed nonrecoverable
by the Servicer) on the first day of such month.
When any mortgaged property underlying a Mortgage Loan is conveyed by a
mortgagor, the Servicer generally will enforce any "due-on-sale" clause
contained in the Mortgage Loan, to the extent permitted under applicable law
and governmental regulations. The terms of a particular Mortgage Loan or
applicable law, however, may provide that the Servicer is prohibited from
exercising the "due-on-sale" clause under certain circumstances related to
the security underlying the Mortgage Loan and the buyer's ability to fulfill
the obligations under the related mortgage note. Upon any assumption of a
Mortgage Loan by a transferee, a fee equal to a specified percentage of the
outstanding principal balance of the Mortgage Loan is typically required,
which sum will be retained by the Servicer as additional servicing
compensation.
EMPLOYEES
The Company has four executive officers, each of whom is described further
below under "Management." The Company does not anticipate that it will
require significantly more employees because it has retained FNMC to perform
certain functions pursuant to the Servicing Agreement. All of the executive
officers of the Company are also executive officers of the Bank and/or its
affiliates. The Company will maintain corporate records and audited financial
statements that are separate from those of the Bank or any of its affiliates.
None of the officers, employees or directors of the Company will have any
direct or indirect pecuniary interest in any Mortgage Asset to be acquired or
disposed of by the Company or in any transaction in which the Company has an
interest or will engage in acquiring, holding and managing Mortgage Assets.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Loans in addition to those in the Initial Portfolio and that substantially
all of these Mortgage Loans will be purchased from the Bank or affiliates of
the Bank. The Company does not expect to compete with mortgage conduit
programs, investment banking firms, savings and loan associations, banks,
thrift and loan associations, finance companies, mortgage bankers or
insurance companies in acquiring its Mortgage Loans.
LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. None of the
Company, the Bank or any of its affiliates is currently involved in nor, to
the Company's knowledge, currently threatened with any material litigation
with respect to the Mortgage Loans to be included in the Initial Portfolio,
other than routine litigation arising in the ordinary course of business,
most of which is expected to be covered by liability insurance.
39
<PAGE>
CERTAIN INFORMATION REGARDING THE BANK
As an integral part of this Prospectus, a copy of the Bank's Offering
Circular filed with the OTS relating to the Bank Preferred Stock to be issued
upon the Exchange Event is attached hereto as Annex I and is incorporated by
reference herein. All material information relating to the Bank, including
information relating to the Bank's financial position and "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
can be found in the Offering Circular. The information provided below is a
summary of certain information contained in the Offering Circular attached
hereto as Annex I and is qualified in its entirety by the Offering Circular.
Capitalized terms used in the section and not defined in the Prospectus have
the meanings given to them in the Offering Circular.
THE BANK
After giving effect to the Cal Fed Acquisition the issuance of the Series
A Preferred Shares and the Capital Contribution, at September 30, 1996, the
Bank 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. The Bank's principal
business consists of operating retail deposit branches and originating and/or
purchasing residential real estate loans and, to a lesser extent, certain
consumer loans, and is conducted primarily in California, Florida, Nevada and
Texas. The Bank also actively manages its portfolio of commercial real estate
loans acquired through acquisitions and is active in mortgage banking and
loan servicing. These operating activities are financed principally with
customer deposits, secured short-term and long-term borrowings, collections
on loans, asset sales and retained earnings. 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.
The Bank is chartered as a federal stock savings bank under the HOLA and
regulated by the OTS and the FDIC, which, through the Savings Association
Insurance Fund ("SAIF"), insures the deposit accounts of the Bank, up to
applicable limits. The Bank is also a member of the FHLBS.
SUMMARY HISTORICAL FINANCIAL DATA
The following data should be read in conjunction with the Consolidated
Financial Statements of First Nationwide and the notes thereto included in
the Offering Circular. See "Selected Historical Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- First Nationwide" contained in the Offering Circular.
40
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------------------
1996(1) 1995 1995 1994(2)
---------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income ......................................... $932,578 $797,856 $1,075,504 $292,984
Interest expense ........................................ 586,358 530,066 709,276 193,464
Net interest income ..................................... 346,220 267,790 366,228 99,520
Provision for loan losses ............................... 29,700 18,000 37,000 6,226
Noninterest income ...................................... 595,461 105,256 150,973 41,158
Noninterest expense ..................................... 370,144 245,042 326,734 95,311
Income before income taxes and extraordinary item ...... 541,837 110,004 153,467 39,141
Income tax (benefit) expense (3) ........................ (77,523) 8,822 (55,826) 3,191
Income before extraordinary item ........................ 619,360 101,182 209,293 35,950
Extraordinary item--(loss) gain on early extinguishment
of debt, net ........................................... (1,586) 1,967 1,967 1,376
Net income .............................................. 617,774 103,149 211,260 37,326
SELECTED PERFORMANCE RATIOS
Return on average assets (4) ............................ 4.79% .94% 1.44% .84%
Return on average common equity (5) ..................... 75.72 19.24 32.40 17.00
Yield on interest-earning assets (6) .................... 7.75 7.65 7.72 6.85
Cost of interest-bearing liabilities (7) ................ 5.03 5.25 5.24 4.73
Net interest margin (8) ................................. 2.87 2.55 2.63 2.33
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------
1996(1) 1995 1994(2)
---------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SELECTED FINANCIAL DATA
Securities available for sale (9) ................ $ 567,933 $ 348,561 $ 45,000
Securities held to maturity (9) .................. 4,277 1,455 411,859
Mortgage-backed securities available for sale (9) 1,660,140 1,477,514 --
Mortgage-backed securities held to maturity (9) . 1,700,387 1,524,488 3,153,812
Loans receivable, net ............................ 10,578,170 8,831,018 9,966,886
Covered assets ................................... -- 39,349 311,603
Total assets ..................................... 16,809,461 14,637,445 14,669,153
Deposits ......................................... 8,799,990 10,241,628 9,196,656
Securities sold under agreements to repurchase .. 2,127,574 969,510 1,883,490
Borrowings ....................................... 4,028,416 2,189,731 2,605,848
Total liabilities ................................ 15,347,880 13,677,560 13,828,556
Stockholders' equity ............................. 1,461,581 959,885 840,597
REGULATORY CAPITAL RATIOS OF FIRST NATIONWIDE
Tangible capital ................................. 6.71% 5.84% 5.50%
Core capital ..................................... 6.71 5.84 5.50
Risk-based capital:
Core capital .................................... 10.81 9.14 8.86
Total capital ................................... 12.93 11.34 11.01
SELECTED OTHER DATA
Number of full service customer facilities ...... 116 160 156
Loans serviced for others (10) ................... $43,826,250 $28,170,543 $ 7,475,119
Approximate number of employees .................. 3,466 3,619 3,573
Non-performing assets as a percentage of First
Nationwide's total assets ....................... 1.36% 1.50% 1.49%
</TABLE>
41
<PAGE>
(1) On January 31, 1996, FNMC consummated the LMUSA 1996 Purchase,
acquiring a $14.1 billion loan servicing portfolio. On February 1,
1996, First Nationwide acquired SFFed, with assets at fair values
totalling approximately $4 billion and liabilities (including deposit
liabilities) with fair values totalling approximately $3.8 billion.
During the nine months ended September 30, 1996, First Nationwide
closed the Branch Sales, with associated deposit accounts totalling
$4.6 billion. Noninterest income for the nine months ended September
30, 1996 includes pre-tax gains of $363.0 million related to the
Branch Sales. Noninterest expense for the nine months ended September
30, 1996 includes a pre-tax charge of $60.1 million for the Special
SAIF Assessment.
(2) On October 3, 1994, effective immediately following the close of
business on September 30, 1994, First Nationwide acquired assets with
fair values totalling approximately $14.1 billion and liabilities
(including deposit liabilities) with fair values totalling
approximately $13.4 billion from Old FNB.
(3) Income tax expense recorded in 1994 after the FN Acquisition
represents federal AMT reduced, to the extent of 90%, by net
operating loss carryovers, and state tax of an assumed rate of 8%.
Income tax benefit for the nine months ended September 30, 1996 and
in 1995 includes the recognition of a deferred tax benefit of $125
million and of $69 million, respectively, offset by federal AMT tax
reduced, to the extent of 90%, by net operating loss carryovers and
state tax at an assumed rate of 8%.
(4) Return on average assets represents net income as a percentage of
average assets for the periods presented. For the nine months ended
September 30, 1996 and 1995, return on average assets is annualized.
(5) Return on average common equity represents net income available to
common stockholders as a percentage of average common equity for the
periods presented. For the nine months ended September 30, 1996 and
1995, return on average common equity is annualized.
(6) Yield on interest-earning assets represents interest income as a
percentage of average interest-earning assets. For the nine months
ended September 30, 1996 and 1995, yield on interest-earning assets
is annualized.
(7) Cost of interest-bearing liabilities represents interest expense as a
percentage of average interest-bearing liabilities. For the nine
months ended September 30, 1996 and 1995, cost of interest-bearing
liabilities is annualized.
(8) Net interest margin represents net interest income as a percentage of
average interest-earning assets. For the nine months ended September
30, 1996 and 1995, net interest margin is annualized.
(9) Fluctuation in securities and mortgage-backed securities held to
maturity and securities and mortgage-backed securities available for
sale from December 31, 1994 to December 31, 1995 resulted from the
reclassification of substantially all securities and mortgage-backed
securities (except for mortgage-backed securities resulting from the
securitization with recourse of certain of First Nationwide's loans)
from held to maturity to securities available for sale on December
29, 1995.
(10) Includes loans serviced by FNMC, First Nationwide and FGB Realty,
excluding loans serviced for First Nationwide by FNMC.
42
<PAGE>
CONSOLIDATED CAPITALIZATION
The following table sets forth the actual consolidated capitalization of
First Nationwide at September 30, 1996 and the capitalization of the Bank on
a consolidated basis at such date as adjusted to give effect to the Cal Fed
Acquisition, the issuance of the Series A Preferred Shares and the Capital
Contribution. The following table should be read in conjunction with the
Consolidated Financial Statements of First Nationwide and the notes thereto,
"Pro Forma Financial Data" and the Unaudited Pro Forma Financial Data
included in the Offering Circular.
<TABLE>
<CAPTION>
CONSOLIDATED
CAPITALIZATION
FIRST OF THE BANK,
NATIONWIDE ADJUSTMENTS AS ADJUSTED
------------ --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits .............................................. $8,799,990 $8,767,439 (a) $17,567,429
============ =============== ==============
Borrowings:
Securities sold under agreements to repurchase ...... $2,127,574 $ 962,700 (a) $ 2,656,049
(434,225)(b)
Other borrowings (primarily FHLB advances) .......... 3,931,744 3,282,357 (a) 7,214,101
------------ --------------- --------------
Total .............................................. $6,059,318 $3,810,832 $ 9,870,150
============ =============== ==============
Long-term notes:
Old FNB Debentures ................................... $ 89,831 $ -- $ 89,831
SFFed Notes .......................................... 6,841 -- 6,841
Cal Fed 10.668% Subordinated Notes ................... -- 50,000 (c) 50,000
Cal Fed 10% Subordinated Debentures .................. -- 4,300 (c) 4,300
Cal Fed 6 1/2% Convertible Subordinated Debentures .. -- 2,700 (c) 2,700
------------ --------------- --------------
Total long-term notes .............................. $ 96,672 $ 57,000 $ 153,672
============ =============== ==============
Minority interest--Series A Preferred Shares ......... $ -- $ 450,000 (d) $ 450,000
------------ --------------- --------------
Stockholders' equity:
As adjusted:
11 1/2% Noncumulative perpetual preferred stock,
(par value $100 per share; 5,000,000 shares
authorized; 3,007,300 shares issued and
outstanding) ....................................... 300,730 -- 300,730
10 5/8% Noncumulative perpetual preferred stock,
(par value $100 per share; 1,725,000 shares
authorized, issued and outstanding) ................ -- 172,500 (a) 172,500
Common stock (par value $.01 per share; 50,000
shares authorized, 800 shares issued and
outstanding) ....................................... 1 -- 1
Additional paid-in capital .......................... 632,805 (15,775)(d) 1,317,030
700,000 (e)
Net unrealized holding gain on securities available
for sale ........................................... 35,087 -- 35,087
Retained earnings ................................... 492,958 -- 492,958
------------ --------------- --------------
Total stockholders' equity ......................... 1,461,581 856,725 2,318,306
------------ --------------- --------------
Total capitalization .................................. $1,461,581 $1,306,725 $ 2,768,306
============ =============== ==============
</TABLE>
- ------------
(a) Represents deposits, borrowed funds (including accrued interest payable
on all borrowings) and preferred stock of California Federal assumed by
First Nationwide at their approximate respective fair values at
September 30, 1996.
(b) Represents utilization of proceeds from the issuance of the Series A
Preferred Shares to reduce borrowings of the Bank.
(c) Represents long-term notes of California Federal assumed by First
Nationwide at their approximate respective fair values at September 30,
1996, excluding accrued interest payable.
(d) Represents the issuance of the Series A Preferred Shares and related
issuance costs.
(e) Represents the Capital Contribution.
43
<PAGE>
RISK FACTORS
Prospective investors should consider carefully the information set forth
under "Risk Factors" in the Offering Circular. Among the risks associated
with the Bank Preferred Stock are the following:
o The Bank Preferred Stock will be issued in an automatic exchange for
the Series A Preferred Shares, only if (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the
Bank is placed into conservatorship or receivership or (iii) the
appropriate federal regulatory agency, in its sole discretion,
anticipates the Bank becoming "undercapitalized" in the near term. As a
result, holders of the Series A Preferred Shares would become holders
of preferred stock of the Bank at a time when the Bank's financial
condition was deteriorating or when the Bank had been placed into
conservatorship or receivership.
o There is no obligation to declare dividends on the Bank Preferred
Stock. Because dividends on the Bank Preferred Stock are noncumulative,
if the Board of Directors of the Bank does not declare the quarterly
dividend payable on the Bank Preferred Stock, the holders of the Bank
Preferred Stock will have no right to receive a dividend for such
period, whether or not dividends of the Bank Preferred Stock are
declared by the Board of Directors for any future period. The Bank's
ability to pay dividends on Bank Preferred Stock would also be subject
to the rights of holders of other classes or series of equity
securities of the Bank currently outstanding or issued in the future.
o The continued implementation of the Bank's strategy is subject to
numerous contingencies beyond management's control.
o The Bank's loan portfolio is concentrated in California. As a result,
the financial condition of the Bank will be subject to general economic
conditions and, in particular, to conditions in the California
residential real estate market.
o Any change in the levels of market interest rates could materially
adversely affect the Bank's net interest spread, asset quality, loan
origination volume and overall results of operation.
o In the years prior to the FN Acquisition, the FNB Acquired Business had
experienced losses stemming from increases in non-performing assets.
o There can be no assurance that long-term interest rates will not
decline and the rate or mortgage loan prepayments will not exceed
management's estimates, resulting in a charge to earnings in the period
of adjustment and reductions in the market value of the MSRs and in
loan servicing fee income, or that management will be able to reinvest
the cash from mortgage loan prepayments in assets earning yields
comparable to the yields on the prepaid mortgages.
o The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
o The financial institutions industry is subject to extensive regulation,
which materially affects the business of the Bank.
o The Bank, Holdings and Mafco Holdings have entered into the Tax Sharing
Agreement. First Nationwide has generated significant federal income
tax net operating losses since it was organized in December 1988. If
for any reason the Bank and Holdings were to be deconsolidated from the
Mafco Group, only the amount of net operating loss carryovers of the
Bank and Holdings not already utilized by the Mafco Group would be
available to offset the taxable income of the Bank and Holdings.
o Dividends made to Holdings, as the sole owner of the Bank's common
stock, and to holders of the Bank's preferred stock in each case in
excess of the Bank's accumulated earnings and profits, as well as any
distributions in dissolution or in redemption or liquidation of stock,
may cause the Bank to recognize a portion of its tax bad debt reserves
as income and, accordingly, could cause the Bank to make payments to
Holdings under the Tax Sharing Agreement.
44
<PAGE>
o The Bank will generally be required to take into income the balance of
its post-1987 bad debt reserves over a six year period beginning in
1996. Consequently, the Bank may be required to make payments to
Holdings under the Tax Sharing Agreement if the Bank has insufficient
expenses and losses to offset such income.
o There can be no assurance as to the liquidity of the trading markets
for the Bank Preferred Stock, if issued, or that an active public
market for the Bank Preferred Stock would develop or be maintained.
o MacAndrews & Forbes will be able to direct and control the policies of
the Bank and its subsidiaries, including mergers, sales of assets and
similar transactions.
PAYMENT OF DIVIDENDS
The federal thrift laws, including the regulations of the OTS, limit the
Bank's ability to pay dividends on its capital stock including the Bank
Preferred Stock. The Bank generally may not declare dividends or make any
other capital distribution if, after the payment of such dividend or other
distribution, it would fall within any of the three undercapitalized
categories under the prompt corrective action standards of the FDICIA. Other
limitations apply to the Bank's ability to pay dividends based on the current
income of the Bank and on the extent to which the Bank meets its regulatory
capital requirements. In addition, the HOLA requires every savings
association subsidiary of a savings and loan holding company to give the OTS
at least 30 days' advance notice of any proposed dividends to be made on its
guarantee, permanent or other non-withdrawable stock or else such dividend
will be invalid. Further the OTS may prohibit any capital distribution that
it determines would constitute an unsafe or unsound practice.
As of September 30, 1996, First Nationwide met the capital requirements of
a "well capitalized" institution under the FDICIA prompt corrective action
standards. Although management expects the Bank to remain "well capitalized,"
there can be no assurance that the Bank will continue to be "well
capitalized" under applicable OTS regulations. If the Bank were only
"adequately capitalized," it would not be able to accept Brokered Deposits
unless it received a waiver from the FDIC. See "Regulation" in the Offering
Circular.
45
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors will initially be composed of seven
members, two of whom will be Independent Directors. An "Independent Director"
is a director who is not a current officer or employee of the Company or a
current director, officer or employee of the Bank or any affiliate of the
Bank. The Charter provides that the Independent Directors will consider the
interests of the holders of both the Common Stock and the Preferred Stock,
including the Series A Preferred Shares, in determining whether any proposed
action requiring their approval is in the best interests of the Company. The
Company currently has four executive officers. See "Business and Strategy --
Employees."
The persons who are directors and executive officers of the Company (ages
as of January 1, 1997) are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND OFFICES HELD
- --------------------- ----- -----------------------------------------------
<S> <C> <C>
Gerald J. Ford ....... 52 Chairman, Chief Executive Officer and Director
Carl B. Webb ......... 47 President, Chief Operating Officer and Director
Christie S. Flanagan 58 Executive Vice President, General Counsel and
Director
P. Richard Frieder .. 62 Director
Robert Nichols ....... 52 Director
James R. Staff ....... 48 Director
Richard H. Terzian .. 60 Executive Vice President, Chief Financial
Officer and Director
</TABLE>
Each of the executive officers has held his position with the Company
since its inception in November 1996. The following is a summary of the
experience of the executive officers and directors of the Company:
Mr. Ford has been Chairman of the Board, Chief Executive Officer and a
Director of First Nationwide or the Bank since October, 1994. Mr. Ford was
Chairman of the Board and a Director of First Madison Bank, FSB from 1993 to
1994. Mr. Ford previously served as Chairman of the Board, Chief Executive
Officer and a Director of First Gibraltar Bank, FSB from 1988 through 1993.
Mr. Ford served as the Chairman of the Board, Chief Executive Officer and a
Director of First United Bank Group, Inc. from 1993 through 1994. Mr. Ford is
Chairman of the Board and a Director of FNMC. Mr. Ford is Chairman of the
Board and a Director of FGB Services, Inc. and Madison Realty Advisors, Inc.
Mr. Ford has also served in the following capacities over the past five
years: Chairman of the Board, Chief Executive Officer and Director, Ford Bank
Group, Inc.; Chairman of the Board, Chief Executive Officer and Director,
United New Mexico Financial Corporation. Mr. Ford is also Chairman of the
Board and Chief Executive Officer of Liberte Investors Inc., President and
Director of Parent Holdings and a Director of Norwest Corporation and
Affiliated Computer Services, Inc.
Mr. Webb has been the President, Chief Operating Officer and a Director of
First Nationwide or the Bank since October, 1994. Mr. Webb served as
President, Chief Executive Officer and Director of First Madison Bank, FSB
from 1993 through 1994. Mr. Webb previously served as President, Chief
Operating Officer and a Director of First Gibraltar Bank, FSB from 1988
through 1993. Mr. Webb also serves as a Director of FNMC.
Mr. Flanagan has been the Executive Vice President and General Counsel of
First Nationwide or the Bank since October, 1994. He also serves as a
Director of FNMC. Mr. Flanagan has been associated with the law firm of
Jenkens & Gilchrist, P.C. and its predecessors since 1968 in various
capacities, including Managing Partner, and he is currently Of Counsel to
that firm.
46
<PAGE>
Mr. Frieder has been a Director of the Company since January 1997. He has
been President and Chief Executive Officer of KSD Industries Inc., a company
engaged in the manufacturing and sale of household hardware, for the past
twenty-six years. Mr. Frieder also is an attorney admitted to practice in the
State of Pennsylvania.
Mr. Nichols has been Chairman of the Board and President of Conley, Lott,
Nichols Machinery Company, a Dallas based company engaged in machinery sales,
since 1978.
Mr. Staff has been an Executive Vice President of First Nationwide or the
Bank since October 17, 1994. He also serves as a Director of FNMC and as
Chairman and a Director of FGB Realty. Mr. Staff previously was associated
with the public accounting firm of KPMG Peat Marwick LLP and its predecessors
since 1979, including most recently as Partner-in-charge of Financial
Services for the Southwest-Dallas area.
Mr. Terzian has served as Executive Vice President and Chief Financial
Officer of First Nationwide or the Bank since April 1, 1995. For the five
years prior to that date, Mr. Terzian served as Chief Financial Officer of
Dime Bancorp, Inc. (The Dime Savings Bank of New York, FSB).
INDEPENDENT DIRECTORS
The Charter requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Company require the approval of a
majority of the Independent Directors. See "Description of Series A Preferred
Shares -- Independent Director Approval." In addition, although not
restricted from doing so, the Board of Directors does not currently intend to
approve the following transactions without the approval of a majority of the
Independent Directors: (i) the modification of the general distribution
policy or the authorization or declaration of any distribution in respect of
Common Stock for any year if, after taking into account any such proposed
distribution, total distributions on the Series A Preferred Shares and the
Common Stock would exceed an amount equal to the sum of 105% of the Company's
REIT taxable income (excluding capital gains) for such year plus net capital
gains of the Company for that year, (ii) the redemption of any shares of
Common Stock, and (iii) any dissolution, liquidation or termination of the
Company prior to January 31, 2026. Messrs. Frieder and Nichols are the
Company's initial Independent Directors.
If full dividends on shares of Series A Preferred Shares shall not have
been paid for six Dividend Periods, the maximum authorized number of
directors of the Company shall thereupon be increased by two. Subject to
compliance with any requirement for regulatory approval of (or non-objection
to) persons serving as directors, the holders of Series A Preferred Shares,
voting together as a class with the holders of any Parity Stock upon which
the same voting rights as those of the Series A Preferred Shares have been
conferred and are irrevocable, shall have the exclusive right to elect the
two additional directors at the Company's next annual meeting of stockholders
and at each subsequent annual meeting until full dividends have been
authorized, declared and paid or authorized and declared and a sum sufficient
for payment thereof is set apart for payment on the Series A Preferred Shares
for four consecutive Dividend Periods. The term of such directors elected
thereby shall terminate, and the total number of directors shall be decreased
by two, upon the payment or the declaration and setting aside for payment of
full dividends on the Series A Preferred Shares for four consecutive Dividend
Periods. See "Description of Series A Preferred Shares -- Voting Rights."
AUDIT COMMITTEE
Upon consummation of the Offering, the Board of Directors will establish
an audit committee which will review the engagement of independent
accountants and review the independence of its auditors. The audit committee
will also review the adequacy of the Company's internal accounting controls.
The audit committee initially will be comprised of the Independent Directors
and Mr. Terzian.
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors of the Company for
their services as directors annual compensation of $15,000 plus a fee of
$2,000 for attendance (in person or by
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telephone) at each meeting of the Board of Directors. Independent Directors
who are members of the audit committee will receive a fee of $1,000 for
attendance (in person or by telephone) at each meeting of the audit
committee.
The Company will not pay any compensation to its officers or employees or
to directors who are not Independent Directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent
permitted by the MGCL.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a)
any present or former director or officer or (b) any individual who, while a
director of the Company and at the request of the Company, serves or has
served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, from and against any claim or liability to
which such person may become subject or which such person may incur by reason
of his or her status as a present or former director or officer of the
Company. The Bylaws of the Company (the "Bylaws") obligate it, to the maximum
extent permitted by Maryland law, to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a)
any present or former director or officer who is made a party to the
proceeding by reason of his service in that capacity or (b) any individual
who, while a director of the Company and at the request of the Company,
serves or has served another corporation, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner
or trustee of such corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise and who is made a party to the proceeding by
reason of his service in that capacity. The Charter and Bylaws also permit
the Company to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and to
any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any
proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or
omission of the director or officer was material to the matter giving rise to
the proceeding and (i) was committed in bad faith or (ii) was the result of
active and deliberate dishonesty, (b) the director or officer actually
received an improper personal benefit in money, property or services or (c)
in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under the MGCL, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation. In addition, the
MGCL requires the Company, as a condition to advancing expenses, to obtain
(a) a written affirmation by the director or officer of his good faith belief
that he has met the standard of conduct necessary for indemnification by the
Company as authorized by the Bylaws and (b) a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
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<PAGE>
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the
Company, the Bank and its affiliates will engage in the transactions
described below, which are designed (i) to facilitate the Offering, (ii) to
transfer the ownership of the Initial Portfolio to the Company and (iii) to
enable the Company to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1997.
The transactions constituting the formation of the Company will include
the following:
o The Company will sell to the public 18,000,000 Series A Preferred
Shares in the Offering (assuming the Underwriters' over-allotment
option is not exercised).
o The Bank acquired 1,000 shares of Common Stock for an aggregate
purchase price equal to $10. In addition, the Bank will make capital
contributions to the Company equal to the sum of $450 million plus the
aggregate amount of underwriting discounts and the aggregate expenses
of the Offering and the formation of the Company. The Bank currently
owns, and following the completion of the Offering will continue to
own, all of the issued and outstanding shares of Common Stock of the
Company. The Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain direct ownership of
at least a majority of the outstanding shares of Common Stock.
o The Bank will sell the Initial Portfolio to the Company for an
aggregate purchase price equal to approximately $900 million pursuant
to the terms of the Residential Mortgage Purchase Agreement. See
"Business and Strategy -- Acquisition of Initial Portfolio."
o FNMC and the Company will enter into the Servicing Agreement pursuant
to which FNMC will service the Mortgage Loans included in the Initial
Portfolio. See "Business and Strategy -- Servicing."
The Company and the Bank intend that the fair value of the Initial
Portfolio will equal the amount that the Company will pay for the Initial
Portfolio (approximately $900 million). However, no third party valuations of
the Mortgage Loans constituting the Initial Portfolio have been or will be
obtained for purposes of the Offering, and there can be no assurance that the
fair value of the Initial Portfolio will not differ from the purchase price
to be paid by the Company. See "Risk Factors -- No Third Party Valuation of
the Mortgage Loans; No Arm's-Length Negotiations with Affiliates" and
"--Relationship with the Bank and its Affiliates; Conflicts of Interest."
BENEFITS TO THE BANK
The Bank expects to realize the following benefits in connection with the
Offering and other transactions constituting the formation of the Company:
o The Bank has advised the Company that the Bank expects the Series A
Preferred Shares to qualify as core capital of the Bank under relevant
regulatory capital guidelines. The increase in the Bank's core capital
and risk-based capital levels that will result from the treatment of
the Series A Preferred Shares as core capital will enable the Bank to
retain a higher base of interest-earning assets, resulting in
incrementally higher related earnings.
o The dividends paid on the Series A Preferred Shares will be deductible
for income tax purposes as a result of the Company's qualification as a
REIT, which provides the Bank with a more cost-effective means of
obtaining regulatory capital than if the Bank were to issue preferred
stock.
o In exchange for the Initial Portfolio, the Bank will receive the $450
million aggregate amount of the net proceeds received by the Company in
connection with the Offering.
o FNMC, a subsidiary of the Bank, will receive service related
compensation pursuant to the Servicing Agreement.
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<PAGE>
DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary of the material terms and provisions of the Series A
Preferred Shares does not purport to be complete and is qualified in its
entirety by reference to the MGCL and to the Charter and Bylaws, the forms of
which have been filed with the Commission as exhibits to the Registration
Statement of which this Prospectus forms a part. See "Description of Capital
Stock" below.
GENERAL
The Series A Preferred Shares form a series of the Preferred Stock of the
Company, which Preferred Stock may be issued from time to time in one or more
series with such designations, preferences, conversion or other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of redemption as are
determined by the Company's Board of Directors or, if then constituted, a
duly authorized committee thereof. The Board of Directors has authorized the
Company to issue the Series A Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series A Preferred Shares will
have no preemptive rights with respect to any shares of the stock of the
Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares
are perpetual and will not be convertible into shares of Common Stock or any
other class or series of stock of the Company and will not be subject to any
sinking fund or other obligation of the Company for its repurchase or
retirement.
The transfer agent, registrar and dividend disbursement agent for the
Series A Preferred Shares will be American Stock Transfer & Trust Co. The
registrar for shares of Series A Preferred Shares will send notices to
stockholders of any meetings at which holders of the Series A Preferred
Shares have the right to elect directors of the Company or to vote on any
other matter.
AUTOMATIC EXCHANGE
Each Series A Preferred Share will be exchanged automatically for one
newly issued share of Bank Preferred Stock if the appropriate federal
regulatory agency directs in writing an exchange of the Series A Preferred
Shares for Bank Preferred Stock because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the Bank
is placed into conservatorship or receivership or (iii) the appropriate
federal regulatory agency, in its sole discretion, anticipates the Bank
becoming "undercapitalized" in the near term. Upon the Exchange Event, each
holder of Series A Preferred Shares shall be unconditionally obligated to
surrender to the Bank all certificates representing the Series A Preferred
Shares of such holder, and the Bank shall be unconditionally obligated to
issue to such holder in exchange for such certificate(s), a certificate or
certificates representing an equal number of shares of Bank Preferred Stock.
Any Series A Preferred Shares purchased or redeemed by the Company prior to
the Time of Exchange (as defined herein) shall not be deemed outstanding and
shall not be subject to the Automatic Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the
effective date of such exchange set forth in the Directive, or, if such date
is not set forth in the Directive, as of 8:00 a.m. Eastern Time on the first
Business Day immediately following the date of issuance of the Directive (the
"Time of Exchange"). As of the Time of Exchange, all shares of Series A
Preferred Shares will be cancelled without any further action by the Company,
all rights of the holders of Series A Preferred Shares as stockholders of the
Company will cease, and such persons shall thereupon and thereafter be deemed
to be and shall be for all purposes the holders of Bank Preferred Stock. The
Company will mail notice of the occurrence of the Exchange Event to each
holder of Series A Preferred Shares within 30 days of such event, and the
Bank will deliver to each such holder certificates for Bank Preferred Stock
upon surrender of such holder's certificates for Series A Preferred Shares.
Until such replacement stock certificates are delivered (or in the event such
replacement certificates are not delivered), certificates previously
representing Series A Preferred Shares shall be deemed for all purposes to
represent Bank Preferred Stock. All corporate action necessary for the Bank
to issue the Bank Preferred Stock as of the Time of Exchange will be
completed prior to or upon completion of the Offering. Accordingly, once the
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<PAGE>
Directive is issued, no action will be required to be taken by holders of
Series A Preferred Shares, by the Bank or by the Company in order to effect
the Automatic Exchange as of the Time of Exchange.
Holders of Series A Preferred Shares, by purchasing such shares of Series
A Preferred Shares, will be deemed to have agreed to be bound by the
unconditional obligation to exchange such shares of Series A Preferred Shares
for Bank Preferred Stock upon the occurrence of the Exchange Event. The
obligation of the holders of Series A Preferred Shares to surrender such
shares and the obligation of the Bank to issue Bank Preferred Stock in
exchange for Series A Preferred Shares shall be enforceable by the Bank and
such holders, respectively, against the other.
Absent the occurrence of the Exchange Event, no shares of Bank Preferred
Stock will be issued. Upon the occurrence of the Exchange Event, the Bank
Preferred Stock to be issued as part of the Automatic Exchange would
constitute a newly issued series of preferred stock of the Bank and would
have the same dividend rights, liquidation preference, redemption options and
other attributes as to the Bank as holders of Series A Preferred Shares have
as to the Company. Any accrued and unpaid dividends on the Series A Preferred
Shares as of the Time of Exchange would be deemed to be accrued and unpaid
dividends on the Bank Preferred Stock. The Bank Preferred Stock would rank
pari passu in terms of dividend payment and liquidation preference with any
outstanding shares of preferred stock of the Bank. The Bank intends to
register the Bank Preferred Stock with the OTS pursuant to an Offering
Circular, a copy of which is affixed to this Prospectus as Annex I and
incorporated herein by reference. The Bank Preferred Stock will not be
registered with the Commission and will be offered pursuant to an exemption
from registration under Section 3(a)(5) of the Securities Act. Absent the
occurrence of the Exchange Event, however, the Bank will not issue any Bank
Preferred Stock, although the Bank will be able to issue preferred stock in
series other than that of the Bank Preferred Stock. In the event of the
issuance of the Bank Preferred Stock, application will be made to list the
Bank Preferred Stock on the NYSE. However, there can be no assurance as to
the liquidity of the trading markets for the Bank Preferred Stock, if issued,
or that an active public market for the Bank Preferred Stock would develop or
be maintained.
Holders of Series A Preferred Shares cannot exchange their Series A
Preferred Shares for Bank Preferred Stock voluntarily. In addition, absent
the occurrence of the Automatic Exchange, holders of Series A Preferred
Shares will have no dividend, voting, liquidation preference or other rights
with respect to any security of the Bank; such rights as are conferred by the
Series A Preferred Shares exist solely as to the Company.
RANK
The Series A Preferred Shares will rank prior to the Common Stock and to
all other classes and series of equity securities of the Company now or
hereafter issued (collectively, "Junior Stock"), other than any class or
series of equity securities of the Company expressly designated as being on a
parity with ("Parity Stock") or senior to ("Senior Stock") the Series A
Preferred Shares as to dividend rights and rights upon liquidation, winding
up or dissolution. The Company has the power to create and issue additional
Preferred Stock or other classes of stock ranking on a parity with the Series
A Preferred Shares, or that constitute Junior Stock, without any approval or
consent of the holders of Series A Preferred Shares. So long as any Series A
Preferred Shares remain outstanding, additional shares of Senior Stock may
not be issued without the approval of the holders of at least two-thirds of
the Series A Preferred Shares. See "--Voting Rights." So long as any Series A
Preferred Shares remain outstanding, additional shares of Parity Stock may
not be issued without the approval of a majority of the Independent
Directors. See "--Independent Director Approval."
DIVIDENDS
Holders of Series A Preferred Shares will be entitled to receive, if, when
and as authorized and declared by the Board of Directors of the Company out
of assets of the Company legally available therefor, noncumulative cash
dividends at the rate of 9 1/8% per annum of the initial liquidation
preference (equivalent to $2.28125 per share per annum). Dividends on the
Series A Preferred Shares will be
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<PAGE>
payable, if authorized and declared, quarterly in arrears on March 31, June
30, September 30 and December 31 (or, if any such day is not a business day,
on the next business day) of each year commencing on March 31, 1997.
Quarterly Dividend Periods will commence on and include the first day, and
end on and include the last day, of the calendar quarter in which the
corresponding Dividend Payment Date occurs; provided, however, that the first
Dividend Period (the "Initial Dividend Period") shall commence on and include
the original issue date of the Series A Preferred Shares and shall end on and
include March 31, 1997. Each authorized and declared dividend will be payable
to holders of record as they appear on the stock register of the Company on
such record dates, not more than 45 calendar days nor less than 10 calendar
days preceding the Dividend Payment Date thereof, as shall be fixed by the
Board of Directors of the Company. Dividends payable on the Series A
Preferred Shares for the Initial Dividend Period and for any other Dividend
Period greater or less than a full dividend period shall be computed on the
basis of twelve 30-day months, a 360-day year and the actual number of days
elapsed in the period; provided, however, that in the event of an Automatic
Exchange, any accrued and unpaid dividends on the Series A Preferred Shares
as of the Time of Exchange shall be deemed to be accrued and unpaid dividends
on the Bank Preferred Stock.
The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors does not authorize or
declare a dividend payable in respect of any Dividend Period, holders of
Series A Preferred Shares will have no right to receive a dividend in respect
of such Dividend Period, and the Company will have no obligation to pay a
dividend in respect of such Dividend Period, whether or not dividends are
authorized and declared payable in respect of any future Dividend Period.
If any Series A Preferred Shares are outstanding, no full dividends or
other distributions shall be authorized, declared or paid or set apart for
payment on any Parity Stock or Junior Stock for any Dividend Period unless
full dividends have been or contemporaneously are authorized, declared and
paid, or authorized and declared and a sum sufficient for the payment thereof
is set apart for such payments on the Series A Preferred Shares for (i) the
immediately preceding Dividend Period, in the case of Parity Stock, and (ii)
the then-current Dividend Period, in the case of Junior Stock. When dividends
are not paid in full (or a sum sufficient for such full payment is not so set
apart) for any Dividend Period upon the Series A Preferred Shares and the
shares of any Parity Stock, all dividends authorized and declared on the
Series A Preferred Shares and the shares of Parity Stock shall only be
authorized and declared pro rata based upon the respective amounts that would
have been paid on the Series A Preferred Shares and any shares of Parity
Stock had dividends been authorized and declared in full.
In addition to the foregoing restriction, the Company shall not authorize,
declare, pay or set apart funds for any dividends or other distributions
(other than in Common Stock or other Junior Stock) with respect to any Common
Stock or other Junior Stock or repurchase, redeem or otherwise acquire, or
set apart funds for repurchase, redemption or other acquisition of, any
Common Stock or other Junior Stock through a sinking fund or otherwise,
unless and until (i) full dividends on the Series A Preferred Shares for the
four most recent preceding Dividend Periods (or such lesser number of
Dividend Periods during which shares of Series A Preferred Shares have been
outstanding) are authorized and declared and paid or a sum sufficient for
payment has been paid over to the dividend disbursing agent for payment of
such dividends and (ii) the Company has authorized and declared a cash
dividend on the Series A Preferred Shares at the annual dividend rate for the
then-current Dividend Period, and sufficient funds have been paid over to the
dividend disbursing agent for the payment of such cash dividend for such
then-current Dividend Period.
No dividend shall be paid or set aside for holders of Series A Preferred
Shares for any Dividend Period unless full dividends have been paid or set
aside for the holders of each class or series of equity securities, if any,
ranking prior to the Series A Preferred Shares as to dividends for such
Dividend Period.
VOTING RIGHTS
Except as indicated below, the holders of the Series A Preferred Shares
will not be entitled to vote. In the event the holders of Series A Preferred
Shares are entitled to vote, each Series A Preferred Share will be entitled
to one vote.
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If full dividends on shares of Series A Preferred Shares shall not have
been paid for six Dividend Periods, the maximum authorized number of
directors of the Company shall thereupon be increased by two. Subject to
compliance with any requirement for regulatory approval of (or non-objection
to) persons serving as directors, the holders of Series A Preferred Shares,
voting together as a class with the holders of any Parity Stock upon which
the same voting rights as those of the Series A Preferred Shares have been
conferred and are irrevocable, shall have the exclusive right to elect the
two additional directors at the Company's next annual meeting of shareholders
and at each subsequent annual meeting until full dividends have been
authorized, declared and paid or authorized and declared and a sum sufficient
for payment thereof is set apart for payment on the Series A Preferred Shares
for four consecutive Dividend Periods. The term of such directors elected
thereby shall terminate, and the total number of directors shall be decreased
by two, upon the first annual meeting of stockholders after the payment or
the authorization or declaration and setting aside for payment of full
dividends on the Series A Preferred Shares for four consecutive Dividend
Periods. Any such director may be removed by, and shall not be removed except
by, the vote of the holders of record of the outstanding Series A Preferred
Shares and Parity Stock entitled to vote, voting together as a single class
without regard to series, at a meeting of the Company's stockholders, or of
the holders of Series A Preferred Shares and Parity Stock so entitled to vote
thereon, called for that purpose. As long as dividends on the Series A
Preferred Shares shall not have been paid for six (6) Dividend Periods, (i)
any vacancy in the office of any such director may be filled (except as
provided in the following clause (ii)) by an instrument in writing signed by
any such remaining director and filed with the Company, and (ii) in the case
of the removal of any such director, the vacancy may be filled by the vote of
the holders of the outstanding Series A Preferred Shares and Parity Stock
entitled to vote, voting together as a single class without regard to series,
at the same meeting at which such removal shall be voted.
So long as any shares of Series A Preferred Shares are outstanding, the
Company shall not, without the consent or vote of the holders of at least
two-thirds of the outstanding shares of Series A Preferred Shares, voting
separately as a class, (a) amend, alter or repeal or otherwise change any
provision of the Charter (including the terms of the Series A Preferred
Shares) if such amendment, alteration, repeal or change would materially and
adversely affect the rights, preferences, powers or privileges of the Series
A Preferred Shares, or (b) authorize, create or increase the authorized
amount of or issue any class or series of any equity securities of the
Company, or any warrants, options or other rights convertible or exchangeable
into any class or series of any equity securities of the Company, ranking
prior to the Series A Preferred Shares, either as to dividend rights or
rights on liquidation, dissolution or winding up of the Company or (c) merge,
consolidate, reorganize or effect any other business combination involving
the Company, unless the resulting corporation will thereafter have no class
or series of equity securities either authorized or outstanding ranking prior
to the Series A Preferred Shares as to dividends or as to the distribution of
assets upon liquidation, dissolution or winding up, except the same number of
shares of such equity securities with the same preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications or terms or conditions or redemption as
the shares of equity securities of the Company that are authorized and
outstanding immediately prior to such transaction, and each holder of Series
A Preferred Shares immediately prior to such transaction shall receive shares
with the same preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications or terms or conditions or redemption of the resulting
corporation as the Series A Preferred Shares held by such holder immediately
prior thereto.
The creation or issuance of Parity Stock or Junior Stock, or an amendment
that increases the number of authorized shares of Preferred Stock, or Series
A Preferred Shares or any Junior Stock or Parity Stock, shall not be deemed
to be a material and adverse change requiring a vote of the holders of Series
A Preferred Shares.
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to January 31,
2002 (except upon the occurrence of a Tax Event or a Change in Control). On
or after such date, the Series A Preferred Shares may be redeemable by the
Company or its successor or any acquiring or resulting entity with respect to
the Company (including by any parent or subsidiary of the Company, any such
successor, or any such
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acquiring or resulting entity), as applicable, at its option, in whole or in
part, at any time or from time to time, at the redemption prices set forth
below in cash, plus authorized, declared and unpaid dividends to the date of
redemption, without interest:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE REDEMPTION PRICE
12-MONTH PERIOD PER SHARE OF THE
BEGINNING JANUARY 31, SERIES A PREFERRED SHARES
- ---------------------- -------------------------
<S> <C>
2002 .................. $26.14
2003 .................. 25.91
2004 .................. 25.68
2005 .................. 25.46
2006 .................. 25.23
2007 and thereafter .. 25.00
</TABLE>
In the event that fewer than all the outstanding Series A Preferred Shares
are to be redeemed, the number of Series A Preferred Shares to be redeemed
shall be determined by the Board of Directors, and the shares to be redeemed
shall be determined by lot or pro rata as may be determined by the Board of
Directors or by any other method as may be determined by the Board of
Directors in its sole discretion to be equitable, provided that such method
satisfies any applicable requirements of any securities exchange on which the
Series A Preferred Shares are then listed.
The Company will also have the right at any time, upon the occurrence of a
Tax Event, to redeem the Series A Preferred Shares, in whole (but not in
part) at a redemption price of $25.00 per share, plus all accumulated and
unpaid dividends for the then current quarter to the date of redemption,
without interest. "Tax Event" means the receipt by the Company of an opinion
of a nationally recognized legal counsel to the Company experienced in such
matters to the effect that, as a result of (i) any amendment to,
clarification of, or change (including any announced prospective change) in,
the laws, treaties or any regulations thereunder of the United States or any
political subdivision or taxing authority thereof or therein affecting
taxation, (ii) any judicial decision, official administrative pronouncement,
published or private ruling, regulatory procedure, notice or announcement
(including any notice or announcement of intent to adopt such procedures or
regulations) or (iii) any amendment to, clarification of, or change in the
official position or the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position with respect to
such Administrative Action that differs from the theretofore generally
accepted position, in each case, by any legislative body, court, governmental
authority or regulatory body, irrespective of the manner in which such
amendment, clarification or change is made known, which amendment,
clarification, or change is effective or such pronouncement or decision is
announced on or after the date of issuance of the Series A Preferred Shares,
there is more than an insubstantial risk that (a) dividends paid or to be
paid by the Company with respect to the stock of the Company are not, or will
not be, fully deductible by the Company for United States federal income tax
purposes or (b) the Company is, or will be, subject to more than a de minimis
amount of other taxes, duties or other governmental charges.
Upon a Change of Control, the Series A Preferred Shares are redeemable on
or prior to January 31, 2002, at the option of the Company or its successor
or any acquiring or resulting entity with respect to the Company (including
by any parent or subsidiary of the Company, any such successor, or any such
acquiring or resulting entity), as applicable, in whole, but not in part, at
a redemption price per share equal to (i) $25.00, plus (ii) an amount equal
to all authorized, declared and unpaid dividends, if any, to the date fixed
for redemption, without interest, and without duplication, an additional
amount equal to the amount of dividends that would be payable on the Series A
Preferred Shares in respect of the period from the first day of the Dividend
Period in which the date fixed for redemption occurs to the date fixed for
redemption (assuming all such dividends were to be authorized and declared),
plus (iii) the Applicable Premium, payable in cash.
The Company or any such successor or any acquiring or resulting entity
will be entitled to issue a notice of redemption after the Company or a
parent company has entered into a definitive binding agreement with a third
party that will result in a Change of Control, provided that (i) the date
fixed for redemption is not earlier than the date on which the related Change
of Control occurs and (ii) the obligation to effect such redemption is
contingent upon the occurence of such Change of Control.
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"Applicable Premium" means the greater of (i) $1.14 and (ii) the excess of
(A) the present value of (1) an amount equal to the amount of dividends that
would be payable on the Preferred Shares in respect of the period from the
date fixed for redemption through January 31, 2002 (assuming all such
dividends were to be authorized and declared) plus (2) $26.14, computed using
a discount rate equal to the Treasury Rate plus 75 basis points, over (B)
$25.00.
"Change of Control" means the occurrence of any of the following events:
(i) any Person (as defined herein) other than a Permitted Holder (as
defined herein) shall be the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act), directly or indirectly, of a majority
in the aggregate of the total voting power of the voting stock of the
Bank, whether as a result of issuance of securities of the Bank, any
merger, consolidation, liquidation or dissolution of the Bank, any direct
or indirect transfer of securities by a Permitted Holder, or otherwise; or
(ii) a sale, transfer, conveyance or other disposition, in a single
transaction or in a series of related transactions (other than to an
affiliate of the Bank or any of its subsidiaries), in either case
occurring outside the ordinary course of business, of more than 75% of the
assets and 75% of the deposit liabilities of the Bank shown on the
consolidated balance sheet of the Bank as of the end of the most recent
fiscal quarter ending at least 45 days prior to such transaction (or the
first in such related series of transactions); or
(iii) a transaction or series of related transactions as a result of
which 20% or more of the voting stock or Common Stock (or capital stock
convertible or exchangeable into 20% of the voting stock or Common Stock)
of the Bank is held by one or more Persons other than Holdings or its
wholly owned subsidiaries.
"Permitted Holder" means Ronald O. Perelman (or in the event of his
incompetence or death, his estate, heirs, executor, administrator, committee
or other personal representative (collectively, "heirs")) or any entity
controlled, directly or indirectly, by Ronald O. Perelman or his heirs.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
date fixed for redemption (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the period of time to January 31, 2002; provided, however, that if
such period is not equal to the constant maturity of a United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall
be obtained by linear interpolation (calculated to the nearest one-twelfth of
a year) from the weekly average yields of United States Treasury securities
for which such yields are given, except that, if such remaining life is less
than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be
used.
If redemption is being effected by the Company, on and as of the date
fixed for redemption, dividends shall cease to accrue on the Series A
Preferred Shares called for redemption, and they shall be deemed to cease to
be outstanding, provided that the redemption price (including any authorized
and declared but unpaid dividends to the date fixed for redemption, without
interest) has been duly paid or provided for. If redemption is being effected
by an entity other than the Company, on and as of the redemption date such
entity shall be deemed to own the Series A Preferred Shares being redeemed
for all purposes of the Charter, provided that the redemption price
(including the amount of any authorized and declared but unpaid dividends to
the date fixed for redemption) has been duly paid or provided for.
Notice of any redemption will be mailed at least 30 days, but not more
than 60 days, prior to any redemption date to each holder of Series A
Preferred Shares to be redeemed at such holder's registered address.
The Company's ability to redeem any Series A Preferred Shares, whether as
a result of a Change of Control or otherwise, is subject to compliance with
applicable regulatory requirements, including the
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prior approval of the OTS, relating to the redemption of capital instruments.
Under current policies of the OTS, such approval would be granted only if the
redemption were to be made out of the proceeds of the issuance of another
capital instrument or if the OTS determines that the condition and
circumstances of Holdings and the Bank warrant the reduction of a source of
permanent capital.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, the holders of the Series A Preferred Shares at
the time outstanding will be entitled to receive in respect of each share,
out of assets of the Company legally available for distribution to its
stockholders under applicable law, before any distribution of assets is made
to holders of any Junior Stock and subject to the rights of the holders of
any class or series of equity securities having preference with respect to
distributions upon liquidation and the rights of the Company's general
creditors, liquidating distributions in the amount of $25.00 per share, plus
authorized, declared and unpaid dividends thereon, if any, without interest.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of Series A Preferred Shares will have no
right or claim to any of the remaining assets of the Company. In the event
that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of the Company are insufficient to pay the
amount of the liquidation distributions on all outstanding Series A Preferred
Shares and the corresponding amounts payable on any Parity Stock, then the
holders of the Series A Preferred Shares and any Parity Stock shall share
ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
For such purposes, the consolidation or merger of the Company with or into
any other entity, or the sale, lease or conveyance of all or substantially
all of the assets of the Company, shall not be deemed to constitute a
liquidation, dissolution or winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The Charter requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Company be approved by a majority of the
Independent Directors. Messrs. Frieder and Nichols are the Company's initial
Independent Directors. See "Management -- Independent Directors." So long as
there are only two Independent Directors, any action that requires the
approval of a majority of Independent Directors must be approved by both
Independent Directors. In order to be considered "independent," a director
must not be a current officer or employee of the Company or a current
director, officer or employee of the Bank or any other affiliate of the Bank.
In addition, any members of the Board of Directors of the Company elected by
holders of Preferred Stock, including the Series A Preferred Shares, will be
deemed to be Independent Directors for purposes of approving actions
requiring the approval of a majority of the Independent Directors. The
actions which require approval of a majority of the Independent Directors
include (i) the issuance of additional shares of Preferred Stock ranking on a
parity with the Series A Preferred Shares, (ii) the incurrence of debt for
borrowed money in excess of 20% of the Company's total stockholders' equity,
(iii) the acquisition of real estate assets other than Residential Mortgage
Loans or Mortgage-Backed Securities, (iv) the termination or modification of,
or the election not to renew, the Servicing Agreement or the subcontracting
of any duties under the Servicing Agreement to third parties unaffiliated
with the Bank, (v) any material amendment to or modification of any of the
Residential Mortgage Purchase Agreements, and (vi) the determination to
revoke the Company's REIT status. The Charter provides that, in determining
whether any proposed action requiring their consent is in the best interests
of the Company, the Independent Directors will consider the interests of
holders of both the Common Stock and the Preferred Stock, including, without
limitation, holders of the Series A Preferred Shares.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For information regarding restrictions on ownership and transfer of the
Series A Preferred Shares, see "Description of Capital Stock -- Restrictions
on Ownership and Transfer."
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DESCRIPTION OF CAPITAL STOCK
The following summary of the material terms of the stock of the Company
does not purport to be complete and is subject in all respects to the
applicable provisions of the MGCL and the Charter and Bylaws of the Company.
COMMON STOCK
General
The Company is authorized by its Charter to issue up to 30,000,000 shares
of Common Stock. Upon consummation of the Offering and the transactions
described in "Transactions Constituting the Formation," the Company will have
outstanding 1,000 shares of Common Stock, all of which will be held by the
Bank. In addition, the Bank currently intends that, so long as any Series A
Preferred Shares are outstanding, it will maintain direct or indirect
ownership of at least a majority of the outstanding shares of Common Stock of
the Company.
As the holder of at least a majority of the outstanding shares of Common
Stock of the Company, the Bank will be able, subject to the terms of the
Series A Preferred Shares and of any other class or series of stock
subsequently issued by the Company, to elect and remove directors, amend the
Charter and approve other actions requiring stockholder approval under the
MGCL or otherwise.
Dividends
Holders of Common Stock are entitled to receive dividends when, as and if
authorized and declared by the Board of Directors out of assets legally
available therefor, provided that, so long as any shares of Preferred Stock
are outstanding, no dividends or other distributions (including redemptions
and purchases) may be made with respect to the Common Stock unless full
dividends on the shares of all series of Preferred Stock, including
accumulations in the case of cumulative Preferred Stock, have been paid. In
order to remain qualified as a REIT, the Company must distribute annually at
least 95% of its annual REIT taxable income to stockholders. Several
limitations exist which may restrict the Company's ability to pay dividends
on the Common Stock. See "Business and Strategy--Dividend Policy."
Voting Rights
Subject to the rights, if any, of the holders of any class or series of
Preferred Stock, including the Series A Preferred Shares, all voting rights
are vested in the Common Stock. The holders of Common Stock are entitled to
one vote per share. All of the issued and outstanding shares of Common Stock
are currently held by the Bank.
As the holder of at least a majority of the outstanding shares of Common
Stock of the Company, the Bank will be able, subject to the terms of the
Series A Preferred Shares and of any other class or series of stock
subsequently issued by the Company, to elect and remove directors, amend the
Charter and approve other actions requiring stockholder approval under the
MGCL or otherwise.
Rights Upon Liquidation
In the event of the liquidation, dissolution or winding up of the Company,
whether voluntary or involuntary, after there have been paid or set aside for
the holders of all series of Preferred Stock the full preferential amounts to
which such holders are entitled, the holders of Common Stock will be entitled
to share equally and ratably in any assets remaining after the payment of all
debts and liabilities.
PREFERRED STOCK
The Company is authorized by its Charter to issue up to 30,000,000 shares
of Preferred Stock. Subject to limitations prescribed by the MGCL and the
Charter, the Board of Directors or, if then constituted, a duly authorized
committee thereof is authorized to issue, from the authorized but unissued
shares of stock of the Company, Preferred Stock in such classes or series as
the Board of Directors may
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determine and to establish, from time to time, the number of shares of
Preferred Stock to be included in any such class or series and to fix the
designation and any preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications and terms and conditions of redemption of the shares of any
such class or series, and such other subjects or matters as may be fixed by
resolution of the Board of Directors.
Shares of Preferred Stock, upon issuance against full payment of the
purchase price therefor, will be fully paid and nonassessable. The specific
terms of a particular class or series of Preferred Stock will be described in
the Articles Supplementary relating to that class or series.
Articles Supplementary relating to each class or series of Preferred Stock
will set forth the preferences and other terms of such class or series,
including without limitation the following: (1) the designation of such class
or series; (2) the number of shares of such class or series offered and the
liquidation preference per share of such class or series; (3) the dividend
rate(s), period(s), and/or payment date(s) or method(s) of calculation
thereof for to such class or series; (4) whether dividends on such class or
series of Preferred Stock are cumulative or not and, if cumulative, the date
from which dividends on such class or series shall accumulate; (5) the
provision for a sinking fund, if any, for such class or series; (6) the terms
and conditions of redemption, if applicable, of such class or series; (7) any
limitations on direct or beneficial ownership and restrictions on transfer,
in each case as may be appropriate to preserve the status of the Company as a
REIT or as otherwise deemed appropriate by the Board of Directors; (8) the
relative ranking and preferences of such class or series as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs
of the Company; (9) any limitations on issuance of any class or series of
Preferred Stock ranking senior to or on a parity with such class or series of
Preferred Stock as to dividend rights and rights upon liquidation,
dissolution or winding up of the affairs of the Company; (10) any other
specific terms, preferences, rights, limitations or restrictions of such
class or series; and (11) any voting rights of such class or series.
As of the date hereof, no shares of Preferred Stock are outstanding and
the Company has no present plans to issue any Preferred Stock other than the
Series A Preferred Shares.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock
and to classify or reclassify unissued shares of Common or Preferred Stock
and thereafter to cause the Company to issue such classified or reclassified
shares of stock will provide the Company with increased flexibility in
structuring possible future financings and acquisitions and in meeting other
needs which might arise. The additional shares of stock will be available for
issuance without further action by the Company's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed or
traded.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Five or Fewer Test
In order for the Company to qualify, and to continue to qualify, as a REIT
under the Code, not more than 50% of the value of its outstanding shares of
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year. The Five or Fewer Test is applied using certain
constructive ownership rules. Immediately after the Offering, certain
significant shareholders of Holdings (i.e., Ronald O. Perelman and Gerald J.
Ford) will, through their constructive ownership of a beneficial interest in
the Bank, constitute two individuals for purposes of this test and, under the
IRS's rules for determining percentages of ownership, will be deemed to own
constructively approximately 39% of the value of the outstanding shares of
stock in the Company. Presently, there are no restrictions which prevent
either (i) any Significant Shareholder from increasing or decreasing its
percentage ownership of the Company, (ii) any Significant Shareholder from
increasing or decreasing its
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percentage ownership of the Bank (and thus its percentage ownership in the
Company) or (iii) any other person from becoming a significant constructive
shareholder of the Company by acquiring an equity interest in the Bank.
Moreover, any increase or decrease in the value of the Common Stock as
compared to the value of the Preferred Stock will increase or decrease the
percentage of ownership held by the Significant Shareholders.
Because the Company believes that it is essential to qualify, and to
continue to qualify, as a REIT, the Charter, subject to certain exceptions,
provides that no individual or entity other than a Significant Shareholder
may own, or be deemed to own by virtue of the attribution rules of the Code,
stock of the Company in amounts in excess of the Ownership Limit. However,
certain entities whose interests are widely held (generally, an entity in
which no Person actually or constructively owns more than 9.9% of the value)
will be permitted to own up to the lesser of 20% of the number of the issued
and outstanding shares of preferred stock, including the Series A Preferred
Shares, or 10% of the value of all of the classes of issued and outstanding
shares of stock of the Company, if they satisfy certain notification
requirements. The Board of Directors may (but will not be required to), upon
the receipt of a ruling from the IRS or the advice of counsel satisfactory to
it, waive the Ownership Limit with respect to a holder if such holder's
ownership will not then or in the future jeopardize the Company's status as a
REIT.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by one individual or entity to
be deemed to be owned by other related individuals or entities. Similarly,
under the constructive ownership rules, an individual or entity that owns
stock of the Bank will be deemed to own a proportionate share of the Common
Stock of the Company owned by the Bank. As a result, the acquisition by an
individual or entity of stock of the Company in amounts below the Ownership
Limit (or the acquisition of an entity that owns such shares) may cause that
individual or entity (or another individual or entity) to violate the
Ownership Limit. In addition, other events, such as changes in relative
values of the Common and Preferred Stock, could cause an individual or entity
to violate the Ownership Limit.
The Charter provides that any Excess Shares will automatically be
transferred, by operation of law, to a trustee as a trustee of a trust for
the exclusive benefit of a charitable beneficiary to be named by the Company
as of the day prior to the day the prohibited transfer took place. Any
distributions paid prior to the discovery of the prohibited transfer are to
be repaid by the original transferee to the Company and by the Company to the
trustee; subject to applicable law, any vote of the holder of the shares
while the shares were held by the original transferee prior to the Company's
discovery thereof shall be void ab initio and the original transferee shall
be deemed to have given its proxy to the trustee. Any unpaid distributions
with respect to the original transferee will be rescinded as void ab initio.
In liquidation, the original transferee stockholder's ratable share of the
Company's assets would be limited to the price paid by the original
transferee for the Excess Shares or, if no value was given, the price per
share equal to the closing market price on the date of the purported
transfer. The trustee of the trust shall promptly sell the shares to any
person whose ownership is not prohibited, whereupon the interest of the trust
shall terminate. Proceeds of the sale shall be paid to the original
transferee up to its purchase price (or, if the original transferee did not
purchase the shares, the value on its date of acquisition) and any remaining
proceeds shall be paid to a charity to be named by the Company.
All certificates representing shares of Preferred Stock will bear a legend
referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even if
the REIT Provisions (as defined herein) are changed so as to eliminate any
ownership concentration limitation or if the ownership concentration
limitation is increased. The foregoing restrictions on transferability and
ownership will not apply, however, if the Company determines that it is no
longer in the best interests of the Company to attempt to qualify, or
continue to qualify, as a REIT.
One Hundred Persons Test
In addition, the REIT provisions of the Code require that the stock of the
Company must be beneficially owned by 100 or more persons during at least 335
days of a taxable year or during a proportionate part of a shorter taxable
year (the "One Hundred Persons Test"). The Charter contains
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restrictions in order to ensure compliance with the One Hundred Persons Test.
Specifically, such provisions require that if any transfer of shares of stock
of the Company would cause the Company to be beneficially owned by fewer than
100 persons, such transfer shall be null and void and the intended transferee
will acquire no rights to the stock.
The Charter requires that any person who beneficially owns 1.0% (or such
lower percentage as may be required by the Code or the Treasury Regulations)
of the outstanding shares of any class or series of Preferred Stock of the
Company must provide certain information to the Company within 30 days of
June 30 and December 31 of each year. In addition, each stockholder shall
upon demand be required to disclose to the Company in writing such
information as the Company may request in order to determine the effect, if
any, of such stockholder's actual and constructive ownership on the Company's
status as a REIT and to ensure compliance with the Five or Fewer and One
Hundred Persons Tests.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation
who, at any time within the two-year period prior to the date in question,
was the beneficial owner of ten percent or more of the voting power of the
then-outstanding voting stock of the corporation (an "Interested
Stockholder") or an affiliate of such an Interested Stockholder are
prohibited for five years after the most recent date on which the Interested
Stockholder becomes an Interested Stockholder. Thereafter, any such business
combination must be recommended by the board of directors of such corporation
and approved by the affirmative vote of at least (a) 80% of the votes
entitled to be cast by holders of outstanding shares of voting stock of the
corporation and (b) two-thirds of the votes entitled to be cast by holders of
voting stock of the corporation other than shares held by the Interested
Stockholder with whom (or with whose affiliate) the business combination is
to be effected, unless, among other conditions, the corporation's common
stockholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the Interested Stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that
are approved or exempted by the board of directors of the corporation prior
to the time that the Interested Stockholder becomes an Interested
Stockholder. The Bank beneficially owns more than ten percent of the
Company's voting shares and would, therefore, together with its affiliates
(including Holdings) be subject to the business combination provision of the
MGCL. However, pursuant to the statute, the Company has exempted any business
combinations involving the Bank and any present or future affiliate thereof
and, consequently, the five-year prohibition and the super-majority vote
requirements will not apply to business combinations between any of them and
the Company. As a result, the Bank and any present or future affiliate
thereof may be able to enter into business combinations with the Company that
may not be in the best interest of its stockholders without compliance by the
Company with the super-majority vote requirements and the other provisions of
the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority, or (iii) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
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A person who has made or proposes to make a control share acquisition,
upon satisfaction of certain conditions (including an undertaking to pay
expenses), may compel the board of directors of the corporation to call a
special meeting of stockholders to be held within 50 days of demand to
consider the voting rights of the shares. If no request for a meeting is
made, the corporation may itself present the question at any stockholders
meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then, subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without
regard to the absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition.
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the corporation is a
party to the transaction or (b) to acquisitions approved or exempted by the
charter or bylaws of the corporation.
The Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any Person of the Company's
shares of stock. There can be no assurance that such provision will not be
amended or eliminated at any time in the future.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The information set forth below, to the extent
that it constitutes summaries of legal matters or legal conclusions, has been
reviewed by Skadden, Arps, Slate, Meagher & Flom LLP, and it is their opinion
that such information insofar as it relates to matters of law or legal
conclusions is accurate in all material respects. The discussion below is
based on existing federal income tax law, which is subject to change, with
possible retroactive effect. The discussion below does not address all
aspects of taxation that may be relevant in the particular circumstances of
each stockholder or to certain types of stockholders (including insurance
companies, tax-exempt entities, financial institutions or broker-dealers,
foreign corporations and persons who are not citizens or residents of the
United States, except to the extent discussed) subject to special treatment
under the federal income tax laws.
EACH PROSPECTIVE PURCHASER IS ENCOURAGED TO CONSULT HIS TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP, AND SALE
OF THE SHARES AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REIT, INCLUDING
THE FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX CONSEQUENCES OF SUCH
PURCHASE, OWNERSHIP, SALE, AND ELECTION AND OF POTENTIAL CHANGES IN
APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General
The Company believes that, commencing with its taxable year ending
December 31, 1997, it will be owned and organized and will operate in such a
manner as to qualify for taxation as a REIT under the Code, and the Company
intends to continue to operate in such a manner, but no assurance can be
given that it will operate in a manner so as to qualify or remain qualified.
The Company will elect to be taxed as a REIT under Sections 856 through 860
of the Code and the applicable Treasury Regulations (the "REIT Provisions"),
which are the requirements for qualifying as a REIT, commencing with its
taxable year ending December 31, 1997. The REIT Provisions are technical and
complex. The following discussion sets forth only the material aspects of
those requirements. This summary is qualified in its entirety by the
applicable Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof.
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, the Company
will be organized in conformity with the requirements for qualification as a
REIT, and its proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT under the Code,
commencing with the Company's taxable year ending December 31, 1997. Such
opinion is based on certain factual assumptions relating to the organization
and operation of the Company and is conditioned upon certain representations
made by the Company as to factual matters, such as the organization and
expected manner of operation of the Company. In addition, this opinion is
based upon the factual representations of the Company concerning its business
and Mortgage Assets set forth in this Prospectus. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to
meet, through actual annual operating results, distribution levels and
diversity of stock ownership, the various qualification tests imposed under
the Code discussed below, the results of which will not be reviewed by
Skadden, Arps, Slate, Meagher & Flom LLP on a continuing basis. No assurance
can be given that the actual results of the Company's operation for any one
taxable year will satisfy such requirements. See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on that portion of its ordinary
income or capital gain that is currently distributed to stockholders. Such
treatment substantially eliminates the federal "double taxation" on earnings
(tax at both the corporate and the stockholder levels) that generally results
from investment in a corporation.
Despite the REIT election, the Company may be subject to federal income
and excise tax as follows: (i) the Company will be taxed at regular corporate
rates on any undistributed REIT taxable income,
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including undistributed net capital gains, (ii) under certain circumstances,
the Company may be subject to the "alternative minimum tax" on certain of its
items of tax preferences, if any, (iii) if the Company has (a) net income
from the sale or other disposition of "foreclosure property" that is held
primarily for sale to customers in the ordinary course of business or (b)
other nonqualifying net income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income, (iv) if the Company has
net income from prohibited transactions (which are, in general, certain sales
or other dispositions of property held primarily for sale to customers in the
ordinary course of business, other than sales of foreclosure property and
sales that qualify for a statutory safe harbor), such income will be subject
to a 100% tax, (v) if the Company should fail to satisfy the 75% gross income
test or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other requirements
have been met, it will be subject to a 100% tax on the income attributable to
the greater of the amount by which the Company fails the 75% or 95% test,
multiplied by a fraction intended to reflect the Company's profitability, and
(vi) if the Company should fail to distribute, or fail to be treated as
having distributed, with respect to each calendar year at least the sum of
(a) 85% of its REIT ordinary income for such year, (b) 95% of its REIT
capital gain net income for such year, and (c) any undistributed taxable
income from prior periods, the Company would be subject to a 4% excise tax on
the excess of such required distribution over the amounts actually
distributed. The Company does not now intend to acquire any appreciated
assets from a corporation generally subject to full corporate-level tax in a
transaction in which any gain on the transfer is not fully recognized.
However, in the event of such an acquisition, the Company could, under
certain circumstances, be subject to tax upon disposition of such assets.
Organizational Requirements
The Code defines a REIT as a corporation, trust, or association (i) that
is managed by one or more trustees or directors; (ii) the beneficial
ownership of which is evidenced by transferable shares, or by transferable
certificates of beneficial interest; (iii) that would be taxable as a
domestic corporation, but for the REIT Provisions; (iv) that is neither a
financial institution nor an insurance company subject to certain provisions
of the Code; (v) the beneficial ownership of which is held by 100 or more
persons; (vi) not more than 50% in value of the outstanding stock of which is
owned, directly or indirectly, by five or fewer individuals (as defined in
the Code to include certain entities) at any time during the last half of
each taxable year; and (vii) meets certain other tests, described below,
regarding the nature of its income and assets. The Code provides that
conditions (i) through (iv), inclusive, must be met during the entire taxable
year and that condition (v) must be met during at least 335 days of a taxable
year of 12 months, or during a proportionate part of a taxable year of less
than 12 months. Conditions (v) and (vi) will not apply until after the first
taxable year for which an election is made to be taxed as a REIT. For
purposes of condition (vi), certain tax-exempt entities are generally treated
as individuals, and the beneficiaries of a pension trust that qualifies under
Section 401(a) of the Code and that holds shares of a REIT will be treated as
holding shares of the REIT in proportion to their actuarial interests in the
pension trust. See "--Taxation of United States Stockholders -- Treatment of
Tax-Exempt Stockholders."
In the opinion of Skadden, Arps, Slate, Meagher & Flom LLP, preferred
stock is taken into account for purposes of determining whether a REIT
satisfies conditions (v) and (vi) above. The Company believes that it will
issue sufficient shares pursuant to the Offering to allow it to satisfy
conditions (v) and (vi) above. In addition, the Charter includes certain
restrictions regarding transfer of its shares, which restrictions are
intended to assist the Company in continuing to satisfy the share ownership
requirements described in (v) and (vi) above. Such transfer and ownership
restrictions are described under "Description of Capital Stock --
Restrictions on Ownership and Transfer." Also, while certain options to
acquire stock would be taken into account for the purpose of determining
whether conditions (v) and (vi) are satisfied, in the opinion of Skadden,
Arps, Slate, Meagher & Flom LLP, because the nature of the Automatic Exchange
is contingent and does not grant an option privilege to the holders of the
Series A Preferred Shares or the Bank, the Automatic Exchange does not
constitute an option to acquire the Series A Preferred Shares for this
purpose and the possibility that the Automatic Exchange might occur
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will not affect the status of the Company as a REIT prior to an actual
occurrence of the Automatic Exchange. Skadden, Arps, Slate, Meagher & Flom
LLP is also of the opinion that the Company will not be treated as a bank for
federal income tax purposes by reason of the activities of any stockholder.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company satisfies this requirement.
Income Tests
The Company must annually satisfy three gross income requirements. First,
at least 75% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived directly or
indirectly from investments relating to real property or mortgages on real
property (including interest on obligations secured by mortgages on real
property, certain "rents from real property" or gain on the sale or exchange
of such property and certain fees with respect to agreements to make or
acquire mortgage loans), from certain types of temporary investments or
certain other types of gross income. Second, at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments as aforesaid
and from dividends, interest, and gain from the sale or other disposition of
stock or securities and certain other types of gross income (or from any
combination of the foregoing). Third, short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions, and
gain on the sale or other disposition of real property (apart from
involuntary conversions and sales of foreclosure property) held for less than
four years from the date of acquisition must represent less than 30% of the
Company's gross income (including gross income from prohibited transactions)
for each taxable year.
For interest to qualify as "interest on obligations secured by mortgages
on real property or on interests in real property," the obligation must be
secured by real property having a fair market value at the time of
acquisition at least equal to the principal amount of the loan. The term
"interest" includes only an amount that constitutes compensation for the use
or forbearance of money. For example, a fee received or accrued by a lender
which is in fact a charge for services performed for a borrower rather than a
charge for the use of borrowed money is not includible as interest; amounts
earned as consideration for entering into agreements to make loans secured by
real property, although not interest, are otherwise treated as within the 75%
and 95% classes of gross income so long as the determination of those amounts
does not depend on the income or profits of any person. By statute, the term
interest does not include any amount based on income or profits except that
the Code provides that (i) interest "based on a fixed percentage or
percentages of receipts or sales" is not excluded and (ii) when the REIT
makes a loan that provides for interest based on the borrower's receipts or
sales and the borrower leases under one or more leases based on income or
profits, only a portion of the contingent interest paid by the borrower will
be disqualified as interest.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the
event that a REIT acquires by foreclosure property that generates income that
does not qualify as "rents from real property," such income will be treated
as qualifying for two years following foreclosure (which period may be
extended by the IRS so long as (i) all leases entered into after foreclosure
generate only qualifying rent, (ii) only limited construction takes place and
(iii) within 90 days of foreclosure, any trade or business in which the
property is used is conducted by an independent contractor from which the
REIT derives no income). In the event the special foreclosure property rule
applies to qualify otherwise unqualified income, the net income that
qualifies only under the special rule for foreclosure property will be
subject to tax, as described above.
The Company expects to satisfy these requirements.
Relief Provisions
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such
year if it is entitled to relief under certain provisions
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of the Code. These relief provisions will be generally available if the
Company's failure to meet such tests was due to reasonable cause and not due
to willful neglect, the Company attaches a schedule of the sources of its
income to its return, and any incorrect information on the schedule was not
due to fraud with intent to evade tax. It is not possible, however, to state
whether in all circumstances the Company would be entitled to the benefit of
these relief provisions. As discussed above in "--Taxation of the Company --
General," even if these relief provisions apply, the Company will, however,
still be subject to a special tax based upon the greater of the amount by
which it fails either the 75% or 95% gross income test for that year.
Asset Tests
At the close of each quarter of its taxable year, the Company must satisfy
two tests relating to the nature of its assets. First, at least 75% of the
value of the Company's total assets must be represented by real estate assets
(including stock or debt instruments held for not more than one year that
were purchased with the proceeds of a stock offering or long-term (at least
five years) debt offering of the Company), cash, cash items, and government
securities. Second, although not more than 25% of the Company's total assets
may be represented by securities other than those in the 75% asset class, (i)
the value of any one issuer's securities owned by the Company may not exceed
5% of the value of the Company's total assets and (ii) the Company may not
own more than 10% of any one issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the
value of its assets to ensure compliance with the asset tests, and to take
such action within 30 days after the close of any quarter as may be required
to cure any noncompliance but no assurance can be given that such asset tests
will be met.
Annual Distribution Requirements
In order to qualify as a REIT, the Company is required to distribute
dividends (other than capital gain dividends) to its stockholders in an
amount at least equal to (A) the sum of (i) 95% of the Company's "REIT
taxable income" (which is defined generally as the taxable income of the
Company computed without regard to the dividends paid deduction and the
Company's net capital gain) plus (ii) 95% of the net income (after tax), if
any, from foreclosure property, minus (B) the sum of certain items of noncash
income. Such distributions must be paid in the taxable year to which they
relate or in the following taxable year if declared before the Company timely
files its tax return for such year and if paid on or before the first regular
dividend payment after such declaration. To the extent that the Company does
not distribute (or is not treated as having distributed) all of its net
capital gain or distributes (or is treated as having distributed) at least
95%, but less than 100% of its REIT taxable income, as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains corporate tax
rates, as the case may be. The Code permits a stockholder to elect to be
treated for tax purposes as having (i) received a distribution in the amount
specified in the election and (ii) contributed the amount thereof to the
capital of the Company. In the event the Company fails to distribute 100% of
its income and capital gains, the Bank may elect to be so treated.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the
amounts actually distributed. The Company intends to make timely
distributions sufficient to satisfy the annual distribution requirement.
It is possible that, from time to time, the Company may not have
sufficient cash or other liquid assets to meet the 95% distribution
requirement due to timing differences between (i) the actual receipt of
income and actual payment of deductible expenses and (ii) the inclusion of
such income and deduction
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of such expenses in calculating the taxable income of the Company. In the
event that such an insufficiency or such timing differences occur, in order
to meet the 95% distribution requirement the Company may find it necessary to
arrange for borrowings or to pay dividends in the form of taxable stock
dividends if it is practicable to do so.
Under certain circumstances, the Company may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the
Company may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions described above do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. To the extent the Company
fails to qualify as a REIT, the Bank has agreed to indemnify the Company for
such income tax liability. Distributions to stockholders in any year in which
the Company fails to qualify will not be deductible by the Company nor will
they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, all distributions to stockholders will be
taxable as ordinary income, and subject to certain limitations of the Code,
corporate distributees may be eligible for the dividends-received deduction.
Unless entitled to relief under specific statutory provisions, the Company
will also be disqualified from taxation as a REIT for the four taxable years
following the year during which qualification was lost.
TAX TREATMENT OF AUTOMATIC EXCHANGE
Upon the occurrence of the Exchange Event, the outstanding Series A
Preferred Shares will be automatically exchanged on a one-for-one basis for
Bank Preferred Stock. See "Description of Series A Preferred Shares --
Automatic Exchange." The Automatic Exchange will be a taxable exchange with
respect to which each holder of the Series A Preferred Shares will have a
gain or loss, as the case may be, measured by the difference between the
basis of such holder in the Series A Preferred Shares and the fair market
value of the Bank Preferred Stock received in the Automatic Exchange.
Assuming that such holder's Series A Preferred Shares were held as capital
assets for more than one year prior to the Automatic Exchange, any gain or
loss will be long-term capital gain or loss. Long-term capital losses are
deductible, subject to certain limitations. The basis of the holder in the
Bank Preferred Stock will be their fair market value at the time of the
Automatic Exchange.
TAXATION OF UNITED STATES STOCKHOLDERS
Distributions Generally. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder out of the Company's current or
accumulated earnings and profits (and not designated as capital gains
dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gains dividends will be treated
as long-term capital gain (to the extent they do not exceed the Company's
actual net capital gain) for the taxable year without regard to the period
for which the stockholder has held its stock. However, corporate stockholders
may be required to treat up to 20% of certain capital gains dividends as
ordinary income, pursuant to Section 291(d) of the Code. A distribution in
excess of current or accumulated earnings and profits will first be treated
as a tax-free return of capital, reducing the tax basis in the United States
Stockholder's Series A Preferred Shares, and a distribution in excess of the
United States Stockholder's tax basis in its Series A Preferred Shares will
be treated as taxable gain realized from the sale of such shares. Dividends
declared by the Company in October, November or December of any year payable
to a stockholder of record on a specified date in any such month shall be
treated as both paid by the Company and received by the stockholder on
December 31 of such year, provided that the dividend is actually paid by the
Company during January of the following calendar year. Stockholders may not
claim the benefit of any tax losses of the Company on their own income tax
returns.
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The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required
to be distributed in order to avoid imposition of the 4% excise tax discussed
under "--Taxation of the Company -- General" and "--Taxation of the Company
- -- Annual Distribution Requirements" above. As a result, stockholders may be
required to treat as taxable dividends certain distributions that would
otherwise result in a tax-free return of capital. Moreover, any "deficiency
dividend" will be treated as a "dividend" (an ordinary dividend or a capital
gain dividend, as the case may be), regardless of the Company's earnings and
profits.
Losses incurred on the sale or exchange of Series A Preferred Shares held
for less than six months will be deemed a long-term capital loss to the
extent of any capital gain dividends received by the selling stockholder with
respect to such stock.
Treatment of Tax-Exempt Stockholders. Distributions from the Company to a
tax-exempt employee's pension trust or other domestic tax-exempt stockholder
will not constitute "unrelated business taxable income" unless the
stockholder has borrowed to acquire or carry its shares of the Company or the
shares are used in an unrelated trade or business of the shareholder. A
tax-exempt employee's pension trust that holds more than 10% of the shares of
a "pension-held" REIT might be required to treat a certain portion of the
dividends paid as unrelated business taxable income. The Company does not
expect to be treated as a pension-held REIT for these purposes.
TAXATION OF FOREIGN STOCKHOLDERS
The following is a discussion of certain anticipated U.S. federal income
and estate tax consequences of the ownership and disposition of the Company's
stock applicable to Non-U.S. Holders of such stock. A "Non-United States
Holder" is any person other than (i) a citizen or resident of the United
States, (ii) a corporation or partnership created or organized in the United
States or under the laws of the United States or of any state thereof, or
(iii) an estate or trust whose income is includible in gross income for U.S.
federal income tax purposes regardless of its source. The discussion is based
on current law and is for general information only. The discussion addresses
only certain and not all aspects of U.S. federal income and estate taxation.
Ordinary Dividends. The portion of dividends received by Non-United States
Holders payable out of the Company's earnings and profits (which are not
attributable to capital gains of the Company and which are not effectively
connected with a U.S. trade or business of the Non-United States Holder) will
be subject to U.S. withholding tax at the rate of 30% (unless reduced by
treaty). In general, Non-United States Holders will not be considered engaged
in a U.S. trade or business solely as a result of their ownership of stock of
the Company. In cases where the dividend income from a Non-United States
Holder's investment in stock of the Company is (or is treated as) effectively
connected with the Non-United States Holder's conduct of a U.S. trade or
business, the Non-United States Holder generally will be subject to U.S. tax
at graduated rates, in the same manner as a United States Stockholder with
respect to such dividends (and may also be subject to the 30% branch profits
tax in the case of a Non-United States Holder that is a foreign corporation).
Non-Dividend Distributions. Distributions by the Company which are not
dividends out of the earnings and profits of the Company will not be subject
to U.S. income or withholding tax. If it cannot be determined at the time a
distribution is made whether or not such distribution will be in excess of
current and accumulated earnings and profits, the distribution will be
subject to withholding at the rate applicable to dividends. However, the
Non-United States Holder may seek a refund of such amounts from the IRS if it
is subsequently determined that such distribution was, in fact, in excess of
current and accumulated earnings and profits of the Company.
Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-United
States Holder, to the extent attributable to gains from dispositions of
United States Real Property Interests ("USRPIs") will be considered
effectively connected with a U.S. trade or business of the Non-U.S. Holder
and subject to U.S. income tax at the rate applicable to U.S. individuals or
corporations, without regard to whether such distribution is designated as a
capital gain dividend. Shares of a corporation are treated as a USRPI only if
the fair
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market value of the USRPIs owned by the corporation equals or exceeds 50% of
the fair market value of its total assets. If at no time during the five
years preceding the sale of exchange of shares in the Company the shares of
constituted a USRPI, gain or loss on the sale or exchange will not be treated
as effectively connected with a U.S. trade or business by reason of FIRPTA.
While ownership of real property in the U.S. is always a USRPI, a loan
secured by a mortgage on U.S. real property does not constitute a USRPI
unless the amounts payable by the borrower are contingent on the income or
receipts of the borrower or the property or otherwise based on the property.
Because such contingent interest is not likely to be present in Mortgage
Loans to be owned by the Company that are expected to represent approximately
90% of the assets of the Company (although such interest is fairly common in
commercial loans), the Company believes that it is unlikely that its shares
will be USRPIs or that it will derive significant gain from USRPIs, although
whether its shares are USRPIs or it derives income from USRPIs will depend on
the facts as they ultimately develop. If the shares do constitute USRPIs, the
Company will be required to withhold tax equal to 35% of the amount of
dividends to the extent such dividends constitute USRPI Capital Gains.
Distributions subject to FIRPTA may also be subject to a 30% branch profits
tax in the hands of a foreign corporate stockholder that is not entitled to
treaty exemption.
Disposition of Stock of the Company. Unless the Company's stock
constitutes a USRPI, a sale of such stock by a Non-U.S. Holder generally will
not be subject to U.S. taxation under FIRPTA. The stock will not constitute a
USRPI if the Company is a "domestically controlled REIT." A domestically
controlled REIT is a REIT in which, at all times during a specified testing
period, less than 50% in value of its shares is held directly or indirectly
by Non-United States Holders. The Company believes that it is, and it expects
to continue to be a domestically controlled REIT, and therefore that the sale
of the Company's stock will not be subject to taxation under FIRPTA. Because
the Company's stock will be publicly traded, however, no assurance can be
given the Company will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a
Non-United States Holder's sale of stock generally will still not be subject
to tax under FIRPTA as a sale of a USRPI provided that (i) the stock is
"regularly traded" (as defined by applicable Treasury regulations) on an
established securities market (e.g., the NYSE, on which the Company's Series
A Preferred Stock will be listed) and (ii) the selling Non-United States
Holder held 5% or less of the Company's outstanding stock at all times during
a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-United States Holder would be subject to the same treatment
as a United States Stockholder with respect to such gain (subject to
applicable alternative minimum tax and a special alternative minimum tax in
the case of nonresident alien individuals) and the purchaser of the stock
could be required to withhold 10% of the purchase price and remit such amount
to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-United States Holder in two cases: (i) if the
Non-United States Holder's investment in the stock of the Company is
effectively connected with a U.S. trade or business conducted by such
Non-United States Holder, the Non-United States Holder will be subject to the
same treatment as a United States Stockholder with respect to such gain, or
(ii) if the Non-United States Holder is a nonresident alien individual who
was present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States, the nonresident alien individual
will be subject to a 30% tax on the individual's capital gain.
Estate Tax. Shares of the Company owned or treated as owned by a
nonresident alien decedent are includible in such individual's gross estate
for United States federal estate tax purposes, unless an applicable estate
tax treaty provides otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the Internal Revenue
Service (the "IRS") the amount of dividends paid or deemed paid during each
calendar year, and the amount of tax withheld, if any.
United States Stockholders. Under certain circumstances, a United States
Stockholder of Series A Preferred Shares may be subject to backup withholding
at a rate of 31% on payments made with
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respect to, or cash proceeds of a sale or exchange of, Series A Preferred
Shares. Backup withholding will apply only if the holder (i) fails to furnish
the person required to withhold with its Taxpayer Identification Number
("TIN") which, for an individual, would be his or her Social Security Number,
(ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it has
failed properly to report payments of interest and dividends, or (iv) under
certain circumstances, fails to certify, under penalty of perjury, that it
has furnished a correct TIN and has not been notified by the IRS that it is
subject to backup withholding for failure to report interest and dividend
payments. Backup withholding will not apply with respect to payments made to
certain exempt recipients, such as corporations and tax-exempt organizations.
A United States Stockholder should consult with a tax advisor regarding
qualification for exemption from backup withholding and the procedure for
obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
United States Stockholder will be allowed as a credit against such United
States Stockholder's United States federal income tax liability and may
entitle such United States Stockholder to a refund, provided that the
required information is furnished to the IRS.
Foreign Stockholders. Additional issues may arise pertaining to
information reporting and backup withholding with respect to Non-U.S.
Holders, and a Non-U.S. Holder should consult with a tax advisor with respect
to any such information reporting and backup withholding requirements. Backup
withholding with respect to a Non-U.S. Holder is not an additional tax.
Rather, the amount of any backup withholding with respect to a payment to a
Non-U.S. Holder will be allowed as a credit against any United States federal
income tax liability of such Non-U.S. Holder. If withholding results in an
overpayment of taxes, a refund may be obtained provided that the required
information is furnished to the IRS.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation
in various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
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ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), a collective investment fund or separate account in which
such plans invest and any other investor using assets that are treated as the
assets of an employee benefit plan subject to ERISA (each, a "Plan" and
collectively, "Plans") should consider (a) whether the ownership of Series A
Preferred Shares is in accordance with the documents and instruments
governing such Plan; (b) whether the ownership of Series A Preferred Shares
is solely in the interest of Plan participants and beneficiaries and
otherwise consistent with the fiduciary's responsibilities and in compliance
with the requirements of Part 4 of Title I of ERISA, including, in
particular, the diversification, prudence and liquidity requirements of
Section 404 of ERISA and the prohibited transaction provisions of Section 406
of ERISA and Section 4975 of the Code; (c) whether the Company's assets are
treated as assets of the Plan; and (d) the need to value the assets of the
Plan annually. In addition, the fiduciary of an individual retirement
arrangement under Section 408 of the Code (an "IRA") considering the purchase
of Series A Preferred Shares should consider whether the ownership of Series
A Preferred Shares would result in a non-exempt prohibited transaction under
Section 4975 of the Code.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all of the fiduciary investment
considerations relevant to Plans and, where indicated, IRAs. This summary is
based on the current provisions of ERISA and the Code and regulations and
rulings thereunder, and may be changed (perhaps adversely and with
retroactive effect) by future legislative, administrative or judicial
actions. PLANS AND IRAS THAT ARE PROSPECTIVE PURCHASERS OF SERIES A PREFERRED
SHARES SHOULD CONSULT WITH AND RELY UPON THEIR OWN ADVISORS IN EVALUATING
THESE MATTERS IN LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulations governing what constitutes the
assets of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of the Code (the "Plan Asset Regulation",
29 C.F.R. Sec.2510.3-101), when a Plan or IRA makes an equity investment in
another entity, the underlying assets of the entity will not be considered
Plan Assets if the equity interest is a "publicly-offered security."
For purposes of the Plan Asset Regulation, a "publicly-offered security"
is a security that is (a) "freely transferable," (b) part of a class of
securities that is "widely held," and (c) sold to the Plan or IRA as part of
an offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may
be allowed by the Commission) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred. The
Series A Preferred Shares will be registered under the Securities Act and the
Exchange Act within the time periods specified in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held" only
if it is a part of the class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not
fail to be "widely held" because the number of independent investors falls
below 100 subsequent to the initial offering as a result of events beyond the
control of the issuer. The Company expects the Series A Preferred Shares to
be "widely held" upon the completion of the Offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment
is $10,000 or less, as is the case with the Offering, certain restrictions
ordinarily will not, alone or in
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<PAGE>
combination, affect the finding that such securities are "freely
transferable." The Company believes that any restrictions imposed on the
transfer of the Series A Preferred Shares are limited to the restrictions on
transfer generally permitted under the Plan Asset Regulation and are not
likely to result in the failure of the Series A Preferred Shares to be
"freely transferable".
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan.
However, the Company believes that under the Plan Asset Regulation the Series
A Preferred Shares should be treated as "publicly-offered securities" and,
accordingly, the underlying assets of the Company should not be considered to
be assets of any Plan or IRA investing in the Series A Preferred Shares.
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held in trust and
that the trustee, or an investment manager (within the meaning of Section
3(38) of ERISA), have exclusive authority and discretion to manage and
control the assets of the Plan. As discussed above, the assets of the Company
under current law do not appear likely to be assets of the Plans receiving
Series A Preferred Shares as a result of the Offering. However, if the assets
of the Company were deemed to be assets of the Plans under ERISA, certain
directors and officers of the Company might be deemed fiduciaries with
respect to the Plans that invest in the Company and the prudence and other
fiduciary standards set forth in ERISA would apply to them and to all
investments of the Company.
If the assets of the Company were deemed to be Plan Assets, transactions
between the Company and parties in interest or disqualified persons with
respect to the investing Plan or IRA could be prohibited transactions unless
a statutory or administrative exemption is available. In addition, investment
authority would also have been improperly delegated to such fiduciaries, and,
under certain circumstances, Plan fiduciaries who make the decision to invest
in the Series A Preferred Shares could be liable as co-fiduciaries for
actions taken by the Company that do not conform to the ERISA standards for
investments under Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing the Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit
with a party in interest; (c) a transaction involving the furnishing of
goods, services or facilities with a party in interest; or (d) a transaction
involving the transfer of Plan assets to, or use of Plan assets by or for the
benefit of, a party in interest. Additionally, Section 406 prohibits a Plan
fiduciary from dealing with Plan assets in its own interest or for its own
account, from acting in any capacity in any transaction involving the Plan on
behalf of a party (or representing a party) whose interests are adverse to
the interests of the Plan, and from receiving any consideration for its own
account from any party dealing with the Plan in connection with a transaction
involving Plan assets. Similar provisions in Section 4975 of the Code apply
to transactions between disqualified persons and Plans and IRAs and result in
the imposition of excise taxes on such disqualified persons.
If a prohibited transaction has occurred, Plan fiduciaries involved in the
transaction could be required to (a) undo the transaction, (b) restore to the
Plan any profit realized on the transaction and (c) make good to the Plan any
loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary,
the IRA would lose its tax-exempt status. The other penalties for prohibited
transactions would not apply.
Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank,
Holdings or any of their affiliates is a party in
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<PAGE>
interest or disqualified person with respect to the Plan. Any such prohibited
transaction could be treated as exempt under ERISA and the Code if the Series
A Preferred Shares were acquired pursuant to and in accordance with one or
more "class exemptions" issued by the Department of Labor, such as Prohibited
Transaction Class Exemption ("PTCE") 75-1 (an exemption for certain
transactions involving employee benefit plans and broker-dealers (such as the
Underwriters), reporting dealers, and banks), PTCE 84-14 (as exemption for
certain transactions determined by an independent qualified professional
asset manager), PTCE 90-1 (an exemption for certain transactions involving
insurance company pooled separate accounts), PTCE 91-38 (an exemption for
certain transactions involving bank collective investment funds), PTCE 95-60
(an exemption for certain transactions involving an insurance company's
general account) and PTCE 96-23 (an exemption for certain transactions
determined by a qualifying in-house asset manager).
A Plan should not acquire the Series A Preferred Shares pursuant to the
Offering if such acquisition will constitute a non-exempt prohibited
transaction.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more
than 10% of the Series A Preferred Shares if the Company is "predominantly
held" by qualified trusts. See "Federal Income Tax Considerations -- Taxation
of United States Stockholders -- Treatment of Tax-Exempt Stockholders."
72
<PAGE>
EXPERTS
The statement of financial condition of the Company as of December 31,
1996 has been included herein and in the Prospectus in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
RATINGS
It is expected that the Series A Preferred Shares will be rated ba2 by
Moody's Investors Service, Inc. and BB by Standard and Poor's Ratings Group.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. No person is obligated to maintain any rating on the Series A
Preferred Shares, and, accordingly, there can be no assurance that the
ratings assigned to the Series A Preferred Shares upon initial issuance will
not be lowered or withdrawn by the assigning rating organization at any time
thereafter.
CERTAIN LEGAL MATTERS
The validity of the Series A Preferred Shares offered hereby will be
passed upon for the Company by Ballard Spahr Andrews & Ingersoll, Baltimore,
Maryland, and certain legal matters and certain tax matters described under
"Federal Income Tax Considerations" will be passed upon for the Company by
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York. Certain legal
matters will be passed upon for the Underwriters by Latham & Watkins, New
York, New York. Skadden, Arps, Slate, Meagher & Flom LLP and Latham & Watkins
have from time to time represented, and may continue to represent, MacAndrews
& Forbes and certain of its affiliates (including the Bank) in connection
with certain legal matters. Joseph H. Flom, a partner in the firm of Skadden,
Arps, Slate, Meagher & Flom LLP, is a director of Revlon Group Incorporated,
a wholly owned subsidiary of MacAndrews & Forbes.
73
<PAGE>
GLOSSARY
"Administrative Action" means any judicial decision, official
administrative pronouncement, published or private ruling, regulatory
procedure, notice or announcement (including any notice or announcement of
intent to adopt such procedures or regulations) relating to the Tax Event.
"Applicable Premium" shall have the meaning set forth in "Description of
Series A Preferred Shares--Redemption."
"ARM" or "adjustable rate mortgage" means a Mortgage Loan that features
adjustments of the underlying interest rate at predetermined times based on
an agreed margin to an established index. An ARM is usually subject to
periodic interest rate and/or payment caps and a lifetime interest rate cap.
"Automatic Exchange" means the automatic exchange of each Series A
Preferred Share for one share of Bank Preferred Stock upon the occurrence of
the Exchange Event.
"Bank" means California Federal Bank, A Federal Savings Bank, the
surviving entity in the Cal Fed Acquisition.
"Bank Preferred Stock" means the newly issued series of preferred stock of
the Bank for which the Series A Preferred Shares will be exchanged
automatically upon the occurrence of the Exchange Event.
"Board of Directors" means the board of directors of the Company.
"Bylaws" means the Bylaws of the Company.
"Cal Fed" means Cal Fed Bancorp Inc.
"Cal Fed Acquisition" means the transactions contemplated by the Amended
and Restated Agreement and Plan of Merger, dated as of July 27, 1996, among
Holdings, CFB Holdings, Inc., Cal Fed and California Federal, in connection
with which on January 3, 1997, First Nationwide was merged with and into
California Federal, with California Federal being the surviving institution.
"California Federal" means California Federal Bank, A Federal Savings
Bank, prior to the consummation of the Cal Fed Acquisition.
"Capital Contribution" means the amount of funds received by First
Nationwide from Holdings, prior to or concurrent with the consummation of the
Cal Fed Acquisition.
"Change of Control" shall have the meaning set forth in "Description of
Series A Preferred Shares--Redemption.
"Charter" means the charter of the Company, as amended or supplemented
from time to time.
"Classified" loans are generally troubled loans which are deemed
substandard or doubtful with respect to collectibility.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the United States Securities and Exchange Commission.
"Common Stock" means the common stock, par value $.01 per share, of the
Company.
"Company" means California Federal Preferred Capital Corporation, a
Maryland corporation.
"Directive" means the writing issued by the appropriate federal regulatory
agency directing the Automatic Exchange.
"Dividend Payment Date" means each quarterly date upon which dividends are
paid by the Company to the holders of the Series A Preferred Shares.
"Dividend Period" means any quarterly dividend period.
"Eleventh District" means the Eleventh Federal Home Loan Bank District.
"Eleventh District Cost of Funds ARM" means an ARM the interest rate of
which is fixed for the first six or twelve monthly payments and adjusts
semi-annually or annually on the dates specified in the related mortgage
note.
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<PAGE>
"Eleventh District Cost of Funds Index" means the monthly weighted average
cost of funds for savings institutions in Arizona, California and Nevada that
are member institutions of the Eleventh District.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares of any class or series of Preferred Stock
owned, or deemed to be owned, by or transferred to a stockholder in excess of
the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Event" means the appropriate federal regulatory agency directs
in writing an exchange of the Series A Preferred Shares for Bank Preferred
Stock because (i) the Bank becomes "undercapitalized" under prompt corrective
action regulations, (ii) the Bank is placed into conservatorship or
receivership or (iii) the appropriate federal regulatory agency, in its sole
discretion, anticipates the Bank becoming "undercapitalized" in the near
term.
"FDIC" means the Federal Deposit Insurance Corporation.
"FDICIA" means the Federal Deposit Insurance Corporation Improvement Act
of 1991.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FHLBS" means the Federal Home Loan Bank System.
"First Nationwide" means First Nationwide Bank, A Federal Savings Bank
prior to the consummation of the Cal Fed Acquisition.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.
"Five or Fewer Test" means the Code requirement that not more than 50% in
value of the Company's outstanding stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code).
"FNMA" means the Federal National Mortgage Association.
"FNMC" means First Nationwide Mortgage Corporation.
"GNMA" means the Government National Mortgage Association.
"Gross Margin" means, with respect to a Residential Mortgage Loan that is
an ARM, the applicable fixed percentage which, when added to the applicable
index, calculates to the current interest rate paid by the borrower of the
adjustable rate Mortgage Loan (without taking into account any interest rate
caps or minimum interest rates). Gross Margin is inapplicable to fixed rate
loans.
"HOLA" means the Home Owners' Loan Act.
"Holdings" means First Nationwide Holdings Inc.
"Independent Directors" means the members of the Board of Directors who
are not current officers or employees of the Company or current directors,
officers or employees of the Bank, or any other affiliate of the Bank.
"Initial Dividend Period" means the first Dividend Period.
"Initial Portfolio" means the initial portfolio of Residential Mortgage
Loans purchased by the Company from the Bank.
"Interested Stockholder" means any person who beneficially owns, directly
or indirectly, 10% or more of the aggregate voting power of a Maryland
corporation.
"IRA" means an individual retirement arrangement under Section 408 of the
Code.
"IRS" means the United States Internal Revenue Service.
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<PAGE>
"Junior Stock" means Common Stock and all other classes and series of
stock which rank below the Series A Preferred Shares as to dividend rights
and rights upon liquidation, winding up or dissolution.
"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the mortgaged
property underlying such Mortgage Loan and (ii) if the Mortgage Loan was made
to finance the acquisition of property, the purchase price of the mortgaged
property.
"Merger Agreement" means the Amended and Restated Agreement and Plan of
Merger, dated as of July 27, 1996, among Holdings, Cal Fed, California
Federal and CFB Holdings, Inc.
"MGCL" means the Maryland General Corporation Law as in effect from time
to time or any successor statute thereto.
"Mortgage Assets" means real estate mortgage assets, including Mortgage
Loans and Mortgage-Backed Securities.
"Mortgage-Backed Securities" means securities either issued or guaranteed
by agencies of the Federal government or government sponsored agencies or
rated by at least one nationally recognized independent rating organization
and representing interests in or obligations backed by pools of Mortgage
Loans.
"Mortgage Loans" means whole loans secured by single-family (one-to
four-unit) residential, multifamily or commercial real estate properties,
including stock allocated to a dwelling unit in a residential cooperative
housing corporation.
"Mortgage Loan Schedule" means the schedule of the Residential Mortgage
Loans in the Initial Portfolio appearing as an exhibit to the Residential
Mortgage Purchase Agreement.
"Nonaccrual Status" generally refers to Mortgage Loans that are past due
90 days or more in principal or interest.
"Non-United States Holder" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii)
foreign trusts and estates.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of Series A Preferred Shares pursuant to the
Prospectus.
"Offering Circular" means the Offering Circular for the Bank Preferred
Stock attached hereto as Annex I.
"One Hundred Persons Test" means the Code requirement that the capital
stock of the Company be owned by 100 or more persons during at least 335 days
of a taxable year or during a proportionate part of a shorter taxable year.
"One-Year Treasury Index" means the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15 (519) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank
or by any U.S. Government department or agency.
"One-Year Treasury Rate ARM" means an ARM that adjusts annually beginning
in the month in which the 6th or 12th monthly payment is due.
"OTS" means the Office of Thrift Supervision.
"Ownership Limit" means the provision in the Charter limiting any Person
from owning (including shares deemed to be owned by the attribution
provisions of the Code) more than the lesser of 2.5% of the number of the
issued and outstanding shares of Preferred Stock, including the Series A
Preferred Shares, or 1.25% of the value of all of the classes of issued and
outstanding shares of the Company.
"Parity Stock" means any class and series of equity securities of the
Company expressly designated as being on a parity with the Series A Preferred
Shares as to dividend rights and rights upon liquidation, winding up or
dissolution.
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<PAGE>
"Permitted Holder" means Ronald O. Perelman (or in the event of his
incompetence or death, his estate, heirs, executor, administrator, committee
or other personal representative (collectively, "heirs")) or, any entity
controlled, directly or indirectly, by Ronald O. Perelman or his heirs.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Plan" means a pension, profit-sharing, retirement or other employee
benefit plan.
"Plan Assets" shall have the meaning set forth under the United States
Department of Labor regulations governing what constitutes the assets of a
Plan or IRA.
"Plan Asset Regulation" means the DOL regulations determining the assets
of a Plan for purposes of ERISA and the related prohibited transaction excise
tax provisions of the Code.
"Preferred Stock" means preferred stock, par value $.01 per share, of the
Company.
"prompt corrective action regulations" means the prompt corrective action
regulations of the OTS implementing the requirements of Section 131 of
FDICIA.
"Prospectus" means this prospectus, as the same may be amended.
"PTCE" means Prohibited Transaction Class Exemption.
"Rate Adjustment Date" means, with respect to any ARM, the date on which
the interest rate on such ARM adjusts as specified in the related mortgage
note.
"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A
Preferred Shares.
"REIT" means a real estate investment trust as defined pursuant to the
REIT Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through 860
of the Code and the applicable Treasury Regulations.
"REIT taxable income" shall have the meaning set forth in "Federal Income
Tax Considerations--Taxation of the Company--Annual Distribution
Requirements".
"Residential Mortgage Loan" means a whole loan secured by a first mortgage
or deed of trust on a single family (one-to four-unit) residential real
estate property or, in the case of a cooperative loan, the shares in a
residential cooperative housing corporation and the related lease or
occupancy agreement.
"Residential Mortgage Purchase Agreement" means the Mortgage Loan Purchase
and Warranties Agreement between the Company and the Bank.
"SAIF" means the Savings Association Insurance Fund.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Stock" means any class and series of securities of the Company
expressly designated as being senior to the Series A Preferred Shares.
"Series A Preferred Shares" means the shares of Preferred Stock of the
Company offered hereby.
"Servicer" means FNMC in its role as servicer pursuant to the Servicing
Agreement.
"Servicing Agreement" means the Mortgage Loan Servicing Agreement between
the Company and FNMC.
"Significant Shareholders" means Ronald O. Perelman, Gerald J. Ford or, in
the event of the incompetence or death of either Ronald O. Perelman or Gerald
J. Ford, their estates, heirs, executors, administrators, committees or other
personal representatives (collectively, "heirs") or, any entities
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<PAGE>
controlled, directly or indirectly, by Ronald O. Perelman, Gerald J. Ford or
their heirs. Furthermore, any Person which owns or is deemed to own shares of
the Company by reason of the attribution of shares of the Company (under
certain attribution provisions of the Code) to a Significant Shareholder
shall be treated as a Significant Shareholder.
"Six-Month Treasury Rate ARM" means an ARM the interest rate of which
adjusts semi-annually beginning in the month in which the sixth monthly
payment is due to equal the applicable Gross Margin plus the Six-Month
Treasury Index on the date specified in the related mortgage note.
"Six-Month Treasury Index" means either the weekly auction average
investment on U.S. Treasury securities with a six month maturity or the
cumulative average over a 26 week period of the weekly auction average rate
on U.S. Treasury securities with a six month maturity, in each case as
published by the Federal Reserve Board in Statistical Release H.15 (519) or
any similar publication or, if not so published, as reported by any Federal
Reserve Bank or by any U.S. Government department or agency.
"Tax Event" means the receipt by the Company of an opinion of a nationally
recognized legal counsel to the Company experienced in such matters to the
effect that, as a result of (i) any amendment to, clarification of, or change
(including any announced prospective change) in, the laws, treaties or any
regulations thereunder of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, (ii) any judicial
decision, official administrative pronouncement, ruling, regulatory
procedure, notice or announcement (including any notice or announcement of
intent to adopt such procedures or regulations) or (iii) any amendment to,
clarification of, or change in the official position or the interpretation of
such Administrative Action or judicial decision or any interpretation or
pronouncement that provides for a position with respect to such
Administrative Action or judicial decision that differs from the theretofore
generally accepted position, in each case, by any legislative body, court,
governmental authority or regulatory body, irrespective of the manner in
which such amendment, clarification or change is made known, which amendment,
clarification, or change is effective or such pronouncement or decision is
announced on or after the date of issuance of the Series A Preferred Shares,
there is more than an insubstantial risk that (a) dividends payable by the
Company with respect to the capital stock of the Company are not, or will not
be, fully deductible for United States federal income tax purposes or (b) the
Company is, or will be, subject to more than a de minimis amount of other
taxes, duties or other governmental charges.
"TIN" means Taxpayer Identification Number.
"Time of Exchange" means the time at which the Automatic Exchange occurs,
deemed to be as of 8:00 a.m. Eastern Time on the date for such exchange set
forth in the Directive, or, if such date is not set in the Directive, as of
8:00 a.m. Eastern Time on the earliest possible date such exchange could
occur consistent with the Directive.
"Treasury Rate" shall have the meaning set forth in "Description of Series
A Preferred Shares--Redemption."
"Treasury Regulations" means the income tax regulations promulgated under
the Code.
"Underwriters" means those underwriters to which the Company will sell the
Series A Preferred Shares pursuant to the terms of the Underwriting
Agreement.
"Underwriting Agreement" means the underwriting agreement by and among the
Company, the Bank and the Underwriters.
"United States Stockholders" means holders of Series A Preferred Shares
that are for United States federal income tax purposes (i) citizens or
residents of the United States, (ii) corporations, partnerships, or other
entities created or organized in or under the laws of the United States or of
any political subdivisions thereof, or (iii) an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source.
"USRPI" means United States real property interest.
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<PAGE>
INDEX TO FINANCIAL STATEMENT
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report ................................................................. F-2
Statement of Financial Condition of California Federal Preferred Capital Corporation as of
December 31, 1996 ........................................................................... F-3
Note to Financial Statement .................................................................. F-4
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
California Federal Preferred Capital Corporation
(formerly First Nationwide Preferred Capital Corporation):
We have audited the accompanying statement of financial condition of
California Federal Preferred Capital Corporation (formerly First Nationwide
Preferred Capital Corporation) (the "Company") as of December 31, 1996. This
financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of financial
condition is free of material misstatement. An audit of a statement of
financial condition includes examining, on a test basis, evidence supporting
amounts and disclosures in that statement of financial condition. An audit of
a statement of financial condition also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall statement of financial condition presentation. We
believe that our audit of the statement of financial condition provides a
reasonable basis for our opinion.
In our opinion, the statement of financial condition referred to above
presents fairly, in all material respects, the financial position of
California Federal Preferred Capital Corporation (formerly First Nationwide
Preferred Capital Corporation) as of December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Dallas, Texas
January 6, 1997
F-2
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash ............................................................................... $10
STOCKHOLDER'S EQUITY
Common Stock, par value $.01 per share, 1,000 shares authorized; 1,000 shares
issued and outstanding ............................................................. $10
</TABLE>
See accompanying note to financial statement.
F-3
<PAGE>
CALIFORNIA FEDERAL PREFERRED CAPITAL CORPORATION
NOTE TO FINANCIAL STATEMENT
1. ORGANIZATION
First Nationwide Preferred Capital Corporation (the "Company"), a
wholly-owned subsidiary of First Nationwide Bank, A Federal Savings Bank (the
"Bank"), was incorporated on November 19, 1996 under the laws of the State of
Maryland. On January 6, 1997, the Company changed its name to "California
Federal Preferred Capital Corporation."
The Company intends to invest in mortgage-related assets financed by
common stock, a preferred stock offering, and capital contributions from the
Bank and expects to generate income for distribution to its future preferred
and common stockholders primarily from the net interest income derived from
its investments in mortgage-related assets. The Company intends to purchase
these mortgage-related assets from the Bank or its affiliates at their
estimated fair values. Assets which are purchased from the Bank or its
affiliates will be recorded in the Company's financial statements at the
Bank's historical cost basis. The Company intends to operate in a manner that
permits it to elect, and it intends to elect, to be subject to tax as a real
estate investment trust for federal income tax purposes. The Company has not
had any operations through December 31, 1996.
The Company intends to sell preferred stock in an underwritten public
offering. The cost of this public offering will be paid by the Company out of
proceeds from a capital contribution by the Bank. If the public offering is
not consummated, the Bank will pay any offering costs.
F-4
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
January 24, 1997 (the "Underwriting Agreement") among the Company, the Bank
and the underwriters named below (the "Underwriters"), the Company has agreed
that the Company will sell to each of the Underwriters, and each of such
Underwriters has severally agreed to purchase from the Company, the
respective number of Series A Preferred Shares set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER OF SHARES
OF SERIES A
UNDERWRITERS PREFERRED STOCK
- -------------------- ----------------
<S> <C>
Goldman, Sachs & Co. 9,000,000
Smith Barney Inc. .. 9,000,000
----------------
Total ............. 18,000,000
================
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Series A Preferred
Shares offered hereby, if any are taken.
The Underwriters propose to offer the Series A Preferred Shares in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $0.50 per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $0.35 per share
to certain brokers and dealers. After the Series A Preferred Shares are
released for sale to the public, the offering price and other selling terms
may from time to time be varied by the Underwriters.
The Company has granted the Underwriters an option exercisable for 30 days
after the date of this Prospectus to purchase up to an aggregate of 2,000,000
additional Series A Preferred Shares solely to cover over-allotments, if any.
If the Underwriters exercise their over-allotment option, the Underwriters
have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of Series A
Preferred Shares to be purchased by each of them, as shown in the foregoing
table, bears to the 18,000,000 Series A Preferred Shares offered hereby.
The Company has agreed that, during the period beginning from the date of
this Prospectus and continuing to and including the date 90 days after the
date of this Prospectus, it will not offer, sell, contract to sell or
otherwise dispose of any securities of the Company which are substantially
similar to the Series A Preferred Shares or which are convertible or
exchangeable into securities which are substantially similar to the Series A
Preferred Shares without the prior written consent of the Underwriters,
except for the Series A Preferred Shares offered in connection with the
Offering.
The Underwriters have informed the Company that they do not expect sales
to accounts over which the Underwriters exercise discretionary authority to
exceed five percent of the total number of shares of Series A Preferred
Shares offered by them.
Prior to the Offering, there has been no public market for the Series A
Preferred Shares. The initial public offering price was determined by
negotiations between the Company and the Underwriters. Among the factors
considered in determining the initial public offering price of the Series A
Preferred Shares, in addition to prevailing market conditions, were the
estimate of the business potential and earnings prospects of the Company, an
assessment of the Company's management, limitations on the voting rights of
the Series A Preferred Shares, the consideration of the above factors in
relation to market valuation of companies in related businesses, and other
factors deemed to be relevant.
The Series A Preferred Shares will be listed on the NYSE. In order to meet
one of the requirements for listing the Series A Preferred Shares on the
NYSE, the Underwriters have undertaken to sell lots of 100 or more shares to
a minimum of 2,000 beneficial holders.
The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act.
Certain of the Underwriters or their affiliates have provided from time to
time, and expect to provide in the future, investment or commercial banking
services to affiliates of the Company, for which such Underwriters or their
affiliates have received or will receive customary fees and commissions.
U-1
<PAGE>
ANNEX I
OFFERING CIRCULAR
18,000,000 Shares
CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
9 1/8% Noncumulative (Liquidation Preference $25.00 Per Share) Preferred
Stock
California Federal Bank, A Federal Savings Bank (formerly First Nationwide
Bank, A Federal Savings Bank) (the "Bank"), is hereby offering 18,000,000
shares of its 9 1/8% Noncumulative Preferred Stock, liquidation preference
$25.00 per share (the "Bank Preferred Stock"). The Bank Preferred Stock is to
be issued, if ever, in connection with an exchange of the 9 1/8%
Noncumulative Exchangeable Preferred Stock, Series A (the "Series A Preferred
Shares") of California Federal Preferred Capital Corporation (the "Company"),
all the common stock of which is owned by the Bank. Any accrued and unpaid
dividends on the Series A Preferred Shares at the time of the conversion will
be deemed to be accrued and unpaid dividends on the Bank Preferred Stock.
Dividends on the Bank Preferred Stock are payable at the rate of 9 1/8% per
annum of the initial liquidation preference (an amount equal to $2.28125 per
annum per share), if, when and as declared by the Board of Directors of the
Bank. Dividends are not cumulative and, if declared, are payable quarterly in
arrears. If no dividend is declared on the Bank Preferred Stock by the Bank
for a dividend period, holders of the Bank Preferred Stock will have no right
to receive a dividend for that period. The Bank's ability to pay cash
dividends is subject to regulatory and other restrictions.
Except in the case of a Change of Control (as defined herein), the Bank
may not redeem the Bank Preferred Stock prior to January 31, 2002. On and
after January 31, 2002, the Bank Preferred Stock may be redeemed for cash at
the option of the Bank, in whole or in part, at the redemption prices per
share set forth herein, plus declared and unpaid dividends, if any, thereon.
Upon a Change of Control, the Bank Preferred Stock is redeemable on or prior
to January 31, 2002, at the option of the Bank or its successor or any
acquiring or resulting entity with respect to the Bank (including by any
parent or subsidiary of the Bank any such successor, or any such acquiring or
resulting entity), as applicable, in whole, but not in part, at a price per
share equal to (i) $25.00, plus (ii) an amount equal to any declared and
unpaid dividends, if any, to the date fixed for redemption, without interest,
and, without duplication, an additional amount equal to the amount of
dividends that would be payable on the Bank Preferred Stock in respect of the
period from the first day of the dividend period in which the date fixed for
redemption occurs to the date fixed for redemption (assuming all such
dividends were to be declared), plus (iii) the Applicable Premium (as defined
herein). The Bank Preferred Stock is not subject to any sinking fund or
mandatory redemption and is not convertible into any other securities of the
Bank.
The Bank has outstanding 3,007,300 shares of its 11 1/2% Noncumulative
Perpetual Preferred Stock (the "11 1/2% Preferred Stock") and 1,725,000
shares of its 10 5/8% Noncumulative Perpetual Preferred Stock, Series B (the
"10 5/8% Preferred Stock" and, collectively with the 11 1/2% Preferred Stock,
the "Existing Preferred Stock"). The Bank Preferred Stock will constitute a
new series of preferred shares of the Bank and will rank pari passu in terms
of cash dividend payment and liquidation preference with the Existing
Preferred Stock (the Existing Preferred Stock and the Bank Preferred Stock
collectively being, the "Preferred Stock"). The Preferred Stock ranks, in
priority of payment of dividends and rights upon the voluntary or involuntary
dissolution, liquidation or winding up of the Bank, junior to all existing
and future liabilities of the Bank, including deposits, indebtedness and
trade payables. The Preferred Stock ranks superior and prior to the issued
and outstanding common stock, par value $.01 per share, of the Bank (the
"Common Stock") with respect to dividend rights and rights upon voluntary or
involuntary dissolution, liquidation or winding up of the Bank, and to all
other classes and series of equity securities of the Bank hereafter issued,
other than any class or series expressly designated as being on parity with
or senior to the Preferred Stock. The Common Stock of the Bank is the only
class of equity securities currently outstanding other than the Existing
Preferred Stock.
The Series A Preferred Shares have been registered with the Securities and
Exchange Commission (the "SEC") and the Series A Preferred Shares have been
approved for listing on the New York Stock Exchange (the "NYSE"), subject to
official notice of issuance, under the symbol "CFP." In the event the Series
A Preferred Shares are converted into Bank Preferred Stock, application will
be made to list the Bank Preferred Stock on the NYSE.
SEE "RISK FACTORS" COMMENCING ON PAGE 19 OF THIS OFFERING CIRCULAR FOR A
DISCUSSION OF CERTAIN RISKS RELATING TO THE BANK PREFERRED STOCK.
THESE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OTHER
DEBT OBLIGATIONS OF A BANK OR SAVINGS ASSOCIATION AND ARE NOT INSURED BY THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE SAVINGS ASSOCIATION INSURANCE
FUND, ANY OTHER GOVERNMENTAL AGENCY OR OTHERWISE.
THESE SECURITIES OFFERED HEREBY HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
OFFICE OF THRIFT SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL AGENCY, OR BY ANY
STATE SECURITIES COMMISSION, NOR HAS SUCH OFFICE, OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS OFFERING
CIRCULAR. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
January 24, 1997
<PAGE>
AVAILABLE INFORMATION
The Bank has filed this Offering Circular on Form OC (including any
amendments thereto, the "Form OC") with the Office of Thrift Supervision (the
"OTS"). This Offering Circular does not contain all of the information set
forth in the Form OC, certain items of which are contained in or incorporated
by reference as exhibits to the Form OC as permitted by the rules and
regulations of the OTS. For further information with respect to the Bank and
the Bank Preferred Stock offered hereby, reference is made to the Form OC,
including the exhibits filed or incorporated by reference as a part thereof.
Statements contained in this Offering Circular as to the contents of any
contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other
document filed or incorporated by reference as an exhibit to the Form OC,
each such statement being qualified in all respects by such reference. The
Form OC and the exhibits thereto may be inspected without charge at the
public reference facilities of the OTS located at 1700 G Street, N.W.,
Washington, D.C. 20552, or at the OTS West Regional Office, located at One
Montgomery Street, Suite 400, San Francisco, California 94104. Copies of such
materials may be obtained from the OTS at prescribed rates.
The Bank is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the OTS. Such reports and
other information can be inspected and copied at the public reference
facilities maintained by the OTS at 1700 G Street, N.W., Washington, D.C.
20552, or at the OTS West Regional Office located at One Montgomery Street,
Suite 400, San Francisco, California 94104.
OC-2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and the notes thereto contained elsewhere in this
Offering Circular. On January 3, 1997, 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. An index of defined terms used in this Offering Circular begins
on page 206.
THE BANK
After giving effect to the Cal Fed Acquisition, the issuance of the Series
A Preferred Shares and the Capital Contribution (as defined herein), at
September 30, 1996, the Bank 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. The Bank's principal business consists of operating retail deposit
branches and originating and/or purchasing residential real estate loans and,
to a lesser extent, certain consumer loans, and is conducted primarily in
California, Florida, Nevada and Texas. The Bank also actively manages its
portfolio of commercial real estate loans acquired through acquisitions and
is active in mortgage banking and loan servicing. These operating activities
are financed principally with customer deposits, secured short-term and
long-term borrowings, collections on loans, asset sales and retained
earnings. 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.
The Bank is chartered as a federal stock savings bank under the Home
Owners' Loan Act ("HOLA") and regulated by the Office of Thrift Supervision
and the Federal Deposit Insurance Corporation ("FDIC"), which, through the
Savings Association Insurance Fund ("SAIF"), insures the deposit accounts of
the Bank, up to applicable limits. The Bank is also a member of the Federal
Home Loan Bank System ("FHLBS").
The Cal Fed Acquisition
On July 27, 1996, First Nationwide Holdings Inc. ("Holdings"), First
Nationwide's parent corporation, entered into an Agreement and Plan of
Merger, dated as of July 27, 1996, among Holdings, Cal Fed and California
Federal (the "Merger Agreement"), pursuant to which on January 3, 1997
Holdings acquired Cal Fed and California Federal and First Nationwide merged
with and into California Federal. The aggregate consideration paid under the
Merger Agreement consisted of approximately $1.2 billion in cash and the
issuance of the Secondary Litigation Interests (as defined herein) by
California Federal. California Federal, headquartered in Los Angeles, was a
federal stock savings bank chartered under the HOLA, which operated 118
branches in California and Nevada. Cal Fed was a Delaware chartered unitary
savings and loan holding company whose only significant asset was all of the
common stock of California Federal. Cal Fed was a publicly owned corporation
whose common shares were traded on the New York Stock Exchange under the
symbol "CAL."
Management believes that the Cal Fed Acquisition furthers its strategy of
building franchise value by expanding First Nationwide's retail branch
network in California. See "--Business Strategy." California Federal offered
a broad range of consumer financial services including demand and term
deposits, mortgage, consumer and small business loans, and insurance and
investment products. At September 30, 1996, California Federal had
approximately $14.1 billion in assets and $8.8 billion in deposits.
Management believes that the Cal Fed Acquisition substantially completes the
strategy initiated in 1994 to expand and focus First Nationwide's retail
franchise in California. See "--Business Strategy."
The Cal Fed Acquisition significantly enhances First Nationwide's presence
in Southern California, which management believes is an attractive area for
expansion and complements First Nationwide's
OC-3
<PAGE>
existing branches in Northern California. At September 30, 1996, First
Nationwide had approximately $4.9 billion in retail deposits at 72 branches
in Northern California and approximately $.8 billion in retail deposits at 17
branches in Southern California. After giving effect to the Cal Fed
Acquisition, at September 30, 1996, the Bank would have had approximately
$6.1 billion in retail deposits at 89 branches in Northern California and
$7.5 billion in retail deposits at 105 branches in Southern California.
In addition to significantly enhancing First Nationwide's statewide branch
network, the Cal Fed Acquisition will contribute significant earnings. See
"--Summary Pro Forma Financial Data." The economies of scale resulting from
the Cal Fed Acquisition will enable the Bank to continue to improve the
efficiency of its operations. The Cal Fed Acquisition also adds approximately
$3.5 billion to the loan servicing portfolio, which will enable First
Nationwide Mortgage Company ("FNMC"), the mortgage banking subsidiary of the
Bank, to realize continued operating efficiencies.
The Cal Fed Acquisition adheres to First Nationwide's strategy of
protecting the credit quality of its assets. In 1994, California Federal
completed a significant restructuring, which included the sale of
approximately $1.3 billion of non-performing and high-risk performing assets.
At December 31, 1995, the California Federal loan portfolio consisted of
predominantly 1-4 unit residential mortgage loans (76.8% of total loans) and
5+ unit residential mortgage loans (14.2% of total loans). The Cal Fed
Acquisition will be accounted for under the purchase method of accounting and
therefore the California Federal loan portfolio will be acquired at its
current fair market value. On a pro forma basis after giving effect to the
Cal Fed Acquisition at September 30, 1996, 70.5% of the Bank's loans would
have consisted of residential mortgages, compared to 59.8% on an historical
basis, and 28.9% of the Bank's loans would have consisted of commercial real
estate loans, compared to 39.6% on an historical basis. See "Business--First
Nationwide--Lending Activities."
Holdings financed the Cal Fed Acquisition with (i) the net proceeds of
approximately $555 million from the issuance of $575 million aggregate
principal amount of 10 5/8% Senior Subordinated Notes Due 2003 of First
Nationwide Escrow Corp. which, contemporaneously with the consummation of the
Cal Fed Acquisition, was merged with and into Holdings (the "10 5/8% Notes"),
(ii) an investment by a newly formed Delaware corporation, all 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 ("Special Purpose Corp."), of
$145 million in cash in Holdings in exchange for $150 million aggregate
liquidation value of Holdings' Cumulative Perpetual Preferred Stock (the
"Holdings Preferred Stock") and (iii) existing cash. The net proceeds from
the 10 5/8% Notes and the Holdings Preferred Stock, approximately $700
million, were contributed to First Nationwide prior to the Cal Fed
Acquisition (the "Capital Contribution").
Management expects the Bank to maintain its "well capitalized" status. It
is expected that the issuance of the Series A Preferred Shares, by increasing
core capital, will enable the Bank to retain a higher base of
interest-earning assets, resulting in incrementally higher related earnings.
See "Strategic Acquisitions and Dispositions--The Cal Fed Acquisition."
Business Strategy
With the Cal Fed Acquisition, the Bank has substantially completed its
business strategy initiated in 1994 by investing in its California retail
franchise and divesting most of its non-California branches. In addition, the
Bank has significantly expanded its mortgage servicing operations to gain
increased economies of scale. The key elements of the Bank's business
strategy following the Cal Fed Acquisition include:
o Evaluating selective opportunities to further enhance the Bank's
retail branch network in California.
o Evaluating selective opportunities to increase the size and the
profitability of the Bank's mortgage banking operations.
OC-4
<PAGE>
o Protecting the credit quality of the assets of the Bank through,
among other things, continuing to originate single-family loans and
consumer loans in accordance with stringent underwriting standards
and actively managing the Bank's existing portfolio of commercial
real estate loans.
o Increasing the Bank's operating efficiency by, among other things,
expanding its customer base, increasing transaction account volumes
and reducing costs through consolidation of certain administrative
and managerial functions.
o Identifying new opportunities to serve the needs of the communities
in which the Bank is located.
Since the FN Acquisition (as defined herein) in 1994, First Nationwide has
consummated the following transactions to effect its business strategy. See
"Strategic Acquisitions and Dispositions."
o On June 1, 1996, First Nationwide acquired Home Federal Financial
Corporation ("HFFC") and its wholly owned federally chartered
savings association subsidiary, Home Federal Savings and Loan
Association of San Francisco ("Home Federal"), which had
approximately $717 million in assets and $632 million in deposits
and operated 15 branches in Northern California (the "Home Federal
Acquisition").
o On February 1, 1996, First Nationwide acquired SFFed Corp. ("SFFed")
and its wholly owned subsidiary, San Francisco Federal Savings and
Loan Association ("San Francisco Federal"), which had approximately
$4.0 billion in assets and approximately $2.7 billion in deposits
and operated 35 branches in the Northern California area (the "SFFed
Acquisition").
o In April 1995, First Nationwide acquired approximately $13 million
in deposits located in Tiburon, California from East-West Federal
Bank, a federal savings bank (the "Tiburon Purchase"). In August
1995, First Nationwide acquired three retail branches located in
Orange County, California with deposit accounts totalling
approximately $356 million from ITT Federal Bank, fsb (the "ITT
Purchase"). On December 8, 1995, First Nationwide consummated the
purchase 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 (the
"Sonoma Purchase" and, collectively with the Tiburon Purchase and
the ITT Purchase, the "Branch Purchases").
o From January through June of 1996, First Nationwide consummated the
sale of its retail branches in Ohio (the "Ohio Branch Sale"), New
York and New Jersey (the "Northeast Branch Sales") and Michigan (the
"Michigan Branch Sale" and, collectively with the Ohio Branch Sale
and the Northeast Branch Sales, the "Branch Sales") at prices which
represented an average premium of 7.96% of the approximately $4.6
billion of deposits sold and resulted in gains of approximately
$363.0 million on a pre-tax basis through September 30, 1996.
o On February 28, 1995, First Nationwide (through FNMC), acquired a
1-4 unit residential mortgage loan servicing portfolio of
approximately $11.4 billion and other assets and liabilities (the
"Maryland Acquisition").
o On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc.
("LMUSA") a loan servicing portfolio of approximately $11.1 billion,
a portfolio of $2.9 billion of mortgage servicing rights ("MSRs"),
which are rights to service mortgages held by others, which MSRs are
owned by third parties who have contracted with FNMC to monitor the
performance, and consolidate the reporting, of various other
servicers (a "master servicing portfolio") and other assets (the
"LMUSA 1995 Purchase"). On January 31, 1996, FNMC purchased LMUSA's
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 (the "LMUSA 1996 Purchase" and, together with the
LMUSA 1995 Purchase, the "LMUSA Purchases").
These transactions have significantly increased First Nationwide's
presence on the West Coast, providing additional economies of scale and
diversity of operations within its target California markets.
OC-5
<PAGE>
Management believes that consummation of the Cal Fed Acquisition further
strengthens First Nationwide's presence on the West Coast. As a result of
these transactions, including the Cal Fed Acquisition, approximately 86% of
the Bank's total retail deposits are located in California. The Bank's retail
deposits in California will have increased from $2.3 billion at the time of
the FN Acquisition in October 1994 to $13.6 billion at September 30, 1996
after giving effect to the Cal Fed Acquisition. The Bank's retail deposits
outside California will have decreased from $6.9 billion at the time of the
FN Acquisition to $2.2 billion at September 30, 1996 after giving effect to
the Cal Fed Acquisition.
The SFFed Acquisition, the Branch Sales and the Home Federal Acquisition
have enabled First Nationwide to enhance, and management expects that the Cal
Fed Acquisition will enable the Bank to further enhance, the value of its
franchise and improve its operating efficiency through the consolidation or
elimination of duplicative back office operations and administrative and
management functions. The efficiency of a financial institution is often
measured by its efficiency ratio, which represents the ratio of noninterest
expense to net interest income and noninterest income. First Nationwide has
improved its efficiency ratio from approximately 62.2% on an annualized basis
during the fourth quarter of 1994 to approximately 53.8% on an annualized
basis, excluding non-recurring gains and charges and certain incentive plan
accruals, during the third quarter of 1996.
The Maryland Acquisition and the LMUSA Purchases have enabled First
Nationwide to increase its noninterest income through fees generated from its
mortgage servicing operations. First Nationwide's excess servicing capacity
and existing servicing expertise enabled it to accommodate the loan servicing
portfolios acquired in these transactions without the need for significant
additional investment. Since the FN Acquisition, the Bank's mortgage
servicing portfolio will have increased from $6.7 billion to $46.2 billion at
September 30, 1996 after giving effect to the Cal Fed Acquisition.
The Bank applies stringent underwriting standards in originating
single-family residential loans and consumer loans, as well as in evaluating
acquisition opportunities. The Bank has a specialized credit risk management
group that is charged with the development of credit policies and performing
credit risk analyses for all asset portfolios. From October 1994 to November
1996, First Nationwide also used the Put Agreement (as defined herein) to
mitigate credit losses on certain acquired assets, thereby improving the
overall credit quality of its loan portfolio.
Background
First Nationwide was organized as "First Gibraltar Bank, FSB" ("First
Gibraltar"), in December 1988 to acquire substantially all of the assets and
certain liabilities of five insolvent Texas thrifts (the "Texas Closed
Banks") in a federally assisted transaction pursuant to an Assistance
Agreement, as amended (the "Assistance Agreement"), by and among First
Nationwide, FSLIC Resolution Fund (the "FSLIC/RF") (as successor to the
Federal Savings and Loan Insurance Corporation (the "FSLIC")), First
Gibraltar Holdings Inc. ("First Gibraltar Holdings") and MacAndrews & Forbes
Holdings Inc. ("MacAndrews Holdings"). On December 31, 1992, First Gibraltar
sold a substantial portion of its business operations in Oklahoma, consisting
of approximately $3 million of loans and 27 branches with $809 million in
deposits (the "First Gibraltar Oklahoma Sale"). On February 1, 1993, First
Gibraltar sold to Bank of America Texas, N.A. and Bank of America Corporation
(collectively, "BankAmerica") $829 million in loans and 130 branches with
approximately $6.9 billion in deposits (the "First Gibraltar Texas Sale"),
and First Nationwide changed its name to "First Madison Bank, FSB" ("First
Madison"). Following the First Gibraltar Texas Sale, and through September
1994, First Madison's principal business was the funding of the assets
acquired from the Texas Closed Banks (the "Covered Assets") and the
performance of its obligations under the Assistance Agreement.
On April 14, 1994, First Nationwide entered into the Asset Purchase
Agreement (the "Asset Purchase Agreement") with First Nationwide Bank, A
Federal Savings Bank ("Old FNB"), an indirect subsidiary of Ford Motor
Company ("Ford Motor"). On October 3, 1994, effective immediately after the
close of business on September 30, 1994, First Nationwide acquired
substantially all of the assets (other than certain non-performing and other
excluded assets) and certain of the liabilities (the "FNB Acquired Business")
of Old FNB (the "FN Acquisition") for $726.5 million. Effective on October 1,
1994, First Nationwide changed its name from "First Madison Bank, FSB" to
"First Nationwide Bank, A Federal Savings Bank."
OC-6
<PAGE>
In connection with the FN Acquisition, First Nationwide entered into a
Non-Performing Asset Sale Agreement (the "Put Agreement") with Granite
Management and Disposition, Inc. ("Granite"), a subsidiary of Ford Motor,
pursuant to which First Nationwide had the right through November 30, 1996 to
require Granite to purchase up to $500 million of principally non-performing
assets acquired from Old FNB. In the event that, as of November 30, 1996,
First Nationwide had not required Granite to purchase $500 million of
non-performing assets, it had the right to require Granite to purchase any
qualifying assets of First Nationwide, other than assets which previously
were eligible to be put to Granite and which First Nationwide did not require
Granite to purchase, up to such $500 million maximum. At September 30, 1996,
the remaining available balance under the Put Agreement was approximately
$70.5 million, which First Nationwide fully utilized on December 5, 1996. Of
the approximately $228 million in non-performing assets at September 30,
1996, approximately $17.3 million were eligible to be sold to Granite under
the Put Agreement. See "Business--First Nationwide--Other Activities--The Put
Agreement."
First Nationwide financed the FN Acquisition with: (i) a capital
contribution by Holdings funded with the net proceeds of (a) the issuance of
Holdings' 12-1/4% Senior Notes Due 2001 (the "Holdings Senior Notes") and (b)
the issuance of Holdings' class C common stock to First Nationwide (Parent)
Holdings Inc. ("Parent Holdings"), an indirect subsidiary of MacAndrews
Holdings (all of which class C common stock was redeemed on June 3, 1996),
(ii) the net proceeds from the issuance of the 11 1/2% Preferred Stock and
(iii) existing cash and proceeds from securities sold under agreements to
repurchase. See "Certain Transactions."
California Federal Preferred Capital Corporation
In November 1996, First Nationwide established the Company for the purpose
of acquiring, holding and managing real estate mortgage assets. All of the
Company's common stock is owned by the Bank. It is expected that
substantially all of the Company's mortgage assets will be acquired from the
Bank and affiliates of the Bank. The Company will enter into a subservicing
agreement with FNMC pursuant to which FNMC will service the Company's
mortgage assets.
The Company has filed a registration statement with the SEC with respect
to the Series A Preferred Shares. Each Series A Preferred Share will be
exchanged automatically for one newly issued share of Bank Preferred Stock
being registered by this Offering Circular if the appropriate federal
regulatory agency directs in writing an exchange of the Series A Preferred
Shares for Bank Preferred Stock because (i) the Bank becomes
"undercapitalized" under prompt corrective action regulations, (ii) the Bank
is placed into conservatorship or receivership or (iii) the appropriate
federal regulatory agency, in its sole discretion, anticipates the Bank
becoming "undercapitalized" in the near term. The exchange feature has been
required by the OTS and is intended, in the event the Bank experiences
financial difficulty, to eliminate the prior claim the holders of the Series
A Preferred Shares would otherwise have on the assets of the Company so that
these assets would be available to support the operations of the Bank on a
consolidated basis.
The Company is undertaking the offering of its Series A Preferred Shares
and the Bank is undertaking the offering of its Bank Preferred Stock for two
principal reasons: (i) the offering will strengthen the Bank's regulatory
capital position as the Series A Preferred Shares will qualify as core
capital of the Bank under relevant regulatory capital guidelines as a result
of the treatment of the Series A Preferred Shares as a minority interest in a
consolidated subsidiary of the Bank and (ii) the dividends paid on the Series
A Preferred Shares will, as a result of the Company's qualification as a real
estate investment trust ("REIT") for federal income tax purposes, be tax
deductible in computing the Company's taxable income. The Company's use of
proceeds from its offering of the Series A Preferred Shares to acquire
mortgage assets from the Bank will result in the proceeds being available to
the Bank for reduction of the Bank's borrowings. The Series A Preferred
Shares are included in the pro forma regulatory capital computation included
in "--Projected Pro Forma Regulatory Capital Ratios of the Bank." See "Pro
Forma Financial Data" and "Projected Pro Forma Regulatory Capital Ratios of
the Bank."
OC-7
<PAGE>
Ownership
All of the Bank's Common Stock is owned by Holdings. Holdings is 80%
indirectly owned by MacAndrews Holdings, a corporation wholly owned through
Mafco Holdings Inc. ("Mafco Holdings" and, together with MacAndrews Holdings,
"MacAndrews & Forbes"), by Ronald O. Perelman, and is 20% indirectly owned by
Hunter's Glen/Ford, Ltd. ("Hunter's Glen"), a limited partnership controlled
by Gerald J. Ford, Chairman of the Board, Chief Executive Officer and a
director of the Bank. See "Ownership of the Common Stock" and "Certain
Transactions--Transactions with Mr. Ford." The Bank's principal executive
offices are located at 135 Main Street, San Francisco, California 94105, and
its telephone number is (415) 904-0100. The Bank was incorporated in 1925
under federal charter.
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<PAGE>
The following chart sets forth in simplified form the ownership of the
common equity of the Bank and the Company.
Ronald O. Perelman
100%
Mafco Holdings Inc.
("Mafco Holdings")
100%
MacAndrews & Forbes Holdings Inc.
("MacAndrews Holdings")
100%
Trans Network Insurance Services Inc.
("TNIS")
(formerly "First Gibraltar (Parent) Holdings Inc.")
100%
First Gibraltar Guarantor Corp.
100%
First Gibraltar Holdings Inc.
("First Gibraltar Holdings")
100%
First Nationwide (Parent) Holdings Inc.
("Parent Holdings")
80%*
Hunter's Glen/
Ford, Ltd.
("Hunter's Glen")
20%*
First Nationwide Holdings Inc.
("Holdings")
100%
CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
(THE "BANK"), AS SUCCESSOR BY MERGER TO
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
100%
California Federal Preferred Capital Corporation
(the "Company")
- ------------
* Hunter's Glen, a limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a director of the
Bank, owns 100% of the class B common stock of Holdings, the Bank's
parent, representing 20% of its voting common stock (representing
approximately 15% of the voting power of its common stock), and Parent
Holdings beneficially owns 100% of the class A common stock of Holdings,
representing 80% of its voting common stock (representing approximately
85% of the voting power of its common stock). See "Ownership of the
Common Stock."
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<PAGE>
THE OFFERING
Securities Offered ..... 18,000,000 shares of the Bank's 9 1/8%
Noncumulative Preferred Stock.
Exchange ............... The Bank Preferred Stock is to be issued, if
ever, in connection with an exchange of the
9 1/8% Noncumulative Preferred Stock, Series
A of the Company. See "Conversion."
Ranking ................ The Bank Preferred Stock ranks senior to the
Bank's Common Stock, pari passu with the
Existing Preferred Stock with respect to
dividend rights and rights upon liquidation
and junior to all existing and future
liabilities of the Bank, including deposits,
indebtedness and trade payables. Additional
shares of preferred stock ranking senior to
the Bank Preferred Stock may not be issued
without the approval of holders of at least
two-thirds of each series of Preferred
Stock.
Dividends .............. Dividends on the Bank Preferred Stock are
payable at the rate of 9 1/8% per annum of
the initial liquidation preference (an
amount equal to $2.28125 per annum per
share), if, when and as declared by the
Board of Directors of the Bank. If declared,
dividends are payable quarterly in arrears
on March 31, June 30, September 30 and
December 31 in each year. Dividends will
accrue in each quarterly period from the
first day of such period, whether or not
dividends are paid with respect to the
preceding period. Dividends on the Bank
Preferred Stock are not cumulative and,
accordingly, if no dividend is declared on
the Bank Preferred Stock by the Bank for a
dividend period, holders of the Bank
Preferred Stock will have no right to
receive a dividend for that period, and the
Bank will have no obligation to pay a
dividend for that period, whether or not
dividends are declared and paid for any
future period. Upon the conversion of Series
A Preferred Shares for the Bank Preferred
Stock, any accrued and unpaid dividends of
the Series A Preferred Shares at the time of
the conversion will be deemed to be accrued
and unpaid dividends on the Bank Preferred
Stock. See "Description of the Bank
Preferred Stock--Dividends." The Bank's
ability to pay cash dividends is subject to
regulatory and other restrictions described
herein.
Liquidation Preference . The liquidation preference for each share of
Bank Preferred Stock is $25.00, plus an
amount equal to declared and unpaid
dividends, if any, thereon. See "Description
of the Bank Preferred Stock--Rights Upon
Liquidation."
Redemption ............. Except in the case of a Change of Control,
the Bank may not redeem the Bank Preferred
Stock before January 31, 2002. After such
date, the Bank Preferred Stock may be
redeemed for cash at the option of the Bank,
in whole or in part, at any time and from
time to time, at the redemption prices per
share set forth herein, plus declared and
unpaid dividends, if any, thereon.
OC-10
<PAGE>
Upon a Change of Control, the Bank Preferred
Stock is redeemable on or prior to January
31, 2002, at the option of the Bank or its
successor or any acquiring or resulting
entity with respect to the Bank (including
by any parent or subsidiary of the Bank any
such successor, or any such acquiring or
resulting entity), as applicable, in whole,
but not in part, at a price per share equal
to (i) $25.00, plus (ii) an amount equal to
declared and unpaid dividends, if any, to
the date fixed for redemption, without
interest, and, without duplication, an
additional amount equal to the amount of
dividends that would be payable on the Bank
Preferred Stock in respect of the period
from the first day of the dividend period in
which the date fixed for redemption occurs
to the date fixed for redemption (assuming
all such dividends were to be declared),
plus (iii) the Applicable Premium.
Redemption of the Bank Preferred Stock will
be subject to compliance with applicable
regulatory and other restrictions. See
"Description of the Bank Preferred
Stock--Redemption."
Voting Rights .......... Holders of Bank Preferred Stock will not
have any voting rights, except as expressly
provided herein. On any matter on which
holders of the Bank Preferred Stock may
vote, each share of Bank Preferred Stock
will be entitled to one vote. See
"Description of the Bank Preferred
Stock--Voting Rights."
Use of Proceeds ........ The Bank Preferred Stock will only be issued
in connection with an exchange for the
Series A Preferred Shares. The proceeds from
the sale of the Series A Preferred Shares
will be used by the Company to purchase a
portfolio of mortgage assets from the Bank.
The Bank will not receive any proceeds from
the exchange of Series A Preferred Shares
for Bank Preferred Stock. See "Use of
Proceeds."
Absence of a Public
Market ................. In the event the Series A Preferred Shares
are converted into Bank Preferred Stock,
application will be made to list the Bank
Preferred Stock on the NYSE. There is
currently no public market for the Bank
Preferred Stock.
RISK FACTORS
See "Risk Factors" for a discussion of risks relating to the Bank
Preferred Stock.
OC-11
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following summary pro forma financial data gives effect to the Cal Fed
Acquisition, the SFFed Acquisition and the LMUSA Purchases (collectively, the
"Acquisitions"), the Branch Sales, the Capital Contribution and the issuance
of the Series A Preferred Shares. 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 summary 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 First Nationwide giving effect to the Cal
Fed Acquisition, the Capital Contribution and the issuance of the Series A
Preferred Shares as if such transactions occurred on September 30, 1996, and
(ii) the historical consolidated statement of operations of First Nationwide
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, the Capital Contribution and the issuance of the Series A Preferred
Shares as if such transactions occurred on January 1, 1995. The following
summary pro forma financial data for the year ended December 31, 1995 is
based on the historical consolidated statement of operations of First
Nationwide for the year ended December 31, 1995 giving effect to the
Acquisitions, the Branch Sales, the Capital Contribution and the issuance of
the Series A Preferred Shares 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 summary pro forma financial
data do not necessarily reflect the results of operations or the financial
position of First Nationwide that actually would have resulted had the
Acquisitions, the Branch Sales, the Capital Contribution and the issuance of
the Series A Preferred Shares occurred at the dates indicated, or project the
results of operations or financial position of the Bank for any future date
or period.
The summary pro forma financial data should be read in conjunction with
the notes accompanying the "Pro Forma Financial Data" and the Unaudited Pro
Forma Financial Data included elsewhere in this Offering Circular. In
addition, the summary pro forma financial data should be read in conjunction
with the Consolidated Financial Statements of First Nationwide and the notes
thereto, the Consolidated Financial Statements of SFFed and the notes thereto
and the Consolidated Financial Statements of California Federal and the notes
thereto, contained elsewhere in this Offering Circular. See "Selected
Historical Financial Data," "Pro Forma Financial Data" and "Projected Pro
Forma Regulatory Capital Ratios of the Bank."
OC-12
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST CAL FED
NATIONWIDE ACQUISITION PRO FORMA
HISTORICAL PRO FORMA(A) CAPITALIZATION(B) COMBINED
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .................. $ 144,345 $ (794,939) $ 555,000 $ 49,406
145,000
Securities ................................. 572,210 1,143,659 -- 1,715,869
Mortgage-backed securities ................. 3,360,527 2,045,568 -- 5,406,095
Loans, net ................................. 11,288,403 10,023,415 -- 21,311,818
Office premises and equipment, net ......... 92,088 7,367 -- 99,455
Mortgage servicing rights, net ............. 406,669 32,258 -- 438,927
Intangible assets .......................... 144,782 554,094 -- 698,876
Other assets ............................... 800,437 490,774 -- 1,291,211
------------- ------------- --------------- -------------
Total assets .............................. $16,809,461 $13,502,196 $ 700,000 $31,011,657
============= ============= =============== =============
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
Deposits ................................... $ 8,799,990 $ 8,767,439 $ -- $17,567,429
Borrowings ................................. 6,155,990 4,302,057 (434,225) 10,023,822
Other liabilities .......................... 391,900 260,200 -- 652,100
------------- ------------- --------------- -------------
Total liabilities ......................... 15,347,880 13,329,696 (434,225) 28,243,351
------------- ------------- --------------- -------------
Minority interest .......................... -- -- 450,000 450,000
Preferred stock ............................ 300,730 172,500 -- 473,230
Common stock ............................... 1 -- -- 1
Additional paid-in capital ................. 632,805 -- 700,000 1,317,030
(15,775)
Net unrealized holding gain on securities .. 35,087 -- -- 35,087
Retained earnings .......................... 492,958 -- -- 492,958
------------- ------------- --------------- -------------
Stockholders' equity ...................... 1,461,581 172,500 684,225 2,318,306
------------- ------------- --------------- -------------
Total liabilities, minority interest and
stockholders' equity .................... $16,809,461 $13,502,196 $ 700,000 $31,011,657
============= ============= =============== =============
</TABLE>
- ------------
(a) Represents the pro forma effect of the Cal Fed Acquisition.
(b) Represents adjustments to record (i) the issuance of the Series A
Preferred Shares, (ii) utilization of proceeds from such issuance to
reduce borrowings of the Bank and (iii) the Capital Contribution.
OC-13
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA 1996
FIRST ACQUISITION PURCHASE
NATIONWIDE PRO FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B)
------------ ------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans .................................. $714,883 $21,821 $ --
Securities ............................. 24,680 1,017 --
Mortgage-backed securities ............. 191,602 3,174 --
Other interest income .................. 1,413 -- --
------------ ------------- ------------
Total interest income ................. 932,578 26,012 --
------------ ------------- ------------
INTEREST EXPENSE:
Deposits ............................... 323,246 12,401 --
Borrowings ............................. 263,112 6,114 (848)
------------ ------------- ------------
Total interest expense ................ 586,358 18,515 (848)
------------ ------------- ------------
Net interest income .................... 346,220 7,497 848
Provision for loan losses .............. 29,700 500 --
------------ ------------- ------------
Net interest income after provision for
loan losses ........................... 316,520 6,997 848
NONINTEREST INCOME:
Customer banking fees .................. 34,356 199 --
Mortgage banking operations ............ 92,150 191 3,484
Net gain (loss) on sales of assets .... 414,413 (1,140) --
Other .................................. 54,542 239 51
------------ ------------- ------------
Total noninterest income .............. 595,461 (511) 3,535
NONINTEREST EXPENSE:
Compensation and benefits .............. 155,976 1,257 2,070
Other .................................. 214,168 2,616 1,099
------------ ------------- ------------
Total noninterest expense ............. 370,144 3,873 3,169
------------ ------------- ------------
Income (loss) before income taxes and
minority interest ..................... 541,837 2,613 1,214
Income tax (benefit) expense ........... (77,523) 369 120
------------ ------------- ------------
Income (loss) before minority interest 619,360 2,244 1,094
Minority interest--Series A Preferred
Stock dividends, net .................. -- -- --
------------ ------------- ------------
Net income (loss) ...................... 619,360 2,244 1,094
Existing Preferred Stock dividends .... 25,938 -- --
------------ ------------- ------------
Net income (loss) available to common
stockholder ........................... $593,422 $ 2,244 $1,094
============ ============= ============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
BRANCH CAL FED
SALES ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTALS(C) TOTALS(D) ADJUSTMENTS(E) COMBINED
----------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans .................................. $ (110) $579,125 $ -- $1,315,719
Securities ............................. -- 80,200 -- 105,897
Mortgage-backed securities ............. -- 127,000 -- 321,776
Other interest income .................. -- (21,792) -- (20,379)
----------- ------------- -------------- ------------
Total interest income ................. (110) 764,533 -- 1,723,013
----------- ------------- -------------- ------------
INTEREST EXPENSE:
Deposits ............................... (40,742) 318,800 -- 613,705
Borrowings ............................. 44,835 174,325 (17,775) 469,763
----------- ------------- -------------- ------------
Total interest expense ................ 4,093 493,125 (17,775) 1,083,468
----------- ------------- -------------- ------------
Net interest income .................... (4,203) 271,408 17,775 639,545
Provision for loan losses .............. -- 30,800 -- 61,000
----------- ------------- -------------- ------------
Net interest income after provision for
loan losses ........................... (4,203) 240,608 17,775 578,545
NONINTEREST INCOME:
Customer banking fees .................. (3,965) 36,300 -- 66,890
Mortgage banking operations ............ -- 3,500 -- 99,325
Net gain (loss) on sales of assets .... 10 1,800 -- 415,083
Other .................................. (163) 15,500 -- 70,169
----------- ------------- -------------- ------------
Total noninterest income .............. (4,118) 57,100 -- 651,467
NONINTEREST EXPENSE:
Compensation and benefits .............. (4,337) 50,994 -- 205,960
Other .................................. (3,387) 173,224 -- 387,720
----------- ------------- -------------- ------------
Total noninterest expense ............. (7,724) 224,218 -- 593,680
----------- ------------- -------------- ------------
Income (loss) before income taxes and
minority interest ..................... (597) 73,490 17,775 636,332
Income tax (benefit) expense ........... (59) 11,606 1,749 (63,738)
----------- ------------- -------------- ------------
Income (loss) before minority interest (538) 61,884 16,026 700,070
Minority interest--Series A Preferred
Stock dividends, net .................. -- -- 27,717 27,717
----------- ------------- -------------- ------------
Net income (loss) ...................... (538) 61,884 (11,691) 672,353
Existing Preferred Stock dividends .... -- 18,900 -- 44,838
----------- ------------- -------------- ------------
Net income (loss) available to common
stockholder ........................... $ (538) $ 42,984 $(11,691) $ 627,515
=========== ============= ============== ============
</TABLE>
- ------------
(a) Represents pro forma results of operations related to the SFFed
Acquisition. See details on P-9.
(b) Represents pro forma results of operations related to the LMUSA 1996
Purchase. See details on P-12.
(c) Represents pro forma results of operations related to the Branch Sales.
See details on P-14.
(d) Represents pro forma results of operations related to the Cal Fed
Acquisition. See details on P-16.
(e) Represents adjustments to reflect (i) the reduction in borrowing
expenses related to the issuance of the Series A Preferred Shares and
(ii) dividends on the Series A Preferred Shares, net of income tax
benefit.
OC-14
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA
FIRST ACQUISITION PURCHASES
NATIONWIDE PRO FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B)
------------ ------------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans .................................. $ 823,864 $230,713 $22,477
Securities ............................. 28,055 10,685 --
Mortgage-backed securities ............. 212,880 62,403 --
Other interest income .................. 10,705 -- --
------------ ------------- -----------
Total interest income ................ 1,075,504 303,801 22,477
------------ ------------- -----------
INTEREST EXPENSE:
Deposits ............................... 447,359 143,797 --
Borrowings ............................. 261,917 74,587 2,018
------------ ------------- -----------
Total interest expense ............... 709,276 218,384 2,018
Net interest income .................... 366,228 85,417 20,459
Provision for loan losses .............. 37,000 11,094 --
------------ ------------- -----------
Net interest income after provision for
loan losses ........................... 329,228 74,323 20,459
NONINTEREST INCOME:
Customer banking fees .................. 47,493 5,291 --
Mortgage banking operations ............ 70,265 860 76,445
Net gain (loss) on sales of assets .... 147 -- (1,851)
Other .................................. 33,068 1,677 2,690
------------ ------------- -----------
Total noninterest income ............. 150,973 7,828 77,284
NONINTEREST EXPENSE:
Compensation and benefits .............. 154,288 11,141 19,500
Other .................................. 172,446 34,896 38,081
------------ ------------- -----------
Total noninterest expense ............ 326,734 46,037 57,581
------------ ------------- -----------
Income (loss) before income taxes and
minority interest ..................... 153,467 36,114 40,162
Federal and state income tax (benefit)
expense ............................... (55,826) 4,890 3,952
------------ ------------- -----------
Income (loss) before minority interest 209,293 31,224 36,210
Minority interest--Series A Preferred
Stock dividends, net .................. -- -- --
------------ ------------- -----------
Net income (loss) ...................... 209,293 31,224 36,210
Existing Preferred Stock dividends .... 34,584 -- --
------------ ------------- -----------
Net income (loss) available to common
stockholder ........................... $ 174,709 $ 31,224 $36,210
============ ============= ===========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
BRANCH CAL FED
SALES ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTAL(C) TOTALS(D) ADJUSTMENTS(E) COMBINED
----------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans .................................. $ (623) $ 722,000 $ -- $1,798,431
Securities ............................. -- 119,000 -- 157,740
Mortgage-backed securities ............. -- 197,800 -- 473,083
Other interest income .................. -- (21,089) -- (10,384)
----------- ------------- -------------- ------------
Total interest income ................ (623) 1,017,711 -- 2,418,870
----------- ------------- -------------- ------------
INTEREST EXPENSE:
Deposits ............................... (211,530) 396,200 -- 775,826
Borrowings ............................. 280,671 245,400 (26,088) 838,505
----------- ------------- -------------- ------------
Total interest expense ............... 69,141 641,600 (26,088) 1,614,331
Net interest income .................... (69,764) 376,111 26,088 804,539
Provision for loan losses .............. -- 31,800 -- 79,894
----------- ------------- -------------- ------------
Net interest income after provision for
loan losses ........................... (69,764) 344,311 26,088 724,645
NONINTEREST INCOME:
Customer banking fees .................. (22,228) 42,100 -- 72,656
Mortgage banking operations ............ -- 3,600 -- 151,170
Net gain (loss) on sales of assets .... -- 6,600 -- 4,896
Other .................................. (789) 2,400 -- 39,046
----------- ------------- -------------- ------------
Total noninterest income ............. (23,017) 54,700 -- 267,768
NONINTEREST EXPENSE:
Compensation and benefits .............. (19,476) 69,408 -- 234,861
Other .................................. (25,823) 158,283 -- 377,883
----------- ------------- -------------- ------------
Total noninterest expense ............ (45,299) 227,691 -- 612,744
----------- ------------- -------------- ------------
Income (loss) before income taxes and
minority interest ..................... (47,482) 171,320 26,088 379,669
Federal and state income tax (benefit)
expense ............................... (4,671) 22,692 2,567 (26,396)
----------- ------------- -------------- ------------
Income (loss) before minority interest (42,811) 148,628 23,521 406,065
Minority interest--Series A Preferred
Stock dividends, net .................. -- -- 36,956 36,956
----------- ------------- -------------- ------------
Net income (loss) ...................... (42,811) 148,628 (13,435) 369,109
Existing Preferred Stock dividends .... -- 25,600 -- 60,184
----------- ------------- -------------- ------------
Net income (loss) available to common
stockholder ........................... $ (42,811) $ 123,028 $(13,435) $ 308,925
=========== ============= ============== ============
</TABLE>
- ------------
(a) Represents pro forma results of operations related to the SFFed
Acquisition. See details on P-22.
(b) Represents pro forma results of operations related to the LMUSA
Purchases. See details on P-26.
(c) Represents pro forma results of operations related to the Branch Sales.
See details on P-28.
(d) Represents pro forma results of operations related to the Cal Fed
Acquisition. See details on P-30.
(e) Represents adjustments to reflect (i) the reduction in borrowing
expenses related to the issuance of the Series A Preferred Shares and
(ii) dividends on the Series A Preferred Shares, net of income tax
benefit.
OC-15
<PAGE>
PROJECTED PRO FORMA REGULATORY CAPITAL RATIOS OF THE BANK
Prior to the consummation of the Cal Fed Acquisition, the Capital
Contribution totalling approximately $700 million was contributed by Holdings
to First Nationwide.
After giving effect to the Cal Fed Acquisition, the Capital Contribution
and the issuance of the Series A Preferred Shares at September 30, 1996, on a
pro forma basis, the Bank is expected to exceed minimum regulatory capital
requirements and to qualify for "well-capitalized" status. The following is a
reconciliation of the Bank's pro forma stockholders' equity to regulatory
capital as of September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of the Bank ........................ $2,318 $2,318 $2,318
Minority interest--Series A Preferred Shares ........... 450 450 450
Unrealized holding gain on securities available for
sale, net .............................................. (35) (35) (35)
Non-qualifying loan servicing rights .................... (44) (44) (44)
Non-allowable capital:
Preferred stock in excess of 50% of Tier 1 Capital .... (97) (97) (97)
Intangible assets ...................................... (699) (699) (699)
Goodwill Litigation Asset .............................. (133) (133) (133)
Investment in subsidiaries ............................. (35) (35) (35)
Excess deferred tax assets ............................. (74) (74) (74)
Supplemental capital:
Qualifying subordinated debt ........................... -- -- 108
General loan loss reserves ............................. -- -- 226
Assets required to be deducted:
Land loans with more than 80% LTV ratio ................ -- -- (2)
---------- --------- ------------
Regulatory capital of the Bank .......................... $1,651 $1,651 $1,983
========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
RISK-BASED
CORE -------------------------
CAPITAL TIER 1 TOTAL CAPITAL
RATIO RATIO RATIO
--------- -------- ---------------
<S> <C> <C> <C>
Regulatory capital of the Bank .... 5.51% 9.20% 11.06%
Well-capitalized ratio ............. 5.00% 6.00% 10.00%
--------- -------- ---------------
Excess above well-capitalized ratio 0.51% 3.20% 1.06%
========= ======== ===============
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios was approximately $30.0 billion. Risk-weighted assets used for the
risk-based core and total capital ratios amounted to approximately $17.9
billion.
OC-16
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The summary historical financial data presented under the captions
"Selected Operating Data" and "Selected Financial Data," have been derived
from the Consolidated Financial Statements of First Nationwide.
The following data should be read in conjunction with the Consolidated
Financial Statements of First Nationwide and the notes thereto included
elsewhere in this Offering Circular. See "Selected Historical Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--First Nationwide."
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
---------------------- ------------------------
1996(1) 1995 1995 1994(2)
---------- ---------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income ......................................... $932,578 $797,856 $1,075,504 $292,984
Interest expense ........................................ 586,358 530,066 709,276 193,464
Net interest income ..................................... 346,220 267,790 366,228 99,520
Provision for loan losses ............................... 29,700 18,000 37,000 6,226
Noninterest income ...................................... 595,461 105,256 150,973 41,158
Noninterest expense ..................................... 370,144 245,042 326,734 95,311
Income before income taxes and extraordinary item ...... 541,837 110,004 153,467 39,141
Income tax (benefit) expense (3) ........................ (77,523) 8,822 (55,826) 3,191
Income before extraordinary item ........................ 619,360 101,182 209,293 35,950
Extraordinary item--(loss) gain on early extinguishment
of debt, net ........................................... (1,586) 1,967 1,967 1,376
Net income .............................................. 617,774 103,149 211,260 37,326
SELECTED PERFORMANCE RATIOS
Return on average assets (4) ............................ 4.79% .94% 1.44% .84%
Return on average common equity (5) ..................... 75.72 19.24 32.40 17.00
Yield on interest-earning assets (6) .................... 7.75 7.65 7.72 6.85
Cost of interest-bearing liabilities (7) ................ 5.03 5.25 5.24 4.73
Net interest margin (8) ................................. 2.87 2.55 2.63 2.33
</TABLE>
OC-17
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------
1996(1) 1995 1994(2)
---------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SELECTED FINANCIAL DATA
Securities available for sale (9) ................ $ 567,933 $ 348,561 $ 45,000
Securities held to maturity (9) .................. 4,277 1,455 411,859
Mortgage-backed securities available for sale (9) 1,660,140 1,477,514 --
Mortgage-backed securities held to maturity (9) . 1,700,387 1,524,488 3,153,812
Loans receivable, net ............................ 10,578,170 8,831,018 9,966,886
Covered assets ................................... -- 39,349 311,603
Total assets ..................................... 16,809,461 14,637,445 14,669,153
Deposits ......................................... 8,799,990 10,241,628 9,196,656
Securities sold under agreements to repurchase .. 2,127,574 969,510 1,883,490
Borrowings ....................................... 4,028,416 2,189,731 2,605,848
Total liabilities ................................ 15,347,880 13,677,560 13,828,556
Stockholders' equity ............................. 1,461,581 959,885 840,597
REGULATORY CAPITAL RATIOS OF FIRST NATIONWIDE
Tangible capital ................................. 6.71% 5.84% 5.50%
Core capital ..................................... 6.71 5.84 5.50
Risk-based capital:
Core capital .................................... 10.81 9.14 8.86
Total capital ................................... 12.93 11.34 11.01
SELECTED OTHER DATA
Number of full service customer facilities ...... 116 160 156
Loans serviced for others (10) ................... $43,826,250 $28,170,543 $ 7,475,119
Approximate number of employees .................. 3,466 3,619 3,573
Non-performing assets as a percentage of First
Nationwide's total assets ....................... 1.36% 1.50% 1.49%
</TABLE>
(1) On January 31, 1996, FNMC consummated the LMUSA 1996 Purchase,
acquiring a $14.1 billion loan servicing portfolio. On February 1,
1996, First Nationwide acquired SFFed, with assets at fair values
totalling approximately $4 billion and liabilities (including deposit
liabilities) with fair values totalling approximately $3.8 billion.
During the nine months ended September 30, 1996, First Nationwide
closed the Branch Sales, with associated deposit accounts totalling
$4.6 billion. Noninterest income for the nine months ended September
30, 1996 includes pre-tax gains of $363.0 million related to the
Branch Sales. Noninterest expense for the nine months ended September
30, 1996 includes a pre-tax charge of $60.1 million for the Special
SAIF Assessment (as defined herein).
(2) On October 3, 1994, effective immediately following the close of
business on September 30, 1994, First Nationwide acquired assets with
fair values totalling approximately $14.1 billion and liabilities
(including deposit liabilities) with fair values totalling
approximately $13.4 billion from Old FNB.
(3) Income tax expense recorded in 1994 after the FN Acquisition
represents federal alternative minimum tax ("AMT") reduced, to the
extent of 90%, by net operating loss carryovers, and state tax of an
assumed rate of 8%. Income tax benefit for the nine months ended
September 30, 1996 and in 1995 includes the recognition of a deferred
tax benefit of $125 million and of $69 million, respectively, offset
by federal AMT tax reduced, to the extent of 90%, by net operating
loss carryovers and state tax at an assumed rate of 8%.
(4) Return on average assets represents net income as a percentage of
average assets for the periods presented. For the nine months ended
September 30, 1996 and 1995, return on average assets is annualized.
(5) Return on average common equity represents net income available to
common stockholders as a percentage of average common equity for the
periods presented. For the nine months ended September 30, 1996 and
1995, return on average common equity is annualized.
(6) Yield on interest-earning assets represents interest income as a
percentage of average interest-earning assets. For the nine months
ended September 30, 1996 and 1995, yield on interest-earning assets
is annualized.
<PAGE>
(7) Cost of interest-bearing liabilities represents interest expense as a
percentage of average interest-bearing liabilities. For the nine
months ended September 30, 1996 and 1995, cost of interest-bearing
liabilities is annualized.
(8) Net interest margin represents net interest income as a percentage of
average interest-earning assets. For the nine months ended September
30, 1996 and 1995, net interest margin is annualized.
(9) Fluctuation in securities and mortgage-backed securities held to
maturity and securities and mortgage-backed securities available for
sale from December 31, 1994 to December 31, 1995 resulted from the
reclassification of substantially all securities and mortgage-backed
securities (except for mortgage-backed securities resulting from the
securitization with recourse of certain of First Nationwide's loans)
from held to maturity to securities available for sale on December
29, 1995.
(10) Includes loans serviced by FNMC, First Nationwide and FGB Realty (as
defined herein), excluding loans serviced for First Nationwide by
FNMC.
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<PAGE>
RISK FACTORS
Prior to making an investment decision, prospective holders of Bank
Preferred Stock should consider carefully all of the information set forth in
this Offering Circular and, in particular, should evaluate the following
risks. This Offering Circular contains certain forward-looking statements and
information relating to the Bank that are based on the beliefs of management
as well as assumptions made by and information currently available to
management. Such forward looking statements are principally contained in the
sections "Business -- Strategy" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." In addition, in those and
other portions of this document, the words "anticipate," "believe,"
"estimate," "expect," "intends" and similar expressions, as they relate to
the Bank or the Bank's management, are intended to identify forward-looking
statements. Such statements reflect the current views of the Bank with
respect to future events and are subject to certain risks, uncertainties and
assumptions, including the risk factors described in this Offering Circular.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially
from those described herein as anticipated, believed, estimated or expected.
The Bank does not intend to update these forward-looking statements.
THE AUTOMATIC EXCHANGE
The Bank Preferred Stock will be issued in an automatic exchange for the
Series A Preferred Shares, only if (i) the Bank becomes "undercapitalized"
under prompt corrective action regulations, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate federal regulatory
agency, in its sole discretion, anticipates the Bank becoming
"undercapitalized" in the near term. As a result, holders of Series A
Preferred Shares would become holders of preferred stock of the Bank at a
time when the Bank's financial condition was deteriorating or when the Bank
had been placed into conservatorship or receivership. In the event of
receivership of the Bank, the claims of depositors and secured, senior,
general and subordinated creditors of the Bank would be entitled to a
priority of payment over the claims of holders of equity interests such as
the Bank Preferred Stock. As a result of such subordination, either if the
Bank were to be placed into receivership after the automatic exchange or if
the automatic exchange were to occur after receivership of the Bank, the
holders of the Bank Preferred Stock likely would receive, if anything,
substantially less than the holders of the Series A Preferred Shares would
have received had the Series A Preferred Shares not been exchanged for Bank
Preferred Stock.
PAYMENT OF DIVIDENDS
There is no obligation to declare dividends on the Bank Preferred Stock.
Because dividends on the Bank Preferred Stock are noncumulative, if the Board
of Directors of the Bank does not declare the quarterly dividend payable on
the Bank Preferred Stock, the holders of the Bank Preferred Stock will have
no right to receive a dividend for such period, whether or not dividends on
the Bank Preferred Stock are declared by the Board of Directors for any
future period. The Bank's ability to pay dividends on Bank Preferred Stock
would also be subject to the prior and superior rights, if any, of holders of
other classes or series of equity securities of the Bank issued in the
future.
The terms of the 11 1/2% Preferred Stock provide that the Bank may not
declare or pay any full dividends with respect to any parity stock, such as
the Bank Preferred Stock, unless and until the Bank has paid full dividends
on the 11 1/2% Preferred Stock for the immediately preceding dividend period.
The Bank is currently in compliance with such requirement.
The federal thrift laws, including the regulations of the OTS, limit the
Bank's ability to pay dividends on its capital stock including the Bank
Preferred Stock. The Bank generally may not declare dividends or make any
other capital distribution if, after the payment of such dividend or other
distribution, it would fall within any of the three undercapitalized
categories under the prompt corrective action standards of the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"). Other
limitations apply to the Bank's ability to pay dividends, the magnitude of
which depends upon the extent to which the Bank meets its regulatory capital
requirements. In addition, the HOLA requires every savings association
subsidiary of a savings and loan holding company to give the OTS at least 30
days' advance notice of any proposed dividends to be made on its guarantee,
permanent or other non-withdrawable stock or else such dividend will be
invalid. Further the OTS may prohibit any capital distribution that it
determines would constitute an unsafe or unsound practice.
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<PAGE>
As of September 30, 1996, First Nationwide met the capital requirements
of a "well capitalized" institution under the FDICIA prompt corrective action
standards. Although management expects the Bank to remain "well capitalized,"
there can be no assurance that the Bank will continue to be "well
capitalized" under applicable OTS regulations. If the Bank were only
"adequately capitalized," it would not be able to accept Brokered Deposits
(as defined herein) unless it received a waiver from the FDIC. See
"Regulation."
STRATEGY
Management intends to continue the implementation of its various
strategies in order to capitalize on the strengths of the Bank. See "Business
Strategy." The continued implementation of any of management's strategies is
subject to numerous contingencies beyond management's control. These
contingencies include general and regional economic conditions, competition
and changes in regulation and interest rates. Accordingly, no assurance can
be given that any of these strategies will prove to be effective or that
management's goals will be achieved.
DISTRIBUTIONS OF EXCESS CAPITAL TO HOLDINGS
The Bank anticipates that it will from time to time distribute to Holdings
a substantial portion of its excess capital, subject to applicable
limitations under the OTS regulations and the terms of the Preferred Stock.
Such distributions would reduce the level of the Bank's excess capital to the
extent of such distributions. If the Bank makes such distributions, it is
possible that the Bank would not have sufficient excess capital in future
periods to make dividend payments or other distributions with respect to the
Preferred Stock.
ECONOMIC CONDITIONS
The Bank's loan portfolio is concentrated in California. As a result, the
financial condition of the Bank will be subject to general economic
conditions and, in particular, to conditions in the California residential
real estate market. Due to the slow recovery of the economy, particularly in
California's market for real estate, the Bank may find it difficult to
originate a sufficient volume of high-quality residential mortgage loans or
maintain its asset quality, either of which could negatively impact future
performance. In addition, any downturn in the economy generally, and in
California in particular, could further reduce real estate values and the
volume of mortgages originated. Real estate values in California could also
be affected by earthquakes.
INTEREST RATE RISK AND CREDIT RISK
It is expected that the Bank will continue to realize income primarily
from the differential or "spread" between the interest earned on loans,
securities and other interest-earnings assets, and interest paid on deposits,
borrowings and other interest-bearing liabilities. Net interest spreads are
affected by the difference between the maturities and repricing
characteristics of interest-earning assets and interest-bearing liabilities.
In addition, loan volume and yields are affected by market interest rates on
loans, and rising interest rates generally are associated with a lower volume
of loan originations. It is expected that a substantial majority of the
Bank's assets will continue to be indexed to changes in market interest rates
and a substantial majority of its liabilities will continue to be short term,
which will mitigate the negative effect of a decline in yield on its assets.
At September 30, 1996, First Nationwide had $12.2 billion in assets indexed
to changes in market rates and $12.9 billion in liabilities maturing or
repricing within one year. At September 30, 1996, after giving effect to the
Cal Fed Acquisition, the Capital Contribution and the issuance of the Series
A Preferred Shares, the Bank would have had $22.7 billion in assets indexed
to changes in market rates and $22.2 billion in liabilities maturing or
repricing within one year. In addition, the lag in implementation repricing
terms on the Bank's adjustable rate assets may result in a decline in net
interest income in a rising interest rate environment. There can be no
assurance that the Bank's interest rate risk will be minimized or eliminated.
In addition, an increase in the general level of interest rates may adversely
affect the ability of certain borrowers to pay the interest on and prinicipal
of their
OC-20
<PAGE>
obligations. Accordingly, changes in levels of market interest rates could
materially adversely affect the Bank's net interest spread, asset quality,
loan origination volume and overall results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management."
Securities owned by the Bank are accounted for financial reporting
purposes in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." On November 15, 1995, the Financial Accounting Standards Board
("FASB") issued a special report, "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities" (the
"Special Report"). The Special Report provided all entities a one-time
opportunity to reassess their ability and intent to hold securities to
maturity and allowed a one-time reclassification of securities from
held-to-maturity to securities available-for-sale without "tainting" the
remaining held-to-maturity securities. On December 29, 1995, First Nationwide
reclassified $1.5 billion and $231.8 million in carrying value of
mortgage-backed securities and U.S. government and agency securities,
respectively, from the held-to-maturity to the available-for-sale portfolio,
resulting in a net after-tax increase of $22.5 million in stockholders'
equity. If the market value of these securities and mortgage-backed
securities is subsequently less than the carrying value, there will be a
negative impact on consolidated stockholders' equity for financial reporting
purposes; however, there will be no impact on the Bank's regulatory capital
because, by definition, the SFAS No. 115 equity component is not included in
regulatory capital.
ASSET QUALITY; SATISFACTION OF OBLIGATIONS OF GRANITE, OLD FNB AND FORD MOTOR
In the several years preceding the FN Acquisition, the FNB Acquired
Business had experienced losses stemming from increases in non-performing
assets. While the Bank may also experience such losses, management believes
that the risk that the Bank will suffer future adverse effects from any
additional deterioration of the portfolio acquired from Old FNB is minimized
by the disposition by Old FNB of non-performing assets prior to the FN
Acquisition, the retention by Old FNB of certain assets, principally
non-performing or other problem assets (with a net book value of
approximately $441 million at September 30, 1994), and the right of First
Nationwide pursuant to the Put Agreement to sell Granite up to $500 million
of certain assets, primarily multi-family and commercial real estate loans
and residential mortgage loans with an original principal balance greater
than $250,000 (the "Putable Assets"), which were primarily non-performing,
through November 30, 1995, less $89 million, the amount of sales of certain
nonperforming assets by Old FNB to Granite during the period from January 1,
1994 through the consummation of the FN Acquisition. At September 30, 1996,
the remaining available balance under the Put Agreement was approximately
$70.5 million, which First Nationwide fully utilized on December 5, 1996. Of
the approximately $228 million in non-performing assets at September 30,
1996, approximately $17.3 million were eligible to be sold to Granite under
the Put Agreement.
Since First Nationwide had not required Granite to purchase $500 million
of non-performing assets as of November 30, 1996, it had the right to require
Granite to purchase any qualifying Putable Assets of First Nationwide, other
than assets which previously became Putable Assets and which First Nationwide
did not require Granite to purchase, up to such $500 million maximum.
The Put Agreement did not protect the Bank from losses: (i) on the assets
not covered by the Put Agreement or the assets covered by the Put Agreement
in excess of the coverage limits described above, (ii) on the assets owned by
First Nationwide prior to the FN Acquisition, (iii) on the Putable Assets
which become non-performing and which First Nationwide did not require
Granite to purchase prior to the expiration of its rights under the Put
Agreement, (iv) on the assets acquired following the FN Acquisition or (v)
incurred after November 30, 1996. There can be no assurance that the Bank
will not experience losses from non-performing assets.
Pursuant to the Asset Purchase Agreement, Old FNB has agreed to indemnify
the Bank from certain breaches of representations, warranties and covenants.
Although the Bank believes that the obligations of Old FNB under the Asset
Purchase Agreement are enforceable against Old FNB, and that Old FNB
OC-21
<PAGE>
will have the ability to satisfy its obligations under such provisions,
there can be no assurance that a court will enforce such provisions or that
Old FNB will have the ability to satisfy their respective obligations. Ford
Motor has guaranteed the obligations of Old FNB under the Asset Purchase
Agreement.
MORTGAGE PORTFOLIO AND MSRS
At September 30, 1996, First Nationwide held a 1-4 unit residential
mortgage loan portfolio of approximately $6.3 billion, and MSRs on a 1-4 unit
residential loan portfolio totalling approximately $42.7 billion. First
Nationwide's MSRs had a book value of $406.7 million at September 30, 1996.
After giving effect to the Cal Fed Acquisition, at September 30, 1996, the
Bank would have held a 1-4 unit residential mortgage loan portfolio of
approximately $14.6 billion, MSRs on a 1-4 unit residential loan portfolio
totalling approximately $46.2 billion and the Bank's MSRs would have had a
book value of $438.9 million. A decline in long-term interest rates generally
results in an acceleration in mortgage loan prepayments, and higher than
anticipated levels of prepayments generally cause the accelerated
amortization of MSRs and generally will result in reductions in the market
value of the MSRs and in the Bank's servicing fee income. There can be no
assurance that long-term interest rates will not decline and the rate of
mortgage loan prepayments will not exceed management's estimates, resulting
in a charge to earnings in the period of adjustment and reductions in the
market value of the MSRs and in loan servicing fee income, or that management
will be able to reinvest the cash from mortgage loan prepayments in assets
earning yields comparable to the yields on the prepaid mortgages.
COMPETITION
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money
market mutual funds and brokerage firms in attracting and retaining deposits.
Competition for deposits from large commercial banks is particularly strong.
Many of the nation's thrift institutions and many large commercial banks have
a significant number of branch offices in the areas in which the Bank
operates.
In addition, there is strong competition in originating and purchasing
real estate and consumer loans, principally from other savings and loan
associations, commercial banks, mortgage banking companies, insurance
companies, consumer finance companies, pension funds and commercial finance
companies. The primary factors in competing for loans are the quality and
extent of service to borrowers and brokers, economic factors such as interest
rates, interest rate caps, rate adjustment provisions, loan maturities,
loan-to-value ("LTV") ratios, loan fees, and the amount of time it takes to
process a loan from receipt of the loan application to date of funding. The
Bank's future performance is dependent on its ability to originate a
sufficient volume of mortgage loans in its local market areas and through its
wholesale network and, if it is unable to originate a sufficient volume of
mortgage loans, to purchase a sufficient quantity of high-quality
mortgage-backed securities with adequate yields. There can be no assurance
that the Bank will be able to effect such actions on satisfactory terms.
REGULATION
The financial institutions industry is subject to extensive regulation,
which materially affects the business of the Bank. Statutes and regulations
to which the Bank and its parent companies are subject may be changed at any
time, and the interpretation of these statutes and regulations is also
subject to change. There can be no assurance that future changes in such
statutes and regulations or in their interpretation will not adversely affect
the business of the Bank.
TAX SHARING AGREEMENT; AVAILABILITY OF NET OPERATING LOSS CARRYOVERS
The Bank, Holdings and Mafco Holdings have entered into a tax sharing
agreement (the "Tax Sharing Agreement") effective as of January 1, 1994,
pursuant to which: (i) the Bank will pay to Holdings amounts equal to the
taxes that the Bank would be required to pay if it were to file a return
separately
OC-22
<PAGE>
from the affiliated group of which Mafco Holdings is the common parent (the
"Mafco Group"), and (ii) Holdings will pay to Mafco Holdings amounts equal to
the taxes that Holdings would be required to pay if it were to file a
consolidated return on behalf of itself and the Bank separately from the
Mafco Group. The Tax Sharing Agreement allows the Bank to take into account,
in determing its liability to Holdings, any net operating loss carryovers
that it would have been entitled to utilize if it had filed separate returns
for each year since the formation of First Nationwide. The Tax Sharing
Agreement also allows Holdings to take into account in determining its
liability to Mafco Holdings, any net operating losses that it would have been
entitled to utilize if it had filed a consolidated return on behalf of itself
and the Bank for each year since the formation of First Nationwide.
Accordingly, pursuant to the Tax Sharing Agreement, the benefits of any net
operating lossses generated by First Nationwide since its formation are
retained by the Bank and Holdings.
First Nationwide generated significant federal income tax net operating
losses since it was organized in December 1988. This was due, in part, to the
fact that under applicable federal income tax law, certain financial
assistance received by First Nationwide pursuant to the Assistance Agreement
was excluded from the taxable income of First Nationwide. In addition to such
tax-free financial assistance, First Nationwide had been entitled to its
normal operating deductions, including interest expense and certain losses
relating to its loan portfolio. As a result, First Nationwide generated
significant net operating losses for federal income tax purposes even though
its operations were profitable. Furthermore, under the reorganization
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
First Nationwide succeeded to certain net operating loss carryovers of the
Texas Closed Banks.
At December 31, 1995, if First Nationwide would have filed a consolidated
tax return on behalf of itself and its subsidiaries for each year since the
formation of First Nationwide, it would have had approximately $2.6 billion
of regular net operating losses and approximately $959 million of AMT net
operating losses, both of which First Nationwide would have utilized. A
portion of such losses, to the extent not previously used to offset income,
will expire in the year 2002 and in each year thereafter and will fully
expire in 2007. It is expected that under the Tax Sharing Agreement, the Bank
and Holdings will be able to eliminate a significant portion of the amounts
that they otherwise would be required to pay to Holdings and Mafco Holdings,
respectively, under the Tax Sharing Agreement in respect of federal income
tax and, accordingly, it is not expected that the Bank or Holdings will
record significant amounts of federal income tax expense through 1997 as
members of the Mafco Group. Payments made by First Nationwide under the Tax
Sharing Agreement with the Mafco Group during the year ended December 31,
1995 totalled $5.1 million. There were no such payments in 1994. During 1998,
the Bank and Holdings anticipate that the AMT net operating losses will be
fully utilized and the Bank and Holdings will incur federal income tax
expense at a rate of 20 percent. Prior to 1998, the Bank and Holdings have
incurred and will continue to incur federal income tax expense at a 2 percent
rate because 90 percent of AMT net operating losses were available to offset
AMT income.
If for any reason the Bank and Holdings were to deconsolidate from the
Mafco Group, only the amount of the net operating loss carryovers of the Bank
and Holdings not already utilized by the Mafco Group would be available to
offset the taxable income of the Bank and Holdings. If for any reason the
Bank were to deconsolidate from Holdings with Holdings remaining a member of
the Mafco Group, the net operating losses of the Bank not already utilized by
the Mafco Group would be available to offset the taxable income of the Bank
subsequent to the date of deconsolidation, but would no longer be available
to offset the taxable income of Holdings. If the Bank had deconsolidated as
of December 31, 1995, the Bank would have had approximately $1.0 billion of
regular net operating loss carryforwards. It cannot be predicted to what
extent the Mafco Group will utilize the net operating losses of Holdings
and/or the Bank in the future or the amount, if any, of net operating loss
carryforwards that Holdings or the Bank may have upon deconsolidation. The
net operating loss carryovers are subject to review and potential
disallowance, in whole or in part, by the Internal Revenue Service (the
"IRS"). Any disallowance of the Bank's net operating loss carryovers may
increase the amounts that the Bank would be required to pay to Holdings under
the Tax Sharing Agreement and that Holdings would be required to pay to Mafco
Holdings and would therefore decrease the earnings of the Bank available for
dividends on the Bank Preferred Stock. See "Certain Transactions--Tax Sharing
Agreement."
OC-23
<PAGE>
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to Holdings, as the sole owner of the Bank's
Common Stock, and to holders of the Preferred Stock in each case in excess of
the Bank's accumulated earnings and profits, as well as any distributions in
dissolution or in redemption or liquidation of stock, may cause the Bank to
recognize a portion of its tax bad debt reserves as income and, accordingly,
could cause the Bank to make payments to Holdings under the Tax Sharing
Agreement.
TAXATION OF THE BANK
As a result of the Small Business Job Protection Act of 1996, which
provided for the repeal of the Section 593 reserve method of accounting for
bad debts by thrift institutions which are treated as large banks, the Bank
will generally be required to take into income the balance of its post-1987
bad debt reserves over a six year period beginning in 1996 subject to a two
year deferral if certain residential loan tests are satisfied. Consequently,
the Bank may be required to make payments to Holdings under the Tax Sharing
Agreement if the Bank has insufficient expenses and losses to offset such
income. As of December 31, 1995, First Nationwide had tax bad debt reserves
totaling $203 million, all of which is subject to recapture into income and
has been provided for in deferred tax liabilities. Additionally, as of
December 31, 1995, Cal Fed and SFFed had tax bad reserves of $196 million and
$25 million, respectively, of which $73 million and $1 million is post-1987
bad debt reserves subject to recapture into income.
LACK OF EXISTING MARKET
In the event the Series A Preferred Shares are exchanged for Bank
Preferred Stock, application will be made to list the Bank Preferred Stock on
the NYSE. There can be no assurance as to the liquidity of the trading
markets for the Bank Preferred Stock, if issued, or that an active public
market for the Bank Preferred Stock would develop or be maintained.
CONTROL BY MACANDREWS & FORBES
All of the Bank's Common Stock is owned by Holdings. Holdings is 80%
indirectly owned through MacAndrews & Forbes by Ronald O. Perelman and 20%
indirectly owned by Hunter's Glen, a limited partnership controlled by Gerald
J. Ford, the Chairman of the Board, Chief Executive Officer and a director of
the Bank. Parent Holdings owns 100% of the class A common stock of Holdings,
representing 80% of its voting common stock (representing approximately 85%
of the voting power of its voting common stock) and Hunter's Glen owns 100%
of the class B common stock of Holdings, representing 20% of its voting
common stock (representing approximately 15% of the voting power of its
common stock). See "Ownership of the Common Stock" and "Certain
Transactions--Transactions with Mr. Ford." As a result, MacAndrews & Forbes
will be able to direct and control the policies of the Bank and its
subsidiaries, including mergers, sales of assets and similar transactions.
See "Certain Transactions--Relationship with MacAndrews & Forbes."
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<PAGE>
STRATEGIC ACQUISITIONS AND DISPOSITIONS
First Nationwide's total consolidated assets have grown from $924 million
as of September 30, 1994, immediately prior to the FN Acquisition, to
approximately $16.8 billion at September 30, 1996 on an historical basis and,
after giving effect to the Cal Fed Acquisition, the issuance of the Series A
Preferred Shares and the Capital Contribution, the Bank's total consolidated
assets would be approximately $31.0 billion. The current composition of First
Nationwide's assets and operations resulted principally from certain of the
acquisitions and dispositions described below. The FN Acquisition laid the
foundation for First Nationwide's current strategy, the implementation of
which is reflected in subsequent acquisitions and dispositions. See
"Business--Business Strategy."
THE CAL FED ACQUISITION
The Cal Fed Acquisition
On July 27, 1996, Holdings entered in the Merger Agreement with Cal Fed
and California Federal, pursuant to which on January 3, 1997 Holdings
acquired Cal Fed and California Federal. At September 30, 1996, California
Federal had approximately $14.1 billion in assets and $8.8 billion in
deposits and operated 118 branches in California and Nevada. 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 are
perfected, shares held directly or indirectly by Holdings and shares held as
treasury stock) was converted into and became the right to receive a cash
payment of $23.50 and one-tenth of one Secondary Litigation Interest. See
"Business--Sources of Funds--Cal Fed Contingent Litigation Recovery
Participation Interests." 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 Litigation Interest (as defined herein). No
fractional Secondary Litigation Interests were issued in the merger. The
Merger Agreement was amended and restated as of September 20, 1996 to (i)
make CFB Holdings, Inc., a wholly owned subsidiary of Holdings, a party to
the Merger Agreement and (ii) amend the provisions relating to fractional
Secondary Litigation Interests. Pursuant to such amendment and restatement,
the stockholders of Cal Fed who would otherwise receive fractional interests
shall not be entitled to receive fractional interests. Such stockholders are
expected to receive 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.
Upon consummation of the Cal Fed Acquisition, Holdings contributed the
capital stock of Cal Fed to First Nationwide. Cal Fed was liquidated and
First Nationwide merged with California Federal, with California Federal
being the surviving bank. In connection with the merger of California Federal
with First Nationwide, each share of the 11 1/2% Preferred Stock of First
Nationwide was converted into and become one share of preferred stock of the
surviving bank, California Federal, which preferred stock has the same
relative rights, terms and preferences as the 11 1/2% Preferred Stock. All
references in this Offering Circular to the 11 1/2% Preferred Stock for the
period preceding consummation of the Cal Fed Acquisition will be deemed
references to the comparable preferred stock issued by California Federal, as
the surviving bank.
After giving effect to the Cal Fed Acquisition, the issuance of the Series
A Preferred Shares and the Capital Contribution, at September 30, 1996, the
Bank 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 gained a substantial presence in Southern
California. In order to realize economies of scale and cost reduction
opportunities presented by the Cal Fed Acquisition, the Bank plans to
consolidate or eliminate duplicative back office operations and
administrative and management functions as soon as practicable. The Bank
presently estimates that it will save approximately $74 million in
noninterest expense during the first twelve months of operations following
the Cal Fed Acquisition as compared to operating Cal Fed on a stand-alone
basis. In connection with the Cal Fed Acquisition and the consolidation of
Cal Fed's operations with those of First Nationwide, the Bank expects to
capitalize acquisition costs totalling approximately $110 million.
OC-25
<PAGE>
Holdings financed the Cal Fed Acquisition with (i) the net proceeds of
approximately $555 million from the issuance of the 10 5/8% Notes, (ii) an
investment by Special Purpose Corp. of $145 million in exchange for the
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 as the Capital Contribution prior to the Cal Fed Acquisition.
As a result of the Cal Fed Acquisition, the Bank is obligated with respect
to the following outstanding securities of California Federal (in addition to
the outstanding securities of First Nationwide): (i) $50 million of 10.668%
Senior Subordinated Notes due 1998 (the "Cal Fed Senior Subordinated Notes"),
(ii) $2.7 million of 6 1/2% Convertible Subordinated Debentures Due 2001 (the
"Cal Fed 6 1/2% Convertible Subordinated Debentures"), (iii) $4.3 million of
10% Subordinated Debentures Due 2003 (the "Cal Fed 10% Subordinated
Debentures") and (iv) the 10 5/8% Preferred Stock with liquidation value of
$172.5 million. See "Business--First Nationwide--Sources of Funds" and
"Business--California Federal--Sources of Funds."
OTHER ACQUISITIONS
The Home Federal Acquisition
On June 1, 1996, First Nationwide consummated the Home Federal
Acquisition, pursuant to which First Nationwide acquired HFFC and its wholly
owned federally chartered savings association subsidiary, Home Federal, which
had approximately $717 million in assets and $632 million in deposits and
operated 15 branches in the Northern California area. The aggregate
consideration paid in connection with the Home Federal Acquisition was
approximately $67.8 million. First Nationwide financed the Home Federal
Acquisition with existing cash.
The SFFed Acquisition
On February 1, 1996, First Nationwide consummated the SFFed Acquisition
pursuant to which First Nationwide acquired SFFed and its wholly owned
federal savings association subsidiary, San Francisco Federal. The aggregate
consideration paid in the SFFed Acquisition was approximately $264 million.
San Francisco Federal operated 35 branches in the Northern California area,
and as a result of the SFFed Acquisition and the related consolidation of
branches, the number of First Nationwide's retail branches in Northern
California increased to 63. On February 1, 1996, San Francisco Federal had
approximately $4.0 billion in assets and approximately $2.7 billion in
deposits.
First Nationwide financed the SFFed Acquisition with existing cash and
other borrowings, some of which were repaid with the $311.8 million of
proceeds from the sale of consumer loans on February 23, 1996.
In connection with the SFFed Acquisition, First Nationwide assumed $50
million of 11.20% Senior Notes issued by SFFed in September 1994 (the "SFFed
Notes"). See "Business--First Nationwide--Sources of Funds--SFFed Notes."
The LMUSA Purchases
On October 2, 1995, FNMC purchased from LMUSA in the LMUSA 1995 Purchase a
loan servicing portfolio of approximately $11.1 billion (including $3.1
billion of MSRs that are owned by third parties who have subcontracted to
FNMC the servicing function (a "subservicing portfolio")), a master servicing
portfolio of $2.9 billion and other assets, principally existing loans and
loan production operations of LMUSA, for $100 million, payable in
installments, and the assumption of certain indebtedness relating to the
acquired loan portfolio. On January 31, 1996, FNMC purchased in the LMUSA
1996 Purchase LMUSA's remaining $14.1 billion loan servicing portfolio
(including a subservicing portfolio of $2.4 billion), a master servicing
portfolio of $2.7 billion, its real estate acquired through loan foreclosures
in connection with its servicing operations and its trade names for $160.0
million (as adjusted pursuant to the terms of the agreement) payable in
installments and subject to certain adjustments, and the assumption of
certain of LMUSA's obligations secured by its mortgage servicing operations.
OC-26
<PAGE>
The Branch Purchases
In April 1995, First Nationwide consummated the Tiburon Purchase in which
it acquired approximately $13 million in deposits located in Tiburon,
California from East-West Federal Bank, a federal savings bank. In August
1995, First Nationwide consummated the ITT Purchase in which it acquired
three retail branches located in Orange County, California with deposit
accounts totalling approximately $356 million from ITT Federal Bank, fsb. On
December 8, 1995, First Nationwide consummated the Sonoma Purchase in which
it acquired four retail branches located in Sonoma County, California with
associated deposit accounts of approximately $144 million from Citizens
Federal Bank, a Federal Savings Bank. The weighted average deposit premium
paid in connection with the Branch Purchases was 3.78%.
The Maryland Acquisition
In December 1994, FNMC entered into a series of agreements with the
Resolution Trust Corporation as conservator for Standard Federal Savings
Association, America's Mortgage Servicing, Inc., A Mortgage Company,
America's Lending Network, Inc., and StanFed Financial Services, Inc.
(collectively, "StanFed"), of Frederick, Maryland, to acquire certain of
StanFed's mortgage servicing assets and assume certain of StanFed's mortgage
servicing liabilities for approximately $178 million. As a result of the
Maryland Acquisition, FNMC acquired a 1-4 unit residential mortgage loan
servicing portfolio of approximately $11.4 billion (including a sub-servicing
portfolio of $1.8 billion) and certain other assets and liabilities. The
transaction was consummated on February 28, 1995. In connection with the
Maryland Acquisition, FNMC has moved its mortgage servicing operations to
Maryland from its former location in Sacramento, California. Costs totalling
$5.7 million associated with such consolidation are included in noninterest
expense in First Nationwide's consolidated statement of operations for the
year ended December 31, 1995.
In April 1995, First Nationwide closed substantially all of its retail
loan production offices. Costs associated with closures of approximately $2.1
million are included in noninterest expense in First Nationwide's
consolidated statement of operations for the year ended December 31, 1995.
The FN Acquisition
On April 14, 1994, First Nationwide entered into the Asset Purchase
Agreement with Old FNB, an indirect subsidiary of Ford Motor, pursuant to
which, on October 3, 1994, effective immediately after the close of business
on September 30, 1994, First Nationwide purchased the FNB Acquired Business
for $726.5 million. Effective on October 1, 1994, First Nationwide changed
its name from "First Madison Bank, FSB" to "First Nationwide Bank, A Federal
Savings Bank."
First Nationwide financed the FN Acquisition and paid related fees and
expenses with: (i) a capital contribution by Holdings funded with the net
proceeds of (a) the issuance of the Holdings Senior Notes and (b) the
issuance of Holdings' class C common stock to Parent Holdings (all of which
class C common stock was redeemed on June 3, 1996), (ii) the net proceeds
from the issuance of the 11 1/2% Preferred Stock, and (iii) existing cash and
proceeds from securities sold under agreements to repurchase. See "Certain
Transactions."
OC-27
<PAGE>
DISPOSITIONS
The Branch Sales
From January through June of 1996, First Nationwide consummated the Branch
Sales in the following transactions:
<TABLE>
<CAPTION>
CARRYING VALUE AT
RESPECTIVE SALE DATE
-----------------------
SALE
CONSUMMATION NUMBER OF PRE-TAX
BRANCH LOCATION DATE BRANCHES SOLD DEPOSITS ASSETS GAIN
- --------------- -------------- -------------------- ------------ --------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
New York 1/12/96 7 $ 416,476 $ 5,997 $ 32,991
Ohio 1/19/96 28 1,392,561 20,480 130,660
New York 2/23/96 3 270,046 1,838 17,027
New York 3/15/96 5 615,572 8,083 48,933
New Jersey 3/22/96 4 501,262 6,396 35,938
New York 3/22/96 11 637,045 9,465 41,286
Michigan 6/28/96 21 799,226 15,060 56,177
-------------------- ------------ --------- ---------
Total 79 $4,632,188 $67,319 $363,012
==================== ============ ========= =========
</TABLE>
The Branch Sales resulted in gains of approximately $363.0 million on a
pre-tax basis through September 30, 1996, which represented an average
premium of 7.96% of the approximately $4.6 billion of deposits sold. The
gains from the Branch Sales were used, as necessary, to augment First
Nationwide's regulatory capital to maintain its "well capitalized" status
after the SFFed Acquisition.
The Illinois Sale
On October 7, 1994, First Nationwide sold (the "Illinois Sale") the FNB
Acquired Business' branch network located in Illinois consisting of 26
branches with approximately $1.2 billion in deposits to Household Bank,
f.s.b. The $89 million deposit premium received by First Nationwide was
treated as a reduction of intangible assets related to the FN Acquisition.
California Federal Preferred Capital Corporation
In November 1996, First Nationwide established the Company for the purpose
of acquiring, holding and managing real estate mortgage assets. All of the
Company's common stock is owned by the Bank. It is expected that
substantially all of the Company's mortgage assets will be acquired from the
Bank and affiliates of the Bank. The Company will enter into a subservicing
agreement with FNMC pursuant to which FNMC will service the Company's
mortgage assets. The Company will be the issuer of the Series A Preferred
Shares which, under certain circumstances, would be exchanged for the Bank
Preferred Stock.
USE OF PROCEEDS
The Bank Preferred Stock is to be issued, if ever, in connection with an
exchange of the Series A Preferred Shares, which shares were sold pursuant to
an effective registration statement filed with the SEC. The proceeds from the
sale of the Series A Preferred Shares were used by the Company to purchase a
portfolio of mortgage assets from the Bank. The Bank will not receive any
proceeds from the exchange of the Series A Preferred Shares for Bank
Preferred Stock.
OC-28
<PAGE>
CONSOLIDATED CAPITALIZATION
The following table sets forth the actual consolidated capitalization of
First Nationwide at September 30, 1996 and the capitalization of the Bank on
a consolidated basis at such date as adjusted to give effect to the Cal Fed
Acquisition, the issuance of the Series A Preferred Shares and the Capital
Contribution. The following table should be read in conjunction with the
Consolidated Financial Statements of First Nationwide and the notes thereto,
"Pro Forma Financial Data" and the Unaudited Pro Forma Financial Data
included elsewhere in this Offering Circular.
<TABLE>
<CAPTION>
CONSOLIDATED
CAPITALIZATION
FIRST OF THE BANK,
NATIONWIDE ADJUSTMENTS AS ADJUSTED
------------ --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits ...................................................... $8,799,990 $8,767,439 (a) $17,567,429
============ =============== ==============
Borrowings:
Securities sold under agreements to repurchase ............... $2,127,574 $ 962,700 (a) $ 2,656,049
(434,225)(b)
Other borrowings (primarily FHLB advances) ................... 3,931,744 3,282,357 (a) 7,214,101
------------ --------------- --------------
Total ...................................................... $6,059,318 $3,810,832 $ 9,870,150
============ =============== ==============
Long-term notes:
Old FNB Debentures ........................................... $ 89,831 $ -- $ 89,831
SFFed Notes .................................................. 6,841 -- 6,841
Cal Fed 10.668% Subordinated Notes ........................... -- 50,000 (c) 50,000
Cal Fed 10% Subordinated Debentures .......................... -- 4,300 (c) 4,300
Cal Fed 6 1/2% Convertible Subordinated Debentures .......... -- 2,700 (c) 2,700
------------ --------------- --------------
Total long-term notes ...................................... $ 96,672 $ 57,000 $ 153,672
============ =============== ==============
Minority interest--Series A Preferred Shares .................. $ -- $ 450,000 (d) $ 450,000
------------ --------------- --------------
Stockholders' equity:
As adjusted:
11 1/2% Noncumulative perpetual preferred stock, (par value
$100 per share; 5,000,000 shares authorized; 3,007,300
shares issued and outstanding) ............................. 300,730 -- 300,730
10 5/8% Noncumulative perpetual preferred stock, (par value
$100 per share; 1,725,000 shares authorized, issued and
outstanding) ............................................... -- 172,500 (a) 172,500
Common stock (par value $.01 per share; 50,000 shares
authorized, 800 shares issued and outstanding) ............. 1 -- 1
Additional paid-in capital .................................. 632,805 (15,775)(d) 1,317,030
700,000 (e)
Net unrealized holding gain on securities available for sale 35,087 -- 35,087
Retained earnings ........................................... 492,958 -- 492,958
------------ --------------- --------------
Total stockholders' equity ................................. 1,461,581 856,725 2,318,306
------------ --------------- --------------
Total capitalization .......................................... $1,461,581 $1,306,725 $ 2,768,306
============ =============== ==============
</TABLE>
- ------------
(a) Represents deposits, borrowed funds (including accrued interest payable
on all borrowings) and preferred stock of California Federal assumed by
First Nationwide at their approximate respective fair values at
September 30, 1996.
(b) Represents utilization of proceeds from the issuance of the Series A
Preferred Shares to reduce borrowings of the Bank.
(c) Represents long-term notes of California Federal assumed by First
Nationwide at their approximate respective fair values at September 30,
1996, excluding accrued interest payable.
(d) Represents the issuance of the Series A Preferred Shares and related
issuance costs.
(e) Represents the Capital Contribution.
OC-29
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data gives effect to the Acquisitions,
the Branch Sales, the Capital Contribution and the issuance of the Series A
Preferred Shares. 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 First Nationwide giving effect to the Cal Fed
Acquisition, the Capital Contribution and the issuance of the Series A
Preferred Shares as if such transactions occurred on September 30, 1996, and
(ii) the historical consolidated statement of operations of First Nationwide
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, the Capital Contribution and the issuance of the Series A Preferred
Shares 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 First Nationwide for the
year ended December 31, 1995 giving effect to the Acquisitions, the Branch
Sales, the Capital Contribution and the issuance of the Series A Preferred
Shares 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 First Nationwide that
actually would have resulted had the Acquisitions, the Branch Sales, the
Capital Contribution and the issuance of the Series A Preferred Shares
occurred at the dates indicated, or project the results of operations or
financial position of the Bank for any future date or period.
The pro forma financial data should be read in conjunction with the
accompanying notes thereto and the Unaudited Pro Forma Financial Data
included elsewhere in this Offering Circular. In addition, the pro forma
financial data should be read in conjunction with the Consolidated Financial
Statements of First Nationwide and the notes thereto, the Consolidated
Financial Statements of SFFed and the notes thereto and the Consolidated
Financial Statements of California Federal and the notes thereto, contained
elsewhere in this Offering Circular. See "Selected Historical Financial Data"
and "Projected Pro Forma Regulatory Capital Ratios of the Bank."
OC-30
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAL FED ACQUISITION
-----------------------------
FIRST CALIFORNIA VALUATION
NATIONWIDE FEDERAL ADJUSTMENTS
HISTORICAL HISTORICAL (A) (B)
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
Cash and cash
equivalents .......... $ 144,345 $ 197,900 $ --
Securities ............ 572,210 1,444,400 (741)(1)
Mortgage-backed
securities ........... 3,360,527 2,040,800 4,768 (1)
Loans, net ............ 11,288,403 10,055,100 (31,685)(1)
Office premises and
equipment, net ....... 92,088 64,000 (56,633)(1)
Mortgage servicing
rights, net .......... 406,669 4,866 27,392 (1)
Intangible assets .... 144,782 14,580 (14,580)(1)
Other assets .......... 800,437 305,054 185,720 (1)
------------- -------------- -------------
Total assets ......... $16,809,461 $14,126,700 $114,241
============= ============== =============
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits .............. $ 8,799,990 $ 8,763,600 $ 3,839 (1)
Borrowings ............ 6,155,990 4,304,100 (2,043)(1)
Other liabilities .... 391,900 254,900 5,300 (1)
------------- -------------- -------------
Total liabilities ... 15,347,880 13,322,600 7,096
------------- -------------- -------------
Minority interest .... -- -- --
Preferred stock ....... 300,730 172,500 --
Common stock .......... 1 -- --
Additional paid-in
capital .............. 632,805 865,700 --
Net unrealized holding
gain on securities .. 35,087 -- --
Retained earnings
(deficit) ............ 492,958 (234,100) 107,145 (1)
------------- -------------- -------------
Stockholders' equity 1,461,581 804,100 107,145
------------- -------------- -------------
Total liabilities,
minority interest
and stockholders'
equity .............. $16,809,461 $14,126,700 $114,241
============= ============== =============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAL FED ACQUISITION
-----------------------------
PRO FORMA CAL FED
ADJUSTMENTS ACQUISITION CAPITALIZATION PRO FORMA
(C) PRO FORMA (D) COMBINED
--------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents .......... $(992,839)(2) $ (794,939) $ 555,000 (4) $ 49,406
145,000 (4)
Securities ............ (300,000)(2) 1,143,659 -- 1,715,869
Mortgage-backed
securities ........... -- 2,045,568 -- 5,406,095
Loans, net ............ -- 10,023,415 -- 21,311,818
Office premises and
equipment, net ....... -- 7,367 -- 99,455
Mortgage servicing
rights, net .......... -- 32,258 -- 438,927
Intangible assets .... 554,094 (1) 554,094 -- 698,876
Other assets .......... -- 490,774 -- 1,291,211
--------------- ------------- -------------- -------------
Total assets ......... $(738,745) $13,502,196 $ 700,000 $31,011,657
=============== ============= ============== =============
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits .............. $ -- $ 8,767,439 $ -- $17,567,429
Borrowings ............ -- 4,302,057 (434,225)(5) 10,023,822
Other liabilities .... -- 260,200 -- 652,100
--------------- ------------- -------------- -------------
Total liabilities ... -- 13,329,696 (434,225) 28,243,351
--------------- ------------- -------------- -------------
Minority interest .... -- -- 450,000 (5) 450,000
Preferred stock ....... -- 172,500 -- 473,230
Common stock .......... -- -- -- 1
Additional paid-in
capital .............. (865,700)(3) -- 700,000 (4) 1,317,030
(15,775)(5)
Net unrealized holding
gain on securities .. -- -- -- 35,087
Retained earnings
(deficit) ............ 126,955 (3) -- -- 492,958
--------------- ------------- -------------- -------------
Stockholders' equity (738,745) 172,500 684,225 2,318,306
--------------- ------------- -------------- -------------
Total liabilities,
minority interest
and stockholders'
equity .............. $(738,745) $13,502,196 $ 700,000 $31,011,657
=============== ============= ============== =============
</TABLE>
- ------------
(a) Represents historical amounts obtained from California Federal's
unaudited financial statements.
(b) Represents adjustments to (i) record California Federal's assets and
liabilities at preliminary estimates of their respective fair values
and (ii) the elimination of California Federal's historical
intangible assets.
(c) Represents adjustments to record (i) the purchase price of the Cal
Fed Acquisition and (ii) the elimination of the common equity of
California Federal.
(d) Represents adjustments to record (i) the issuance of the Series A
Preferred Shares, (ii) utilization of proceeds from such issuance to
reduce borrowings of the Bank and (iii) the Capital Contribution.
OC-31
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF
FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
(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
California Federal 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 California
Federal to the fair value of the net assets to be acquired by First
Nationwide:
<TABLE>
<CAPTION>
<S> <C> <C>
Common equity of California Federal at September 30,
1996 ................................................... $ 631,600
Fair value adjustments: (c)
Securities ............................................. $ (741)
Mortgage-backed securities ............................. 4,768
Loans, net ............................................. (31,685)
Mortgage servicing rights .............................. 27,392
Office premises and equipment (d) ...................... (56,633)
Litigation asset, 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 ...................... 738,745
Purchase cost .......................................... 1,292,839
-----------
Excess of purchase cost over net assets acquired
("goodwill") .......................................... $ 554,094
===========
</TABLE>
(a)Represents cash to be received by California Federal 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).
OC-32
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF
FINANCIAL CONDITION -- CONTINUED
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(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>
(c)Fair value adjustments are amortized against (accreted to) net
income as follows:
<TABLE>
<CAPTION>
PERIOD OF
ITEM METHOD OF AMORTIZATION (ACCRETION) AMORTIZATION (ACCRETION)
<S> <C> <C>
Mortgage-backed
securities .............. Level yield method over effective 6 to 9 years
terms of such assets, considering
estimated prepayments
Loans, net .............. Level yield method over effective 2 to 12 years
terms of such assets, considering
estimated prepayments
Mortgage servicing rights Level yield method over effective 2 to 7 years
terms of such assets, considering
estimated prepayments
Goodwill ................ Straight-line method 15 years
Deposit accounts ........ Level yield method over 1 to 6 years
stated terms of such liabilities
Borrowings .............. Level yield method over 1 to 9 years
stated terms of such liabilities
</TABLE>
With respect to goodwill, representing the excess of the purchase
price over the fair value of tangible assets acquired and
liabilities assumed (the "Excess Purchase Price"), First
Nationwide does not currently anticipate that any of the Excess
Purchase Price 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. First Nationwide has elected
instead to amortize the Excess Purchase Price 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 Purchase Price,
and that non-segregation of these assets would not have a
significant effect on the Bank's financial statements.
(d)Includes (i) $45.7 million in fair value adjustments to reflect
obligations to be assumed under master lease arrangements on
California Federal'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.
OC-33
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF
FINANCIAL CONDITION -- CONTINUED
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(e) Represents the estimated after-tax recovery that will inure to the
Bank from the California Federal Litigation, net of amounts
payable to holders of Litigation Interests and the Secondary
Litigation Interests.
(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 California Federal'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
California Federal of $738,745.
(4) Represents the Capital Contribution to be made by Holdings to First
Nationwide prior to the Cal Fed Acquisition:
<TABLE>
<CAPTION>
<S> <C> <C>
Proceeds from the issuance of debt securities by
Holdings ............................................... $575,000
Less:deferred issuance costs ............................ (20,000)
----------
Net proceeds ....................................... $555,000
Proceeds from the issuance of Holdings Preferred Stock . 150,000
Less:issuance costs ..................................... (5,000)
----------
Net proceeds ....................................... 145,000
----------
$700,000
==========
</TABLE>
(5) Represents the proceeds from the issuance of the Series A Preferred
Shares:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Series A Preferred
Shares ............................................. $450,000
Less:issuance costs (additional paid-in capital) ... (15,775)
----------
Net proceeds ................................... $434,225
==========
</TABLE>
Net proceeds will be utilized to reduce borrowings. It is expected that
the issuance of the Series A Preferred Shares, by increasing core
capital, will enable the Bank to retain a higher base of interest-earning
assets, resulting in incrementally higher related earnings.
OC-34
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA 1996
FIRST ACQUISITION PURCHASE
NATIONWIDE PRO FORMA PRO FORMA
HISTORICAL TOTALS (1) TOTALS (2)
------------ ------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ....................................... $714,883 $21,821 $ --
Securities .................................. 24,680 1,017 --
Mortgage-backed securities .................. 191,602 3,174 --
Other interest income ....................... 1,413 -- --
------------ ------------- ------------
Total interest income ...................... 932,578 26,012 --
------------ ------------- ------------
INTEREST EXPENSE:
Deposits .................................... 323,246 12,401 --
Borrowings .................................. 263,112 6,114 (848)
------------ ------------- ------------
Total interest expense ..................... 586,358 18,515 (848)
------------ ------------- ------------
Net interest income ......................... 346,220 7,497 848
Provision for loan losses ................... 29,700 500 --
------------ ------------- ------------
Net interest income after provision for loan
losses ..................................... 316,520 6,997 848
NONINTEREST INCOME:
Customer banking fees ....................... 34,356 199 --
Mortgage banking operations ................. 92,150 191 3,484
Net gain (loss) on sales of assets .......... 414,413 (1,140) --
Other ....................................... 54,542 239 51
------------ ------------- ------------
Total noninterest income ................... 595,461 (511) 3,535
NONINTEREST EXPENSE:
Compensation and benefits ................... 155,976 1,257 2,070
Other ....................................... 214,168 2,616 1,099
------------ ------------- ------------
Total noninterest expense .................. 370,144 3,873 3,169
------------ ------------- ------------
Income (loss) before income taxes and
minority interest .......................... 541,837 2,613 1,214
Income tax (benefit) expense ................ (77,523) 369 120
------------ ------------- ------------
Income (loss) before minority interest ..... 619,360 2,244 1,094
Minority interest--Series A Preferred Stock
dividends, net ............................. -- -- --
------------ ------------- ------------
Net income (loss) ........................... 619,360 2,244 1,094
Existing Preferred Stock dividends .......... 25,938 -- --
------------ ------------- ------------
Net income (loss) available to common
stockholder ................................ $593,422 $ 2,244 $1,094
============ ============= ============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAL FED
BRANCH SALES ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTALS (3) TOTALS (4) ADJUSTMENTS (5) COMBINED
-------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans ....................................... $ (110) $579,125 $ -- $1,315,719
Securities .................................. -- 80,200 -- 105,897
Mortgage-backed securities .................. -- 127,000 -- 321,776
Other interest income ....................... -- (21,792) -- (20,379)
-------------- ------------- --------------- ------------
Total interest income ...................... (110) 764,533 -- 1,723,013
-------------- ------------- --------------- ------------
INTEREST EXPENSE:
Deposits .................................... (40,742) 318,800 -- 613,705
Borrowings .................................. 44,835 174,325 (17,775) 469,763
-------------- ------------- --------------- ------------
Total interest expense ..................... 4,093 493,125 (17,775) 1,083,468
-------------- ------------- --------------- ------------
Net interest income ......................... (4,203) 271,408 17,775 639,545
Provision for loan losses ................... -- 30,800 -- 61,000
-------------- ------------- --------------- ------------
Net interest income after provision for loan
losses ..................................... (4,203) 240,608 17,775 578,545
NONINTEREST INCOME:
Customer banking fees ....................... (3,965) 36,300 -- 66,890
Mortgage banking operations ................. -- 3,500 -- 99,325
Net gain (loss) on sales of assets .......... 10 1,800 -- 415,083
Other ....................................... (163) 15,500 -- 70,169
-------------- ------------- --------------- ------------
Total noninterest income ................... (4,118) 57,100 -- 651,467
NONINTEREST EXPENSE:
Compensation and benefits ................... (4,337) 50,994 -- 205,960
Other ....................................... (3,387) 173,224 -- 387,720
-------------- ------------- --------------- ------------
Total noninterest expense .................. (7,724) 224,218 -- 593,680
-------------- ------------- --------------- ------------
Income (loss) before income taxes and
minority interest .......................... (597) 73,490 17,775 636,332
Income tax (benefit) expense ................ (59) 11,606 1,749 (63,738)
-------------- ------------- --------------- ------------
Income (loss) before minority interest ..... (538) 61,884 16,026 700,070 (6)
Minority interest--Series A Preferred Stock
dividends, net ............................. -- -- 27,717 27,717
-------------- ------------- --------------- ------------
Net income (loss) ........................... (538) 61,884 (11,691) 672,353
Existing Preferred Stock dividends .......... -- 18,900 -- 44,838
-------------- ------------- --------------- ------------
Net income (loss) available to common
stockholder ................................ $ (538) $ 42,984 $(11,691) $ 627,515
============== ============= =============== ============
</TABLE>
OC-35
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(1) Represents historical results of operations of SFFed for the month
ended January 31, 1996. The SFFed Acquisition was consummated on
February 1, 1996. Historical results have been adjusted to reflect:
(a) the amortization or accretion of fair value adjustments;
(b) the elimination of amortization of historical goodwill;
(c) the elimination of certain noninterest expense due to consolidation of
SFFed operations with those of First Nationwide; and
(d) income taxes relative to the SFFed Acquisition.
(2) Represents historical results of operations for the month ended
January 31, 1996 related to the LMUSA 1996 Purchase (unaudited). The
LMUSA 1996 Purchase was consummated January 31, 1996. Historical
results have been adjusted to reflect:
(a) the amortization of the fair value of mortgage servicing rights;
(b) the elimination of amortization of historical mortgage servicing
rights;
(c) the decrease in interest expense resulting from the transfer of
custodial accounts acquired to First Nationwide;
(d) the elimination of certain other noninterest expense due to
consolidation with First Nationwide's existing mortgage banking
operations; and
(e) income taxes relative to the LMUSA 1996 Purchase.
(3) Represents adjustments necessary to record the impact of the Branch
Sales:
(a) the elimination of historical interest income and expense from January
1, 1996 through the respective sale date on the savings account loans
and deposits sold during the six months ended June 30, 1996;
(b) the elimination of historical noninterest income (customer banking
fees and other noninterest income) from January 1, 1996 through the
respective sale date related to the deposits sold during the six
months ended June 30, 1996;
(c) the elimination of historical noninterest expense from January 1, 1996
through the respective sale date, including compensation and benefits,
occupancy, SAIF insurance premiums, marketing, OTS assessments, data
processing and telecommunications directly attributable to the Ohio,
Michigan, and Northeast retail branch operations sold during the six
months ended June 30, 1996;
(d) interest expense for the borrowings used to fund the Branch Sales; and
(e) income taxes relative to the Branch Sales.
(4) Represents historical results of operations of California Federal for
the nine months ended September 30, 1996. Historical results have been
adjusted to reflect:
(a) the amortization or accretion of fair value adjustments;
(b) the elimination of amortization of historical intangible assets;
(c) the reduction in interest income relative to the loss in yield on the
purchase price of the Cal Fed Acquisition funded with existing cash;
(d) the elimination of certain noninterest expense of $57.7 million,
representing a 36% reduction over historical levels, due to
consolidation of California Federal operations with those of First
Nationwide; and
(e) income taxes relative to the Cal Fed Acquisition.
(5) Represents adjustments to reflect:
(a) the reduction in interest expense on borrowings related to the
utilization of proceeds from the issuance of the Series A Preferred
Shares to reduce debt;
(b) dividends on the Series A Preferred Shares, net of income tax benefit
to the Bank; and
(c) income taxes relative to (a).
It is expected that the issuance of the Series A Preferred Shares, by
increasing core capital, will enable the Bank to retain a higher base of
interest-earning assets, resulting in incrementally higher related
earnings.
(6) Includes the following:
(a) gains of approximately $334.0 million (on an after-tax basis) realized
in connection with the Branch Sales;
(b) deferred tax benefit of First Nationwide of $125 million;
(c) after-tax gain on sale of ACS (as defined herein) common stock of
$36.4 million;
(d) Incentive Plan expense of $30.2 million (on an after-tax basis);
(e) gain of approximately $10.8 million (on an after-tax basis)
representing Cal Fed's gain on branch sales.
(f) $23.0 million in after-tax income recognized in connection with the
termination of the Assistance Agreement; and
(g) the one-time Special SAIF Assessment (as defined herein) of $106.4
million (on an after-tax basis) levied on the deposits of First
Nationwide and California Federal.
OC-36
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA
FIRST ACQUISITION PURCHASES
NATIONWIDE PRO FORMA PRO FORMA
HISTORICAL TOTALS (1) TOTALS (2)
------------ ------------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ......................................... $ 823,864 $230,713 $22,477
Securities .................................... 28,055 10,685 --
Mortgage-backed securities .................... 212,880 62,403 --
Other interest income ......................... 10,705 -- --
------------ ------------- -----------
Total interest income ....................... 1,075,504 303,801 22,477
------------ ------------- -----------
INTEREST EXPENSE:
Deposits ...................................... 447,359 143,797 --
Borrowings .................................... 261,917 74,587 2,018
------------ ------------- -----------
Total interest expense ...................... 709,276 218,384 2,018
Net interest income ........................... 366,228 85,417 20,459
Provision for loan losses ..................... 37,000 11,094 --
------------ ------------- -----------
Net interest income after provision for loan
losses ....................................... 329,228 74,323 20,459
NONINTEREST INCOME:
Customer banking fees ......................... 47,493 5,291 --
Mortgage banking operations ................... 70,265 860 76,445
Net gain (loss) on sales of assets ............ 147 -- (1,851)
Other ......................................... 33,068 1,677 2,690
------------ ------------- -----------
Total noninterest income .................... 150,973 7,828 77,284
NONINTEREST EXPENSE:
Compensation and benefits ..................... 154,288 11,141 19,500
Other ......................................... 172,446 34,896 38,081
------------ ------------- -----------
Total noninterest expense ................... 326,734 46,037 57,581
------------ ------------- -----------
Income (loss) before income taxes and minority
interest ..................................... 153,467 36,114 40,162
Federal and state income tax (benefit) expense (55,826) 4,890 3,952
------------ ------------- -----------
Income (loss) before minority interest ....... 209,293 31,224 36,210
Minority interest-Series A Preferred Stock
dividends, net ............................... -- -- --
------------ ------------- -----------
Net income (loss) ............................. 209,293 31,224 36,210
Existing Preferred Stock dividends ............ 34,584 -- --
------------ ------------- -----------
Net income (loss) available to common
stockholder .................................. $ 174,709 $ 31,224 $36,210
============ ============= ===========
</TABLE>
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK
A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAL FED
BRANCH SALES ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTALS (3) TOTALS (4) ADJUSTMENTS (5) COMBINED
-------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans ......................................... $ (623) $ 722,000 $ -- $1,798,431
Securities .................................... -- 119,000 -- 157,740
Mortgage-backed securities .................... -- 197,800 -- 473,083
Other interest income ......................... -- (21,089) -- (10,384)
-------------- ------------- --------------- ------------
Total interest income ....................... (623) 1,017,711 -- 2,418,870
-------------- ------------- --------------- ------------
INTEREST EXPENSE:
Deposits ...................................... (211,530) 396,200 -- 775,826
Borrowings .................................... 280,671 245,400 (26,088) 838,505
-------------- ------------- --------------- ------------
Total interest expense ...................... 69,141 641,600 (26,088) 1,614,331
Net interest income ........................... (69,764) 376,111 26,088 804,539
Provision for loan losses ..................... -- 31,800 -- 79,894
-------------- ------------- --------------- ------------
Net interest income after provision for loan
losses ....................................... (69,764) 344,311 26,088 724,645
NONINTEREST INCOME:
Customer banking fees ......................... (22,228) 42,100 -- 72,656
Mortgage banking operations ................... -- 3,600 -- 151,170
Net gain (loss) on sales of assets ............ -- 6,600 -- 4,896
Other ......................................... (789) 2,400 -- 39,046
-------------- ------------- --------------- ------------
Total noninterest income .................... (23,017) 54,700 -- 267,768
NONINTEREST EXPENSE:
Compensation and benefits ..................... (19,476) 69,408 -- 234,861
Other ......................................... (25,823) 158,283 -- 377,883
-------------- ------------- --------------- ------------
Total noninterest expense ................... (45,299) 227,691 -- 612,744
-------------- ------------- --------------- ------------
Income (loss) before income taxes and minority
interest ..................................... (47,482) 171,320 26,088 379,669
Federal and state income tax (benefit) expense (4,671) 22,692 2,567 (26,396)
-------------- ------------- --------------- ------------
Income (loss) before minority interest ....... (42,811) 148,628 23,521 406,065
Minority interest-Series A Preferred Stock
dividends, net ............................... -- -- 36,956 36,956
-------------- ------------- --------------- ------------
Net income (loss) ............................. (42,811) 148,628 (13,435) 369,109
Existing Preferred Stock dividends ............ -- 25,600 -- 60,184
-------------- ------------- --------------- ------------
Net income (loss) available to common
stockholder .................................. $ (42,811) $ 123,028 $(13,435) $ 308,925
============== ============= =============== ============
</TABLE>
OC-37
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK,
A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(1) Represents historical results of operations of SFFed for the year
ended December 31, 1995. Historical results have been adjusted to
reflect:
(a) the amortization or accretion of fair value adjustments;
(b) the elimination of amortization of historical goodwill;
(c) the elimination of certain noninterest expense due to consolidation of
SFFed operations with those of First Nationwide; and
(d) income taxes relative to the SFFed Acquisition.
(2) Represents historical results of operations for the nine months ended
September 30, 1995 and the year ended December 31, 1995 related to the
LMUSA 1995 Purchase and LMUSA 1996 Purchase, respectively (unaudited).
(LMUSA 1995 Purchase consummated October 2, 1995). Historical results
have been adjusted to reflect:
(a) the amortization of the fair value of mortgage servicing rights;
(b) the elimination of amortization of historical mortgage servicing
rights;
(c) the decrease in interest expense resulting from the transfer of
custodial accounts acquired to First Nationwide;
(d) decreases in compensation and benefits expense due to reduction in
staffing;
(e) the elimination of certain other noninterest expenses due to
consolidation with First Nationwide's existing mortgage banking
operations; and
(f) income taxes relative to the LMUSA Purchases.
(3) Represents adjustments necessary to record the impact of the Branch
Sales:
(a) the elimination of historical interest income and expense for the year
ended December 31, 1995 on the savings account loans and deposits
being sold;
(b) the elimination of historical noninterest income (customer banking
fees and other noninterest income) for the year ended December 31,
1995 related to the deposits being sold;
(c) the elimination of historical noninterest expense for the year ended
December 31, 1995, including compensation and benefits, occupancy,
SAIF insurance premiums, marketing, OTS assessments, data processing
and telecommunications directly attributable to the Ohio, Michigan,
and Northeast retail branch operations;
(d) interest expense for the borrowings used to fund the Branch Sales; and
(e) income taxes relative to the Branch Sales.
(4) Represents historical results of operations of California Federal for
the year ended December 31, 1995. Historical results have been
adjusted to reflect:
(a) the amortization or accretion of fair value adjustments;
(b) the elimination of amortization of historical intangible assets;
(c) the reduction in interest income relative to the loss in yield on the
purchase price of the Cal Fed Acquisition funded with existing cash;
(d) the elimination of certain noninterest expense of $78 million,
representing a 35% reduction over historical levels, due to
consolidation of California Federal operations with those of First
Nationwide; and
(e) income taxes relative to the Cal Fed Acquisition.
(5) Represents adjustments to reflect:
(a) the reduction in interest expense on borrowings related to the
utilization of proceeds from the issuance of the Series A Preferred
Shares to reduce debt;
(b) dividends on the Series A Preferred Shares, net of income tax benefit
to the Bank; and
(c) income taxes relative to (a).
It is expected that the issuance of the Series A Preferred Shares, by
increasing core capital, will enable the Bank to retain a higher base of
interest-earning assets, resulting in incrementally higher related
earnings.
OC-38
<PAGE>
PROJECTED PRO FORMA REGULATORY CAPITAL RATIOS OF THE BANK
Prior to the consummation of the Cal Fed Acquisition, the Capital
Contribution totalling approximately $700 million was contributed by Holdings
to First Nationwide.
After giving effect to the Cal Fed Acquisition, the Capital Contribution,
and the issuance of the Series A Preferred Shares, at September 30, 1996, on
a pro forma basis, the Bank exceeded minimum regulatory capital requirements
and qualified for "well-capitalized" status. The following is a
reconciliation of the Bank's pro forma stockholders' equity to regulatory
capital as of September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of the Bank ........................ $2,318 $2,318 $2,318
Minority interest--Series A Preferred Shares ........... 450 450 450
Unrealized holding gain on securities available for
sale, net .............................................. (35) (35) (35)
Non-qualifying loan servicing rights .................... (44) (44) (44)
Non-allowable capital:
Preferred stock in excess of 50% of Tier 1 Capital .... (97) (97) (97)
Intangible assets ...................................... (699) (699) (699)
Goodwill Litigation Asset .............................. (133) (133) (133)
Investment in subsidiaries ............................. (35) (35) (35)
Excess deferred tax assets ............................. (74) (74) (74)
Supplemental capital:
Qualifying subordinated debt ........................... -- -- 108
General loan loss reserves ............................. -- -- 226
Assets required to be deducted:
Land loans with more than 80% LTV ratio ................ -- -- (2)
---------- --------- ------------
Regulatory capital of the Bank .......................... $1,651 $1,651 $1,983
========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
RISK-BASED
CORE -------------------------
CAPITAL TIER 1 TOTAL CAPITAL
RATIO RATIO RATIO
--------- -------- ---------------
<S> <C> <C> <C>
Regulatory capital of the Bank .... 5.51% 9.20% 11.06%
Well-capitalized ratio ............. 5.00% 6.00% 10.00%
--------- -------- ---------------
Excess above well-capitalized ratio 0.51% 3.20% 1.06%
========= ======== ===============
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios was approximately $30.0 billion. Risk-weighted assets used for the
risk-based core and total capital ratios amounted to approximately $17.9
billion.
OC-39
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial data for First Nationwide presented
under the captions "Selected Operating Data" and "Selected Financial Data"
have been derived from the Consolidated Financial Statements of First
Nationwide.
The following data should be read in conjunction with the Consolidated
Financial Statements of First Nationwide and the notes thereto, the
Consolidated Financial Statements of the FNB Acquired Business and the notes
thereto and the Consolidated Financial Statements of SFFed and the notes
thereto included elsewhere in this Offering Circular. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 (1) 1995
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SELECTED OPERATING DATA
Interest income .......................... $932,578 $797,856
Interest expense ......................... 586,358 530,066
Net interest income ...................... 346,220 267,790
Provision for loan losses ................ 29,700 18,000
Noninterest income ....................... 595,461 105,256
Noninterest expense ...................... 370,144 245,042
Income (loss) before income taxes and
extraordinary item ...................... 541,837 110,004
Income tax (benefit) expense (5) ........ (77,523) 8,822
Income (loss) before extraordinary item . 619,360 101,182
Extraordinary item: (loss)/gain on early
extinguishment of debt, net ............. (1,586) 1,967
Net income (loss) ........................ 617,774 103,149
SELECTED PERFORMANCE RATIOS
Return (loss) on average assets (6) ..... 4.79% .94%
Return (loss) on average common
equity (7) .............................. 75.72 19.24
Yield on interest-earning assets (8) .... 7.75 7.65
Cost of interest-bearing liabilities (9) 5.03 5.25
Net interest margin (10) ................. 2.87 2.55
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK
DIVIDENDS (11)
Excluding interest on deposits (12) ..... 2.76x 1.36x
Including interest on deposits (12) ..... 1.84 1.15
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 (2) 1993 (3) 1992 (4) 1991
------------ ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income .......................... $1,075,504 $292,984 $ 95,264 $659,201 $990,596
Interest expense ......................... 709,276 193,464 74,728 450,240 663,016
Net interest income ...................... 366,228 99,520 20,536 208,961 327,580
Provision for loan losses ................ 37,000 6,226 1,402 16,193 17,698
Noninterest income ....................... 150,973 41,158 190,876 384,336 128,366
Noninterest expense ...................... 326,734 95,311 63,392 361,549 464,624
Income (loss) before income taxes and
extraordinary item ...................... 153,467 39,141 146,618 215,555 (26,376)
Income tax (benefit) expense (5) ........ (55,826) 3,191 2,500 -- --
Income (loss) before extraordinary item . 209,293 35,950 144,118 215,555 (26,376)
Extraordinary item: (loss)/gain on early
extinguishment of debt, net ............. 1,967 1,376 -- -- --
Net income (loss) ........................ 211,260 37,326 144,118 215,555 (26,376)
SELECTED PERFORMANCE RATIOS
Return (loss) on average assets (6) ..... 1.44% .84% 7.84% 2.52% (0.25)%
Return (loss) on average common
equity (7) .............................. 32.40 17.00 69.41 58.89 (6.64)
Yield on interest-earning assets (8) .... 7.72 6.85 5.42 8.32 9.99
Cost of interest-bearing liabilities (9) 5.24 4.73 4.70 5.73 6.78
Net interest margin (10) ................. 2.63 2.33 1.14 2.63 3.30
RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK
DIVIDENDS (11)
Excluding interest on deposits (12) ..... 1.39x 1.30x 9.59x 10.74x --
Including interest on deposits (12) ..... 1.16 1.15 3.02 1.46 --
</TABLE>
OC-40
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------
1996 (1)
----------------
(DOLLARS IN
THOUSANDS)
<S> <C>
SELECTED FINANCIAL DATA
Securities available for sale (13) .. $ 567,933
Securities held to maturity (13)(14) 4,277
Mortgage-backed securities available
for sale (13) ....................... 1,660,140
Mortgage-backed securities held to
maturity ............................ 1,700,387
Loans receivable, net ................ 10,578,170
Covered assets ....................... --
Total assets ......................... 16,809,461
Deposits ............................. 8,799,990
Securities sold under agreements to
repurchase .......................... 2,127,574
Borrowings ........................... 4,028,416
Total liabilities .................... 15,347,880
Stockholders' equity ................. 1,461,581
REGULATORY CAPITAL RATIOS OF FIRST
NATIONWIDE
Tangible capital ..................... 6.71%
Core capital ......................... 6.71
Risk-based capital:
Core capital ........................ 10.81
Total capital ....................... 12.93
SELECTED OTHER DATA
Number of full service customer
facilities .......................... 116
Loans serviced for others (15) ...... $43,826,250
Approximate number of employees ..... 3,466
Non-performing assets as a percentage
of First Nationwide's total assets . 1.36%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------------------------------------------------
1995 1994 (2) 1993 (3) 1992 (4) 1991
------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
SECURITIES AVAILABLE FOR SALE (13) .. $ 348,561 $ 45,000 $ -- $ -- $ --
Securities held to maturity (13)(14) 1,455 411,859 15,118 2,034,842 90,416
Mortgage-backed securities available
for sale (13) ....................... 1,477,514 --
Mortgage-backed securities held to
maturity ............................ 1,524,488 3,153,812 341,224 77,622 1,771,168
Loans receivable, net ................ 8,831,018 9,966,886 29,244 777,265 2,541,600
Covered assets ....................... 39,349 311,603 592,593 839,538 1,398,906
Total assets ......................... 14,637,445 14,669,153 1,125,222 8,961,473 10,178,061
Deposits ............................. 10,241,628 9,196,656 431,778 7,809,478 9,148,901
Securities sold under agreements to
repurchase .......................... 969,510 1,883,490 119,144 30,647 305,000
Borrowings ........................... 2,189,731 2,605,848 440,792 597,564 192,117
Total liabilities .................... 13,677,560 13,828,556 1,012,328 8,488,697 9,761,664
Stockholders' equity ................. 959,885 840,597 112,894 472,776 416,397
REGULATORY CAPITAL RATIOS OF FIRST
NATIONWIDE
Tangible capital ..................... 5.84% 5.50% 9.50% 4.59% 3.37%
Core capital ......................... 5.84 5.50 9.50 5.13 3.88
Risk-based capital:
Core capital ........................ 9.14 8.86 67.71 15.67 12.39
Total capital ....................... 11.34 11.01 68.97 16.24 13.09
SELECTED OTHER DATA
Number of full service customer
facilities .......................... 160 156 4 162 162
Loans serviced for others (15) ...... $28,170,543 $ 7,475,119 $ 327,449 $10,156,020 $ 4,466,467
Approximate number of employees ..... 3,619 3,573 317 3,030 2,693
Non-performing assets as a percentage
of First Nationwide's total assets . 1.50% 1.49% 0.98% 0.12% 0.53%
</TABLE>
- ------------
(1) On January 31, 1996, FNMC consummated the LMUSA 1996 Purchase,
acquiring a $14.1 billion loan servicing portfolio. On February 1,
1996, First Nationwide acquired SFFed, with assets at fair values
totalling approximately $4 billion and liabilities (including
deposit liabilities) with fair values totalling approximately $3.8
billion. During the nine months ended September 30, 1996, First
Nationwide closed the Branch Sales, with associated deposit accounts
totalling $4.6 billion. Noninterest income for the nine months ended
September 30, 1996 includes pre-tax gains of $363.0 million related
to the Branch Sales. Noninterest expense for the nine months ended
September 30, 1996 includes a pre-tax charge of $60.1 million for
the Special SAIF Assessment.
(2) On October 3, 1994, effective immediately following the close of
business on September 30, 1994, First Nationwide acquired assets
with fair values totalling approximately $14.1 billion and
liabilities (including deposit liabilities) with fair values
totalling approximately $13.4 billion from Old FNB.
(3) During the first quarter of 1993, First Nationwide sold certain
assets, liabilities, and substantially all of its branch operations
located in Texas, including $829 million of loans and 130 branches
with $6.9 billion in deposits, in the First Gibraltar Texas Sale. A
net gain of $141 million was recorded in connection with this sale.
(4) During the last quarter of 1992, First Nationwide sold certain
assets, liabilities, and branch operations located in Oklahoma,
including $3 million of loans and 27 branches with $809 million in
deposits, in the First Gibraltar Oklahoma Sale. The increase in
noninterest income in 1992 was primarily attributable to the gain of
$203 million on sales of assets in anticipation of the First
Gibraltar Texas Sale, the gain of $19 million on the First Gibraltar
Oklahoma Sale and a gain of $41 million as a result of the
modification of the Assistance Agreement.
OC-41
<PAGE>
(5) Utilization of net operating loss carryovers resulted in no
provisions for income taxes until the FN Acquisition. Income tax
expense of $2.5 million was recorded in the first quarter of 1993
representing AMT expense related to the gain recognized on the First
Gibraltar Texas Sale (see Footnote 3). Income tax expense recorded
in 1994 after the FN Acquisition represents federal AMT reduced, to
the extent of 90%, by net operating loss carryovers, and state tax
at an assumed rate of 8%. Income tax benefit for the nine months
ended September 30, 1996 and in 1995 includes the recognition of a
deferred tax benefit of $125 million and of $69 million,
respectively, offset by federal AMT tax reduced, to the extent of
90%, by net operating loss carryovers and state tax at an assumed
rate of 8%.
(6) Return (loss) on average assets represents net income (loss) as a
percentage of average assets for the periods presented. For the nine
months ended September 30, 1996 and 1995, return on average assets
is annualized.
(7) Return (loss) on average common equity represents net income (loss)
available to common stockholders as a percentage of average common
equity for the periods presented. For the nine months ended
September 30, 1996 and 1995, return on average common equity is
annualized.
(8) Yield on interest-earning assets represents interest income as a
percentage of average interest-earning assets. For the nine months
ended September 30, 1996 and 1995, yield on interest-earning assets
is annualized.
(9) Cost of interest-bearing liabilities represents interest expense as
a percentage of average interest-bearing liabilities. For the nine
months ended September 30, 1996 and 1995, cost of interest-bearing
liabilities is annualized.
(10) Net interest margin represents net interest income as a percentage
of average interest-earning assets. For the nine months ended
September 30, 1996 and 1995, net interest margin is annualized.
(11) Earnings used in computing the ratio of earnings to combined fixed
charges and preferred stock dividends consist of income before
income taxes and extraordinary item. Fixed charges consist of
interest expense on borrowings, the interest component of lease
expense and, where indicated, interest expense on deposits.
(12) Earnings were insufficient to cover fixed charges in 1991 by $37.1
million excluding interest on deposits, and $37.1 million including
interest on deposits.
(13) Fluctuation in securities and mortgage-backed securities held to
maturity and securities and mortgage-backed securities available for
sale from December 31, 1994 to December 31, 1995 resulted from the
reclassification of substantially all securities and mortgage-backed
securities (except for mortgage-backed securities resulting from the
securitization with recourse of certain of First Nationwide's loans)
from held to maturity to securities available for sale on December
29, 1995.
(14) Increase in securities held to maturity at December 31, 1992
resulted from the investment of proceeds on sale of certain
long-term interest-bearing assets, primarily loans and
mortgage-backed securities, in cash, cash equivalents and securities
in anticipation of the First Gibraltar Texas Sale.
(15) Includes loans serviced by FNMC, First Nationwide, and FGB Realty,
excluding loans serviced for First Nationwide by FNMC.
OC-42
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of First Nationwide and California Federal
and the notes thereto included elsewhere in this Offering Circular. The
following discussion includes information relating to First Nationwide and
California Federal prior to consummation of the Cal Fed Acquisition.
FIRST NATIONWIDE
GENERAL
The principal business of First Nationwide consists of operating retail
deposit branches and originating and/or purchasing residential real estate
loans and, to a lesser extent, certain consumer loans, for investment. First
Nationwide actively manages its commercial real estate loan portfolio and is
active in mortgage banking and loan servicing. Revenues are derived primarily
from interest charged on loans, interest received on government and agency
securities and mortgage-backed securities, gains on sales of loans and other
investments, and fees received in connection with loan servicing, securities
brokerage and other customer service transactions. Expenses primarily consist
of interest on customer deposit accounts, interest on short-term and
long-term borrowings, provisions for losses, general and administrative
expenses consisting of compensation and benefits, advertising and marketing,
premises and equipment, communications, deposit insurance assessments, data
processing and other general and administrative expenses.
The Cal Fed Acquisition
On July 27, 1996, Holdings entered into the Merger Agreement providing for
the acquisition of Cal Fed and its subsidiary, California Federal, which as
of September 30, 1996, had approximately $14.1 billion in assets, $8.8
billion in deposits and operated 118 branches in California and Nevada. After
giving effect to the Cal Fed Acquisition, the issuance of the Series A
Preferred Shares and the Capital Contribution, at September 30, 1996, the
Bank 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. See "--Pro Forma
Financial Condition and Results of Operations."
Impact of Other Acquisitions and Dispositions
The FN Acquisition was consummated on October 3, 1994, effective
immediately after the close of business on September 30, 1994, and was
recorded using the purchase method of accounting. Accordingly, the
accompanying financial data include the results of operations related to the
approximately $14.1 billion in assets and $13.4 billion in liabilities
acquired in the FN Acquisition. See the Consolidated Financial Statements of
the FNB Acquired Business and the notes thereto included elsewhere in this
Offering Circular.
On February 28, 1995, FNMC consummated the Maryland Acquisition and
acquired a loan servicing portfolio of approximately $11.4 billion, including
a subservicing portfolio of $1.8 billion, and certain assets and liabilities
from StanFed for approximately $178 million. The transaction was accounted
for as a purchase, and First Nationwide's consolidated statement of
operations for the year ended December 31, 1995 includes the results of
operations of the acquired mortgage servicing operation for the period from
March 1, 1995 through December 31, 1995.
In April 1995, First Nationwide acquired approximately $13 million in
deposits in the Tiburon Purchase. In August 1995, First Nationwide acquired
three retail branches located in Orange County, California with deposit
accounts totalling approximately $356 million in the ITT Purchase. On
December 8, 1995, First Nationwide acquired four retail branches with deposit
accounts of approximately $144 million in the Sonoma Purchase. The Branch
Purchases were accounted for as purchases, and the results of operations of
the acquired retail deposit operations are included in First Nationwide's
consolidated statement of operations for the year ended December 31, 1995
from the date each of the transactions was consummated.
OC-43
<PAGE>
On October 2, 1995, FNMC consummated the LMUSA 1995 Purchase and acquired
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a master servicing portfolio of
$2.9 billion and other assets, principally existing loans and loan production
operations for approximately $100 million, payable in installments, and the
assumption of certain indebtedness secured by the acquired loan portfolio
totalling approximately $274 million. The LMUSA 1995 Purchase was accounted
for as a purchase and First Nationwide's consolidated statement of operations
for the year ended December 31, 1995 includes the results of operations of
the acquired mortgage servicing operations for the period from October 3,
1995 through December 31, 1995.
On January 31, 1996, FNMC consummated the acquisition of a $14.1 billion
loan servicing portfolio, a master servicing portfolio of $2.7 billion and
other assets in the LMUSA 1996 Purchase. The LMUSA 1996 Purchase was
accounted for as a purchase and First Nationwide's consolidated statement of
operations for the nine months ended September 30, 1996 includes the results
of operations of the acquired mortgage servicing operations for the period
from February 1, 1996 through September 30, 1996.
On February 1, 1996, First Nationwide consummated the SFFed Acquisition
involving assets totalling $4.0 billion and retail deposits totalling $2.7
billion. The SFFed Acquisition was accounted for as a purchase, and First
Nationwide's consolidated statement of operations for the nine months ended
September 30, 1996 includes the results of operations of the acquired
operations of SFFed for the period from February 1, 1996 through September
30, 1996.
On June 1, 1996, First Nationwide consummated the Home Federal
Acquisition, involving approximately $717 million in assets and $632 million
in deposits. The Home Federal Acquisition was accounted for as a purchase,
and First Nationwide's consolidated statement of operations for the nine
months ended September 30, 1996 includes the results of operations of the
acquired operations of HFFC for the period from June 1, 1996 through
September 30, 1996.
During the first half of 1996, First Nationwide closed the Branch Sales
with associated deposit accounts totalling $4.6 billion, resulting in pre-tax
gains totalling $363.0 million. First Nationwide's consolidated statement of
operations for the nine months ended September 30, 1996 includes the results
of operations of those branches sold in the Branch Sales for the period prior
to sale.
The First Gibraltar Texas Sale was effective February 1, 1993 resulting in
the sale of $829 million of loans and $6.9 billion in deposits in 130
branches. The accompanying financial data for 1993 reflect the results of
operations in 1993 including these sold assets and liabilities during the
first month of the year. Subsequent to the First Gibraltar Texas Sale, First
Nationwide managed four retail branches in Texas and supplemented the retail
deposit base with wholesale funds from Brokered Deposits and Federal Home
Loan Bank ("FHLB") advances.
Prior to and during 1993, most of the mortgage banking operations of First
Nationwide were conducted through First Gibraltar Mortgage Holdings, Inc.
("FGMH") prior to the distribution by First Nationwide of the stock of FGMH
to its then immediate parent in the first quarter of 1993. Therefore, the
accompanying financial data for 1993 reflect the results of such mortgage
banking operations during 1993 prior to the distribution. See
"Business--First Nationwide--Background."
Special SAIF Assessment
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "Reduction Act") was enacted. The Reduction Act
included a special assessment ("Special SAIF Assessment") related to the
recapitalization of the SAIF, which was levied based on a rate of 65.7 cents
per $100 of SAIOC-OC-insured domestic deposits held as of March 31, 1995. As a
result of the Reduction Act, First Nationwide recorded a pre-tax charge of
$60.1 million on September 30, 1996. The portion of the assessment related to
deposits sold in Ohio, New York, New Jersey and Michigan will be borne,
pursuant to each sales contract, by the respective purchasers and
accordingly, such amounts are not included in the expense recorded by First
Nationwide. Management expects the 1997 SAIF deposit premiums (including a
separate assessment to fund the obligations of the Financial Corporation,
which will expire after December 31, 1999) to decline to 6.4 cents per $100
of SAIOC-OC-F-insured deposits per year from the prior rate of 23 cents.
OC-44
<PAGE>
Accrued Termination and Facilities Costs
During 1995, First Nationwide recorded $12.7 million in noninterest
expense related to four specific actions. In connection with the Maryland
Acquisition, the former residential loan servicing center in Sacramento,
California was relocated to Maryland, resulting in a charge of $5.7 million
for employee termination and facilities costs, net of expected sublease
income. Additionally, $2.1 million was provided for employee termination and
facilities costs (net of expected sublease income) related to the closing of
First Nationwide's residential loan production offices. First Nationwide also
recorded a charge of $4.0 million related to employee termination benefits
for positions which were eliminated over a twelve month period in conjunction
with First Nationwide's cost reduction plan. In connection with the
elimination of these positions, First Nationwide identified opportunities for
office space consolidation and has established additional liabilities
totalling $.4 million for lease termination payments. Additionally, First
Nationwide identified certain of its retail banking facilities which will be
closed and marketed for sale, with the related operations consolidated into
other retail banking facilities acquired in the ITT Purchase. In connection
with such closures and consolidations, a liability totalling $.5 million was
established to record such facilities at fair value.
During the nine months ended September 30, 1996, First Nationwide recorded
liabilities totalling $1.4 million in connection with the closures and
consolidations into other banking facilities acquired in the SFFed
Acquisition.
Accounting Changes
On June 28, 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management has not yet analyzed SFAS No. 125 and is unable to
determine the effect, if any, implementation may have on First Nationwide's
consolidated financial statements.
In March 1995, FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
provides guidance for the recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related both
to assets to be held and used by an entity and assets to be disposed of. SFAS
No. 121 is effective for financial statements for fiscal years beginning
after December 15, 1995. First Nationwide adopted SFAS No. 121 effective
January 1, 1996. Such adoption had no material impact on First Nationwide's
consolidated financial statements.
First Nationwide adopted SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," as amended by SFAS No. 118, "Accounting by Creditors
for Impairment of a Loan--Income Recognition and Disclosures," effective
January 1, 1995. Under SFAS No. 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. 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 loan's observable
market price, or (iii) the fair value of the loan's collateral. SFAS No. 114
does not apply to large groups of smaller balance homogeneous loans that are
collectively evaluated for impairment. For First Nationwide, loans
collectively reviewed for impairment include all single family loans and
performing multi-family and commercial real estate loans under $500,000,
excluding loans which have entered the workout process. The adoption of SFAS
No. 114, as amended by SFAS No. 118, had no material impact on First
Nationwide's consolidated financial statements as First Nationwide's existing
policy of measuring loan impairment was consistent with methods prescribed in
these standards.
OC-45
<PAGE>
First Nationwide considers a loan to be impaired when, based upon current
information and events, it believes it is probable that First Nationwide will
be unable to collect all amounts due according to the contractual terms of
the loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, First Nationwide considers
large non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios or other
indications that the borrowers are experiencing increased levels of financial
difficulty. First Nationwide bases the measurement of collateral-dependent
impaired loans on the fair value of their collateral. The amount, if any, by
which the recorded investment of the loan exceeds the measure of the impaired
loan's value is recognized by recording a valuation allowance.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority
of impaired loans at September 30, 1996, have not been established because
most would be eligible to be sold to Granite under the Put Agreement. First
Nationwide considers the volume of impaired loans that are not eligible under
the Put Agreement and the level in excess of the amount available under the
Put Agreement in its evaluation of the adequacy of the established allowance
for loan losses. There have not been any significant multi-family or
commercial real estate loans originated since October 1, 1994. At September
30, 1996, the specific allowances for loan losses reflected on First
Nationwide's books represent allowances established by predecessor
institutions and were acquired in the SFFed and Home Federal Acquisitions.
At September 30, 1996, the carrying value of loans that are considered to
be impaired under SFAS No. 114 totalled $136.2 million (of which $31.4
million were on nonaccrual status). The average recorded investment in
impaired loans during the nine months ended September 30, 1996 was
approximately $136.9 million. For the nine months ended September 30, 1996,
First Nationwide recognized interest income on these impaired loans of $12.3
million which included $.3 million of interest income recognized using the
cash basis method of income recognition.
On May 12, 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment to Statement No. 65." This statement provides
guidance for the recognition of mortgage servicing rights as an asset when a
mortgage loan is sold or securitized and servicing rights are retained. First
Nationwide adopted this standard effective April 1, 1995.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on its fair market
value. To determine the fair value of the servicing rights created since
April 1, 1995, First Nationwide uses the market prices under comparable
servicing sale contracts, when available, or alternatively, uses a valuation
model that calculates the present value of future net servicing income. In
using this valuation method, First Nationwide incorporated assumptions that
market participants would use in estimating future net servicing income which
included estimates of the cost of servicing, the discount rate, mortgage
escrow earnings rate, an inflation rate, ancillary income, prepayment speeds
and default rates and losses. As a result of First Nationwide's adoption of
SFAS No. 122, mortgage servicing rights related to loans originated by First
Nationwide totalling $52.1 million were capitalized during the nine months
ended September 30, 1996.
Also, SFAS No. 122 requires enterprises to measure the impairment of
servicing rights based on the difference between the carrying amount of the
servicing rights and their current fair value. In determining impairment,
First Nationwide aggregates all mortgage servicing rights and stratifies them
based on the predominant risk characteristics of interest rate, loan type and
investor type. Further, mortgage servicing rights capitalized prior to the
adoption of SFAS No. 122 were stratified by acquisition to measure
impairment. A valuation allowance is established for any excess of amortized
book value over the current fair value, by risk stratification, by a charge
to income. Based on this analysis, no allowance for loss on impairment of
loan servicing rights was necessary at September 30, 1996.
Effective January 1, 1994, First Nationwide adopted SFAS No. 115 for
financial reporting purposes. SFAS No. 115 directs that securities held to
maturity be reported at amortized cost. Securities bought and held
principally for the purpose of selling them in the near term are classified
as trading securities and reported at fair value, with unrealized gains and
losses included in earnings. All other securities held for
OC-46
<PAGE>
investment purposes are classified as held for sale and are carried at fair
value, with unrealized gains and losses excluded from earnings and reported
in a separate component of stockholders' equity, net of tax. There was no
impact on the consolidated financial statements of First Nationwide as a
result of such adoption. At December 31, 1994, all U.S. government and agency
securities and mortgage-backed securities were classified in the
held-to-maturity portfolio.
On November 15, 1995, the FASB issued the Special Report, which provided
all entities an opportunity to reconsider their ability and intent to hold
securities to maturity and allowed a one-time reclassification of securities
from held to maturity to available for sale without "tainting" the remaining
held-to-maturity securities. On December 29, 1995, First Nationwide
reclassified $1.5 billion and $231.8 million in carrying value of
mortgage-backed securities and U.S. government and agency securities,
respectively, from the respective held-to-maturity categories to securities
available-for-sale, resulting in a net after-tax increase of $22.5 million in
stockholders' equity. There was no impact on First Nationwide's regulatory
capital as a result of this reclassification.
In 1993, First Nationwide adopted SFAS No. 109, "Accounting for Income
Taxes." Under the asset and liability method of SFAS No. 109, deferred tax
assets and liabilities are recognized for the 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 expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. There was no impact on the consolidated
financial statements of First Nationwide as a result of such adoption.
As of December 31, 1994, First Nationwide recorded a valuation allowance
for 100% of the net deferred tax asset because at that time it was not more
likely than not that such deferred tax asset would be realized. Based on a
favorable earnings trend since the consummation of the FN Acquisition and
future earnings expectations, management changed its judgment about the
realizability of First Nationwide's net deferred tax asset and recognized a
deferred tax benefit of $69 million in the fourth quarter of 1995 and an
additional $125 million in the second quarter of 1996. Management believes
that the realization of such asset is more likely than not, based upon the
expectation that First Nationwide will generate the necessary amount of
taxable income in future periods.
PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the pro forma condensed combined statement of
financial condition at September 30, 1996 gives effect to the Cal Fed
Acquisition, the issuance of the Series A Preferred Shares and the Capital
Contribution. The pro forma condensed combined statement of operations for
the nine months ended September 30, 1996 gives effect to the Cal Fed
Acquisition, the SFFed Acquisition, the LMUSA 1996 Purchase, the Branch
Sales, the issuance of the Series A Preferred Shares and the Capital
Contribution. The discussion of the pro forma condensed combined statement of
operations for the year ended December 31, 1995 gives effect to the Cal Fed
Acquisition, the SFFed Acquisition, the LMUSA Purchases, the Branch Sales,
the issuance of the Series A Preferred Shares and the Capital Contribution.
The following discussion should be read in conjunction with the Unaudited Pro
Forma Financial Data included elsewhere in this Offering Circular. See also
"Projected Pro Forma Capital Ratios of the Bank."
Pro Forma Statement of Financial Condition at September 30, 1996
The Cal Fed Acquisition, the issuance of the Series A Preferred Shares,
and the Capital Contribution have a significant effect on the Bank's
September 30, 1996 historical consolidated statement of financial condition.
Total assets increase $14.2 billion, or 84.5%, from $16.8 billion on an
historical basis to $31.0 billion pro forma combined.
Cash and cash equivalents decrease by approximately $95 million from the
historical amount, representing the net impact of the payment made in
connection with the purchase price of California Federal, offset by the
proceeds from the Capital Contribution and cash acquired in the Cal Fed
Acquisition.
OC-47
<PAGE>
Securities and mortgage-backed securities increase by approximately $3.2
billion from the historical amount as a result of the Cal Fed Acquisition.
Loans receivable increase approximately $10.0 billion from the historical
amount, including approximately $8.2 billion of 1-4 unit residential loans,
approximately $1.3 billion of multi-family residential loans, approximately
$497 million of commercial real estate loans, and approximately $196 million
of principally consumer loans, net of allowances for loan losses of
approximately $170.1 million. Approximately 84% of these loans are
adjustable-rate mortgage loans and approximately 88% are collateralized with
properties located in California.
MSRs increase approximately $32.3 million from the historical amount as a
result of the Cal Fed Acquisition, which is expected to add a loan servicing
portfolio of approximately $3.5 billion and 39,315 loans.
Intangible assets increase by approximately $554.1 million from the
historical amount as a result of the purchase accounting applied in the Cal
Fed Acquisition.
Other assets increase by approximately $490.8 million from the historical
amount as a result of other assets (primarily interest and accounts
receivable, real estate held for sale, FHLB stock, servicing-related
receivables, tax receivables, and miscellaneous other assets) acquired in the
Cal Fed Acquisition. Other assets also include $132.7 million representing
the estimated after-tax recovery that will inure to the Bank from the
California Federal Litigation, net of amounts payable to holders of the
Litigation Interests and Secondary Litigation Interests.
Deposits increase by approximately $8.8 billion from the historical
amount, representing deposits acquired in the Cal Fed Acquisition. First
Nationwide operated 116 full service branches in four major metropolitan
areas at September 30, 1996. After giving effect to the Cal Fed Acquisition,
First Nationwide will operate 227 full service branches (194 of which will be
in California) in four major metropolitan areas.
Borrowings increase by approximately $3.9 billion from the historical
amount, representing borrowings assumed in connection with the Cal Fed
Acquisition (principally securities sold under agreements to repurchase and
FHLB advances), net of borrowings reduced through the utilization of proceeds
from the issuance of the Series A Preferred Shares.
Other liabilities increase by approximately $260.2 million from the
historical amount, principally related to other liabilities and accrued
expenses assumed by the Bank as part of the Cal Fed Acquisition.
Minority interest increases by approximately $450.0 million as a result of
the issuance of the Series A Preferred Shares by California Federal Preferred
Capital Corp.
Stockholders' equity increases by approximately $856.7 million from the
historical amount, representing the 10 5/8 Preferred Stock and the Capital
Contribution, net of the issuance costs related to the Series A Preferred
Shares.
Pro Forma Results of Operations
Nine Months ended September 30, 1996
On a pro forma basis, the Bank's historical net income for the nine months
ended September 30, 1996 increases approximately $53.0 million, or 8.6%, as a
result of the Cal Fed Acquisition, the SFFed Acquisition, the LMUSA 1996
Purchase, the Branch Sales and the issuance of the Series A Preferred Shares.
Net interest income after provision for loan losses increases
approximately $262.0 million from the historical amount, due in part to the
net effect of the interest-earning assets acquired and the interest-bearing
liabilities assumed in the Cal Fed Acquisition. The positive impact of the
Cal Fed Acquisition is partially offset by the pro forma interest expense on
borrowings to replace deposits sold in the Branch Sales, which is
approximately $4.1 million higher than the interest expense on such deposits.
Noninterest income increases approximately $56.0 million from the
historical amount, substantially all of which relates to customer banking
fees on the additional $8.8 billion deposit portfolio acquired in connection
with the Cal Fed Acquisition. California Federal's historical amounts include
a $12 million gain on the sale of branches.
OC-48
<PAGE>
Noninterest expense increases approximately $223.5 million from the
historical amount, principally due to incremental expenses of operations
acquired in the Cal Fed Acquisition, offset by the elimination of historical
noninterest expense directly attributable to the Ohio, Michigan, and
Northeast retail branch operations. The pro forma results of operations for
the Cal Fed Acquisition include a $57.7 million reduction in noninterest
expense over historical California Federal levels relative to a staff
reduction of approximately 36%, the consolidation of seven branch offices and
two administrative facilities and other economies of scale, offset in part by
the amortization of goodwill.
Net income available to common stockholder increases by $34.1 million,
reflecting the $27.7 million Series A Preferred Shares dividends net of tax
benefit, as well as $18.9 million in dividends on the 10 5/8% Preferred
Stock.
Year ended December 31, 1995
On a pro forma basis, the Bank's historical net income for the year ended
December 31, 1995 increases approximately $159.8 million, or 76.4%, as a
result of the Acquisitions, the Branch Sales, and the issuance of the Series
A Preferred Shares.
Net interest income after provision for loan losses increases
approximately $395.4 million from the historical amount, due in part to the
net effect of the interest-earning assets acquired and the interest-bearing
liabilities assumed in the Cal Fed and SFFed Acquisitions. In addition, the
loans receivable acquired as part of the LMUSA Purchases contributed to this
increase. The positive impact of the Cal Fed and SFFed Acquisitions and the
LMUSA Purchases is offset by the pro forma interest expense on borrowings to
replace deposits sold in the Branch Sales, which is approximately $69.1
million higher on a pro forma basis than the interest expense on such
deposits.
Noninterest income increases approximately $116.8 million from the
historical amount, which relates to loan servicing fee income on the
additional $25.2 billion loan servicing portfolio acquired in connection with
the LMUSA Purchases and customer banking fees generated from the $11.5
billion deposit portfolio acquired through the Cal Fed and SFFed Acquisitions
offset by a loss of customer banking fees relating to deposits sold in the
Branch Sales.
Noninterest expense increases approximately $286.0 million from the
historical amount, principally due to incremental expenses of operations
acquired in the Cal Fed and SFFed Acquisitions and the LMUSA Purchases,
offset by the elimination of historical noninterest expense directly
attributable to the Ohio, Michigan, and Northeast retail branch operations.
The pro forma results of operations for the Cal Fed Acquisition include a
$78.0 million reduction in noninterest expense from historical California
Federal levels as a result of consolidation with First Nationwide's
operations, including a 35% reduction in staff and consolidation of seven
branch offices and two administrative facilities. The pro forma results of
operations for the SFFed Acquisition include a $45.6 million reduction in
noninterest expense over historical SFFed levels relative to a staff
reduction of approximately 58%, the consolidation of nine branch offices and
administrative facilities, the elimination of nonrecurring historical
expenses related to the SFFed Acquisition and other economies of scale,
offset in part by the amortization of goodwill. Similarly, the pro forma
results of operations for the LMUSA Purchases include a $280.9 million
reduction in noninterest expense over historical LMUSA levels, representing
the effect of significant staff reductions, reductions in facilities costs
due to the consolidation and the elimination of certain historical amounts
related to operations not acquired as part of the LMUSA Purchases.
Net income available to common stockholder increases by $134.2 million,
reflecting the $37.0 million Series A Preferred Shares dividends net of tax
benefit, as well as $25.6 million in dividends on the 10 5/8% Preferred
Stock.
OC-49
<PAGE>
RESULTS OF OPERATIONS
The period to period comparisons set forth below, including the changes in
magnitude of the various items between periods, have been affected by the
acquisitions and dispositions consummated during the periods involved.
The following tables set forth, for the periods and at the dates
indicated, information regarding First Nationwide's consolidated average
statements of financial condition, together with the total dollar amounts of
interest income and interest expense and the weighted average interest rates
for the periods presented. Average balances are calculated on a daily basis.
The information presented represents the historical activity of First
Nationwide and includes the impact of the LMUSA 1996 Purchase, the SFFed
Acquisition and the Home Federal Acquisition from their respective
acquisition dates of January 31, 1996, February 1, 1996 and June 1, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------- --------- --------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities (2)(5) ................................ $ 535 $ 25 6.23% $ 421 $ 21 6.58%
Mortgage-backed securities available for sale (5) 1,723 88 6.81 -- -- --
Mortgage-backed securities held to maturity (5) . 1,804 103 7.61 2,996 156 6.94
Loans held for sale, net ......................... 850 46 7.22 110 7 8.42
Loans receivable, net ............................ 11,086 669 8.05 10,170 604 7.92
Covered Assets (3) ............................... 35 1 5.43 206 10 6.40
--------- ---------- --------- --------- ---------- ---------
Total interest-earning assets ................... 16,033 932 7.75% 13,903 798 7.65%
---------- ========= ---------- =========
Noninterest-earning assets ........................ 1,149 718
--------- ---------
Total assets .................................... $17,182 $14,621
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits ......................................... $ 9,629 $323 4.48% $ 9,876 $329 4.45%
Securities sold under agreements to repurchase .. 2,118 90 5.68 1,554 78 6.71
Borrowings (4) ................................... 3,824 173 6.04 2,078 123 7.93
--------- ---------- --------- --------- ---------- ---------
Total interest-bearing liabilities .............. 15,571 586 5.03% 13,508 530 5.25%
---------- ========= ---------- =========
Noninterest-bearing liabilities ................... 268 277
Stockholders' equity .............................. 1,343 836
--------- ---------
Total liabilities and stockholders' equity ..... $17,182 $14,621
========= =========
Net interest income ................................ $346 $268
========== ==========
Interest rate spread ............................... 2.72% 2.40%
========= =========
Net interest margin ................................ 2.87% 2.55%
========= =========
Average equity to average assets ................... 7.82% 5.72%
========= =========
</TABLE>
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and securities
purchased under agreements to resell.
(3) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
(4) Interest and average rate include the impact of interest rate swaps.
(5) Prior to December 29, 1995, all U.S. government agency and
mortgage-backed securities were classified in the held to maturity
category. On December 29, 1995, First Nationwide reclassified $1.5
billion and $231.8 million, respectively, of securities and
mortgage-backed securities from the held-to-maturity category to the
available-for-sale category. The information presented in the
"securities" line for 1996 includes securities held to maturity of $4
million and related interest of less than $.01 million with the
remainder representing securities available for sale. Average balances
presented for 1996 represent the original amortized cost of the
securities without the effect of unrealized gains and losses recorded
as a result of the available for sale classification.
OC-50
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1995 1994
-------------------------------- ---------------------
AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST
--------- ---------- --------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1):
U.S. government and agency
securities held to maturity
(2)(3) ....................... $ 426 $ 28 6.57% $ 138 $ 7
Mortgage-backed securities
held to maturity (3)(4) ..... 2,985 213 7.14 711 43
Loans held for sale ........... 304 24 7.89 11 1
Loans receivable, net (4) .... 10,058 800 7.95 2,926 212
Covered Assets, net (5) ...... 165 11 6.67 491 30
--------- ---------- --------- --------- ----------
Total interest-earning
assets ...................... 13,938 1,076 7.72% 4,277 293
---------- ========= ----------
Noninterest-earning assets .... 741 156
--------- ---------
Total assets ................. $14,679 $4,433
========= =========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits ...................... $ 9,959 $ 447 4.49% $2,605 $101
Securities sold under
agreements to repurchase .... 1,577 105 6.66 351 19
Borrowings (6) ................ 2,010 158 7.86 1,132 73
--------- ---------- --------- --------- ----------
Total interest-bearing
liabilities ................. 13,546 710 5.24% 4,088 193
---------- ========= ----------
Noninterest-bearing
liabilities ................... 287 52
Stockholders' equity ........... 846 293
--------- ---------
Total liabilities and
stockholders' equity ........ $14,679 $4,433
========= =========
Net interest income ............. $ 366 $100
========== ==========
Interest rate spread ............ 2.48%
=========
Net interest margin ............. 2.63%
=========
Average equity to average assets 5.76%
=========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1994 1993
----------- ----------------------------------
AVERAGE AVERAGE AVERAGE
RATE BALANCE INTEREST RATE
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1):
U.S. government and agency
securities held to maturity
(2)(3) ....................... 4.95% $ 710 $24 3.43%
Mortgage-backed securities
held to maturity (3)(4) ..... 6.05 120 6 5.04
Loans held for sale ........... 5.22 -- -- --
Loans receivable, net (4) .... 7.27 124 16 12.67
Covered Assets, net (5) ...... 6.11 804 49 6.11
--------- --------- ---------- ---------
Total interest-earning
assets ...................... 6.85% 1,758 95 5.42%
========= ---------- =========
Noninterest-earning assets .... 81
---------
Total assets ................. $1,839
=========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits ...................... 3.88% $1,197 $55 4.59%
Securities sold under
agreements to repurchase .... 5.37 21 1 3.83
Borrowings (6) ................ 6.50 373 19 5.09
--------- --------- ---------- ---------
Total interest-bearing
liabilities ................. 4.73% 1,591 75 4.70%
========= ---------- =========
Noninterest-bearing
liabilities ................... 40
Stockholders' equity ........... 208
---------
Total liabilities and
stockholders' equity ........ $1,839
=========
Net interest income ............. $20
==========
Interest rate spread ............ 2.12% .72%
========= =========
Net interest margin ............. 2.33% 1.14%
========= =========
Average equity to average assets 6.61% 11.31%
========= =========
</TABLE>
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and short-term
investment securities.
(3) Substantially all securities held to maturity (except for
mortgage-backed securities resulting from the securitization with
recourse of certain of First Nationwide's loans) were reclassified to
securities available for sale on December 29, 1995. The average balance
of such securities for three days is not material and is therefore not
presented.
(4) In late December 1994, $1.3 billion of single-family loans were
securitized with recourse. The large increase in the average balance of
mortgage-backed securities held to maturity from 1994 to 1995 is
primarily due to such securitized loans.
(5) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
(6) Interest and average rate include the impact of interest rate swaps.
OC-51
<PAGE>
The following tables present certain information regarding changes in
interest income and interest expense of First Nationwide during the periods
indicated. The dollar amount of interest income and interest expense
fluctuates depending upon changes in the respective interest rates and upon
changes in the respective amounts (volume) of First Nationwide's
interest-earning assets and interest-bearing liabilities. For each category
of interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (i) changes in volume (changes in
average outstanding balances multiplied by the prior period's rate) and (ii)
changes in rate (changes in average interest rate multiplied by the prior
period's volume). Changes attributable to both volume and rate have been
allocated proportionately.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 VS.
1995
INCREASE (DECREASE) DUE
TO
------------------------
VOLUME RATE NET
-------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Interest Income:
Securities ..................................... $ 5 $ (1) $ 4
Mortgage-backed securities available for sale . 88 -- 88
Mortgage-backed securities held to maturity ... (70) 17 (53)
Loans held for sale, net ....................... 40 (1) 39
Loans receivable, net .......................... 55 10 65
Covered assets ................................. (8) (1) (9)
-------- ------ ------
Total ......................................... 110 24 134
-------- ------ ------
Interest Expense:
Deposits ....................................... (9) 3 (6)
Securities sold under agreements to repurchase 21 (9) 12
Borrowings ..................................... 69 (19) 50
-------- ------ ------
Total ......................................... 81 (25) 56
-------- ------ ------
Change in net interest income ................ $ 29 $ 49 $ 78
======== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 VS. 1994 1994 VS. 1993
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO TO
------------------------ -------------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------ ------ -------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Securities (1) ..................... $ 18 $ 3 $ 21 $(38) $21 $(17)
Mortgage-backed securities ......... 160 10 170 36 1 37
Loans held for sale ................ 23 0 23 1 0 1
Loans receivable, net .............. 566 22 588 200 (4) 196
Covered assets, net (2) ............ (22) 3 (19) (19) 0 (19)
-------- ------ ------ -------- ------ -------
Total ............................. 745 38 783 180 18 198
-------- ------ ------ -------- ------ -------
Interest Expense:
Deposits ........................... 328 18 346 53 (7) 46
Securities sold under agreements to
repurchase ........................ 80 6 86 18 0 18
Borrowings ......................... 67 18 85 48 6 54
-------- ------ ------ -------- ------ -------
Total ............................. 475 42 517 119 (1) 118
-------- ------ ------ -------- ------ -------
Change in net interest income ... $270 $(4) $266 $ 61 $19 $ 80
======== ====== ====== ======== ====== =======
</TABLE>
- ------------
(1) Includes interest-bearing deposits in banks and short-term investments.
(2) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
The volume variances in total interest income and total interest expense
from the nine months ended September 30, 1995 to the corresponding period in
1996 are largely due to the additional $4.2 billion in interest-earning
assets acquired and $4.4 billion in interest-bearing liabilities assumed in
the SFFed and Home Federal Acquisitions. The overall volume change in net
interest income is positive due to the SFFed and Home Federal Acquisitions
and the Branch Sales. The positive total rate variance of $49 million is
attributed to increasing rates on adjustable-rate assets as such assets
repriced to their
OC-52
<PAGE>
fully-indexed yields and the decrease in overall market rates on
interest-bearing liabilities between the two periods, offset slightly by the
impact of the additional wholesale borrowings used to finance the Branch
Sales. During the first nine months of 1996, deposits totalling $4.6 billion
with a weighted average rate of 4.59% were sold and replaced with $4.1
billion of FHLB advance borrowings and securities sold under agreements to
repurchase with a weighted average rate of 5.45%.
The positive volume variance of $270 million from 1994 to 1995 is largely
due to $13.4 billion in interest-earning assets acquired offset in part by
the $13.3 billion in interest-bearing liabilities assumed in the FN
Acquisition on October 3, 1994, which contributed to net interest income
during the last quarter of 1994 and all of 1995. The negative rate variance
of $4 million is attributed to the interest-bearing liabilities acquired in
the FN Acquisition, which rates reflect the overall increase in market
interest rates from the fourth quarter of 1994 through 1995. In an increasing
rate environment, First Nationwide's cost of interest-bearing liabilities
reacts more quickly to changes in rates than the yields on interest-bearing
assets, due to the volume of adjustable rate interest-bearing assets which
generally reprice on an annual or semi-annual basis.
The positive volume variance of $61 million from 1993 to 1994 is largely
due to the FN Acquisition, which resulted in $14 billion in interest-earning
assets contributing to net interest income during the last quarter of 1994.
The positive total rate variance of $19 million is also attributed to the FN
Acquisition, as the majority of the interest-earning assets acquired were
variable-rate assets, reflecting the overall increase in market interest
rates from 1993 to 1994.
Nine Months Ended September 30, 1996 versus Nine Months Ended September 30,
1995
Net Income. First Nationwide reported net income for the nine months ended
September 30, 1996 of $617.8 million compared with net income of $103.1
million for the corresponding period in 1995. Net income for the nine nonths
ended September 30, 1996 includes $363.0 million in pre-tax gains on sales of
branches, $40.4 million in pre-tax gains from the sale of stock of Affiliated
Computer Systems ("ACS"), $25.6 million in pre-tax income recognized in
connection with the termination of the Assistance Agreement and the
recognition of a $125.0 million deferred tax benefit, partially offset by a
$60.1 million charge for the Special SAIF Assessment. Net income, excluding
the aforementioned items, Incentive Plan (as defined herein) charges and
extraordinary loss on early extinguishment of debt, totaled $185.3 million
for the nine month period ended September 30, 1996.
Interest income. Total interest income was $932.6 million for the nine
months ended September 30, 1996, an increase of $134.7 million from the nine
months ended September 30, 1995. The interest-earning assets acquired in the
SFFed and Home Federal Acquisitions resulted in total interest-earning assets
for the nine months of 1996 averaging $16.0 billion, compared to $13.9
billion for the corresponding period in 1995. In addition, the yield on total
interest-earning assets during the nine months ended September 30, 1996
increased to 7.75% from the 7.65% yield on total interest-earning assets for
the nine months ended September 30, 1995.
First Nationwide earned $669.5 million of interest income on loans
receivable for the nine months ended September 30, 1996, an increase of $65.6
million from the nine months ended September 30, 1995. The loans acquired in
the SFFed and Home Federal Acquisitions contributed most of the increased
interest income in 1996, and resulted in an increase in the average balance
of loans receivable to $11.1 billion from $10.2 billion for the nine months
ended September 30, 1995. The weighted average yield on loans receivable
increased to 8.05% for the nine months ended September 30, 1996 from 7.92%
for the same period in 1995 due to upward rate adjustments on adjustable rate
residential loans as such loans repriced to their fully indexed rates,
without the effect of teaser rates or annual interest rate adjustment caps.
First Nationwide earned $45.4 million of interest income on loans held for
sale for the nine months ended September 30, 1996, an increase of $38.5
million from the nine months ended September 30, 1995. The increased income
is the net effect of a higher average volume of loans held for sale due to
increased originations from the operations acquired in the Maryland
Acquisition and the LMUSA Purchases, partially offset by a decrease in the
weighted average rate of such loans. The average balance of loans held
OC-53
<PAGE>
for sale was $850 million for the nine months ended September 30, 1996, an
increase of $740 million over the same period in 1995. The weighted average
yield on loans held for sale decreased to 7.22% for the nine months ended
September 30, 1996 from 8.42% during the nine months ended September 30, 1995
due to generally decreasing market rates during the period and the portfolio
consisting of a higher percentage of comparatively lower-rate adjustable rate
loans in 1996 compared to a higher fixed rate in 1995.
Interest income on all mortgage-backed securities, including the
available-for-sale portfolio and mortgage-backed securities held to maturity,
was $191.6 million for the nine months ended September 30, 1996, an increase
of $35.2 million from the nine months ended September 30, 1995. The average
portfolio balances increased $.5 billion, to $3.5 billion, during the nine
months ended September 30, 1996 compared to $3.0 billion during the nine
months ended September 30, 1995. The weighted average yield on all
mortgage-backed securities increased to 7.22% for the nine months ended
September 30, 1996 from 6.94% for the corresponding period in 1995, primarily
due to the upward rate adjustments of adjustable rate mortgage-backed
securities as the loans underlying such securities repriced to their fully
indexed rates, without the effect of teaser rates or annual interest rate
adjustment caps.
The interest income from Covered Assets declined $8.5 million, to $1.4
million, for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995. The decline is due to a reduction in the
volume of Covered Assets resulting from the FDIC Purchase (as defined herein)
in June 1995 and the termination of the Assistance Agreement in August 1996.
Interest income from securities and interest-bearing deposits in banks was
$24.7 million for the nine months ended September 30, 1996, an increase of
$3.9 million from the nine months ended September 30, 1995. The average
portfolio balances during the nine months ended September 30, 1996 and 1995
increased to $535 million from $421 million, respectively, primarily due to
assets acquired in the SFFed Acquisition. The weighted average yield on these
assets decreased to 6.23% for the nine months ended September 30, 1996 from
6.58% for the nine months ended September 30, 1995, primarily due to an
overall decline in interest rates.
Interest Expense. Total interest expense was $586.4 million for the nine
months ended September 30, 1996, an increase of $56.3 million from the nine
months ended September 30, 1995. The increase is the result of additional
interest-bearing liabilities assumed in the SFFed and Home Federal
Acquisitions and incrementally higher rates paid on the additional borrowings
incurred to replace the retail deposits sold in the Branch Sales.
Interest expense on customer deposits, including Brokered Deposits, was
$323.2 million for the nine months ended September 30, 1996, a decrease of
$5.6 million from the nine months ended September 30, 1995. The average
balance of customer deposits outstanding decreased from $9.9 billion to $9.6
billion for the nine months ended September 30, 1995 and 1996, respectively.
The $4.6 billion in deposits sold in the Branch Sales decreased the average
balance from period to period by $3.4 billion while deposits of approximately
$3.8 billion acquired in the SFFed and Home Federal Acquisitions and the
Branch Purchases increased the average balance from period to period by $3.2
billion due to the timing of such acquisitions and sales. The overall
weighted average cost of deposits increased from 4.45% for the nine months
ended September 30, 1995 to 4.48% for the nine months ended September 30,
1996, due principally to the effect of the deposits assumed in the SFFed and
Home Federal Acquisitions having a weighted average rate of 5.08% and the
deposits sold in the Branch Sales having a weighted average rate of
approximately 4.59%, as well as slight increases in the market rates of
interest paid for Brokered Deposits, partially offset by the impact of higher
average balances of lower rate custodial transaction accounts related to the
additional loan servicing acquired in the Maryland Acquisition and the LMUSA
Purchases.
Interest expense on securities sold under agreements to repurchase
totalled $89.9 million for the nine months ended September 30, 1996, an
increase of $11.9 million from the nine months ended September 30, 1995. The
average balance of such borrowings for the nine months ended September 30,
1996 and 1995 was $2.1 billion and $1.6 billion, respectively. The increase
is attributed to $.8 billion of such liabilities acquired in the SFFed and
Home Federal Acquisitions together with $1.5 billion in additional short-term
borrowings to fund the Branch Sales during 1996, partially offset by
maturities and payoffs that were
OC-54
<PAGE>
refinanced with deposits acquired from the Home Federal Acquisition and FHLB
advances. The weighted average interest rate on these instruments decreased
to 5.68% during the nine months ended September 30, 1996 from 6.71% for the
nine months ended September 30, 1995, primarily due to the impact of
decreases in overall market interest rates for such borrowings.
Interest expense on borrowings totalled $173.2 million for the nine months
ended September 30, 1996, an increase of $50.0 million from the nine months
ended September 30, 1995. The increase is attributed to the net effect of a
volume increase for borrowings assumed in the SFFed and Home Federal
Acquisitions and additional borrowings to replace the deposits sold in the
Branch Sales, partially offset by the impact of decreases in the rates paid
on such borrowings largely due to the shorter weighted average maturity of
the borrowings at September 30, 1996 compared to September 30, 1995. The
average balance outstanding for the nine months ended September 30, 1996 and
1995 was $3.8 billion and $2.1 billion, respectively. The weighted average
interest rate on these instruments decreased to 6.04% during the nine months
ended September 30, 1996 from 7.93% for the nine months ended September 30,
1995, primarily due to the impact of decreases in overall market interest
rates and the shorter average maturity of the portfolio.
Net Interest Income. Net interest income was $346.2 million for the nine
months ended September 30, 1996, an increase of $78.4 million from the nine
months ended September 30, 1995. The interest rate spread increased to 2.72%
for the nine months ended September 30, 1996 from 2.40% for the nine months
ended September 30, 1995.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, management fees and gains on the
Branch Sales and on sales of assets, was $595.5 million for the nine months
ended September 30, 1996, an increase of $490.2 million from the nine months
ended September 30, 1995. This increase includes (i) gains on sales of
branches of $363.0 million, (ii) gain from the sale of ACS stock of $40.4
million and (iii) the income recognized in connection with the termination of
the Assistance Agreement of $25.6 million.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $92.2 million for the nine months ended September 30, 1996, compared to
$48.1 million for the nine months ended September 30, 1995. This increase is
due to the addition of the mortgage servicing portfolios acquired in the
Maryland Acquisition, the LMUSA Purchases and the SFFed and Home Federal
Acquisitions, as well as servicing rights originated through the increased
origination capacity provided by these acquisitions. The single-family
residential loan servicing porfolio, excluding loans serviced for First
Nationwide, increased from $7.4 billion at January 1, 1995 to $27.0 billion
at January 1, 1996 and to $42.7 billion at September 30, 1996. During the
nine months ended September 30, 1996, First Nationwide sold $3.8 billion in
single-family mortgage loans originated for sale as part of its ongoing
mortgage banking operations compared to $411.2 million of such sales for the
corresponding period in 1995.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $34.4 million for the nine months ended September 30, 1996,
compared to $34.8 million for the nine months ended September 30, 1995. The
decrease is attributable to the impact of decreased revenues associated with
the Branch Sales, partially offset by the increased revenues from the retail
banking operations acquired in the Branch Purchases and the SFFed and Home
Federal Acquisitions.
Management fees totalled $8.0 million for the nine months ended September
30, 1996, compared to $11.1 million for the nine months ended September 30,
1995. The decrease is attributable principally to the reduced number of
assets under management as a result of contracts with the Resolution Trust
Corporation and other third parties which have expired.
Gain on sales of branches was $363.0 million for the nine months ended
September 30, 1996. See note 2 to the accompanying unaudited consolidated
financial statements of First Nationwide at September 30, 1996 for additional
information regarding the Branch Sales.
Gain on sales of loans was $13.0 million for the nine months ended
September 30, 1996, compared to a loss of $1.1 million for the nine months
ended September 30, 1995. The increase is attributed in part
OC-55
<PAGE>
to a gain of $7.5 million on the sale of $298.0 million of consumer loans
during the first quarter of 1996. In addition, the Bank experienced increased
gains on sales of single-family mortgage loans due to the adoption of SFAS
No. 122 on April 1, 1995. See "--Mortgage Banking Operations."
Gain on sales of assets was $38.4 million for the nine months ended
September 30, 1996. The gain is primarily the result of a $40.4 million gain
from the sale of ACS stock, partially offset by a writedown recorded on
certain collateralized mortgage obligations ("CMOs") in the mortgage-backed
securities available-for-sale portfolio determined to have a permanent
impairment in value.
Other noninterest income was $46.5 million for the nine months ended
September 30, 1996, an increase of $34.0 million from the nine months ended
September 30, 1995. The increase is primarily attributed to $25.6 million
recognized in connection with the termination of the Assistance Agreement, an
increase of $3.5 million in dividends on FHLB stock related to an increase in
the volume of such stock owned by First Nationwide and $2.3 million of
interest received related to the favorable outcome of an arbitration hearing.
Noninterest Expense. Total noninterest expense was $370.1 million for the
nine months ended September 30, 1996, an increase of $125.1 million from the
nine months ended September 30, 1995. The increase is principally due to
additional conpensation, loan expense, deposit insurance premiums and other
noninterest expenses, primarily related to the growth of First Nationwide
through the various acquisitions in 1995 and the first half of 1996 and the
Special SAIF Assessment.
Total compensation and employee benefits expense was $156.0 million for
the nine months ended September 30, 1996, an increase of $38.1 million from
the nine months ended September 30, 1995, primarily attributable to $33.6
million of Incentive Plan accruals. The number of full time employees
increased by 245 to 3,466 for the nine months ended September 30, 1996,
compared to the nine months ended September 30, 1995. This increase is
primarily due to the net impact of employee additions in the mortgage banking
operations related to the servicing portfolios acquired in the LMUSA
Purchases and an increase in retail banking employees attributable to the
SFFed and Home Federal Acquisitions, partially offset by a reduction in
employees due to the Branch Sales and First Nationwide's cost reduction
program. The nine months ended September 30, 1995 includes accruals for
termination benefits of $6.6 million related to the cost reduction plan and
the relocation of loan servicing operations to Frederick, Maryland from
Sacramento, California.
Occupancy and equipment expense was $37.4 million for the nine months
ended September 30, 1996, a decrease of $2.0 million from the nine months
ended September 30, 1995, attributed primarily to accruals established in
1995 for facilities costs related to the relocation of First Nationwide's
mortgage loan servicing operations to Maryland, the closure of retail
mortgage loan production offices and the cost reduction project. In addition,
the decrease in occupancy expenses includes the net effect of operations sold
in the Branch Sales, partially offset by increased expenses due to the
Maryland, SFFed and Home Federal Acquisitions.
Loan expense was $20.5 million for the nine months ended September 30,
1996, an increase of $14.2 million from the nine months ended September 30,
1995. The increase relates to additional expenses associated with the higher
volume of loans serviced due to the LMUSA Purchases and the Maryland
Acquisition. Such expenses include subservicing fees paid on acquired
servicing portfolios prior to conversion to FNMC's systems and increased
pass-through interest expense for loan payoffs in serviced loan pools. In
addition, such expenses also include outside appraisal fees, inspection fees,
and provision for losses on loans insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
SAIF deposit insurance premiums increased $60.7 million, to $77.0 million,
for the nine months ended September 30, 1996. The increase is primarily due
to a $60.1 million accrual for the Special SAIF Assessment.
Data processing expense was $8.3 million for the nine months ended
September 30, 1996, an increase of $1.2 million from the nine months ended
September 30, 1995. The increase is attributed to the SFFed and Home Federal
Acquisitions and expenses associated with the higher volume of loans serviced
in connection with the LMUSA Purchases and the Maryland Acquisition.
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Marketing expense was $7.7 million for the nine months ended September
30, 1996, a decrease of $3.6 million from the nine months ended September 30,
1995, due to reduced nationwide marketing efforts as a result of the Branch
Sales.
Professional fees increased $5.2 million, to $13.4 million, for the nine
months ended September 30, 1996. This increase includes additional expenses
related to the servicing portfolios acquired in the LMUSA Purchases, as well
as additional accruals for various legal and litigation expenses.
Foreclosed real estate operations, including gains on sales, resulted in a
net gain of $6.8 million for the nine months ended September 30, 1996
compared to a net gain of $.2 million for the same period in 1995. The change
is attributed to a higher volume of sales in 1996 at comparatively higher
prices to carrying values.
Amortization of intangible assets increased to $6.9 million for the nine
months ended September 30, 1996 from $.5 million for the corresponding period
in 1995, primarily due to the amortization of the $133.8 million intangible
asset recorded in connection with the SFFed and Home Federal Acquisitions.
Other noninterest expense was $49.7 million for the nine months ended
September 30, 1996, an increase of $11.8 million from the nine months ended
September 30, 1995, principally due to increased telecommunications, postage,
office supplies, insurance, OTS assessments and travel expenses, all of which
are attributed primarily to the increased loan servicing activity as a result
of the Maryland Acquisition and the LMUSA Purchases.
Provision for Income Taxes. During the nine months ended September 30,
1996 and 1995, First Nationwide recorded income tax benefit of $77.5 million
and income tax expense of $8.8 million, respectively. Based on a favorable
earnings trend since the consummation of the FN Acquisition and future
earnings expectations, management changed its judgment about the
realizability of First Nationwide's deferred tax assets and recognized a
deferred tax benefit of $125.0 million in the second quarter of 1996. In
order to recognize the total net deferred tax asset recorded as of September
30, 1996, the Bank must have future earnings of approximately $865 million.
Included in tax expense for the nine months ended September 30, 1995 is the
reversal of 1993 and 1994 over accruals of federal taxes totalling $2.2
million. First Nationwide's effective federal tax rates, before extraordinary
items were (22%) and 0% during the nine months ended September 30, 1996 and
1995, respectively, while its statutory federal tax rate was 35% during both
periods. The difference between the effective and statutory rates was
primarily the result of the utilization of net operating loss carryforwards
for both periods, the reversal of 1993 and 1994 over accruals for the nine
months ended September 30, 1995 and the recognition of a $125.0 million
deferred tax benefit in 1996. First Nationwide's effective state tax rate
before extraordinary item was approximately 7% and 8% during the nine months
ended September 30, 1996 and 1995, respectively.
Extraordinary Item. During the nine months ended September 30, 1996, First
Nationwide repurchased $44 million aggregate principal amount of the SFFed
Notes, resulting in a loss of $1.6 million, net of income taxes.
During the nine months ended September 30, 1995, First Nationwide recorded
a gain of $2.0 million on the early extinguishment of $250 million in FHLB
advances, net of income taxes.
Year Ended December 31, 1995 versus Year Ended December 31, 1994
Net Income. First Nationwide reported net income for 1995 of $211 million
compared with net income of $37 million for 1994. Net income for 1995
includes an income tax benefit of $56 million (largely due to the recognition
of a $69 million deferred tax benefit), and an extraordinary gain from the
early extinguishment of FHLB advances of $2.0 million, net of tax. Net income
for 1994 includes income tax expense totalling $3.2 million and $1.4 million,
net of tax, in extraordinary gain from the early extinguishment of FHLB
advances.
First Nationwide reported income before income taxes and extraordinary
item of $153 million in 1995 compared with pre-tax income of $39 million in
1994. The increase is generally due to the inclusion in 1995 of the
operations acquired in the FN Acquisition for a full year compared to the
operations acquired in the FN Acquisition for only the fourth quarter of
1994.
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Net interest income was $366 million for 1995, compared with $100 million
for 1994, an increase of $266 million. The increase is generally due to the
inclusion in 1995 of the operations acquired in the FN Acquisition for a full
year compared with the inclusion of the operations acquired in the FN
Acquisition for only the fourth quarter of 1994.
Interest Income. Total interest income was $1.1 billion for the year ended
December 31, 1995, an increase of $783 million from the year ended December
31, 1994.
The interest-bearing assets acquired in the FN Acquisition resulted in
total interest-earning assets for 1995 averaging $13.9 billion, compared to
$4.3 billion in 1994. In addition, the yield on total interest-earning assets
during 1995 increased .87% from the yield on total interest-earning assets
during 1994, principally due to changes in overall market interest rates and
higher yielding assets acquired in the FN Acquisition.
First Nationwide earned $800 million of interest income on loans
receivable for the year ended December 31, 1995, an increase of $588 million
from the year ended December 31, 1994. The loans acquired in the FN
Acquisition resulted in an increase in the average balance of loans
receivable to $10.1 billion from $2.9 billion for the years ended December
31, 1995 and 1994, respectively. The weighted average yield on loans
receivable increased to 7.95% for 1995 from 7.27% during 1994, primarily due
to the repricing of the adjustable rate loans in the portfolio acquired in
the FN Acquisition.
First Nationwide earned $24 million of interest income on loans held for
sale for the year ended December 31, 1995, an increase of $23 million from
the year ended December 31, 1994. The additional loan production from the
Maryland Acquisition and the LMUSA 1995 Purchase resulted in an increase in
the average balance of loans held for sale to $304 million from $11 million
for the years ended December 31, 1995 and 1994, respectively. The weighted
average yield on loans held for sale increased to 7.89% for 1995 from 5.22%
during 1994.
Interest income on mortgage-backed securities was $213 million for the
year ended December 31, 1995, an increase of $170 million from the year ended
December 31, 1994. The mortgage-backed securities acquired in the FN
Acquisition, including $1.3 billion of qualifying single-family loans
securitized from First Nationwide's loan portfolio in late 1994 and an
additional $.4 billion securitized in 1995, resulted in the average portfolio
balances increasing from $711 million to $3.0 billion during the years ended
December 31, 1994 and 1995, respectively. The weighted average yield on
mortgage-backed securities increased to 7.14% for 1995 from 6.05% for 1994,
primarily due to the addition of higher-yielding securities from the FN
Acquisition, including loan securitizations, and the subsequent upward rate
adjustments of adjustable rate mortgage-backed securities related to an
overall increase in market interest rates.
Interest income from Covered Assets declined $19 million, to $11 million,
for the year ended December 31, 1995. This decline is due to a reduction in
the volume of Covered Assets, due to sales, repayments and other dispositions
of Covered Assets, including the purchase by the FDIC of substantially all of
the remaining Covered Assets at the fair market value of such assets (the
"FDIC Purchase"), offset in part by an increase in the effective rate earned
on such Covered Assets, which was 6.67% for 1995 compared to 6.11% for 1994.
The higher rate is due to the net effect of the increase in the TCOF (as
defined herein) between the two periods due to generally increasing interest
rates, partially offset by the reduction in the applicable margin over TCOF
prescribed in the Assistance Agreement.
Interest income from securities and interest-bearing deposits in banks was
$28 million for the year ended December 31, 1995, an increase of $21 million
from the year ended December 31, 1994. The average portfolio balances during
the years ended December 31, 1995 and 1994 increased to $426 million from
$138 million, respectively, due to the securities acquired in the FN
Acquisition being held for an entire year in 1995 versus the fourth quarter
only in 1994. The weighted average yield on these assets increased to 6.57%
for 1995 from 4.95% for 1994, primarily due to the increase in overall market
interest rates.
Interest Expense. Total interest expense was $710 million for the year
ended December 31, 1995, an increase of $517 million from the year ended
December 31, 1994. The increase is generally due to the inclusion for a full
year in 1995 of the additional interest-bearing liabilities from the
operations acquired in the FN Acquisition and changes in overall market rates
of interest paid as discussed in more detail below.
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Interest expense on deposits, including Brokered Deposits, was $447
million for the year ended December 31, 1995, an increase of $346 million
from the year ended December 31, 1994. The deposits of approximately $10
billion acquired in the FN Acquisition, net of $1.2 billion in deposits sold
in the Illinois Sale, and the $513 million of deposits assumed in the Branch
Purchases, resulted in an increase in the average balance of deposits
outstanding from $2.6 billion to $10.0 billion for the years ended December
31, 1994 and 1995, respectively. The overall weighted average cost of
deposits increased from 3.88% for 1994 to 4.49% for 1995, due principally to
increases in the overall level of interest rates between the two years.
Interest expense on securities sold under agreements to repurchase and
borrowings totalled $263 million for the year ended December 31, 1995, an
increase of $171 million from the year ended December 31, 1994.
The timing of the FN Acquisition and the Illinois Sale, offset in part by
the reduction of borrowings from funds received in connection with the Branch
Purchases, resulted in the average balance outstanding of securities sold
under agreements to repurchase and borrowings for the years ended December
31, 1995 and 1994 increasing to $3.6 billion from $1.5 billion, respectively.
The weighted average interest rate on these instruments increased to 7.33% in
1995 from 6.27% for 1994, primarily due to the impact of increases in overall
market interest rates.
Net Interest Income. Net interest income before provision for loan losses
was $366 million for the year ended December 31, 1995, an increase of $266
million from the year ended December 31, 1994. The interest rate spread
increased to 2.48% in 1995 from 2.12% in 1994. The increase in net interest
income is generally due to the inclusion in 1995 of the operations acquired
in the FN Acquisition for a full year compared to the inclusion of the
operations acquired in the FN Acquisition for only the fourth quarter of
1994.
Noninterest Income. Total noninterest income, consisting primarily of
mortgage banking, customer banking and management fee income, was $151
million for the year ended December 31, 1995, an increase of $110 million
from the year ended December 31, 1994. The increase is generally due to the
inclusion in 1995 of the operations acquired in the FN Acquisition for a full
year compared to the inclusion of the operations acquired in the FN
Acquisition for only the fourth quarter of 1994. In addition, additional fee
revenues were generated from operations acquired in the Maryland Acquisition
and the LMUSA 1995 Purchase.
Fees and service charges related to mortgage banking operations, which
consist principally of loan servicing income and borrower fees, were $70
million for the year ended December 31, 1995, compared to $10 million for the
year ended December 31, 1994. This increase is due to the inclusion in 1995
of the mortgage banking operations acquired in the FN Acquisition for an
entire year versus only the fourth quarter in 1994, as well as additional fee
revenues received as a result of the inclusion of the mortgage banking
operations acquired in the Maryland Acquisition and the LMUSA 1995 Purchase.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $48 million for the year ended December 31, 1995 compared to
$11 million for the year ended December 31, 1994. The increase of $37 million
is due to the inclusion in 1995 of the retail banking operations acquired in
the FN Acquisition for an entire year compared to only the fourth quarter of
such operations in 1994, as well as a slight increase in such fees related to
the operations acquired in the Branch Purchases.
Management fees, principally from commercial loan servicing and asset
management services provided for third-party investors, totalled $15 million
for the year ended December 31, 1995, an increase of $2 million over 1994.
This $2 million increase is the net effect of a $3.8 million increase in the
revenues from the asset servicing agreements entered into with Granite in
conjunction with the FN Acquisition, offset by decreases in disposition and
other third-party fees received by FGB Realty Advisors, Inc. ("FGB Realty"),
principally due to the expiration of certain government contracts, totalling
$1.8 million.
Other noninterest income was $18 million for the year ended December 31,
1995, an increase of $10.4 million from the year ended December 31, 1994. The
increase is attributed to an increase of $3.4 million
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in dividends on FHLB stock, $1.7 million in fees earned on check
disbursement products, $1.1 million in early withdrawal penalties on
deposits, and $4.2 million in miscellaneous other income. The increases are
attributed to the inclusion in 1995 of the operations acquired in the FN
Acquisition for a full year compared to the inclusion of the operations
acquired in the FN Acquisition for only the fourth quarter of 1994.
Noninterest Expense. Total noninterest expense was $327 million for the
year ended December 31, 1995, an increase of $231 million from the year ended
December 31, 1994. All categories of noninterest expense increased, primarily
due to the inclusion in 1995 of expenses related to the operations acquired
in the FN Acquisition for an entire year compared to including such expenses
for only the fourth quarter in 1994. In addition, the year ended December 31,
1995 includes charges totalling $13 million related to accrued termination
and facilities costs for specific cost reduction actions taken by First
Nationwide during the year.
Total compensation and employee benefits expense was $154 million for the
year ended December 31, 1995, an increase of $105 million from the year ended
December 31, 1994. The increase is primarily due to the inclusion in 1995 of
a full year of such charges related to the operations acquired in the FN
Acquisition compared to only the fourth quarter of such expenses in 1994. In
addition, 1995 includes expenses totalling $7 million related to employee
severance and termination costs for the relocation of First Nationwide's
mortgage loan servicing operations to Maryland, the closure of First
Nationwide's retail mortgage loan production offices, and a bank-wide cost
reduction project.
Occupancy and equipment expense was $50 million for the year ended
December 31, 1995, an increase of $38 million from the year ended December
31, 1994. The increase is primarily due to the inclusion in 1995 of a full
year of such charges related to the operations acquired in the FN Acquisition
compared to only the fourth quarter of such expenses in 1994. In addition,
1995 includes expenses totalling $6 million related to space reductions and
lease termination charges for the relocation of First Nationwide's mortgage
loan servicing operations to Maryland, the closure of First Nationwide's
retail mortgage loan production offices, a bank-wide cost reduction project,
and retail branch consolidations due to duplicate facilities resulting from
the Branch Purchases.
Data processing expense increased to $10 million for the year ended
December 31, 1995 from $3 million for the same period in 1994. The increase
is primarily due to the inclusion in 1995 of a full year of such charges
related to the operations acquired in the FN Acquisition compared to only the
fourth quarter of such charges in 1994.
SAIF deposit insurance premiums increased to $22 million in 1995 compared
to $7 million for the year ended December 31, 1994. The increase is primarily
due to the inclusion in 1995 of a full year of such charges related to the
operations acquired in the FN Acquisition compared to only the fourth quarter
of such charges in 1994.
Marketing expense was $11 million for the year ended December 31, 1995, an
increase of $8 million from the year ended December 31, 1994. The increase is
primarily due to the inclusion in 1995 of a full year of such charges related
to the operations acquired in the FN Acquisition compared to only the fourth
quarter of such charges in 1994.
Loan expense was $12 million for the year ended December 31, 1995, an
increase of $11 million from the year ended December 31, 1994. The increase
is due to the inclusion in 1995 of a full year of the mortgage banking
operations acquired in the FN Acquisition compared to only the fourth quarter
in 1994, as well as increased expenses related to operations acquired in the
Maryland Acquisition and the LMUSA 1995 Purchase.
Other noninterest expense was $67 million for the year ended December 31,
1995, an increase of $47 million from the year ended December 31, 1994,
principally due to increased telecommunications, postage, office supplies,
travel and professional fees expenses, all of which are attributed primarily
to the inclusion in 1995 of a full year of the operations acquired in the FN
Acquisition compared to only the fourth quarter in 1994. The Branch
Purchases, Maryland Acquisition and LMUSA 1995 Purchase also contributed to
these increases in these expenses.
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Extraordinary Item. During the year ended December 31, 1995, First
Nationwide had a gain of $2.0 million on the early extinguishment of $250
million in FHLB advances, net of income taxes. During the year ended December
31, 1994, First Nationwide had a gain of $1.4 million on the early
extinguishment of $95 million in FHLB advances, net of income taxes.
Year Ended December 31, 1994 versus Year Ended December 31, 1993
Net Income. First Nationwide reported net income for 1994 of $37 million
compared with net income of $144 million for 1993. Net income for 1994
includes $1.4 million, net of tax effect, in extraordinary gain from the
early extinguishment of FHLB advances. Net income for 1993 includes a pre-tax
gain of $141 million from the First Gibraltar Texas Sale.
First Nationwide reported income before income taxes and extraordinary
item of $39 million in 1994 compared with pre-tax income of $147 million in
1993. Pre-tax income was reduced by provision for income taxes of $2.6
million and $2.5 million in 1994 and 1993, respectively.
Net interest income was $100 million for the year ended December 31, 1994,
compared with $19 million for 1993, an increase of $79 million. The
interest-bearing assets and liabilities acquired in the FN Acquisition
contributed $83 million of net interest income in 1994.
Interest Income. Total interest income was $293 million for the year ended
December 31, 1994, an increase of $198 million from the year ended December
31, 1993. The interest-bearing assets acquired in the FN Acquisition resulted
in total interest-earning assets for 1994 averaging $4.3 billion, compared to
$1.8 billion for 1993 and contributed $245 million of total interest income
in 1994. The assets sold in the First Gibraltar Texas Sale contributed $26
million in total interest income in 1993. In addition, yields on
mortgage-backed securities, securities to be held to maturity and all
interest-earning assets during 1994 increased 1.01%, 1.52% and 1.43%,
respectively, from the yields on mortgage-backed securities, securities to be
held to maturity and all interest-earning assets during 1993, principally due
to increases in overall market interest rates and the FN Acquisition.
First Nationwide earned $212 million of interest income on loans
receivable for the year ended December 31, 1994, an increase of $196 million
from the year ended December 31, 1993. The loans acquired in the FN
Acquisition contributed $211 million of interest income in 1994, and resulted
in an increase in the average balance of loans receivable to $2.9 billion
from $124 million for the years ended December 31, 1994 and 1993,
respectively. The weighted average yield on real estate loans decreased to
7.27% for 1994 from 12.67% during 1993, primarily due to the absorption of
the smaller, but higher-yielding 1993 portfolio balance into the larger,
market rate sensitive portfolio acquired in the FN Acquisition.
Interest income on mortgage-backed securities was $43 million for the year
ended December 31, 1994, an increase of $37 million from the year ended
December 31, 1993. The mortgage-backed securities acquired in the FN
Acquisition contributed $29 million of the increase and resulted in the
average portfolio balances increasing from $120 million to $711 million
during the years ended December 31, 1993 and 1994, respectively. The weighted
average yield on mortgage-backed securities increased to 6.05% for 1994 from
5.04% for 1993, primarily due to the addition of higher-yielding securities
from the FN Acquisition and the subsequent upward rate adjustments of
adjustable-rate mortgage-backed securities related to an overall increase in
market interest rates.
The interest income from Covered Assets declined $19 million, to $30
million for the year ended December 31, 1994. This decline is due to a
reduction in the volume of Covered Assets due to sales, repayments and other
dispositions net of a slight increase in the effective rate earned on such
Covered Assets. The higher rate is due to the net effect of the increase in
the Texas Cost of Funds ("TCOF") between the two periods due to generally
increasing interest rates offset by the reduction in the applicable margin
over the TCOF prescribed in the Assistance Agreement.
Interest income from securities to be held to maturity and
interest-bearing deposits in other banks was $7 million for the year ended
December 31, 1994, a decrease of $17 million from the year ended December 31,
1993. The average portfolio balances during the years ended December 31, 1994
and 1993
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decreased to $138 million from $710 million, respectively, due to
restructuring of the balance sheet as a result of the FN Acquisition. The
weighted average yield on these assets increased to 4.95% for 1994 from 3.43%
for 1993, primarily due to the increase in market interest rates.
Interest Expense. Total interest expense was $193 million for the year
ended December 31, 1994, an increase of $118 million from the year ended
December 31, 1993. The increase is the result of additional interest-bearing
liabilities from the FN Acquisition and the increase in overall market
interest rates.
Interest expense on deposits, including Brokered Deposits, was $101
million for the year ended December 31, 1994, an increase of $46 million from
the year ended December 31, 1993. The deposits of approximately $10 billion
acquired in the FN Acquisition, net of $1.2 billion in deposits sold in the
Illinois Sale, contributed an additional $85 million in interest expense in
1994 and resulted in an increase in the average balance of deposits
outstanding from $1.2 billion to $2.6 billion for the years ended December
31, 1993 and 1994, respectively. The deposit liabilities included in the
First Gibraltar Texas Sale contributed $26 million of interest expense in
1993. The overall weighted average cost of deposits decreased from 4.59% for
1993 to 3.88% for 1994, due principally to the larger volume of lower rate
transaction accounts acquired in the FN Acquisition. The FN Acquisition
decreased First Nationwide's reliance on Brokered Deposits as a source of
funds.
Interest expense on securities sold under agreements to repurchase and
borrowings totalled $92 million for the year ended December 31, 1994, an
increase of $72 million from the year ended December 31, 1993. Approximately
$55 million of the increase is attributed to liabilities acquired in the FN
Acquisition, with an additional $18 million attributable to the FHLB advances
which replaced the deposits sold in the Illinois Sale. The average balance of
securities sold under agreements to repurchase and borrowings outstanding for
the years ended December 31, 1994 and 1993 was $1.5 billion and $394 million,
respectively. The weighted average interest rate on these instruments
increased to 6.27% in 1994 from 4.91% for 1993, primarily due to the impact
of increases in overall market interest rates between December 1993 through
the date of the FN Acquisition and continued increasing rates thereafter
through year end 1994.
Net Interest Income. Net interest income before provision for loan losses
was $100 million for the year ended December 31, 1994, an increase of $80
million from the year ended December 31, 1993. The interest rate spread
increased to 2.12% in 1994 from .72% in 1993.
Noninterest Income. Total noninterest income, consisting primarily of
mortgage banking, customer banking and management fee income, was $41 million
for the year ended December 31, 1994, a decrease of $150 million from the
year ended December 31, 1993. Noninterest income in 1993 included gains of
$165 million from the sales of branches and loans related to the First
Gibraltar Texas Sale. After adjusting for these gains, other noninterest
income increased $16 million from the year ended December 31, 1993 to
December 31, 1994, which represents the net of $25 million additional income
related to operations acquired in the FN Acquisition offset in part by $9
million of income in 1993 related to the operations included in the First
Gibraltar Texas Sale.
Fees and service charges related to mortgage banking operations,
principally loan servicing income and borrower fees, were $10 million for the
year ended December 31, 1994, compared to $9 million for the year ended
December 31, 1993. This increase is due to the addition of the mortgage
banking operations from the FN Acquisition, offset in part by the
distribution of FGMH to First Gibraltar Holdings (the then immediate parent
of First Nationwide) in the first quarter of 1993. During 1994, First
Nationwide sold $47 million in principally fixed rate single-family mortgage
loans originated as part of the First Nationwide's ongoing mortgage banking
operations.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $11 million for the year ended December 31, 1994 compared to
$3 million for the year ended December 31, 1993. The increase of $8 million
is composed of $11 million in income related to retail banking operations
acquired in the FN Acquisition, offset in part by $3 million received in 1993
related to the retail banking operations sold in the First Gibraltar Texas
Sale.
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Management fees, which were recorded as other noninterest income,
totalled $13 million for the year ended December 31, 1994, an increase of $5
million over 1993. This increase is due to a $3.5 million increase in
disposition and other fees for assets serviced by FGB Realty and $1.5 million
in fees related to the shared services and asset servicing contracts with
Granite entered into in conjunction with the FN Acquisition.
Noninterest Expense. Total noninterest expense was $95 million for the
year ended December 31, 1994, an increase of $32 million from the year ended
December 31, 1993, principally due to increased compensation, occupancy and
SAIF deposit insurance premiums, primarily related to the FN Acquisition.
Total compensation and employee benefits expense was $49 million for the
year ended December 31, 1994, an increase of $24 million from the year ended
December 31, 1993. This increase of $24 million is composed principally of a
$32 million increase attributable to the FN Acquisition, offset in part by $5
million of the expense in 1993 related primarily to operations sold in the
First Gibraltar Texas Sale.
Occupancy and equipment expense was $12 million for the year ended
December 31, 1994, an increase of $7 million from the year ended December 31,
1993. This increase of $7 million is comprised principally of $9 million due
to the FN Acquisition, offset in part by $2 million of the expense
represented by operations sold in the First Gibraltar Texas Sale.
Extraordinary Item. First Nationwide had a net gain on the early
extinguishment of FHLB advances of $1.4 million during the year ended
December 31, 1994. Such gain resulted from the prepayment of $95.2 million in
FHLB advances.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
During the years ended December 31, 1995, 1994 and 1993, First Nationwide
recorded income tax (benefit) expense, excluding the tax effects associated
with extraordinary items in 1995 and 1994, of $(55.8) million, $3.2 million
and $2.5 million respectively. First Nationwide's effective tax rates were
(36)%, 8% and 2% in 1995, 1994 and 1993, respectively. First Nationwide's
statutory federal tax rate was 35% in each of 1995, 1994 and 1993. The
difference between effective and statutory rates was primarily the result of
offsetting certain deductions and losses with the receipt of non-taxable
FSLIC/RF assistance payments and, in 1995, the recognition of a deferred tax
benefit totalling $69 million. The non-taxable portions of the FSLIC/RF
assistance payments decreased to $5 million in 1995 from $9 million in 1994.
During 1995, First Nationwide used the experience method for purposes of
calculating its bad debt reserve.
The Bank, Holdings and Mafco Holdings are parties to the Tax Sharing
Agreement effective as of January 1, 1994, pursuant to which (i) the Bank
will pay to Holdings amounts equal to the taxes that the Bank would be
required to pay if it were to file a return separately from the Mafco Group
and (ii) Holdings will pay to Mafco Holdings amounts equal to the taxes that
Holdings would be required to pay if it were to file a consolidated return on
behalf of itself and the Bank separately from the Mafco Group. The Tax
Sharing Agreement allows the Bank to take into account, in determining its
liability to Holdings, any net operating loss carryovers that it would have
been entitled to utilize if it had filed separate returns for each year since
the formation of First Nationwide. The Tax Sharing Agreement also allows
Holdings to take into account, in determining its liability to Mafco
Holdings, any net operating losses that it would have been entitled to
utilize if it had filed a consolidated return on behalf of itself and First
Nationwide for each year since the formation of First Nationwide.
Accordingly, pursuant to the Tax Sharing Agreement, the benefits of any net
operating losses generated by First Nationwide since its formation are
retained by the Bank and Holdings.
First Nationwide had generated significant federal income tax net
operating losses since it was organized in December 1988. This was due, in
part, to the fact that under applicable federal income tax law, certain
financial assistance received by First Nationwide pursuant to the Assistance
Agreement was excluded from the taxable income of First Nationwide. In
addition to such tax-free financial assistance, the Bank had been entitled to
its normal operating deductions, including interest expense and certain
losses
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relating to its loan portfolio. As a result, First Nationwide generated
significant net operating losses for federal income tax purposes even though
its operations were profitable. Furthermore, under the reorganization
provisions of the Code, First Nationwide succeeded to certain net operating
loss carryovers of the Texas Closed Banks.
At December 31, 1995, if First Nationwide had filed a consolidated tax
return on behalf of itself and its subsidiaries for each year since the
formation of First Nationwide, it would have had approximately $2.6 billion
of regular tax net operating losses and approximately $959 million of AMT net
operating losses, both of which could have been utilized by First Nationwide.
A portion of such losses, to the extent not previously used to offset income,
will expire in the year 2002 and thereafter and will fully expire in 2007.
Under applicable tax law, only 90% of a corporation's alternative minimum
taxable income may be offset by carryovers from other years. Thus, 10% of the
alternative minimum taxable income earned by First Nationwide in the current
period will be subject to federal income tax at an effective rate of 20%. For
the year ended December 31, 1995 this resulted in federal income tax benefit,
including the tax effects associated with extraordinary items, of $68.1
million. Included in federal income tax benefit for the year ended December
31, 1995 was the recognition of a $69 million deferred tax benefit in the
fourth quarter of 1995 and an adjustment reducing prior years' tax expense by
$2.2 million. It is not anticipated that the Bank's liability for alternative
minimum tax under the Tax Sharing Agreement will be significant. Accordingly,
it is expected that under the Tax Sharing Agreement, the Bank will be able to
eliminate a significant portion of the amounts that it otherwise would be
required to pay to Holdings, in respect of federal income tax and,
accordingly, it is not expected that the Bank will record significant amounts
of federal income tax expense as a member of the Mafco Group. Payments made
by First Nationwide under the Tax Sharing Agreement with the Mafco Group
during the year ended December 31, 1995 totalled $5.1 million. There were no
such payments in 1994. Such payments may increase significantly at such time
as the net operating losses described above are either used in full to offset
income or expire. During 1998, the Bank and Holdings anticipate that the AMT
net operating losses will be fully utilized and the Bank and Holdings will
begin providing federal income tax expense at a rate of 20%. Prior to 1998,
the Bank and Holdings provided federal income tax expense at a 2% rate
because 90% of AMT net operating losses were available to offset AMT revenue.
TAX EFFECTS OF DIVIDEND PAYMENTS BY FIRST NATIONWIDE
Dividend distributions made to Holdings, as the sole owner of First
Nationwide's Common Stock, and to holders of the Preferred Stock in each case
in excess of First Nationwide's accumulated earnings and profits, as well as
any distributions in dissolution or in redemption or liquidation of stock,
may cause First Nationwide to recognize a portion of its tax bad debt
reserves as income and, accordingly, could cause First Nationwide to make
payments to Holdings under the Tax Sharing Agreement. First Nationwide does
not expect to generate substantial amounts of federal taxable income (after
taking into account its net operating loss carryovers) from any recapture of
its bad debt reserve. Accordingly, the recapture of its bad debt reserve as a
result of distributions to stockholders, or of the redemption of stock, would
not be expected to have a material adverse effect on the Bank.
TAXATION OF THE BANK
As a result of the Small Business Job Protection Act of 1996, which
provided for the repeal of the Section 593 reserve method of accounting for
bad debts by thrift institutions which are treated as large banks, the Bank
will generally be required to take into income the balance of its post-1987
bad debt reserves over a six year period beginning in 1996. Consequently, the
Bank may be required to make payments to Holdings under the Tax Sharing
Agreement if the Bank has insufficient expenses and losses to offset such
income. As of December 31, 1995, First Nationwide had tax bad debt reserves
totaling $203 million, all of which had been provided for in deferred tax
liabilities. The Bank does not expect to generate substantial amounts of
federal taxable income (after taking into account its net operating loss
carryovers) from any recapture of the Bank's bad debt reserve. Accordingly,
the repeal of the section 593 reserve method of accounting for bad debts by
thrift institutions is not expected to have a material adverse effect on the
Bank.
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PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient
to absorb expected loan losses. The Bank charges current earnings with a
provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks
not specifically identified in the loan portfolio. First Nationwide
established provisions for loan losses of $37 million, $6 million and $1
million for the years ended December 31, 1995, 1994 and 1993, respectively,
and established provisions for loan losses of $29.7 million and $18 million
for the nine months ended September 30, 1996 and 1995, respectively. The
allowance for loan losses is increased by provisions for loan losses and
decreased by charge-offs (net of recoveries). See "--General--Accounting
Changes." The increase in the provision for losses in 1995 over 1994 is due
to the increased loan production activity (primarily single-family
residential) and loans acquired through acquisitions in 1995 compared to
1994.
A significant portion of the Bank's loans is secured by real estate
located within markets where real estate prices continue to be weak.
Accordingly, the ultimate collectibility of those loans is susceptible to
changes in the economic conditions in such regions. Management's periodic
evaluation of the adequacy of the allowance is based on past loan loss
experience, known and inherent risks in the portfolio, potential adverse
situations that may affect the borrower's ability to repay, estimated value
of any underlying collateral and current prospective economic conditions. At
September 30, 1996, First Nationwide had a remaining available balance under
the Put Agreement of $70.5 million, which First Nationwide fully utilized on
December 5, 1996.
Although management believes that its present allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the
extent to which any changes in economic conditions or loss experience may
require further provisions in the future.
ASSET AND LIABILITY MANAGEMENT
Financial institutions are subject to interest rate risk to the degree
that their interest-bearing liabilities, consisting principally of deposits,
securities sold under agreements to repurchase and FHLB advances, mature or
reprice more or less frequently, or on a different basis, than their
interest-earning assets. A key element of banking is the monitoring and
management of liquidity risk and interest rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to
influence the net interest spread is referred to as asset and liability
management. The objective of the Bank's asset and liability management is to
maximize the net interest yield within the constraints imposed by prudent
lending and investing practices, liquidity needs and capital planning.
The Bank actively pursues investment and funding strategies to minimize
the sensitivity of its earnings to interest rate fluctuations while
maintaining the flexibility required to execute its business strategy. The
Bank measures the interest rate sensitivity of the balance sheet through gap
and duration analysis, as well as net interest income and market value
simulation, and, after taking into consideration both the variability of
rates and the maturities of various instruments, evaluates strategies which
may reduce the sensitivity of its earnings to interest rate and market value
fluctuations. An important decision is the selection of interest-bearing
liabilities and the generation of interest-earning assets which best match
relative to interest rate changes. In order to reduce interest rate risk by
increasing the percentage of interest sensitive assets, the Bank has
continued its emphasis on the origination of adjustable rate mortgage ("ARM")
products for its portfolio. Where possible, the Bank seeks to originate real
estate loans that reprice frequently and that on the whole adjust in
accordance with the repricing of its liabilities. During the nine months
ended September 30, 1996, most of the fixed and variable rate real estate
loans originated were sold in the secondary market to provide funds for the
acquisition and divestiture activity occurring during the period. At
September 30, 1996, approximately 89% of First Nationwide's real estate loan
portfolio consisted of ARMs.
ARMs have from time to time been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest
rates, ARMs could reach a periodic adjustment cap while still at a rate
significantly below
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their contractual margin over existing market rates. Since repricing
liabilities are typically not subject to such interest rate adjustment
constraints, the Bank's net interest margin would most likely be negatively
impacted in this situation. Certain ARMs now offered by the Bank have a fixed
monthly payment for a given period, with any changes as a result of market
interest rates reflected in the unpaid principal balance through negative
amortization. From the lender's perspective, these loans respond most quickly
to rate changes because interest accruals immediately reflect the loans as
though they were fully indexed. In general, the closer the interest rate on a
portfolio of ARMs is to the ultimate contractual margin over market rates,
the more sensitive the portfolio yield is to changes in market interest
rates.
As a result of the FN Acquisition, First Nationwide acquired the rights
and assumed the obligations of Old FNB under certain interest rate swap
agreements. Under the terms of these agreements, the Bank pays the variable
rate based on LIBOR and receives fixed rates. During 1995 and 1994, First
Nationwide's net interest margin decreased by $12.9 million and $4.2 million,
respectively, as a result of these interest rate swap agreements, largely due
to the amortization of the premium assigned to these agreements in the FN
Acquisition. Similarly, during the nine months ended September 30, 1996,
First Nationwide's net interest income increased by $0.1 million as a result
of these interest rate swap agreements largely due to a decrease in the
variable rate paid due to changing market interest rates, net of the fixed
rate payments received and the amortization of the premium assigned to these
agreements at the time of acquisition.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the income earned on
interest-earning assets and the expense paid on interest-bearing liabilities.
Net interest income is also dependent on the relative balances of
interest-earning assets and interest-bearing liabilities.
A traditional measure of interest-rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced
within a given period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds interest rate sensitive liabilities,
while the opposite results in a negative gap. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, and a positive gap would tend to result in an increase in net
interest income, while the opposite would tend to occur in a period of
falling rates.
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities), and the impact of interest rate swap agreements as of September
30, 1996. Prepayment rates are assumed in each period on substantially all of
the Bank's loan portfolio based upon expected loan prepayments. Repricing
mechanisms on the Bank's assets are subject to limitations such as caps on
the amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Bank's liabilities. In addition,
the interest rate sensitivity of the assets and liabilities illustrated in
the table would vary substantially if different assumptions were used or if
actual experience differed from the assumptions set forth. First Nationwide's
estimated interest rate sensitivity gap at September 30, 1996 is as follows:
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<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
---------------------------------------------------------
WITHIN 1-5 OVER 5 NONINTEREST
1 YEAR YEARS YEARS BEARING TOTAL
--------- ---------- -------- ------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity,
interest-bearing deposits in other
banks and short-term investment
securities (1)(2) ...................... $ 29 $ -- $ -- -- $ 29
Securities available for sale (3) ...... 568 -- -- -- 568
Mortgage-backed securities available for
sale (3) ............................... 1,660 -- -- -- 1,660
Mortgage-backed securities held to
maturity (1)(5) ........................ 1,686 2 3 -- 1,691
Loans held for sale, net (3) ............ 710 -- -- -- 710
Loans receivable, net (1)(4) ............ 9,571 740 351 -- 10,662
Investment in FHLB ...................... 218 -- -- -- 218
--------- ---------- -------- ------------- ---------
Total interest-earning assets ........ 14,442 742 354 -- 15,538
Noninterest-earning assets .............. -- -- -- 1,271 1,271
--------- ---------- -------- ------------- ---------
$14,442 $ 742 $354 $1,271 $16,809
========= ========== ======== ============= =========
INTEREST-BEARING LIABILITIES:
Deposits (6) ............................ $ 7,544 $ 1,224 $ 32 -- $ 8,800
Securities sold under agreements to
repurchase (1) ......................... 2,073 55 -- -- 2,128
FHLB advances (1) ....................... 3,249 671 6 -- 3,926
Other borrowings (1) .................... 5 -- 97 -- 102
--------- ---------- -------- ------------- ---------
Total interest-bearing liabilities ... 12,871 1,950 135 -- 14,956
Noninterest-bearing liabilities ........ -- -- -- 391 391
Stockholders' equity .................... -- -- -- 1,462 1,462
--------- ---------- -------- ------------- ---------
$12,871 $ 1,950 $135 $1,853 $16,809
========= ========== ======== ============= =========
Gap before interest rate swap agreements $ 1,571 $(1,208) $219 $ 582
Interest rate swap agreements ........... (400) 400 -- --
--------- ---------- -------- ---------
Gap adjusted for interest rate swap
agreements ............................. $ 1,171 $ (808) $219 $ 582
========= ========== ======== =========
Cumulative gap .......................... $ 1,171 $ 363 $582 $ 582
========= ========== ======== =========
Gap as a percentage of total assets .... 7.0% (4.8)% 1.3% 3.5%
========= ========== ======== =========
Cumulative gap as a percentage of total
assets ................................. 7.0% 2.2% 3.5% 3.5%
========= ========== ======== =========
</TABLE>
- ------------
(1) Based upon (a) contractual maturity, (b) instrument repricing date,
if applicable, and (c) projected repayments and prepayments of
principal, if applicable. Prepayments were estimated generally by using
the prepayment rates forecast by various large brokerage firms as of
September 30, 1996. The actual maturity and rate sensitivity of these
assets could vary substantially if future prepayments differ from
prepayment estimates.
(2) Consists of $4 million of securities held to maturity, $24 million of
interest-bearing deposits in other banks and $1 million of short-term
investment securities.
(3) As securities available for sale may be sold within one year, they
are considered to be maturing within one year. Loans held for sale at
September 30, 1996 were funded under either (i) forward commitments to
sell such loans or (ii) pre-existing purchase commitments to various
housing bond programs and the California Public Employees Retirement
System and, accordingly, are expected to be sold within one year.
(4) Excludes allowance for loan losses of $244 million and nonaccrual
loans of $160 million.
(5) Excludes underlying loans on nonaccrual status of $9 million.
(6) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts
and passbook accounts are reflected as maturing within one year.
At September 30, 1996, interest-earning assets of First Nationwide
exceeded interest-bearing liabilities by approximately $582 million. At
December 31, 1995, interest-earning assets of First
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<PAGE>
Nationwide exceeded interest-bearing liabilities by approximately $332
million. The change in the cumulative gap between the two periods is due
principally to the SFFed and Home Federal Acquisitions and the Branch Sales.
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of the Bank's sensitivity to
interest rate changes. Being at a point in time, this analysis may not fully
describe the complexity of relationships between product features and
pricing, market rates and future management of the balance sheet mix. The
Bank utilizes computer modeling, under various interest rate scenarios, to
provide a dynamic view of the effects of the changes in rates, spreads, and
yield curve shifts on net interest income.
The Bank's risk management policies are established by the Asset/Liability
Management Committee ("ALCO") of the Bank. ALCO meets monthly to formulate
the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity to measure the stability of earnings, management of
liquidity to provide adequate funding, and the establishment of asset product
priorities by formulating performance evaluation criteria, risk evaluation
techniques and a system to standardize the analysis and reporting of
originations, competitive trends, profitability and risk. On a quarterly
basis, the Board of Directors of the Bank is apprised of ALCO strategies
adopted and their impact on operations. At least annually, the Board of
Directors of the Bank reviews the Bank's interest rate risk management policy
statements.
On November 15, 1995, the FASB issued the Special Report. On December 29,
1995, First Nationwide reclassified substantially all of its securities and
mortgage-backed securities from held to maturity to available for sale. The
impact on the gap schedule of reclassifying securities from the
held-to-maturity portfolio to the available-for-sale portfolio was to shorten
the maturity and interest rate sensitivity of such assets. See
"--General--Accounting Changes."
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U.S. government and other specified securities to
deposits and borrowings due within one year. The OTS has currently
established a minimum liquidity ratio requirement of 5.00%. First
Nationwide's liquidity ratio was 5.31% and 5.46% at September 30, 1996 and
December 31, 1995, respectively.
The Bank's funds are obtained from the repayment and maturities of loans
and mortgage-backed securities, customer and Brokered Deposits, loan sales,
securities sold under agreements to repurchase, FHLB advances and other
secured and unsecured borrowings.
A major source of the Bank's funding is expected to be its retail deposit
branch network, which management believes will be sufficient to meet its
long-term liquidity needs. The ability of the Bank to retain and attract new
deposits is dependent upon the variety and effectiveness of its customer
account products, customer service and convenience, and rates paid to
customers. The Bank also obtains funds from the repayment and maturities of
loans and mortgage-backed securities, while additional funds can be obtained
from a variety of sources including customer and Brokered Deposits, loan
sales, securities sold under agreements to repurchase, FHLB advances, and
other secured and unsecured borrowings. It is anticipated that FHLB advances
and securities sold under agreements to repurchase will be secondary sources
of funding, and management expects there to be adequate collateral for such
funding requirements.
The Bank's primary uses of funds are the origination or purchase of loans,
the funding of maturing certificates of deposit, demand deposit withdrawals,
and the repayment of borrowings. Certificates of deposit scheduled to mature
during the twelve months ending September 30, 1997 total $4.6 billion. The
Bank may renew these certificates, attract new replacement deposits, replace
such funds with other borrowings, or it may elect to reduce the size of the
balance sheet. In addition, at September 30, 1996, First Nationwide had FHLB
advances and other borrowings of $4.6 billion maturing within twelve months.
The Bank may elect to pay off such debt or to replace such borrowings with
additional FHLB advances or other borrowings at prevailing rates.
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<PAGE>
During 1994, First Nationwide issued 3,007,300 shares of the 11 1/2%
Preferred Stock. Cash dividends on the 11 1/2% Preferred Stock are
noncumulative and are payable at an annual rate of 11-1/2% if, when, and as
declared by the Board of Directors of the Bank. The payment of dividends by
the Bank is subject to certain federal laws applicable to savings
associations. Dividends on the 11 1/2% Preferred Stock totalling $25.9
million were declared and paid during the nine months ended September 30,
1996.
During 1995, the FSLIC/RF purchased substantially all remaining Covered
Assets at the fair market value of such assets in the FDIC Purchase. Any
losses sustained by First Nationwide from this directed purchase were
reimbursed under the Capital Loss Provision of the Assistance Agreement. See
"Business--Other Activities--The Assistance Agreement." Proceeds from this
transaction were reinvested in the normal course of business. As a result of
the FDIC Purchase, First Nationwide's reliance on dispositions of Covered
Assets as a source of funds has been eliminated.
In the FN Acquisition, First Nationwide assumed $92.1 million of Old FNB's
Subordinated Debentures which have an annual interest rate of 10% and an
annual interest cost of $9.2 million. In the SFFed Acquisition, First
Nationwide assumed $50 million of the SFFed Notes which have an annual
interest rate of 11.20%. On September 12, 1996, First Nationwide repurchased
$44 million aggregate principal amount of the SFFed Notes at a price of
approximately 116.45% of the principal amount, plus the accrued interest
thereon. The $6.0 million of SFFed Notes that remain outstanding have an
annual interest cost of $0.7 million.
The Bank anticipates the cash flow from assets as well as other sources of
funds will provide adequate liquidity in the future. In addition to cash and
cash equivalents of $144.3 million at September 30, 1996, First Nationwide
has substantial additional borrowing capacity with the FHLB and other
sources. During 1996, First Nationwide used existing cash and the proceeds
from borrowings under reverse repurchase agreements and advances from the
FHLB to finance the Branch Sales and the SFFed and Home Federal Acquisitions.
The primary sources of funds in the first nine months of 1996 were sales
of loans held for sale, net of originations, of $471.2 million, repayments of
mortgage backed securities totalling $720.3 million, a net decrease in loans
receivable of $1.3 billion, and additional borrowings and securities sold
under agreements to repurchase of $7.2 billion. The primary uses of funds
were the $4.6 billion funding of the Branch Sales, principal payments on
borrowings of $5.2 billion, net cash paid for the SFFed and Home Federal
Acquisitions and the LMUSA 1996 Purchase of $52.4 million and dividends paid
of $254.2 million.
Net cash provided by investing activities for the year ended December 31,
1995 totalled $1.7 billion, an increase of $1.7 billion from the year ended
December 31, 1994. Cash flows provided by investing activities included $272
million from the FDIC Purchase and other dispositions of the Covered Assets,
principal payments on mortgage-backed securities totalling $571 million and
proceeds from maturities of securities of $344 million. Proceeds from sales
of loans receivable, including loans sold to Granite pursuant to the Put
Agreement of $199.5 million, totalled $431 million. Redemptions of FHLB stock
provided $26 million, and proceeds from sales of foreclosed real estate
provided $71 million. Proceeds from the Branch Purchases provided $501
million. Cash flows used in investing activities included $215 million for
the Maryland Acquisition and LMUSA 1995 Purchase, purchases of securities of
$158 million, purchases of $20 million in mortgage-backed securities, a net
increase in loans receivable of $86 million, and purchases of office premises
and equipment of $15 million.
Net cash used in financing activities for the year ended December 31, 1995
totalled $1.2 billion. Principal payments on borrowings totalled $6.9
billion, and the net decrease in securities sold under agreements to
repurchase totalled $913 million. Cash flows provided by financing activities
included increases in deposits (other than the Branch Purchases) of $543
million and additional borrowings of $6.2 billion. Additionally, dividends on
the 11 1/2% Preferred Stock and the Common Stock totalled $146 million.
Net cash provided by financing activities for the year ended December 31,
1994 totalled $160 million. The issuance of the 11 1/2% Preferred Stock and
the capital contribution from Holdings in connection with
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<PAGE>
the FN Acquisition provided $289 million and $391 million, respectively.
These funds were partially offset by an overall net decrease in borrowings
and securities sold under agreements to repurchase of $435 million.
Additionally, deposits decreased $84 million as Brokered Deposits were
allowed to mature.
The terms of the 11 1/2% Preferred Stock provide that the Bank may not
declare or pay any full dividends with respect to any parity stock, such as
the 10 5/8% Preferred Stock and the Bank Preferred Stock (if issued), unless
and until the Bank has paid full dividends on the 11 1/2% Preferred Stock for
the most recent dividend period. The Bank is currently in compliance with
such requirement.
IMPACT OF INFLATION AND CHANGING PRICES
Prevailing interest rates have a more significant impact on the Bank's
performance than does the general level of inflation. While interest rates
may bear some relationship to the general level of inflation (particularly in
the long run), over short periods of time interest rates may not necessarily
move in the same direction or change in the same magnitude as the general
level of inflation. As a result, the business of the Bank is generally not
affected by inflation in the short run, but may be affected by inflation in
the long run.
NON-PERFORMING ASSETS AND IMPAIRED LOANS
Pursuant to SFAS No. 114, as amended by SFAS No. 118, effective January 1,
1995, loans collectively reviewed for impairment by First Nationwide include
all single family loans and performing multi-family and commercial real
estate loans under $500,000, excluding loans which have entered the workout
process. The adoption of SFAS No. 114, as amended by SFAS No. 118, had no
material impact on First Nationwide's consolidated financial statements as
First Nationwide's existing policy of measuring loan impairment was
consistent with methods prescribed in these standards. See
"--General--Accounting Changes."
The Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, the Bank considers large
non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios, or other
indications that the borrowers are experiencing increased levels of financial
difficulty. The Bank bases the measurement of collateral-dependent impaired
loans, which represents substantially all of the Bank's loan portfolio, on
the fair value of the loan's collateral. The amount, if any, by which the
recorded investment of the loan exceeds the measure of the impaired loan's
value is recognized by recording a valuation allowance.
At September 30, 1996, the carrying value of loans that are considered to
be impaired totalled $136.2 million (of which $31.4 million were on
non-accrual status). The average recorded investment in impaired loans during
the nine months ended September 30, 1996 was approximately $136.9 million.
For the nine months ended September 30, 1996, First Nationwide recognized
interest income on those impaired loans of $12.3 million, which included $0.3
million of interest income recognized using the cash basis method of income
recognition.
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<PAGE>
The following table presents the amounts, net of specific allowances for
losses and purchase accounting adjustments, of First Nationwide's nonaccrual
loans, foreclosed real estate, troubled debt restructurings, and impaired
loans as of the dates indicated. These categories are not mutually exclusive;
certain loans are included in more than one classification.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
---------------------------------------------- ----------------------------------------------
NONACCRUAL IMPAIRED RESTRUCTURED NONACCRUAL IMPAIRED RESTRUCTURED
-------------- ------------ ---------------- -------------- ------------ ----------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
1-4 unit residential ..... $134 $ -- $ 4 $136 $ -- $ 8
5+ unit residential ...... 19 66 66 23 73 147
Commercial and other ..... 13 70 63 9 52 79
Land ..................... -- -- -- -- -- --
Construction ............. -- -- -- -- -- --
-------------- ------------ ---------------- -------------- ------------ ----------------
Total real estate ...... 166 136 133 168 125 234
Non-real estate ............ 3 -- -- 13 -- --
-------------- ------------ ---------------- -------------- ------------ ----------------
Total loans, net ....... $169 $136(b) $133(c) 171 $125(b) $234(c)
============ ================
Foreclosed real estate, net 59 49
-------------- --------------
Total non-performing
assets ................ $228(a) $220
============== ==============
</TABLE>
- ------------
(a) Includes loans securitized with recourse on nonaccrual status of $9
million.
(b) Includes loans on nonaccrual status of $31.4 million and $29.6 million
at September 30, 1996 and December 31, 1995, respectively, and loans
classified as troubled debt restructurings of $28.4 million and $31.9
million at September 30, 1996 and December 31, 1995, respectively.
(c) Includes nonaccrual loans of $3.4 million and $1.2 million at September
30, 1996 and December 31, 1995, respectively. At September 30, 1996,
$2.4 million of these nonaccrual, troubled debt restructurings were
also considered impaired. The decrease from $234 million at December
31, 1995 to $133 million at September 30, 1996 is due to loans which
have been performing under the restructured terms for greater than
twelve months which then cease to be reported as "restructured."
There were no accruing loans contractually past due 90 days or more at
September 30, 1996 or December 31, 1995.
Non-performing assets at September 30, 1996 include $49.3 million of
non-performing loans and $19.2 million of foreclosed real estate which were
acquired in the SFFed and Home Federal Acquisitions. Foreclosed real estate
also includes $6.0 million of single-family foreclosed real estate acquired
in the LMUSA 1996 Purchase that is covered for loss under the indemnification
provisions of the related contract, provided such real estate is sold prior
to January 31, 1997. The decrease in the percentage of First Nationwide's
non-performing assets to total assets was due to the level of First
Nationwide's non-performing assets remaining relatively constant while the
total assets significantly increased over such time period. During the nine
months ended September 30, 1996, $41.9 million of assets were sold to Granite
under the Put Agreement, leaving a remaining available balance under the Put
Agreement of $70.5 million, which First Nationwide fully utilized on December
5, 1996. Of the $228 million in non-performing assets at September 30, 1996,
approximately $17.3 million were eligible to be sold to Granite pursuant to
the Put Agreement.
First Nationwide's non-performing assets, consisting of nonaccrual loans,
net of specific allowances for loan losses and purchase accounting
adjustments, and foreclosed real estate, net, increased slightly to $220
million at December 31, 1995, compared with $218 million at December 31,
1994. Non-performing assets as a percentage of the Bank's total assets
increased slightly to 1.50% at December 31, 1995, from 1.49% of total assets
at December 31, 1994. First Nationwide's non-performing assets increased
slightly to $228 million at September 30, 1996, but decreased as a percentage
of First Nationwide's total assets at September 30, 1996 to 1.36% from 1.50%
at December 31, 1995.
The Bank continuously manages its credit risk by assessing the current and
estimated future performance of the real estate markets in which it operates.
The Bank continues to place a high degree
OC-71
<PAGE>
of emphasis on the management of its asset portfolio. The Bank has three
distinct asset management functions: performing loan asset management,
problem loan asset management and credit review. Each of these three
functions is charged with the responsibility of reducing the risk profile
within the residential, commercial and multi-family asset portfolios by
applying asset management and risk evaluation techniques that are consistent
with the Bank's portfolio management strategy and regulatory requirements. In
addition to these asset management functions, the Bank has a specialized
credit risk management group that is charged with development of credit
policies and performing credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of September 30, 1996:
<TABLE>
<CAPTION>
TOTAL
NONACCRUAL FORECLOSED NON-PERFORMING
REAL ESTATE REAL ESTATE, REAL ESTATE GEOGRAPHIC
REGION LOANS, NET(2) NET(2) ASSETS CONCENTRATION
- -------------- ------------- -------------- -------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Northeast(1) $ 37 $12 $ 49 21.71%
California .. 99 42 141 62.83
Other regions 30 5 35 15.46
------------- -------------- -------------- ---------------
Total ....... $166 $59 $225 100.00%
============= ============== ============== ===============
</TABLE>
- ------------
(1) Includes Connecticut, Massachusetts, Maine, New Hampshire, New Jersey,
New York, Pennsylvania, Rhode Island and Vermont.
(2) Net of purchase accounting adjustments and specific allowances for
losses.
The level of non-performing assets is directly affected by economic
conditions throughout the country. The following table indicates nonaccrual
real estate loans, net of purchase accounting adjustments, by collateral type
and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT
RESIDENTIAL RESIDENTIAL
------------------- -------------------
STATE VARIABLE FIXED VARIABLE FIXED
- ----------------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
California ....... $ 53 $ 4 $10 $ 1
New York ......... 27 2 1 1
Ohio ............. 3 2 2 4
Hawaii ........... 10 1 -- --
New Jersey ....... 7 2 -- --
Illinois ......... 2 1 -- 3
Florida .......... 2 3 -- --
Pennsylvania ..... 2 -- -- 1
Connecticut ...... 2 -- -- --
Massachusetts ... 1 1 -- --
Other states (1) 8 3 -- --
---- --- --- ---
Total .......... $117 $19 $13 $10
==== === === ===
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COMMERCIAL TOTAL
AND OTHER NONACCRUAL
---------------- REAL ESTATE % OF
STATE VARIABLE FIXED LOANS TOTAL
- ----------------- -------- ----- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
California ....... $ 7 $ -- $ 75 44.64%
New York ......... -- -- 31 18.45
Ohio ............. -- -- 11 6.55
Hawaii ........... -- -- 11 6.55
New Jersey ....... -- -- 9 5.36
Illinois ......... 1 -- 7 4.17
Florida .......... 1 -- 6 3.57
Pennsylvania ..... -- -- 3 1.79
Connecticut ...... -- -- 2 1.19
Massachusetts ... -- -- 2 1.19
Other states (1) -- -- 11 6.54
---- ------ ---- ------
Total .......... $ 9 $ -- $168 100.00%
==== ====== ==== ======
</TABLE>
- ------------
(1) There are 27 states, Puerto Rico, and the District of Columbia, of
which no one state had nonaccrual loans in excess of 1% of the total.
At September 30, 1996, First Nationwide's largest non-performing asset was
approximately $3.6 million, and it had seven non-performing assets over $2
million in size with balances averaging approximately $2.8 million. First
Nationwide has 1,873 non-performing assets below $2 million in size,
including 1,783 non-performing 1-4 unit residential assets.
OC-72
<PAGE>
The following table indicates outstanding balances of troubled debt
restructured loans, net of purchase accounting adjustments, by collateral
type, interest rate type and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL
RESIDENTIAL RESIDENTIAL AND OTHER
------------------- ------------------- ----------
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE
- ----------------- ---------- ------- ---------- ------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California ....... $ 1 $ 5 $29 $ 5 $19
New York ......... -- 1 3 35 --
New Jersey ....... -- -- 16 2 --
Pennsylvania ..... -- -- 17 1 --
Florida .......... -- -- 4 1 8
Missouri ......... -- -- 1 3 5
Georgia .......... -- -- -- 6 --
Texas ............ -- -- 2 4 --
Other states (1) -- 1 4 14 1
---------- ------- ---------- ------- ----------
Total .......... $ 1 $ 7 $76 $71 $33
========== ======= ========== ======= ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TOTAL
COMMERCIAL TROUBLED
AND OTHER DEBT % OF
STATE FIXED RESTRUCTURED TOTAL
- ----------------- ------- ------------ ---------
<S> <C> <C> <C>
California ....... $23 $ 82 35.04%
New York ......... 22 61 26.07
New Jersey ....... -- 18 7.69
Pennsylvania ..... -- 18 7.69
Florida .......... -- 13 5.56
Missouri ......... -- 9 3.85
Georgia .......... -- 6 2.56
Texas ............ -- 6 2.56
Other states (1) 1 21 8.98
------- -------------- --------
Total .......... $46 $234 100.00%
======= ============== ========
</TABLE>
- ------------
(1) There are 12 states of which no one state had troubled debt
restructured loans in excess of 2% of the total.
The following table indicates outstanding balances of impaired loans, net
of purchase accounting adjustments, by collateral type, interest rate type
and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
5+ UNIT COMMERCIAL
RESIDENTIAL AND OTHER
------------------- ------------------- TOTAL % OF
STATE VARIABLE FIXED VARIABLE FIXED IMPAIRED TOTAL
- ----------------- -------- ----- -------- ----- -------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California ....... $29 $ 3 $38 $10 $ 80 64.00%
New York ......... 4 12 1 -- 17 13.60
Georgia .......... -- 6 -- -- 6 4.80
Ohio ............. 2 4 -- -- 6 4.80
Arizona .......... 1 3 -- -- 4 3.20
Illinois ......... -- 4 1 -- 5 4.00
Other states (1) 2 3 1 1 7 5.60
---------- ------- ---------- ------- ---------- --------
Total .......... $38 $35 $41 $11 $125 100.00%
========== ======= ========== ======= ========== ========
</TABLE>
- ------------
(1) There are 8 states of which no one state had impaired loans in excess
of 1.5% of the total.
OC-73
<PAGE>
A summary of the activity in the allowance for loan losses by loan type
is as follows for the years ended December 31, 1994 and 1995 and the nine
months ended September 30, 1996:
<TABLE>
<CAPTION>
5+ UNIT
RESIDENTIAL
1-4 UNIT AND COMMERCIAL CONSUMER
RESIDENTIAL REAL ESTATE AND OTHER TOTAL
------------- -------------- ----------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance -- December 31, 1994 ......... $ 111 $ 83 $ 9 $ 203
Provision for loan losses .......... 31 3 3 37
Charge-offs ........................ (27) (1) (5) (33)
Recoveries ......................... 1 -- 2 3
------------- -------------- ----------- --------
Balance -- December 31, 1995 ......... $ 116 $ 85 $ 9 $ 210
------------- -------------- ----------- --------
Purchases/acquisitions ............. 12 32 1 45
Provision for loan losses .......... 25 2 3 30
Charge-offs ........................ (36) (3) (5) (44)
Recoveries ......................... 2 -- 1 3
------------- -------------- ----------- --------
Balance -- September 30, 1996 ....... $ 119 $ 116 $ 9 $ 244
============= ============== =========== ========
Ratio of allowance for loan losses to
non-performing loans:
December 31, 1994 ................. 83.5% 188.6% 225.0% 112.2%
============= ============== =========== ========
December 31, 1995 ................. 85.3% 265.6% 300.0% 122.8%
============= ============== =========== ========
September 30, 1996 ................ 88.8% 362.5% 300.0% 144.4%
============= ============== =========== ========
</TABLE>
For additional discussion on the non-performing assets of First
Nationwide, see "Business--Non-performing Assets."
MORTGAGE BANKING OPERATIONS
First Nationwide, through FNMC, has significantly expanded and enhanced
the efficiency of its mortgage banking operations. With the consummation of
the LMUSA 1996 Purchase on January 31, 1996 and the acquisition of the
single-family loan servicing portfolio in the SFFed and Home Federal
Acquisitions, other acquisitions and the originated servicing, the
single-family residential loans serviced for others totalled $42.7 billion at
September 30, 1996, an increase of $15.7 billion from December 31, 1995.
During the first three quarters of 1996, First Nationwide, through FNMC,
originated and sold (generally with servicing retained) single-family
residential loans totalling approximately $3.6 billion and $3.8 billion,
respectively. Gross revenues from mortgage loan servicing activities for the
first three quarters of 1996 total $155.5 million, an increase of $89.4
million from the nine months ended September 30, 1995.
In accounting for its mortgage loan sales prior to April, 1995, a gain or
loss was recognized by First Nationwide based on the sum of three components:
(i) the difference between the cash proceeds of the loan sales and the
carrying value of the loans; (ii) the "excess servicing," if any; less (iii)
provisions for estimated losses to be incurred from limited recourse
obligations, if any. Excess servicing results in a capitalized asset that is
amortized as an offset to servicing fee income using the interest method over
the estimated remaining lives of the loans sold.
Effective April 1, 1995, First Nationwide adopted SFAS No. 122, which
requires that, when a mortgage loan is sold and servicing rights are
retained, a portion of the cost of originating a mortgage loan be allocated
to the mortgage servicing rights based on its fair market value. This cost of
originating the loan is capitalized and amortized as an offset to servicing
fee income using the interest method over the estimated remaining lives of
the loans sold. The net gains on sales of single-family mortgage loans during
the nine months ended September 30, 1996 totalled $5.5 million and included
amounts related to the capitalization of originated and excess mortgage
servicing rights of $55.0 million.
OC-74
<PAGE>
The following is a summary of activity in mortgage servicing rights
purchased ("Purchased"), originated ("Originated") and excess servicing fees
receivable ("Excess") for the nine months ended September 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
PURCHASED ORIGINATED EXCESS TOTAL
----------- ------------ -------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $223,749 $16,370 $1,236 $241,355
Additions .................. 175,823 52,121 2,852 230,796
Amortization ............... (62,058) (2,980) (444) (65,482)
Impairment ................. -- -- -- --
----------- ------------ -------- ----------
Balance at September 30, 1996 $337,514 $65,511 $3,644 $406,669
=========== ============ ======== ==========
</TABLE>
Capitalized mortgage servicing rights are amortized over the period of
estimated future net servicing income. No allowance for loss due to
impairment of mortgage servicing rights was necessary at September 30, 1996.
CAPITAL RESOURCES
OTS capital regulations require savings banks to satisfy three minimum
capital requirements: tangible capital, core capital and risk-based capital.
In general, an institution's tangible capital, which must be at least 1.5% of
adjusted total assets, is the sum of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and minority
interest in equity accounts of fully consolidated subsidiaries, less
disallowed intangibles. An institution's ratio of core capital to adjusted
total assets (the "leverage capital ratio") must be at least 3%. Core capital
generally is the sum of tangible capital plus certain other qualifying
intangibles. Under the risk-based capital requirement, a savings bank must
have total capital (core capital plus supplementary capital) equal to at
least 8% of risk-weighted assets (which equals assets plus the credit risk
equivalent of certain off-balance sheet items, each multiplied by the
appropriate risk weight). Supplementary capital, which may not exceed 100% of
core capital for purposes of the risk-based requirements, includes, among
other things, certain permanent capital instruments such as qualifying
cumulative perpetual preferred stock, as well as some forms of term capital
instruments, such as qualifying subordinated debt. These capital requirements
are viewed as minimum standards by the OTS, and most institutions are
expected to maintain capital levels well above the minimum. In addition, the
OTS regulations provide that minimum capital levels higher than those
provided in the regulations may be established by the OTS for individual
savings associations, depending upon their particular circumstances. The Bank
is not subject to any such individual minimum regulatory capital requirement.
These capital requirements are applicable to the Bank but not to Holdings.
See "Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
OC-75
<PAGE>
At September 30, 1996, First Nationwide's regulatory capital levels
exceeded the minimum regulatory capital requirements, with tangible, core and
risk-based capital ratios of 6.71%, 6.71% and 12.93%, respectively. The
following is a reconciliation of First Nationwide's stockholders' equity to
regulatory capital as of September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of First Nationwide ..................... $1,462 $1,462 $1,462
Unrealized holding gain on securities available for sale, net (35) (35) (35)
Non-qualifying loan-servicing rights ......................... (41) (41) (41)
Non-allowable capital:
Intangible assets .......................................... (145) (145) (145)
Investment in subsidiaries ................................. (8) (8) (8)
Excess deferred tax assets ................................... (125) (125) (125)
Supplemental capital:
Qualifying subordinated debt debentures .................... -- -- 90
General loan loss reserves ................................. -- -- 129
Assets required to be deducted:
Land loans with more than 80% LTV ratio .................... -- -- (2)
---------- --------- ------------
Regulatory capital of First Nationwide ....................... 1,108 1,108 1,325
Minimum regulatory capital requirement ....................... 248 495 820
---------- --------- ------------
Excess above minimum capital requirement ..................... $ 860 $ 613 $ 505
========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL
RATIO RATIO RATIO
---------- ---------- ------------
<S> <C> <C> <C>
Regulatory capital of First Nationwide .. 6.71% 6.71% 12.93%
Minimum regulatory capital requirement .. 1.50 3.00 8.00
---------- ---------- ------------
Excess above minimum capital requirement 5.21% 3.71% 4.93%
========== ========== ============
</TABLE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $16.5 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $10.3 billion.
The Bank is also subject to the provisions of the FDICIA, which, among
other things, define specific capital categories based on an institution's
capital ratios. The capital categories, in declining order, are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Institutions
categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with the OTS,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by the
OTS or by the FDIC, including requirements to raise additional capital, sell
assets, or sell the entire institution. Once an institution becomes
"critically undercapitalized" it is generally placed in receivership or
conservatorship within 90 days.
At September 30, 1996, First Nationwide's leverage capital, Tier 1 (core
capital) risk-based and total risk-based capital ratios were sufficient for
it to be considered "well capitalized":
<TABLE>
<CAPTION>
RISK-BASED
-------------------------
CORE CAPITAL TIER 1 TOTAL CAPITAL
-------------- -------- ---------------
<S> <C> <C> <C>
Regulatory capital of First Nationwide 6.71% 10.81% 12.93%
Well capitalized ratio ................. 5.00 6.00 10.00
-------------- -------- ---------------
Excess above well capitalized ratio ... 1.71% 4.81% 2.93%
============== ======== ===============
</TABLE>
Management expects that the Bank will remain a "well capitalized"
institution after consummation of the Cal Fed Acquisition.
OC-76
<PAGE>
OTS capital regulations allow a savings bank to include a net deferred
tax asset under SFAS No. 109 in regulatory capital, subject to certain
limitations. To the extent that the realization of a deferred tax asset
depends on a savings bank's future taxable income, such deferred tax asset is
limited for regulatory capital purposes to the lesser of the amount that can
be realized within one year or 10 percent of core capital. As of December 31,
1994, First Nationwide recorded a valuation adjustment for 100% of First
Nationwide's net deferred tax asset because First Nationwide believed at that
time, it was not more likely than not that such deferred tax assets would be
realized.
Based on a favorable earnings trend since the consummation of the FN
Acquisition and future earnings expectations, management changed its judgment
about the realizability of First Nationwide's net deferred tax assets and
recognized a deferred tax benefit of $69 million in the fourth quarter of
1995, and an additional $125 million in the second quarter of 1996. The net
tax benefit of $69 million was determined based upon the amount of taxable
income that may be realized within one year. This amount does not exceed 10
percent of core capital and therefore is allowed without limitation under OTS
capital regulations. The additional $125 million net tax benefit recorded in
the second quarter of 1996 was determined based upon the amount of taxable
income that may be realized in periods beyond one year. Accordingly, such
amount has been excluded from regulatory capital at September 30, 1996.
CALIFORNIA FEDERAL
OVERVIEW
California Federal maintained 118 full service branches in California and
Nevada and was one of the largest savings associations in the United States
with assets of $14.1 billion at September 30, 1996 and $14.3 billion at
December 31, 1995. California Federal offered a broad range of consumer
financial services including demand and term deposits, mortgage, consumer and
small business loans, and insurance and investment products.
During the third quarter of 1996, federal legislation was enacted, which,
among other things, will fund the SAIF through the Special SAIF Assessment
for SAIF members, such as California Federal. The Special SAIF Assessment was
based on California Federal's deposits as of March 31, 1995 at an assessment
rate of 65.7 basis points. During the third quarter of 1996, California
Federal accrued $58.1 million for the Special SAIF Assessment. The Special
SAIF Assessment was paid on November 27, 1996.
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
California Federal's common stock was converted into one share of Cal Fed
common stock. Consequently, California Federal became a wholly-owned
subsidiary of Cal Fed.
OC-77
<PAGE>
The following is a summary of California Federal's financial highlights
for the periods indicated:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(DOLLARS IN
MILLIONS, EXCEPT PER
SHARE DATE)
<S> <C> <C>
Net interest income before provision for loan losses ................ $ 260.0 $ 229.1
Provisions for losses on loans and operations of real estate held
for sale ........................................................... 38.8 31.8
General and administrative expenses ................................. 173.9 179.2
(Loss) earnings available for common shareholder .................... 32.1 49.1
Loan originations ................................................... 1,562.7 1,379.8
Loan purchases ...................................................... 628.5 408.5
Net interest rate spread ............................................ 2.19% 1.94%
Net interest rate margin ............................................ 2.48% 2.19%
General and administrative expenses as a percentage of average
assets (annualized)(A), (B) ........................................ 1.65% 1.68%
Operating efficiency ratio(B) ....................................... 56.26% 65.28%
Return on average assets (annualized)(A) ............................ 0.59% 0.64%
Return on average equity (annualized)(A), (C) ....................... 9.86% 10.93%
</TABLE>
- ------------
(A) Annualized ratios are based upon results for the quarter and nine
months ended September 30. Results may vary from quarter to quarter and
for the year.
(B) The computation excludes the $58.1 million Special SAIF Assessment.
(C) Average equity includes preferred stock of subsidiary totalling $172.5
million and $266.0 million at September 30, 1996 and 1995,
respectively.
For the nine months ended September 30, 1996 earnings available to common
shareholder were $32.1 million compared to $49.1 million for the same period
of 1995. The loss before dividends on preferred stock of subsidiary for the
quarter ended September 30, 1996 was primarily attributable to the $58.1
million accrual for the Special SAIF Assessment.
Net interest income for the nine months ended September 30, 1996 was
$260.0 million compared to $229.1 million for the same period of 1995. The
increase in the level of net interest income is the result of an improvement
in California Federal's net interest rate spread. The improvement in
California Federal's net interest rate spread for the nine months ended
September 30, 1996 compared to the same period of 1995 resulted primarily
from a decrease in the cost of interest bearing liabilities.
OC-78
<PAGE>
The following is a summary of California Federal's financial highlights
for the periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- ---------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Net interest income .................................. $ 311.9 $ 341.6 $ 402.0
Provisions for losses on loans and operations of real
estate held for sale ................................ 39.8 120.8 281.8
General and administrative expenses .................. 241.9 290.3 323.3
Net earnings (loss) .................................. 93.6 (423.1) (145.5)
Primary net earnings (loss) per common share ........ 1.36 (10.10) (5.98)
Fully-diluted net earnings (loss) per common share .. 1.36 (10.10) (5.98)
Loan originations .................................... 1,768.4 2,545.3 2,827.5
Loan purchases ....................................... 578.2 229.2 115.0
Interest rate spread ................................. 2.00% 2.23% 2.62%
Net interest margin .................................. 2.23% 2.34% 2.59%
General and administrative expenses as a percentage
of average assets ................................... 1.70% 1.97% 1.99%
Return on average assets ............................. 0.66% (2.87)% (0.89)%
Return on average equity ............................. 11.10% (50.10)% (15.88)%
</TABLE>
California Federal's net earnings of $93.6 million, or $1.36 per common
share for the year ended December 31, 1995 represented a $516.7 million
increase from the net loss for 1994. The 1994 net loss included certain
nonrecurring items: (i) a $135.0 million net gain from the sale of California
Federal's Southeast Division (as defined herein), (ii) a $273.7 million
charge for the effect of a change in accounting for goodwill and (iii) a
$274.8 million loss on assets held for accelerated disposition.
The improvement in operations for 1995 compared to 1994 resulted primarily
from decreases in provisions for loan losses, lower general and
administrative expenses and improvements in real estate operations.
Provisions for loan losses for the year ended December 31, 1995 were $31.8
million, a 57.5% decrease from 1994. Further, general and administrative
expenses for 1995 were $241.9 million, a 16.7% decrease from 1994. The
reduction in general and administrative expenses reflects the sale of
California Federal's Southeast Division in 1994 and cost containment measures
implemented in California Federal's California operations during 1994 and
1995. Real estate operations were positively affected by a reduction in the
volume of real estate held for sale and a reduced need for allowances for
losses on real estate held for sale.
During 1995, California Federal sold $952.2 million of U.S. Treasury
securities, that had been designated as available for sale, and realized a
gain of $6.9 million. California Federal reinvested the proceeds from the
sale of the securities into short-term liquid investments. Due to the small
yield differential between short-term and medium-term instruments, the near
term impact to California Federal's net interest income is not expected to be
material.
During 1994, California Federal successfully completed a number of
strategic initiatives. Those initiatives included (i) the raising of $347.5
million of new equity capital through the issuance of preferred and common
stock, (ii) the accelerated disposition of $1.3 billion of non-performing
assets ("NPA's") and certain performing loans with higher risk profiles than
California Federal wished to retain in its portfolio (the "1994 Bulk Sales"),
(iii) the sale of 43 depository branches located in Florida and 1 branch in
Georgia (the "Southeast Division") and (iv) the reduction in operating costs
in California Federal's California operations. California Federal realized a
net gain of $135.0 million from the sale of the Southeast Division during the
third quarter of 1994.
In 1994, California Federal recorded a $273.7 million charge to earnings
from the application of SFAS No. 72, Accounting for Certain Acquisitions of
Banking or Thrift Institutions to California Federal's acquisitions initiated
prior to September 30, 1982. The cumulative effect of the retroactive
application of SFAS No. 72 resulted in the acceleration of California
Federal's goodwill amortization arising from
OC-79
<PAGE>
California Federal's thrift institution acquisitions initiated prior to
September 30, 1982, to the extent that $273.7 million of remaining
unamortized goodwill was eliminated effective January 1, 1994.
The 1994 strategic initiatives and the change in accounting for goodwill
are the primary reasons for the material changes in California Federal's
operating results between 1993, 1994 and 1995.
The following table presents the primary composition of California
Federal's gross income for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
----------------------------------------
1996 1995
------------------ ---------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Total interest income $761.6 92.5% $747.6 93.7%
Total other income ... 61.9 7.5 50.3 6.3
-------- -------- -------- -------
Total gross income . $823.5 100.0% $797.9 100.0%
======== ======== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1994 1993
----------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest income $1,008.0 94.1% $ 908.1 81.9% $1,013.9 93.5%
Total other income ... 63.5 5.9 201.2 18.1 70.2 6.5
---------- -------- ---------- -------- ---------- -------
Total gross income . $1,071.5 100.0% $1,109.3 100.0% $1,084.1 100.0%
========== ======== ========== ======== ========== =======
</TABLE>
California Federal's gross income is primarily derived from interest
earned on loans, mortgage-backed securities, investment securities and other
assets that earn interest ("interest earning assets"). See "--Net Interest."
Other income is primarily comprised of fees and gains from the sale of
assets. As previously discussed, the nonrecurring gain from the sale of the
Southeast Division is reflected as a component of California Federal's other
income for 1994.
The following table compares California Federal's financial condition,
asset quality and capital position as of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
--------------- ---------------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Total assets ......................................... $14,126.7 $14,208.9
Interest earning asets ............................... $13,704.6 $13,645.8
Deposits ............................................. $ 8,763.6 $ 9,438.0
Borrowings ........................................... $ 4,281.0 $ 3,712.3
Total shareholder's equity ........................... $ 804.1 $ 867.3
NPA's ................................................ $ 164.5 $ 211.6
Non-performing loans ("NPL's") ....................... $ 152.3 $ 182.2
Ratio of NPA's to total assets ....................... 1.16% 1.49%
Number of depository branches ........................ 118 126
Shareholder's equity as a percentage of total assets 5.69% 6.10%
Tangible capital ratio ............................... 5.40% 5.80%
Core capital ratio ................................... 5.40% 5.80%
Risk-based capital ratio ............................. 11.18% 12.17%
Tier 1 risk-based capital ratio ...................... 9.72% 10.60%
</TABLE>
During the second quarter of 1996, California Federal called for
redemption all of the 3,740,000 outstanding shares of its 7 3/4 percent
Noncumulative Convertible Preferred Stock, Series A (the "California Federal
Preferred Stock, Series A"). Except for the conversion of 18,820 shares into
23,336 shares of Cal Fed's common stock, all shares of the California Federal
Preferred Stock, Series A were redeemed effective June 14, 1996 at a
redemption price of $25.00 per share, plus a dividend of $0.398264 per share.
On October 18, 1996 California Federal declared a regular quarterly dividend
of $2.65625 per share on the 10 5/8% Preferred Stock.
OC-80
<PAGE>
The following table compares California Federal's financial condition,
asset quality and capital position as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER
1995 1994 31, 1993
-------------- -------------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Interest earning assets .............................. $13,755.0 $13,520.0 $13,558.6
Total assets ......................................... $14,320.6 $14,182.4 $15,325.9
Deposits ............................................. $ 9,476.7 $ 8,360.9 $12,600.8
Borrowings ........................................... $ 3,786.4 $ 4,818.8 $ 1,647.0
Total shareholders' equity ........................... $ 887.5 $ 798.3 $ 890.7
NPA's ................................................ $ 231.8 $ 223.1 $ 805.7
Number of depository branches ........................ 125 119 168
Book value per common share .......................... $ 12.63 $ 10.82 $ 31.93
Tangible book value per common share ................. $ 12.28 $ 10.74 $ 20.96
Ratio of NPA's to total assets ....................... 1.62% 1.57% 5.26%
Shareholder's equity as a percentage of total assets 6.20% 5.63% 5.81%
Tangible capital ratio ............................... 5.91% 5.60% 3.98%
Core capital ratio ................................... 5.91% 5.60% 4.73%
Risk-based capital ratio ............................. 12.36% 12.45% 9.67%
</TABLE>
During 1995, California Federal acquired three branch offices and $138.6
million in deposits of Pacific Heritage Bank and six branch offices and
$359.4 million in deposits of Continental Savings of America.
During 1995, California Federal made a non-taxable distribution of its
Litigation Interests to its common shareholders. The Litigation Interests
represent a right to receive a portion of the net cash proceeds, if any,
resulting from California Federal's pending goodwill lawsuit against the
Federal government. The Litigation Interests trade on the NASDAQ Small Cap
Market under the symbol "CALGZ". See "Business--First Nationwide--Other
Activities--Cal Fed Contingent Litigation Recovery Participation Interests."
NET INTEREST INCOME
Net interest income is the difference between interest income earned from
interest-earning assets and interest expense paid on savings deposits and
borrowings ("interest-bearing liabilities").
For the nine months ended September 30, 1996 net interest income totaled
$260.0 million compared to $229.1 million for the same period of 1995.
Net interest income totaled $311.9 million for the year ended December 31,
1995, compared to $341.6 million and $402.0 million for 1994 and 1993,
respectively. Net interest income is affected by (i) the average volume and
repricing characteristics of California Federal's interest earning assets and
interest bearing liabilities, (ii) the level and volatility of market
interest rates and (iii) the performance of California Federal's loan
portfolio and investments. Net interest income also depends upon the excess
of yields earned on interest-earning assets over rates paid on
interest-bearing liabilities ("interest rate spread").
OC-81
<PAGE>
The following table presents the primary determinants of California
Federal's net interest income for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Average interest-earning assets ..... $13,977.1 $13,964.7 $13,989.6 $14,624.5 $15,535.8
Less: Average non-performing
loans (A) ........................... 184.1 178.0 184.3 387.4 675.1
----------- ----------- ----------- ----------- -----------
Average performing interest-earning
assets .............................. 13,793.0 13,786.7 13,805.3 14,237.1 14,860.7
Less: Average interest-bearing
liabilities ......................... 13,176.8 13,298.3 13,347.6 14,217.7 15,634.3
----------- ----------- ----------- ----------- -----------
Average performing interest-earning
assets over (under) average
interest-bearing liabilities ........ $ 616.2 $ 488.4 $ 457.7 $ 19.4 $ (773.6)
=========== =========== =========== =========== ===========
Yield earned on average-interest
earning assets ...................... 7.27% 7.14% 7.21% 6.21% 6.53%
Rate paid on average interest-bearing
liabilities ......................... 5.08 5.20 5.21 3.98 3.91
----------- ----------- ----------- ----------- -----------
Net interest rate spread ............. 2.19% 1.94% 2.00% 2.23% 2.62%
=========== =========== =========== =========== ===========
Net interest rate margin ............. 2.48% 2.19% 2.23% 2.34% 2.59%
=========== =========== =========== =========== ===========
Total interest income ................ $ 761.6 $ 747.6 $ 1,008.0 $ 908.1 $ 1,013.9
Total interest expense ............... 501.6 518.5 696.1 566.5 611.9
----------- ----------- ----------- ----------- -----------
Net interest income .................. $ 260.0 $ 229.1 $ 311.9 $ 341.6 $ 402.0
=========== =========== =========== =========== ===========
</TABLE>
- ------------
(A) Average NPL's include non-accrual and restructured loans.
As indicated in the table above, net interest income increased by $30.9
million for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995. The increase in net interest income was
primarily due to an improvement in California Federal's net interest rate
spread. California Federal's net interest rate spread has increased during
the nine months ended September 30, 1996 compared to the same period of 1995.
The improvement in California Federal's net interest rate spread is primarily
due to a decline in its cost of funds. California Federal's cost of funds
declined by 12 basis points for the nine months ended September 30, 1996
compared to the same period of 1995.
Net interest income has declined since 1993 due to a decrease in the
average level of interest earning assets and due to an increase in short-term
interest rates that has increased California Federal's cost of funds. As
indicated in the table above, net interest income decreased by $29.7 million
for the year ended December 31, 1995 as compared to the same period of 1994.
The decrease in net interest income was primarily due to an increase in
California Federal's cost of funds. During 1994 and continuing into the first
half of 1995, short-term market rates, offering rates on deposits, LIBOR
rates and the Eleventh District Cost of Funds Index ("COFI") increased. The
increase in rates resulted in increased costs of deposits and borrowings and
to a lesser extent, increased yields on loans and investments. California
Federal, and most of its competitors in its deposit markets, raised interest
rates on deposits during 1994 and throughout most of 1995 in order to keep
them an attractive investment vehicle for consumers relative to other
investment alternatives. Additionally, a substantial amount of California
Federal's borrowings bore interest that was based on the 1 month LIBOR index.
Because LIBOR has increased significantly since 1993, the cost of California
Federal's borrowings have also increased. During the second half of 1995 the
cost of funds began to stabilize; however, the yield on California Federal's
interest earning assets increased due to the lagging effect of the repricing
characteristics of California Federal's adjustable rate loans and mortgage-
OC-82
<PAGE>
backed securities. The lagging repricing of California Federal's adjustable
rate loans and mortgage-backed securities ("MBS's") has led to an improvement
in California Federal's interest rate spread at December 31, 1995 as compared
to December 31, 1994.
The majority of California Federal's loans receivable and MBS's,
(approximately 83.3% of the total amount of loans receivable and MBS's) earn
interest based upon the movement of COFI and the 1-year constant maturity
Treasury. Changes in the COFI have historically lagged other indices and
market rates. Therefore, the repricing of California Federal's loans
typically lags the repricing of its deposits and borrowings. Additionally,
the extent to which loans and mortgage-backed securities can reprice upward
may be limited by contractual terms that restrict the frequency of repricing
and periodic interest rate adjustment caps ("periodic caps").
The following table presents information on the yields earned, rates paid
and interest rate spreads for California Federal:
<TABLE>
<CAPTION>
DECEMBER
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 31, 1995
----------------------- ----------------------- ---------
FOR THE AT THE FOR THE AT THE FOR THE
NINE MONTHS PERIOD NINE MONTHS PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED
------------- -------- ------------- -------- ---------
<S> <C> <C> <C> <C> <C>
Weighted Average Yield
Earned:
Loans Receivable .......... 7.76% 7.60% 7.64% 7.88% 7.71%
Mortgage-Backed Securities 6.71 6.78 6.59 6.92 6.66
Repurchase Agreements(A) . 5.51 5.56 5.60 5.87 5.97
Other (B) ................. 5.41 6.11 6.00 5.57 5.59
Total Interest Earning
Assets .................. 7.27 7.26 7.14 7.42 7.21
Weighted Average Rate Paid:
Deposits .................. 4.80 4.66 4.71 4.91 4.77
FHLB Advances(C) .......... 5.71 5.67 6.34 6.16 6.28
Reverse Repurchase
Agreements(D) ............ 5.37 5.25 5.95 5.85 5.91
Other Borrowings .......... 6.70 10.42 6.80 6.35 6.71
Total Interest Bearing
Liabilities ............. 5.08 4.98 5.20 5.25 5.21
Interest Rate Spread ..... 2.19 2.28 1.94 2.17 2.00
Net Margin on Average
Interest Earning Assets . 2.48% 2.52% 2.19% 2.38% 2.23%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31,
1995 DECEMBER 31, 1994 DECEMBER 31, 1993
------------- ------------------- -------------------
AT THE FOR THE AT THE FOR THE AT THE
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
-------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Weighted Average Yield
Earned:
Loans Receivable .......... 7.93% 6.92% 7.14% 7.22% 6.73%
Mortgage-Backed Securities 6.93 5.61 6.08 5.59 5.41
Repurchase Agreements(A) . 6.01 4.26 5.70 3.21 3.15
Other (B) ................. 5.87 4.71 5.43 5.46 4.81
Total Interest Earning
Assets .................. 7.54 6.21 6.67 6.53 6.30
Weighted Average Rate Paid:
Deposits .................. 4.87 3.68 4.02 3.94 3.67
FHLB Advances(C) .......... 6.06 5.05 6.25 3.83 3.82
Reverse Repurchase
Agreements(D) ............ 5.56 4.52 5.87 3.17 3.40
Other Borrowings .......... 6.85 5.53 6.88 4.91 4.71
Total Interest Bearing
Liabilities ............. 5.19 3.98 4.83 3.91 3.70
Interest Rate Spread ..... 2.35 2.23 1.84 2.62 2.60
Net Margin on Average
Interest Earning Assets . 2.55% 2.34% 1.99% 2.59% 2.45%
</TABLE>
- ------------
(A) Securities purchased under agreements to resell ("repurchase
agreements").
(B) Consists of U.S. Treasury securities, short-term liquid investments and
other investment securities.
(C) Federal Home Loan Bank Advances ("FHLB advances").
(D) Securities sold under agreements to repurchase ("reverse repurchase
agreements").
OC-83
<PAGE>
The table below presents California Federal's loans and mortgage-backed
securities and the various indices which dictate their repricing:
<TABLE>
<CAPTION>
SEPTEMBER
SEPTEMBER 30, 1996 30, 1995
-------------------------- ----------
MORTGAGE-
BACKED
LOANS SECURITIES(A) LOANS
----------- ------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Adjustable Rates:
COFI ..................... $ 5,735.1 $ 979.6 $5,495.2
Treasury ................. 2,712.4 877.9 2,613.7
Prime rate ............... 127.2 -- 147.7
Other adjustable ......... 24.3 -- 29.6
----------- ------------- ----------
8,599.0 1,857.5 8,286.2
----------- ------------- ----------
Fixed Rates:
Fixed .................... 559.2 49.2 573.8
Fixed for 3-5 years
converting to ARM ....... 1,047.4 134.6 505.1
----------- ------------- ----------
1,606.6 183.8 1,078.9
----------- ------------- ----------
10,205.6 2,041.3 9,365.1
----------- ------------- ----------
Deferred (fees) costs,
discounts and
other items, net ......... 19.6 (0.5) 0.8
Allowance for loan losses (170.1) -- (177.6)
----------- ------------- ----------
$10,055.1 $2,040.8 $9,188.3
=========== ============= ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1995 DECEMBER 31, 1995 DECEMBER 31, 1994
--------------- ----------------------- ------------------------
MORTGAGE- MORTGAGE- MORTGAGE-
BACKED BACKED BACKED
SECURITIES(A) LOANS SECURITIES LOANS SECURITIES
------------- ---------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
Adjustable Rates:
COFI ..................... $1,114.6 $5,511.4 $1,081.4 $4,925.5 $ 918.5
Treasury ................. 1,138.9 2,612.1 1,063.8 2,795.3 1,306.9
Prime rate ............... -- 142.5 -- 107.3 --
Other adjustable ......... -- 28.7 -- 143.0 10.6
------------- ---------- ------------ ---------- ------------
2,253.5 $8,294.7 2,145.2 7,971.1 2,236.0
------------- ---------- ------------ ---------- ------------
Fixed Rates:
Fixed .................... 256.8 559.4 222.0 612.5 280.3
Fixed for 3-5 years
converting to ARM ....... -- 625.4 -- 384.8 --
------------- ---------- ------------ ---------- ------------
256.8 1,184.8 222.0 997.3 280.3
------------- ---------- ------------ ---------- ------------
2,510.3 9,479.5 2,367.2 8,968.4 2,516.3
------------- ---------- ------------ ---------- ------------
Deferred (fees) costs,
discounts and
other items, net ......... (0.4) 5.1 (0.5) (9.5) (2.6)
Allowance for loan losses -- (181.0) -- (211.6) --
------------- ---------- ------------ ---------- ------------
$2,509.9 $9,303.6 $2,366.7 $8,747.3 $2,513.7
============= ========== ============ ========== ============
</TABLE>
- ------------
(A) Included in the Consolidated Statement of Financial Condition of
California Federal with securities held to maturity.
<PAGE>
The table below lists representative rates of various indices at the dates
indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
INDEX 1996 1995 1995 1994 1993
- ---------------------- --------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
COFI .................. 4.84% 5.13% 5.12% 4.37% 3.82%
30 year treasury bond 6.93 6.49 5.96 7.89 6.35
1 year treasury bill . 5.71 5.65 5.18 7.20 3.63
6 month treasury bill 5.17 5.27 5.04 6.24 3.21
Prime rate ............ 8.25 8.75 8.50 8.50 6.00
Federal funds ......... 6.09 6.20 4.73 5.50 2.85
1 month LIBOR ......... 5.37 5.88 5.63 6.00 3.25
</TABLE>
During 1995, the difference between short and long-term interest rates
decreased as compared to 1994 and 1993. As a result, the risk of California
Federal's borrowers refinancing from adjustable rate loans to fixed rate
loans increased. Should California Federal experience a significant level of
such refinancings, and should the difference between short-term and long-term
rates remain relatively small, California Federal's interest rate spread and
net interest income would be negatively impacted.
California Federal's deposits are its primary funding source. Deposits
generally tend to reprice on a comparable basis with similar term U.S.
Treasury securities and other market rates. During 1994 and continuing
through the first half of 1995, California Federal increased its offering
rates on deposits as a result of increases in market rates. The pricing of
deposits is based upon competitive demand and the desirability of increasing
or decreasing California Federal's level of deposits. As a result of
California Federal funding a portion of the sale of the Southeast Division
with various borrowings, California Federal's level of borrowings was a more
significant source of funding during 1994 than in 1993 and 1995. During 1994
and the first half of 1995, the indices that contractually affected the cost
of California
OC-84
<PAGE>
Federal's borrowings increased. This contributed to the increase in
California Federal's cost of funds during 1995 as compared to 1994 and 1993.
During 1995, California Federal reduced the level of its borrowings by
obtaining additional time deposits, primarily certificates of deposit, with
maturities of less than two years.
The table below shows the changes in California Federal's total interest
income, total interest expense and net interest income, attributable to
changes in average balances outstanding (volume) and to changes in average
interest rates earned and paid on balances:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
VERSUS NINE MONTHS ENDED VERSUS YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
---------------------------- -------------------------------
AMOUNT OF
INCREASE
AMOUNT OF INCREASE (DECREASE) DUE TO
(DECREASE) DUE TO CHANGE IN: CHANGE IN:
---------------------------- --------------------------------
VOLUME RATE TOTAL(A) VOLUME RATE TOTAL(A)
-------- -------- -------- -------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable ............. $ 37.8 $ 9.3 $ 47.1 $ 3 $ 74 $ 77
Other interest earning assets (31.3) (1.8) (33.1) (24) 47 23
-------- -------- -------- -------- ------- --------
Total Interest Income ...... 6.5 7.5 14.0 (21) 121 100
-------- -------- -------- -------- ------- --------
Interest Expense:
Deposits ..................... 0.3 3.2 3.5 (29) 80 51
Borrowings ................... (7.4) (13.0) (20.4) 22 57 79
-------- -------- -------- -------- ------- --------
Total Interest Expense ..... (7.1) (9.8) (16.9) (7) 137 130
-------- -------- -------- -------- ------- --------
Change in Net Interest Income $ 13.6 $ 17.3 $ 30.9 $(14) $(16) $(30)
======== ======== ======== ======== ======= ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994
VERSUS YEAR ENDED
DECEMBER 31, 1993
---------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO CHANGE
IN:
---------------------------
VOLUME RATE TOTAL(A)
-------- ------- --------
<S> <C> <C> <C>
Interest Income:
Loans receivable ............ $(108) $(18) $(126)
Other interest earning assets 17 3 20
-------- ------- --------
Total Interest Income ..... (91) (15) (106)
-------- ------- --------
Interest Expense:
Deposits .................... (96) (29) (125)
Borrowings .................. 46 34 80
-------- ------- --------
Total Interest Expense .... (50) 5 (45)
-------- ------- --------
Change in Net Interest Income $ (41) $(20) $ (61)
======== ======= ========
</TABLE>
<PAGE>
- ------------
(A) Changes in rate/volume (change in rate multiplied by the change in
average volume) which cannot be segregated have been allocated to the
change in rate or the change in average volume based upon their
respective percentages of the combined totals.
The decreases in average balances of interest-earning assets and
interest-bearing liabilities for 1995 compared to 1994 resulted primarily
from the sale of interest earning assets included with the 1994 Bulk Sales
and the reduction of deposits from the sale of the Southeast Division.
During 1995 compared to 1994, increases in market rates improved the yield
earned on California Federal's interest-earning assets, however, such
improvements were exceeded by increases in the cost of interest-bearing
liabilities, resulting in a negative impact on California Federal's interest
rate spread and net interest income.
During 1994, California Federal's net interest income, compared to 1993,
was negatively impacted by a decline in the level of average interest-earning
assets partially offset by a decline in the volume of interest-bearing
liabilities. The decline in the amount of interest-earning assets was due to
the payoffs at maturity of certain securities, the use of short-term liquid
investments to fund the sale of the Southeast Division and the 1994 Bulk
Sales. California Federal's net interest income is negatively affected by
declines in average interest-earning assets and average interest-bearing
liabilities whenever the yield of the assets exceeds the cost of the
liabilities.
ASSET/LIABILITY MANAGEMENT
To the extent that yields earned on assets respond to changes in market
interest rates differently from rates paid on liabilities, earnings will be
sensitive to changes in market interest rates. The objective of California
Federal's interest rate risk management is to maintain a balance between
stable income growth and its exposure to potential earnings fluctuations
resulting from differences in the amount of interest-earning assets and
interest-bearing liabilities maturing or repricing in different time periods
("interest rate sensitivity"). California Federal controls its interest rate
sensitivity through a variety of methods including originating loans that
reprice monthly or semi-annually and the use of interest rate exchange
agreements.
OC-85
<PAGE>
Adjustable rate loans have interest rates that reprice periodically based
upon changes in COFI, the one year Treasury constant maturity index (the
"CMT") and other indices. However, such repricing characteristics are subject
to periodic caps. As a result of the rise in interest rates during 1994 and
early 1995, California Federal's net interest rate spread was negatively
impacted due to the periodic caps associated with many of California
Federal's adjustable rate loans, including those indexed to COFI.
Additionally, many of California Federal's adjustable loans reprice at
periodic intervals. The contractual limitation of the adjustment period and
periodic caps have a negative impact on earnings during periods of increasing
market rates.
California Federal's use of derivative financial instruments is limited to
interest rate exchange agreements. California Federal utilizes interest rate
exchange agreements as an integral part of its asset/liability management
program.
On a quarterly basis, California Federal 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 are
considered.
Based upon the outcome of the simulation analysis, California Federal 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. California Federal 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.
California Federal has historically used interest rate swaps, caps and
floors as a means of controlling the potential negative impact on net
interest income from potential changes in interest rates. California Federal
was a party to interest rate swap agreements in the notional amounts of $2.7
billion and $1.8 billion at September 30, 1996 and September 30, 1995,
respectively. California Federal was a party to notional amounts of $100.0
million of interest rate floor agreements at both September 30, 1996 and
September 30, 1995. California Federal was not a party to interest rate cap
agreements at September 30, 1996 or at September 30, 1995. California Federal
was a party to interest rate swap agreements in the notional amounts of $2.4
billion, $541.5 million and $465.9 million at December 31, 1995, 1994 and
1993, respectively. California Federal was a party to notional amounts of
$100.0 million, $150.0 million and $150.0 million of interest rate floor
agreements at December 31, 1995, 1994 and 1993, respectively. California
Federal was not a party to interest rate cap agreements at December 31, 1995,
December 31, 1994 or at December 31, 1993.
During 1995, $1.6 billion of California Federal'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, California Federal entered into an
interest rate swap agreement which reduces the cost of the advances to
approximately the one month LIBOR plus 0.20%. The notional amount of the
swaps totalled $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.
California Federal also monitors the difference between the amount of
interest rate sensitive assets and interest rate sensitive liabilities which
reprice within one year ("one year gap"). At September 30, 1996, the one year
gap as a percentage of total interest earning assets was positive 6.19% as
compared to positive 17.10% at September 30, 1995. At December 31, 1995, the
one year gap as a percentage of total interest-earning assets was positive
12.0% as compared to negative 0.74% at December 31, 1994 and positive 2.02%
at December 31, 1993.
OC-86
<PAGE>
The following table summarizes interest rate sensitive assets and
liabilities for California Federal (exclusive of subsidiaries) at September
30, 1996. In preparing the table below, assumptions were made regarding
estimated prepayments and maturities of mortgage-backed securities and loans.
These assumptions were based upon California Federal's historical experience
of maturities and prepayments for similar assets. For all other
interest-earning assets and liabilities, contractual maturities were used.
Additionally, California Federal used the inherent contractual repricing
characteristics of its interest-earning assets and interest-bearing
liabilities in categorizing the interest rate sensitivity period.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY PERIOD
-----------------------------------------------------
0 TO 91 TO 181 TO OVER
90 DAYS 180 DAYS 365 DAYS 1 YEAR TOTAL
--------- ---------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments and investment securities $1,438 $ -- $ -- $ 6 $ 1,444
Mortgage-backed securities ....................... 1,405 465 127 44 2,041
Loans, net:
Real Estate Mortgage:
Adjustable rate ................................ 6,153 1,556 995 729 9,433
Fixed rate ..................................... 17 14 33 429 493
Equity .......................................... 135 9 6 38 188
Commercial ...................................... 6 -- -- -- 6
Consumer ........................................ 34 25 7 13 79
Loans to subsidiaries ........................... 112 -- -- -- 112
--------- ---------- ---------- -------- --------
Impact of hedging ................................ -- -- -- -- --
--------- ---------- ---------- -------- --------
Total interest-earning assets ................. 9,300 2,069 1,168 1,259 13,796
--------- ---------- ---------- -------- --------
Interest-bearing liabilities:
Deposits:
Passbook and demand ............................. 736 -- -- -- 736
Money market and NOW accounts ................... 1,960 -- -- -- 1,960
Certificates of deposit ......................... 2,170 1,774 1,424 713 6,081
--------- ---------- ---------- -------- --------
Total deposits ................................ 4,866 1,774 1,424 713 8,777
--------- ---------- ---------- -------- --------
Borrowings:
FHLB advances .................................... 2,950 -- -- 311 3,261
Other borrowings ................................. 969 -- -- 54 1,023
--------- ---------- ---------- -------- --------
Total borrowings .............................. 3,919 -- -- 365 4,284
--------- ---------- ---------- -------- --------
Impact of hedging ................................ (300) -- -- 300 --
--------- ---------- ---------- -------- --------
Total interest-bearing liabilities ............ 8,485 1,774 1,424 1,378 13,061
--------- ---------- ---------- -------- --------
Total interest-earning assets less total
interest-bearing liabilities ..................... $ 815 $ 295 $ (256) $ (119) $ 735
========= ========== ========== ======== ========
Cumulative total interest-earning assets less
cumulative total interest-bearing liabilities as
a percentage of total interest-earning assets ... 5.91% 8.05% 6.19% 5.33% 5.33%
========= ========== ========== ======== ========
</TABLE>
OC-87
<PAGE>
NON-PERFORMING ASSETS
Net interest income is also affected by the composition, quality and type
of interest-earning assets. NPA's totaled $164.5 million or 1.16% of total
assets at September 30, 1996, as compared to $211.6 million or 1.49% of total
assets at September 30, 1995. The average amount of NPL's negatively impacted
California Federal's interest rate spread by 9 and 10 basis points during the
third quarters of 1996 and 1995, respectively. NPL's reduced California
Federal's interest rate spread by 10 basis points for both the nine months
ended September 30, 1996 and 1995.
The following table presents California Federal's total NPA's by type at
the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
TYPE 1996 1995
- --------------------------------------- --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
REO, net of allowances ................. $ 12.2 $ 29.4
Non-accrual loans ...................... 148.4 179.3
Restructured loans ..................... 3.9 2.9
--------------- ---------------
Total NPL's ........................ 152.3 182.2
--------------- ---------------
Total NPA's ........................ $164.5 $211.6
=============== ===============
Performing NPA's (included above) ..... $ 60.8 $ 46.1
=============== ===============
Performing NPA's as a % of total NPA's 37.0% 21.8%
=============== ===============
COMPOSITION
- ---------------------------------------
Residential 1-4 ........................ $ 85.6 $124.1
Multi-family ........................... 60.4 61.2
Commercial real estate ................. 16.9 23.0
Other .................................. 1.6 3.3
--------------- ---------------
Total NPA's ........................ $164.5 $211.6
=============== ===============
NPA's as a percentage of total assets . 1.16% 1.49%
=============== ===============
</TABLE>
Net interest income is also affected by the composition, quality and type
of interest-earning assets. NPA's totaled $231.8 million or 1.62% of total
assets at December 31, 1995, as compared to $223.1 million or 1.57% of total
assets at December 31, 1994 and $805.7 million or 5.26% of total assets at
December 31, 1993. The average amount of NPL's negatively impacted California
Federal's interest rate spread by 10, 18 and 31 basis points during 1995,
1994 and 1993, respectively.
OC-88
<PAGE>
The following table presents California Federal's total NPA's by type at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
TYPE 1995 1994
- -------------------------------------- -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
REO, net of allowances ................ $ 22.2 $ 39.1
Non-accrual loans ..................... 206.3 178.2
Restructured loans .................... 3.3 5.8
Past due loans ........................ -- --
-------------- --------------
Total NPL's ....................... 209.6 184.0
-------------- --------------
Total NPA's ....................... $231.8 $223.1
============== ==============
Performing NPA's (included above) .... $ 81.3 $ 34.5
============== ==============
Performing NPA's as a % of total NPA's 35.1% 15.5%
============== ==============
COMPOSITION
- --------------------------------------
Residential 1-4 ....................... $122.6 $124.9
Multi-family .......................... 88.1 61.0
Commercial real estate ................ 17.6 35.3
Other ................................. 3.5 1.9
-------------- --------------
Total NPA's ....................... $231.8 $223.1
============== ==============
NPA's as a percentage of total assets 1.62% 1.57%
============== ==============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
TYPE 1993 1992 1991
- -------------------------------------- -------------- -------------- --------------
<S> <C> <C> <C>
REO, net of allowances ................ $273.5 $ 432.6 $ 267.4
Non-accrual loans ..................... 515.4 725.1 712.0
Restructured loans .................... 16.8 64.2 45.3
Past due loans ........................ -- 3.9 2.6
-------------- -------------- --------------
Total NPL's ....................... 532.2 793.2 759.9
-------------- -------------- --------------
Total NPA's ....................... $805.7 $1,225.8 $1,027.3
============== ============== ==============
Performing NPA's (included above) .... $156.5 $ 310.1 $ 266.4
============== ============== ==============
Performing NPA's as a % of total NPA's 19.4% 25.3% 25.9%
============== ============== ==============
COMPOSITION
- --------------------------------------
Residential 1-4 ....................... $340.4 $ 383.5 $ 253.8
Multi-family .......................... 241.4 460.0 313.3
Commercial real estate ................ 218.0 288.2 355.8
Other ................................. 5.9 94.1 104.4
-------------- -------------- --------------
Total NPA's ....................... $805.7 $1,225.8 $1,027.3
============== ============== ==============
NPA's as a percentage of total assets 5.26% 7.11% 5.64%
============== ============== ==============
</TABLE>
The 1994 Bulk Sales included the sale of approximately $1.3 billion of
performing and non-performing assets. Although California Federal recorded a
$274.8 million loss from the 1994 Bulk Sales, the transactions resulted in a
$529.1 million reduction of NPA's. However, California Federal's net interest
income was negatively impacted by the sale of the $822.1 million of
performing interest-earning assets.
<PAGE>
The table below presents the composition of the assets sold in the 1994
Bulk Sales:
<TABLE>
<CAPTION>
PERFORMING NON-ACCRUAL RESTRUCTRED
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
Other 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, California Federal completed the sale of a pool of $232.1
million of non-performing assets and collected $52.4 million of discounted
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 and were the primary reason for the decline in NPA's
during 1993 as compared to 1992. The 1993 Bulk Sale resulted in $80.0 million
of charge-offs.
In May 1993, the FASB issued SFAS No. 114. Under SFAS No. 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. 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. Additionally, SFAS No. 114 eliminates the requirement
that a creditor account for certain loans as foreclosed assets until the
creditor has taken possession of the collateral. SFAS No. 114 became
effective for financial statements issued for fiscal years beginning after
OC-89
<PAGE>
December 15, 1994 and is required to be adopted prospectively. California
Federal adopted SFAS No. 114 as of January 1, 1995. All loans designated by
California Federal as "impaired" are either placed on non-accrual status or
are designated as restructured and are included with those loans reported as
non-performing. California Federal did not experience a material impact upon
its financial condition or operations from the implementation of SFAS No.
114.
Impaired and Potential Problem Loans
California Federal has established a monitoring system for its loans in
order to identify impaired loans, potential problem loans and to permit
periodic evaluation of impairment and the adequacy of allowances for losses
in a timely manner. Total loans include the following portfolios: (i)
residential 1-4 loans, (ii) income property loans and (iii) consumer loans.
In analyzing these loans, California Federal has established specific
monitoring policies and procedures suitable for the relative risk profile and
other characteristics of the loans within the various portfolios. California
Federal's residential 1-4 and consumer loans are relatively homogeneous and
no single loan is individually significant in terms of its size or potential
risk of loss. Therefore, California Federal generally reviews its residential
1-4 and consumer portfolios by analyzing their performance and the
composition of their collateral for the portfolios as a whole. 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. California
Federal stratifies its income property loan portfolio by size and by type and
treats smaller 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. For income property loans
exceeding the homogenous threshold, California Federal 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. California
Federal evaluates the risk of default and the risk of loss for each loan
subject to individual monitoring. During the fourth quarter of 1995,
California Federal 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, California Federal had utilized a threshold
of $750,000 for all income property loans. California Federal expanded the
scope of its non-homogenous loans to assure that a majority of its commercial
real estate loans was subject to individual review.
Loans on which California Federal has ceased the accrual of interest
("non-accrual loans") and loans on which various concessions have been made
due to the inability of the borrower to service the obligation under the
original terms of the agreement ("restructured loans") constitute the primary
components of the portfolio of NPL's. Loans are generally placed on
non-accrual status when the payment of interest is 90 days or more
delinquent, or if the loan is in the process of foreclosure, or earlier if
the timely collection of interest and/or principal appears doubtful. In
addition, California Federal monitors its loan portfolio in order to identify
performing loans with excessive risk characteristics indicating that the
collection of principal and interest may not be probable. In the event that
California Federal believes collection of principal and interest does not
appear probable, California Federal will designate the loan as impaired and
place the loan on non-accrual status. California Federal's policy allows for
loans to be designated as impaired and placed on non-accrual status even
though the loan may be current as to principal and interest payments and may
continue to perform in accordance with its contractual terms. If a performing
loan is placed on non-accrual status, cash collections of interest are
generally applied as a reduction to the recorded investment of the loan.
California Federal restructures a loan when the borrower or the collateral
is experiencing financial or operational problems that are expected to be
relatively short-term in nature with the expectation that the borrower and/or
the collateral will rebuild cash flow over time.
OC-90
<PAGE>
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>
SEPTEMBER 30, 1996
---------------------
GROSS SPECIFIC NET
AMOUNT ALLOWANCE AMOUNT
-------- ----------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Impairment Measured By Individual Review:
Impaired Loans with Specific Allowances:
Multi-family ................................ $ 58.7 $ (9.8) 48.9
Commercial real estate:
Office buildings ........................... 5.7 (2.0) 3.7
Shopping centers ........................... 4.8 (0.2) 4.6
Industrial ................................. 3.7 (0.3) 3.4
Other ...................................... 0.8 (0.3) 0.5
-------- ----------- --------
Total commercial real estate ................ 15.0 (2.8) 12.2
-------- ----------- --------
Total impaired loans with specific allowances 73.7 (12.6) 61.1
-------- ----------- --------
Impaired Loans without Specific Allowances:
Residential 1-4 ............................. 2.1 -- 2.1
Multi-family ................................ 0.6 -- 0.6
Commercial real estate ...................... 1.4 -- 1.4
-------- ----------- --------
Total impaired loans without specific
allowances .................................. 4.1 -- 4.1
-------- ----------- --------
Total impaired loans measured by individual
review ....................................... 77.8 (12.6) 65.2
-------- ----------- --------
Impairment Measured on a Pool Basis:
Residential 1-4 ............................. 72.9 -- 72.9
Consumer .................................... 1.6 -- 1.6
-------- ----------- --------
74.5 -- 74.5
-------- ----------- --------
Total impaired loans .......................... $152.3 $(12.6) $139.7
======== =========== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------
GROSS SPECIFIC NET
AMOUNT ALLOWANCE AMOUNT
-------- ----------- --------
<S> <C> <C> <C>
Impairment Measured By Individual Review:
Impaired Loans with Specific Allowances:
Multi-family ............................... $ 56.7 $(10.8) $ 45.9
Commercial real estate:
Office buildings .......................... 6.4 (1.5) 4.9
Shopping centers .......................... 2.2 (0.3) 1.9
Industrial ................................ 1.9 (0.2) 1.7
Other ..................................... 0.9 (0.3) 0.6
-------- ----------- --------
Total commercial real estate ............... 11.4 (2.3) 9.1
-------- ----------- --------
Total impaired loans with specific allowances 68.1 (13.1) 55.0
-------- ----------- --------
Impaired Loans without Specific Allowances:
Residential 1-4 ............................ 0.8 -- 0.8
Multi-family ............................... 1.6 -- 1.6
Commercial real estate ..................... 9.7 -- 9.7
-------- ----------- --------
Total impaired loans without specific
allowances ................................. 12.1 -- 12.1
-------- ----------- --------
Total impaired loans measured by individual
review ...................................... 80.2 (13.1) 67.1
-------- ----------- --------
Impairment Measured on a Pool Basis:
Residential 1-4 ............................ 98.7 -- 98.7
Consumer ................................... 3.3 -- 3.3
-------- ----------- --------
102.0 -- 102.0
-------- ----------- --------
Total impaired loans ......................... $182.2 $(13.1) $169.1
======== =========== ========
</TABLE>
California Federal has designated all impaired loans at September 30, 1996
and September 30, 1995 as non-accrual or as troubled debt restructuring. For
all impaired loans, California Federal evaluates the need for a specific
allowance by comparing the fair value of the related collateral to the net
recorded investment of the loan. In the event that the fair value of the
related collateral is less than the net recorded investment in the loan,
California Federal 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 September 30, 1996, California Federal had designated $60.8
million of loans that were performing in accordance with their contractual
terms as impaired. California Federal applies cash collections from impaired
loans as a reduction of the loan's carrying amount. The average recorded
investment in the impaired loans measured by individual review was $184.0
million for the nine months ended September 30, 1996. During the nine months
ended September 30, 1996, California Federal recognized $1.9 million of
interest income on restructured loans designated as impaired loans.
OC-91
<PAGE>
The following table summarizes California Federal's gross NPL's by type
at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Non-accrual loans:
Real estate
Residential 1-4 .............. $ 72.9 $ 99.6
Multi-family ................. 58.8 86.3
--------------- --------------
Total residential real estate 131.7 185.9
--------------- --------------
Commercial real estate
Hotels ....................... -- --
Shopping centers ............. 4.8 1.3
Office buildings ............. 5.7 8.8
Other ........................ 4.6 6.8
--------------- --------------
Total commercial real estate . 15.1 16.9
--------------- --------------
Total real estate ............. 146.8 202.8
Commercial banking ............ -- --
Consumer ...................... 1.6 3.5
--------------- --------------
Total non-accrual loans ........ $148.4 $206.3
=============== ==============
Restructured loans:
Real estate
Residential 1-4 .............. $ 2.1 $ 3.0
Multi-family ................. 0.5 0.3
--------------- --------------
Total residential real estate 2.6 3.3
--------------- --------------
Commercial real estate ........ 1.3 --
--------------- --------------
Total real estate ............. 3.9 3.3
Commercial banking ............ -- --
--------------- --------------
Total restructured loans ...... $ 3.9 $ 3.3
=============== ==============
Past due loans:
Consumer ...................... $ -- $ --
--------------- --------------
Total past due loans ........... $ -- $ --
=============== ==============
$152.3 $209.6
=============== ==============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1992
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Non-accrual loans:
Real estate
Residential 1-4 .............. $ 97.7 $214.3 $291.5 $201.9
Multi-family ................. 55.9 172.4 251.5 248.5
-------------- -------------- -------------- --------------
Total residential real estate 153.6 386.7 543.0 450.4
-------------- -------------- -------------- --------------
Commercial real estate
Hotels ....................... 0.2 30.5 52.2 54.3
Shopping centers ............. 2.3 4.0 17.5 27.0
Office buildings ............. 6.7 68.5 28.8 53.5
Other ........................ 13.5 19.8 18.9 25.0
-------------- -------------- -------------- --------------
Total commercial real estate . 22.7 122.8 117.4 159.8
-------------- -------------- -------------- --------------
Total real estate ............. 176.3 509.5 660.4 610.2
Commercial banking ............ -- 2.7 61.1 99.2
Consumer ...................... 1.9 3.2 3.6 2.6
-------------- -------------- -------------- --------------
Total non-accrual loans ........ $178.2 $515.4 $725.1 $712.0
============== ============== ============== ==============
Restructured loans:
Real estate
Residential 1-4 .............. $ 5.8 $ 2.9 $ -- $ --
Multi-family ................. -- 13.9 28.0 19.1
-------------- -------------- -------------- --------------
Total residential real estate 5.8 16.8 28.0 19.1
-------------- -------------- -------------- --------------
Commercial real estate ........ -- -- 10.7 26.2
-------------- -------------- -------------- --------------
Total real estate ............. 5.8 16.8 38.7 45.3
Commercial banking ............ -- -- 25.5 --
-------------- -------------- -------------- --------------
Total restructured loans ...... $ 5.8 $ 16.8 $ 64.2 $ 45.3
============== ============== ============== ==============
Past due loans:
Consumer ...................... $ -- $ -- $ 3.9 $ 2.6
-------------- -------------- -------------- --------------
Total past due loans ........... $ -- $ -- $ 3.9 $ 2.6
============== ============== ============== ==============
$184.0 $532.2 $793.2 $759.9
============== ============== ============== ==============
</TABLE>
At September 30, 1996, $60.8 million or 39.9% of California Federal's
NPL's were performing in accordance with their contractual terms. For the
nine months ended September 30, 1996, additional interest income of $8.3
million would have been recorded had the non-accrual loans performed in
accordance with their original terms.
The increase in non-accrual loans during 1995 was primarily due to an
increase in performing loans placed on non-accrual status. Additionally,
during the fourth quarter of 1995 California Federal expanded its scope of
loans subject to individual monitoring. The performing loans that were placed
on non-accrual status had risk profiles that included: (i) inverted loan to
value ratios, (ii) low levels of operating income insufficient to service the
required loan payments, or (iii) had other adverse characteristics. Please
refer to the activity of NPA's by property type tables for further
information on the change in non-accrual loans from December 31, 1994 to
December 31, 1995 and from December 31, 1993 to December 31, 1994. At
December 31, 1995, $81.3 million or 38.8% of California Federal's NPL's were
performing in accordance with their contractual terms.
For the year ended December 31, 1995, additional interest income of $10.6
million would have been recorded had the non-accrual loans been performing in
accordance with their original terms, compared
OC-92
<PAGE>
to $18.0 million and $50.7 million of additional interest income which would
have been recorded for the years ended December 31, 1994 and 1993,
respectively.
California Federal has designated all impaired loans at December 31, 1995
as non-accrual or as troubled debt restructuring. At December 31, 1995,
California Federal had designated $81.3 million of loans that were performing
in accordance with their contractual terms as impaired. 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, California
Federal did not recognize interest income on impaired loans.
The following table shows California Federal's delinquent loans at the
dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
--------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Residential 1-4 loans:
30-59 days delinquent ....... $ 12.5 $ 23.7
60-89 days delinquent ....... 2.3 6.3
90 or more days delinquent . 70.1 98.6
--------------- ---------------
84.9 128.6
--------------- ---------------
Multi-family loans:
30-59 days delinquent ....... 1.8 0.6
60-89 days delinquent ....... 0.2 --
90 or more days delinquent . 10.1 16.3
--------------- ---------------
12.1 16.9
--------------- ---------------
Commercial real estate loans:
30-59 days delinquent ....... 0.8 0.3
60-89 days delinquent ....... 0.4 --
90 or more days delinquent . 3.6 12.6
--------------- ---------------
4.8 12.9
--------------- ---------------
Commercial banking loans:
30-59 days delinquent ....... -- --
60-89 days delinquent ....... -- --
90 or more days delinquent . -- --
--------------- ---------------
-- --
--------------- ---------------
Consumer loans:
30-59 days delinquent ....... 1.2 2.4
60-89 days delinquent ....... 0.9 0.9
90 or more days delinquent . 1.7 3.3
--------------- ---------------
3.8 6.6
--------------- ---------------
Total .................... $105.6 $165.0
=============== ===============
Total delinquent loans:
30-59 days delinquent ....... $ 16.3 $ 27.0
60-89 days delinquent ....... 3.8 7.2
90 or more days delinquent . 85.5 130.8
--------------- ---------------
$105.6 $165.0
=============== ===============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Residential 1-4 loans:
30-59 days delinquent ....... $ 24.1 $ 31.5 $ 34.6
60-89 days delinquent ....... 3.5 7.7 5.2
90 or more days delinquent . 99.6 96.1 212.3
-------------- -------------- --------------
127.2 135.3 252.1
-------------- -------------- --------------
Multi-family loans:
30-59 days delinquent ....... 0.8 0.5 3.3
60-89 days delinquent ....... -- 0.7 0.1
90 or more days delinquent . 18.1 36.4 95.4
-------------- -------------- --------------
18.9 37.6 98.8
-------------- -------------- --------------
Commercial real estate loans:
30-59 days delinquent ....... 0.2 0.1 6.3
60-89 days delinquent ....... -- 0.7 0.8
90 or more days delinquent . 2.6 16.4 42.7
-------------- -------------- --------------
2.8 17.2 49.8
-------------- -------------- --------------
Commercial banking loans:
30-59 days delinquent ....... -- -- --
60-89 days delinquent ....... -- -- --
90 or more days delinquent . -- -- 2.2
-------------- -------------- --------------
-- -- 2.2
-------------- -------------- --------------
Consumer loans:
30-59 days delinquent ....... 3.5 2.9 3.3
60-89 days delinquent ....... 1.0 1.5 1.2
90 or more days delinquent . 3.5 3.5 4.6
-------------- -------------- --------------
8.0 7.9 9.1
-------------- -------------- --------------
Total .................... $156.9 $198.0 $412.0
============== ============== ==============
Total delinquent loans:
30-59 days delinquent ....... $ 28.6 $ 35.0 $ 47.5
60-89 days delinquent ....... 4.5 10.6 7.3
90 or more days delinquent . 123.8 152.4 357.2
-------------- -------------- --------------
$156.9 $198.0 $412.0
============== ============== ==============
</TABLE>
OC-93
<PAGE>
The primary factor for the improvement in the level of delinquent loans of
September 30, 1996 as compared to the level of delinquencies at September 30,
1995, was the sale of $34.7 million of delinquent residential 1-4 loans
during the second quarter of 1996.
Delinquent loans have continued to decline since December 31, 1993. The
1994 Bulk Sale and the 1993 Bulk Sale transactions reduced the levels of
delinquent loans and performing loans with a high risk of default. The sale
of those performing loans has been a factor in the reduced level of
delinquent loans between 1995 and 1994.
The following tables present activity of NPA's by property type for the
periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------
PAYOFFS/
BALANCE NEW FORE- CURES/ BALANCE
12/31/95 NPA'S CLOSURES SALES OTHER 9/30/96
---------- ---------- ---------- ---------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential 1-4 ....... $ 99.6 $ 45.5(A) $(72.2) $ -- $ -- $ 72.9
Multi-family .......... 86.3 51.5 (22.3) (52.8) (3.9) 58.8
Commercial real estate 16.9 19.3 (2.5) (17.5) (1.1) 15.1
Consumer .............. 3.5 -- -- (1.9)(A) -- 1.6
---------- ---------- ---------- ---------- -------- ---------
206.3 116.3 (97.0) (72.2) (5.0) 148.4
---------- ---------- ---------- ---------- -------- ---------
Restructured loans:
Residential 1-4 ....... 3.0 -- -- (0.8) (0.1) 2.1
Multi-family .......... 0.3 0.5 -- (0.3) -- 0.5
Commercial real estate -- 1.3 -- -- -- 1.3
---------- ---------- ---------- ---------- -------- ---------
3.3 1.8 -- (1.1) (0.1) 3.9
---------- ---------- ---------- ---------- -------- ---------
REO, net:
Residential 1-4 ....... 20.0 -- 57.6 (66.1) (0.9) 10.6
Multi-family .......... 1.5 -- 15.4 (15.2) (0.6) 1.1
Commercial real estate 0.7 -- 1.4 (1.5) (0.1) 0.5
---------- ---------- ---------- ---------- -------- ---------
22.2 -- 74.4 (82.8) (1.6) 12.2
---------- ---------- ---------- ---------- -------- ---------
Total NPA's ........... $231.8 $118.1 $(22.6) $(156.1) $(6.7) $164.5
========== ========== ========== ========== ======== =========
</TABLE>
- ------------
(A) Represents net activity for the period.
OC-94
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
--------------------------------------
BALANCE NEW FORE-
12/31/94 NPL'S CLOSURES
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Non-accrual loans:
Residential 1-4 .......... $ 97.7 $ 93.1(A) $ (91.1)
Multi-family ............. 55.9 147.6 (48.5)
Commercial income
property ................ 22.7 59.2 (6.6)
Consumer ................. 1.9 1.6(A) --
---------- ---------- ----------
178.2 301.5 (146.2)
---------- ---------- ----------
Restructured loans:
Residential 1-4 .......... 5.8 3.0 --
Multi-family ............. -- 1.5 --
Commercial income
property ................ -- 0.6 ----------
---------- ---------- --
5.8 5.1 ----------
---------- ----------
REO, net: 70.7
Residential 1-4 .......... 21.5 -- 32.6
Multi-family ............. 5.1 --
Commercial income 4.3
property ................ 12.5 -- ----------
---------- ---------- 107.6
39.1 -- ----------
---------- ---------- $ (38.6)
Total NPA's .............. $223.1 $306.6 ==========
========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1995
---------------------------------
PAYOFFS/
CURES/ BALANCE
SALES OTHER 12/31/95
---------- --------- ----------
<S> <C> <C> <C>
Non-accrual loans:
Residential 1-4 .......... $ -- $ (0.1) $ 99.6
Multi-family ............. (64.3) (4.4) 86.3
Commercial income
property ................ (52.0) (6.4) 16.9
Consumer ................. -- -- 3.5
---------- --------- ----------
(116.3) (10.9) 206.3
---------- --------- ----------
Restructured loans:
Residential 1-4 .......... (5.8) -- 3.0
Multi-family ............. (1.2) -- 0.3
Commercial income
property ................ (0.6) -- --
---------- --------- ----------
(7.6) -- 3.3
---------- --------- ----------
REO, net:
Residential 1-4 .......... (62.6) (9.6) 20.0
Multi-family ............. (34.5) (1.7) 1.5
Commercial income
property ................ (20.6) 4.5 0.7
---------- --------- ----------
(117.7) (6.8) 22.2
---------- --------- ----------
Total NPA's .............. $(241.6) $(17.7) $231.8
========== ========= ==========
</TABLE>
- ------------
(A) Represents net activity for the period.
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
1994
-----------------------------------
BALANCE NEW FORE-
12/31/93 NPA'S CLOSURES
---------- ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Non-accrual loans:
Residential 1-4 .......... $214.3 $112.4(B) $(107.2)
Multi-family ............. 172.4 158.2 (62.6)
Commercial income
property ................ 122.8 65.0 (19.5)
Commercial banking ....... 2.7 -- --
Consumer ................. 3.2 -- --
---------- ----------- ----------
515.4 335.6 (189.3)
---------- ----------- ----------
Restructured loans:
Residential 1-4 .......... 2.9 6.1 --
Multi-family ............. 13.9 0.6 --
Commercial income
property ................ -- 3.4 --
---------- ----------- ----------
16.8 10.1 --
---------- ----------- ----------
REO, net:
Residential 1-4 .......... 123.2 -- 94.8
Multi-family ............. 55.1 -- 54.9
Commercial income
property ................ 95.2 -- 26.0
---------- ----------- ----------
273.5 -- 175.7
---------- ----------- ----------
Total NPA's ............... $805.7 $345.7 $ (13.6)
========== =========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
BULK
PAYOFFS/ SALES
CURES/ CHARGE- BALANCE
SALES OFFS(A) OTHER 12/31/94
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Non-accrual loans:
Residential 1-4 .......... $(121.8) $ -- $ -- $ 97.7
Multi-family ............. (192.4) (17.8) (1.9) 55.9
Commercial income
property ................ (122.7) (22.1) (0.8) 22.7
Commercial banking ....... (2.1) -- (0.6) --
Consumer ................. (1.2) -- (0.1) 1.9
---------- --------- --------- ----------
(440.2) (39.9) (3.4) 178.2
---------- --------- --------- ----------
Restructured loans:
Residential 1-4 .......... (3.3) -- 0.1 5.8
Multi-family ............. (14.6) -- 0.1 --
Commercial income
property ................ (3.4) -- -- --
---------- --------- --------- ----------
(21.3) -- 0.2 5.8
---------- --------- --------- ----------
REO, net:
Residential 1-4 .......... (181.1) -- (15.4) 21.5
Multi-family ............. (96.1) -- (8.8) 5.1
Commercial income
property ................ (89.4) -- (19.3) 12.5
---------- --------- --------- ----------
(366.6) -- (43.5) 39.1
---------- --------- --------- ----------
Total NPA's ............... $(828.1) $(39.9) $(46.7) $223.1
========== ========= ========= ==========
</TABLE>
- ------------
(A) Represents charge-offs of specific allowances on NPA's that were
established prior to designating the associated assets for inclusion in
the 1994 Bulk Sales.
(B) Represents net activity for the period.
OC-95
<PAGE>
PROVISION FOR LOAN LOSSES
California Federal's provision for loan losses during the nine months
ended September 30, 1996 totaled $30.8 million. Comparatively, provision for
loan losses totaled $24.5 million during the nine months ended September 30,
1995.
California Federal's general valuation allowance declined to $155.3
million at September 30, 1996 from $162.4 million at September 30, 1995. The
total allowance for loan losses has decreased to $170.1 million at September
30, 1996 from $177.6 million at September 30, 1995. California Federal has
reduced its general valuation allowance to a level that reflects its current
assessment of the credit risk profile of its loan portfolio. California
Federal evaluates the allowance for losses by estimating a range of losses
inherent in the portfolio. California Federal then performs an evaluation to
determine what level in the range of inherent losses is most appropriately
given: (i) the level of non-performing and classified loans, (ii) the
composition of the loan portfolio, (iii) prevailing and forecasted economic
conditions, (iv) other credit factors, and (v) California Federal's judgment.
Should any of the aforementioned factors vary materially in the near term
California Federal could experience the need to increase its allowance for
loan losses which would result in a higher level of provisions for loan
losses.
California Federal's provision for loan losses during the year ended
December 31, 1995 totaled $31.8 million. Comparatively, provisions for loan
losses totaled $74.9 million during 1994 and $163.5 million during 1993. Loan
loss provisions during 1995 were recorded to partially replenish the general
valuation allowance for net charge-offs of $62.4 million. California
Federal's charge-offs during 1995 were primarily related to multi-family
loans and residential 1-4 loans.
California Federal's general valuation allowance declined to $156.7
million at December 31, 1995 from $177.1 million at December 31, 1994 and
from $196.2 million at December 31, 1993. The total allowance for loan losses
has decreased to $181.0 million at December 31, 1995 from $211.6 million at
December 31, 1994.
During 1994 and 1993, California Federal's level of loan loss provisions
reflected the higher levels of nonperforming loans outstanding. The 1994 Bulk
Sales substantially reduced the level of nonperforming loans which has
resulted in a lower level of charge-offs. The decline in the total allowance
for loan losses between December 31, 1995 and December 31, 1993 is due to the
reduction in the level of non-performing loans.
The following table presents the activity in the specific and general
allowances for loan losses for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------- ------------------------------
SPECIFIC GENERAL TOTAL SPECIFIC GENERAL TOTAL
---------- --------- -------- ---------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of period ........ $ 24.3 $156.7 $181.0 $ 34.5 $177.1 $211.6
Provision for
losses .......... -- 30.8 30.8 -- 31.8 31.8
Allocations to/
from general
allowances ...... 7.1 (7.1) -- 21.0 (21.0) --
Charge-offs, net (16.6) (25.1) (41.7) (31.2) (31.2) (62.4)
Allowances of
sold subsidiary -- -- -- -- -- --
---------- --------- -------- ---------- --------- --------
Balance, end of
period ........... $ 14.8 $155.3 $170.1 $ 24.3 $156.7 $181.0
========== ========= ======== ========== ========= ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------------------- --------------------------------
SPECIFIC GENERAL TOTAL SPECIFIC GENERAL TOTAL
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of period ........ $ 58.1 $196.2 $ 254.3 $ 71.8 $ 252.2 $ 324.0
Provision for
losses .......... -- 74.9 74.9 -- 163.5 163.5
Allocations to/
from general
allowances ...... 75.5 (75.5) -- 95.1 (95.1) --
Charge-offs, net (99.1) (18.5) (117.6) (108.8) (117.3) (226.1)
Allowances of
sold subsidiary -- -- -- -- (7.1) (7.1)
---------- --------- --------- ---------- --------- ---------
Balance, end of
period ........... $ 34.5 $177.1 $ 211.6 $ 58.1 $ 196.2 $ 254.3
========== ========= ========= ========== ========= =========
</TABLE>
OC-96
<PAGE>
The net charge-offs by loan category for the periods presented are
summarized as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------
1996 1995 1995 1994(A) 1993(B)
------- ------- ------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential 1-4 .................... $19.8 $15.6 $21.7 $ 18.6 $ 42.9
Income property
Multi-family ...................... 14.0 29.2 25.0 55.2 60.2
Hotels ............................ -- -- -- 11.6 15.7
Office buildings .................. 2.3 4.5 5.1 14.9 17.1
Shopping centers .................. -- -- 4.8 0.9 15.3
Other ............................. 0.4 5.7 1.6 5.8 3.2
------- ------- ------- -------- --------
Total income property .............. 16.7 39.4 36.5 88.4 111.5
------- ------- ------- -------- --------
Total real estate ................... 36.5 55.0 58.2 107.0 154.4
Commercial banking .................. -- -- -- 4.8 60.7
Consumer ............................ 5.2 3.5 4.2 5.8 11.0
------- ------- ------- -------- --------
$41.7 $58.5 $62.4 $117.6 $226.1
======= ======= ======= ======== ========
As a percentage of average net loans 0.58% 0.88% 0.69% 1.35 % 2.21 %
======= ======= ======= ======== ========
</TABLE>
- ------------
(A) Includes net charge-offs of $60.4 million on certain assets included in
the 1994 Bulk Sales. These allowances were established prior to the
designation of these assets as "Held for Accelerated Disposition."
(B) Includes net charge-offs of $80.0 million related to the 1993 Bulk
Sale.
The table below presents certain key ratios for NPL's and the allowances
for loan losses at the dates presented:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994 1993
--------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NPL's as a % of gross loans
receivable .......................... 1.49% 1.95% 2.21% 2.05% 5.42%
Total allowances for loan losses as a
% of NPL's .......................... 111.69 97.48 86.35 115.00 47.78
General allowances as a % of NPL's .. 101.97 89.13 74.76 96.25 36.87
General allowances as a % of gross
loans receivable .................... 1.52 1.73 1.65 1.98 2.00
Total allowances for loan losses as a
% of gross loans receivable ......... 1.66 1.90 1.91 2.36 2.59
Ratio of NPA's to total assets(A) ... 1.16 1.49 1.62 1.57 5.26
</TABLE>
- ------------
(A) NPA's consist of NPL's and REO.
OTHER INCOME
Other Income
For the nine months ended September 30, 1996 and 1995 total other income
was $61.9 million and $50.3 million, respectively. The increase in other
income for the nine months ended September 30, 1996 compared to the same
period of 1995 was primarily due to the $12.0 million gain recorded during
the second quarter of 1996 on the sale of six branches located in San Diego
County with deposits totaling approximately $380 million.
OC-97
<PAGE>
For 1995, total other income decreased to $63.5 million from $201.2
million for 1994 and $70.2 million for 1993. Other income is primarily
comprised of fee income and gains from the sales of assets. The sale of the
Southeast Division accounted for $135.0 million of other income during 1994.
Fee Income
Fee income primarily includes fees charged to depositors for services
rendered, fees from loan servicing and fees earned from the sales of
alternative investment products. Total fee income is affected by the level
and type of savings deposits, the level of loan servicing and the sales of
alternative investment products. The following table presents California
Federal's sources of fee income for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED FOR THE YEARS ENDED
SEPTEMBER 30, DECEMBER 31,
---------------- -------------------------
SOURCE OF FEES 1996 1995 1995 1994 1993
- ------------------------------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Savings deposits ............... $22.3 $18.4 $25.4 $25.2 $26.1
Loan servicing ................. 8.3 9.5 12.4 14.6 18.5
Sales of alternative investment
products ...................... 14.0 10.6 14.4 21.7 21.3
Other .......................... -- 1.8 2.3 0.9 (1.6)
------- ------- ------- ------- -------
$44.6 $40.3 $54.5 $62.4 $64.3
======= ======= ======= ======= =======
</TABLE>
The increase in savings deposit fees for the nine months ended September
30, 1996 compared to the same period of 1995 resulted from increases in rates
charged for depository services and improvements in effectiveness of the fee
collection process.
During 1995, fees from deposits increased slightly as compared to 1994 but
declined slightly from 1993. Fees from deposits result from the volume of
deposits, and the pricing associated with services relating to the deposits.
California Federal has increased its number of checking accounts during 1995
as compared to 1994. Checking accounts typically generate a higher level of
fees than money market accounts and time deposits. Additionally, California
Federal increased its rates for services provided to its depositors. These
actions mitigated the impact of the sale of the Southeast Division, which
included a $3.9 billion sale of deposits.
California Federal offers its customers the opportunity to purchase
investment products as an alternative to traditional savings deposits.
California Federal offers these products, including annuities, mutual funds
and other investments, through its branch network. Sales of alternative
investment products totaled $338.3 million for 1995 compared to $477.8
million and $646.0 million for 1994 and 1993, respectively. The decline in
the volume of sales has led to a reduction in the level of fees earned by
California Federal.
Loans serviced for others totaled $3.5 billion and $3.9 billion at
September 30, 1996 and September 30, 1995, respectively. Loans serviced for
others totaled $3.8 billion, $4.5 billion and $5.3 billion at December 31,
1995, 1994 and 1993, respectively. Loans serviced for others are loans that
have been sold with the servicing thereof retained by California Federal. The
level of loans serviced for others is determined by the volume of loan sales
and loan prepayments. The decrease in the portfolio of loans serviced for
others since December 31, 1993 primarily resulted from loan payoffs.
California Federal limited its sale of loans during 1995 and 1994 as a result
of the low volume of fixed rate loan originations and California Federal's
decision to retain more of its originations in its portfolio of assets. The
reduced volume of loans originated for sale and the level of payoffs
contributed to a reduction in the level of loans serviced for others which
has resulted in a decline in servicing fee income.
California Federal offers its customers the opportunity to purchase
investment products as an alternative to traditional savings deposits.
California Federal offers these products, including annuities, mutual funds
and other investments, through its branch network. California Federal earns a
fee from the
OC-98
<PAGE>
sale of these products. Sales of alternative investment products totaled
$348.9 million for the nine months ended September 30, 1996 compared to
$248.9 million for the same period of 1995. The increase in the volume of
sales has led to an increased in the level of fees earned by California
Federal.
Gain (Loss) on Sales of Loans
At September 30, 1996, $32.2 million of loans were held for sale with a
market value of $32.3 million. For the nine months ended September 30, 1996
and 1995 gains/(losses) on sales of loans were $0.7 million and $(0.3)
million, respectively. Loan sales for the nine months ended September 30,
1996 and 1995 were $219.8 million and $149.4 million, respectively.
During the first quarter of 1996 California Federal implemented SFAS No.
122, Accounting for Mortgage Servicing Rights. SFAS No. 122 removes the
distinction in accounting for mortgage servicing rights resulting from
originated and purchased loans. California Federal did not experience a
material impact to its results of operations or financial condition from the
implementation of SFAS No. 122.
For the year ended December 31, 1995, losses on sales of loans were $0.3
million compared with gains of $0.5 million for the year ended December 31,
1994 and a gain of $5.4 million for the year ended December 31, 1993. Loan
sales for 1995 totaled $183.6 million. Excluding the 1994 Bulk Sales, loan
sales for 1994 totaled $174.2 million. Loan sales for the year ended December
31, 1993 totaled $1.0 billion. California Federal engages in mortgage banking
activities for several reasons, including providing liquidity and managing
asset size. California Federal's originations of conforming fixed rate
residential 1-4 loans are generally held for sale. Originations of adjustable
rate loans are generally held for investment. California Federal has
established desired ranges for loan portfolio composition and asset growth
based upon numerous factors. These factors include (i) origination volume and
mix, (ii) portfolio repayments and payoffs, (iii) interest rate risk
considerations, (iv) desired servicing portfolio levels, (v) anticipated
deposit flows and (vi) regulatory capital requirements. Collectively, these
factors enter into the determination of the amount of loans originated for
sale.
Available for Sale Securities
California Federal determines which securities are available for sale by
evaluating whether such securities would be sold in response to liquidity
needs, asset/liability management, regulatory capital requirements and other
factors. Generally accepted accounting principles require the variance
between the market value of available for sale securities and the recorded
investment in such securities to be reflected as an unrealized holding gain
or loss and presented as an adjustment to shareholders' equity. At September
30, 1996, California Federal had no adjustment to shareholders' equity. The
after tax unrealized holding loss from available for sale securities totaled
$0.7 million at September 30, 1995. All U.S. treasury securities held by
California Federal are included as available for sale securities. Securities
available for sale totaled $6.0 million and $150.2 million at September 30,
1996 and 1995, respectively. At December 31, 1995 the adjustment was less
than $0.1 million. The after tax unrealized holding loss from available for
sale securities totaled $19.2 million at December 31, 1994. Securities
available for sale totaled $200.3 million, $1,731.5 million and $894.7
million at December 31, 1995, 1994 and 1993, respectively.
California Federal sold $952.2 million of securities for a net gain of
$6.9 million and $670.2 million of securities for a net gain of $0.2 million
during 1995 and 1994, respectively. California Federal did not sell
securities during 1993, however, approximately $250.2 million of securities
available for sale matured during 1993. California Federal utilized the
proceeds from the maturity and sale of the securities to acquire short-term
liquid investments and fund the repayment of certain borrowings.
In November 1995, the FASB issued a Special Report as an aid to
understanding and implementing SFAS No. 115. During the fourth quarter of
1995, California Federal, 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.
OTHER EXPENSES
Total other expenses are primarily comprised of general and administrative
expenses and operations of real estate held for sale. Other expenses for the
nine months ended September 30, 1996 increased to
OC-99
<PAGE>
$240.0 million compared to $186.5 million for the nine months ended September
30, 1995. The increase in other expenses for the nine months ended September
30, 1996 compared to the same period of 1995 is due to an accrual of $58.1
million relating to the Special SAIF Assessment. The assessment was based on
California Federal's deposits at March 31, 1995 at a rate of 65.7 basis
points and was payable during the fourth quarter of 1996. For the year ended
December 31, 1995, other expenses decreased to $249.9 million compared to
$611.0 million and $457.1 million for the years ended December 31, 1994 and
1993, respectively. The primary reason for the decrease in other expenses for
the year ended December 31, 1995 compared to the year ended December 31, 1994
was the $274.8 million provision for loss on assets held for accelerated
disposition recorded in 1994.
General and Administrative Expenses
General and administrative expenses are comprised of compensation, office
occupancy, federal deposit insurance premiums and special assessments and
other general and administrative expenses. General and administrative
expenses were $173.9 million for the nine months ended September 30, 1996,
compared to $179.2 million for the nine months ended September 30, 1995. At
September 30, 1996 California Federal had 2,057 employees as compared to
2,212 at September 30, 1995. General and administrative expenses were $241.9
million for the year ended December 31, 1995, compared to $290.3 million and
$323.3 million for the years ended December 31, 1994 and 1993, respectively.
The decrease in general and administrative expenses for the year ended
December 31, 1995 compared to 1994 was primarily due to the sale of the
Southeast Division in the third quarter of 1994. Compensation and office
occupancy expenses of the Southeast Division for 1994 were approximately $11
million. Federal deposit insurance premiums associated with the Southeast
Division were approximately $12 million for the year ended December 31, 1994.
However, the decrease in federal deposit insurance premiums during 1995
compared to 1994 was partially offset by increases in deposits in California
Federal's California operations. General and administrative expenses were
also reduced by staff reductions and other efficiency measures implemented in
California Federal's California operations. During 1995, California Federal
incurred approximately $1 million in expenses related to the formation of Cal
Fed. Effective January 1, 1996, California Federal became a wholly-owned
subsidiary of Cal Fed.
Operations of Real Estate Held for Sale
Operations of real estate held for sale consists of operations of real
estate held for investment ("REI") and operations of REO. Operations of real
estate held for sale include (i) provisions for losses, (ii) the net effect
of rental income and related operating expenses and (iii) gains or losses
resulting from the sale of properties. For the nine months ended September
30, 1996 and September 30, 1995, operations of real estate held for sale
resulted in losses of $8.0 million and $7.3 million, respectively. During
1996, California Federal recorded $5.0 million in provisions for losses on
REI, in order to reflect its portfolio at a value that would represent the
expected proceeds from an accelerated disposition of the property. California
Federal began to actively market its remaining REI during the second quarter
of 1996 and during the third quarter of 1996 sold its remaining real estate
project. California Federal did not record any profit or loss from the sale.
California Federal's remaining real estate held for investment consists of
several single family residential properties. California Federal has recorded
these properties at their current disposition value.
Operations of real estate held for sale resulted in losses of $8.0
million, $45.9 million and $118.3 million for the years ended December 31,
1995, 1994 and 1993, respectively. The decline in the expense of operations
of real estate held for sale between 1995, 1994 and 1993 is due to lower
levels of provisions for losses on REO and REI. The decline in the level of
those loss provisions is due to a lower volume of REO properties and a
reduced need for allowances for losses on REI. The 1994 and 1993 Bulk Sale
transactions reduced the level of delinquent loans, which has resulted in
lower levels of foreclosures and losses.
During the second quarter of 1995, California Federal 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 California Federal 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
OC-100
<PAGE>
it determined that California Federal 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 California Federal and $5.0 million against
CCI. California Federal has begun the process of appealing the judgment.
While California Federal 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
California Federal 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 following table presents the composition of real estate held for sale,
net of allowances, at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
PROPERTY TYPE 1996 1995 1995 1994 1993
- ----------------- --------------- --------------- -------------- -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Residential 1-4 . $13.6 $57.2 $47.3 $58.6 $188.6
Multi-family ..... 1.1 3.0 1.5 5.1 64.3
Office buildings 0.1 0.4 0.3 5.6 35.8
Shopping centers -- -- -- -- 5.0
Hotels ........... -- -- -- 6.1 27.7
Other ............ 0.4 1.4 0.4 2.5 30.2
--------------- --------------- -------------- -------------- --------------
$15.2 $62.0 $49.5 $77.9 $351.6
=============== =============== ============== ============== ==============
REO .............. $12.2 $29.4 $22.2 $39.1 $273.5
REI .............. 3.0 32.6 27.3 38.8 78.1
--------------- --------------- -------------- -------------- --------------
$15.2 $62.0 $49.5 $77.9 $351.6
=============== =============== ============== ============== ==============
</TABLE>
Please see the NPA activity tables in the Non-Performing Assets section
for a comprehensive analysis of the change in REO.
California Federal determines its level of allowance for losses on REO by
comparing the net investment in the property to its fair value as determined
by a current appraisal, less cost of disposition. In the event that prices
indicated by the current market for similar REO properties ("market price")
are less than those indicated by appraisals, California Federal will utilize
the market price in evaluating the carrying value of its REO. California
Federal has provided specific allowances for all known declines in value and
has utilized the most readily available market price for each property in the
REO portfolio. Additionally, California Federal maintains general allowances
for potential future losses that have not been specifically identified.
However, there can be no assurance that real estate market values or the
market prices for REO will not decline. In the event such declines occur,
further provisions for losses may be required.
Amortization of Goodwill
During 1994, California Federal applied SFAS No. 72 retroactively to
acquisitions initiated prior to September 30, 1982 resulting in the
elimination of $273.7 million of California Federal's goodwill effective
January 1, 1994. SFAS No. 72 requires, among other things, that to the extent
the fair value of liabilities assumed exceed the fair value of assets
resulting from the acquisition of a banking or thrift institution initiated
after September 30, 1982, the resulting goodwill recognized shall be
amortized over a period no longer than the discount that is recognized as
interest income on the acquired long-term interest-earning assets. California
Federal had been accounting for acquisitions initiated subsequent to
September 30, 1982 in accordance with SFAS No. 72. SFAS No. 72 allowed
retroactive implementation for acquisitions that were initiated prior to
September 30, 1982. California Federal's application of SFAS No. 72 resulted
in the acceleration of the amortization of goodwill arising from California
Federal's thrift institution acquisitions initiated prior to September 30,
1982. As a result of California Federal's application of SFAS No. 72,
California Federal had no goodwill amortization during 1995 or 1994. During
1993, California Federal's amortization of goodwill totalled $15.5 million.
OC-101
<PAGE>
INCOME TAXES
Income tax expense (benefit) is computed upon, and generally varies
proportionately with, earnings (loss) before income tax expense (benefit)
adjusted for nontaxable items of income and expense and certain changes in
the components of its net deferred tax asset and related valuation allowance.
Although California Federal had earnings before income tax expense for the
nine months ended September 30, 1996 and for the year ended December 31,
1995, there was minimal income tax expense because of the availability of
unbenefited net operating loss carryforwards. California Federal recorded
income tax expense of $6.3 million during 1994 to offset the tax benefit
previously recorded on unrealized losses on securities available for sale,
which were reported net of taxes as an adjustment to shareholders' equity.
Because of the uncertainty regarding the realizability of California
Federal's net operating loss carryforward and other deferred tax assets,
California Federal has recorded a valuation allowance equal to its net
deductible temporary differences at September 30, 1996 and 1995, and at
December 31, 1995 and 1994.
CONTINGENCIES
California Federal is involved as a defendant in certain legal proceedings
incidental to its business. California Federal does not believe that the
legal proceedings to which it is a party, if adversely decided, in the
aggregate would have a material adverse effect upon its financial condition.
California Federal has established allowances in connection with these legal
proceedings for its current estimate of the potential related liabilities. It
is possible that California Federal could be found liable for an amount in
excess of the allowance California Federal has established. Adverse decisions
in such matters could have a material adverse effect upon California
Federal's results of operations for the relevant period or periods in which
they occur.
LIQUIDITY AND CAPITAL RESOURCES
California Federal's cash flows are derived from the results of its
investing activities, financing activities and operating activities.
California Federal's cash flows from investing activities include: making and
collecting loans and acquiring and disposing of investment securities.
California Federal's cash flows from financing activities include: California
Federal's deposit gathering systems, borrowing money and repaying amounts
borrowed, obtaining and paying for other resources obtained from creditors,
obtaining capital from shareholders and the dividend return of their
investment. California Federal's cash flows from operating activities
generally involve the cash effects of transactions and other events that
enter into the determination of net earnings.
Operating Activities
California Federal's net cash flows from operating activities totaled
$218.2 million for the nine months ended September 30, 1996 compared to
$155.1 million for the same period of 1995. California Federal does not
expect the Special SAIF Assessment to have a material adverse impact on its
liquidity. California Federal's cash flows from operating activities totalled
$170.4 million, $1.2 billion and $428.4 million during 1995, 1994 and 1993,
respectively. The primary sources of these cash flows include (i) sales of
loans held for sale and (ii) the excess of net interest income and fee income
over general and administrative expenses.
Investing Activities
California Federal's cash flows from investing activities are primarily
derived from the payments, originations and purchases of loans, and the
acquisition and maturity of investment securities.
Payments on loans and mortgage-backed securities represent other
significant sources of funds for California Federal. California Federal's net
cash flows provided (used) by investing activities totaled $36.9 million for
the nine months ended September 30, 1996 compared to $(157.7) million for the
same period of 1995. Principal payments, including payoffs, on loans produced
$1.2 billion, $1.4 billion and $1.9 billion of funds for California Federal
during 1995, 1994 and 1993, respectively. The reduction in the level of
payments from loans receivable is primarily due to a decline in the level of
loan prepayments. The
OC-102
<PAGE>
reduction of loan prepayments has not had a material adverse impact on
California Federal's liquidity. Payments from mortgage-backed securities
totaled $435.8 million, $533.5 million and $597.4 million during 1995, 1994
and 1993, respectively. Proceeds from maturities of securities during the
years ended December 31, 1995, 1994 and 1993 were $808.8 million, $1.0
million and $254.5 million respectively.
California Federal's principal use of capital resources is to originate
residential 1-4 loans. The table below presents the amount and type of loans
originated and purchased by California Federal for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1996 DECEMBER 31,
------------------- ----------------------
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Originations:
Residential 1-4 ................... $1,477.3 $1,646.7 $2,322.4
Multi-family ...................... 11.0 20.6 54.3
Commercial real estate ............ .7 1.8 49.5
------------------- ---------- ----------
Total Real Estate Loans .......... 1,489.0 1,669.1 2,426.2
Commercial banking ................ -- -- 0.5
Business Banking .................. 6.6 -- --
Consumer .......................... 67.1 99.3 118.6
------------------- ---------- ----------
Total Originations ............... 1,562.7 1,768.4 2,545.3
------------------- ---------- ----------
Purchases:
Residential 1-4 ................... $ 622.7 $ 494.5 $ 121.8
Multi-family ...................... 4.6 22.1 61.1
Commercial real estate ............ -- 61.6 46.3
Business Banking .................. 1.2 -- --
------------------- ---------- ----------
Total Purchases .................. 628.5 578.2 229.2
------------------- ---------- ----------
Total Originations and Purchases $2,191.2 $2,346.6 $2,774.5
=================== ========== ==========
</TABLE>
Commercial real estate loans and multi-family loans are originated solely
to facilitate the sales of REO and REI. California Federal originates loans
through its loan representatives and its branch offices ("retail lending")
primarily located in California. Additionally, California Federal utilizes
mortgage brokers who offer California Federal's various loan programs
("wholesale lending"). During 1995, California Federal's wholesale lending
generated $1.0 billion, or 63% of total residential loans. California
Federal's retail lending produced $621.6 million, or 38% of residential loans
during 1995 as compared to $784.7 million or 34% during 1994. Approximately
75%, or $1.2 billion, of California Federal's 1995 residential loan
production was COFI indexed adjustable rate loans. During the second half of
1995 the demand for fixed rate mortgage loans, including those loans that
convert to an adjustable rate after a 3-5 year period, began to rise as the
spread between a fully indexed adjustable rate loan and a 30 year fixed rate
loan decreased substantially. Although California Federal only originated
$455.5 million of fixed rate residential loans during 1995, California
Federal anticipates that fixed rate loans may represent a more significant
portion of its origination volume during 1996. The decrease in the market
demand for adjustable rate loans may lead to more competitive pricing in the
market and may adversely impact the yield that California Federal receives on
its lending products. The increase in commercial real estate loans originated
and purchased for 1995 compared to 1994 is primarily the result of loans
repurchased in settlement of a servicing relationship. The decrease in
consumer loan originations for 1995 compared to 1994 reflects a decrease in
advances on home equity lines of credit. California Federal did not approve
additional home equity lines during 1995 or 1994 and originations for 1995
and 1994 consist of fundings of prior commitments. During 1995, California
Federal increased its purchases of mortgage loans. California Federal
purchases loans as a cost effective means to supplement its origination
process. Typically, when California Federal purchases loans, the party that
originated the loan retains the servicing. However, California Federal did
purchase $56.2 million of loans and the related servicing during 1995.
OC-103
<PAGE>
Financing Activities
California Federal's cash flows from financing activities represent the
major source of funds for California Federal consisting of retail deposits,
FHLB advances, reverse repurchase agreements and other borrowings. California
Federal also has access to brokered deposits and capital markets as
alternative sources of funds. The mix of these funding sources is changed
from time to time, in light of market conditions, liquidity needs, capital
requirements and interest rate sensitivity concerns in order to obtain the
appropriate balance between maturities and costs of funds.
California Federal's net cash flows (used) by financing activities totaled
$(330.9) million for the nine months ended September 30, 1996 compared to
$(48.5) million for the same period of 1995.
Principal payments, including payoffs, on loans produced $1,026.9 million
and $804.5 million of funds for California Federal during the nine months
ended September 30, 1996 and 1995, respectively. The increase in the level of
payments from loans receivable is primarily due to an increase in the level
of loan prepayments. Payments from securities held to maturity totaled $325.1
million and $310.3 million during the nine months ended September 30, 1996
and 1995, respectively, Proceeds from maturities of securities during the
nine months ended September 30, 1996 and 1995 were $156.0 million and $807.8
million, respectively.
Total deposits of California Federal were $8.8 billion and $9.4 billion at
September 30, 1996 and September 30, 1995, respectively. Total Brokered
Deposits of California Federal were $173.6 million at September 30, 1996 and
$259.2 million at September 30, 1995.
The following table presents the weighted average interest rates and the
amounts of deposits for California Federal at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
----------------------- ----------------------
AVG. RATE BALANCE AVG. RATE BALANCE
----------- ---------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
COMPOSITION OF DEPOSITS:
No minimum term -checking:
Money market checking ........... 1.17% $ 672.0 1.25% $ 774.5
Non-interest bearing commercial -- 286.5 -- 220.7
No minimum term -savings:
Passbook ........................ 2.21 435.3 2.22 530.7
Tiered savings .................. 4.43 343.4 -- --
Money market savings ............ 3.44 945.1 3.48 1,249.4
Term:
Less than 3 months .............. 4.41 102.8 4.05 97.8
3 months to 6 months ............ 4.98 527.2 5.29 644.5
7 months to 1 year .............. 5.32 2,505.7 5.91 2,226.5
13 months to 2 years ............ 6.00 2,410.8 6.11 2,982.7
25 months to 3 years ............ 5.77 64.2 5.43 77.8
37 months to 4 years ............ 5.60 23.5 6.41 69.6
49 months to 5 years ............ 6.19 171.2 6.64 224.0
Over 5 years .................... 7.10 275.9 7.33 339.8
---------- ---------
Total consolidated deposits ..... $8,763.6 $9,438.0
========== =========
</TABLE>
During the second quarter of 1996, California Federal sold six branches
located in San Diego County, California with deposits totaling approximately
$380 million. The sale of the branches resulted in a net gain of $12.0
million or approximately $0.24 per share. The sale of the branches did not
have a material impact on the liquidity of California Federal.
Total deposits of California Federal were $9.5 billion, $8.4 billion and
$12.6 billion at December 31, 1995, 1994 and 1993, respectively. Total
Brokered Deposits of California Federal were $273.8 million at
OC-104
<PAGE>
December 31, 1995. California Federal had no Brokered Deposits at December
31, 1994 and 1993. During 1995, California Federal acquired three branch
offices and $138.6 million in deposits of Pacific Heritage Bank and six
branch offices and $359.4 million in deposits of Continental Savings of
America. The acquired branches are located in Los Angeles County and in the
San Francisco Bay area of Northern California. California Federal received
cash as consideration for the assumption of the deposits. In August 1994,
California Federal completed the sale of the Southeast Division. The
Southeast Division included deposits of approximately $3.9 billion.
California Federal funded the sale of the Southeast Division with (i) FHLB
advances, (ii) reverse repurchase agreements, (iii) liquid funds held by
California Federal, (iv) the sale of short-term liquid investments, (v)
proceeds from the 1994 Bulk Sales and (vi) proceeds from equity offerings.
During the third quarter of 1996, California Federal accrued $58.1 million
for the Special SAIF Assessment. California Federal does not anticipate that
the Special SAIF Assessment will have a material negative impact on its
liquidity.
California Federal's outstanding balance of FHLB advances at September 30,
1996 and 1995 totaled $3.3 billion and $2.4 billion respectively. The
weighted average remaining maturity of these advances at September 30, 1996
was nine months. Reverse repurchase agreements had carrying values of $962.7
million and $801.3 million at September 30, 1996 and 1995, respectively.
California Federal's outstanding balance of FHLB advances at December 31,
1995, 1994 and 1993 totaled $2.7 billion, $2.5 billion and $1.0 billion,
respectively. The weighted average remaining maturity of these advances at
December 31, 1995 was twelve months. Reverse repurchase agreements had
carrying values of $857.3 million, $1,751.0 million and $249.8 million at
December 31, 1995, 1994 and 1993, respectively. During the fourth quarter of
1995, $275.0 million of Student Loan Marketing Association advances ("SLMA
advances") matured. California Federal replaced this funding source with FHLB
advances. During 1995, California Federal repurchased $8.7 million of the Cal
Fed 10% Subordinated Debentures.
During the quarter ended September 30, 1996 California Federal declared
and paid dividends of $4.6 million on its 10 5/8% Preferred Stock, compared
to dividends totaling $6.4 million on its California Federal Preferred Stock,
Series A and 10 5/8% Preferred Stock during the quarter ended September 30,
1995.
During 1994, California Federal, as part of its strategic initiatives,
raised $183.3 million from the issuance of 21.6 million of additional common
shares and $164.2 million from the issuance of 1.7 million shares of the 10
5/8% Preferred Stock. During each of the quarters ending December 31, 1995
and 1994, California Federal declared and paid quarterly dividends of $1.8
million on the California Federal Preferred Stock, Series A, and $4.6 million
on the 10 5/8% Preferred Stock. During the year ended December 31, 1995 and
1994, California Federal declared and paid dividends totaling $25.6 million
and $16.9 million, respectively, on the California Federal Preferred Stock,
Series A and the 10 5/8% Preferred Stock.
During 1995, California Federal announced its intention to repurchase up
to $50.0 million par value of its preferred stock. California Federal did not
purchase any preferred stock during 1995. The California Federal Preferred
Stock, Series A was callable, at its par value of $25 per share, at the
option of California Federal, on or subsequent to March 31, 1996.
During the second quarter of 1996, California Federal called for
redemption all of the 3,740,000 outstanding shares of its California Federal
Preferred Stock, Series A. Except for the conversion of 18,820 shares into
23,336 shares of Cal Fed's common stock, all shares of the California Federal
Preferred Stock, Series A were redeemed effective June 14, 1996 at a
redemption price of $25.00 per share, plus a dividend of $0.398264 per share.
California Federal has pledged certain of its assets as collateral for
certain borrowings, interest rate letters of credit, and other miscellaneous
obligations. By utilizing collateralized funding sources, California Federal
is able to access a variety of cost effective sources of funds. The assets
pledged consist of loans, mortgage-backed securities and U.S. treasury
securities. California Federal's process for monitoring its liquidity
requirements incorporates an assessment of assets pledged, the level of
assets held
OC-105
<PAGE>
for sale, additional borrowing capacity and other factors. California Federal
does not anticipate any negative impact to its liquidity from its pledging
activities. The total amount of California Federal's assets pledged was $5.5
billion at September 30, 1996 and $4.9 billion at December 31, 1995 as
compared with $6.2 billion at December 31, 1994 and $3.5 billion at December
31, 1993.
The following table presents assets pledged at September 30, 1996 for
California Federal:
<TABLE>
<CAPTION>
SUMMARY OF PLEDGED COLLATERAL
-----------------------------------------------------
MORTGAGE-
BACKED TOTAL
MORTGAGES SECURITIES SECURITIES COLLATERAL
----------- ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Borrowings:
FHLB advances ......................... $4,036.7 $ -- $ 397.2 $4,433.9
Reverse repurchase agreements ......... -- -- 969.2 969.2
Other Obligations:
Interest rate swaps ................... -- -- 5.1 5.1
Revenue bond standby letters of credit -- -- 22.7 22.7
FHLB letters of credit/lines of credit 20.0 -- -- 20.0
Other miscellaneous obligations ...... 6.6 51.5 0.1 58.2
----------- ------------ ------------ ------------
Total pledged collateral .............. $4,063.3 $51.5 $1,394.3 $5,509.1
=========== ============ ============ ============
</TABLE>
California Federal also acquires securities for resale. California
Federal's securities available for sale consist of U.S. Treasury securities.
During 1995, California Federal sold $952.2 million of securities for a gain
of $6.9 million. During 1994, California Federal sold $670.2 million of
securities. California Federal did not sell securities during 1993, however,
approximately $250.2 million of securities available for sale matured during
1993.
California Federal also invested in short-term liquid investments as a
means of maximizing its return on its liquid investments and to comply with
the liquidity requirements of the OTS.
The liquidity of California Federal, as measured by the ratio of cash and
cash equivalents to the sum of withdrawable savings and borrowings payable
within one year, averaged 16.3% for the nine months ended September 30, 1996
and 12.3% for the year ended December 31, 1995, compared to 14.6% and 11.3%
for the years ended December 31, 1994 and 1993, respectively. California
Federal is required by the OTS to maintain its liquidity level in excess of
5.0%.
CAPITAL REQUIREMENTS
As a savings institution regulated by the OTS with deposits insured by
FDIC, 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. The OTS has adopted prompt corrective action requirements ("PCA
requirements") pursuant to FDICIA. At September 30, 1996, the industry-wide
minimum regulatory capital requirements were:
o Tangible capital of 1.50 percent consisting generally of shareholders'
equity, but excluding intangible assets such as goodwill.
o A leverage ratio requiring core capital (i.e., Tier 1 capital) of 3.00
percent consisting of tangible capital plus qualifying supervisory
goodwill (certain goodwill arising as a result of the acquisition of
troubled institutions and regulatory assisted acquisitions).
o Risk-based capital, consisting of core capital plus certain
subordinated debt and other capital instruments and general valuation
allowances on loans receivable, equal to 8.00 percent of the value of
risk-weighted assets plus off-balance sheet items.
OC-106
<PAGE>
In addition, the PCA requirements provide that, a savings association is
deemed to be "well capitalized" if the savings association has: (i) a total
risk-based capital ratio of 10.00 percent or greater, (ii) a Tier 1
risk-based capital ratio (defined as Tier 1 capital as a percentage of
risk-weighted assets) of 6.00 percent or greater, and (iii) a leverage ratio
of 5.00 percent or greater. At September 30, 1996, (i) California Federal's
total risk-based capital ratio was 11.18 percent, $92.5 million in excess of
"well-capitalized" requirements, (ii) California Federal's Tier 1 risk-based
capital ratio was 9.72 percent, $292.2 million in excess of
"well-capitalized" requirements, and (iii) California Federal's leverage
ratio was 5.40 percent, $57.0 million in excess of "well-capitalized"
requirements. At December 31, 1995, (i) California Federal's total risk-based
capital ratio was 12.36 percent, $183.3 million in excess of
"well-capitalized" requirements, (ii) California Federal's Tier 1 risk-based
capital ratio was 10.90 percent, $380.1 million in excess of
"well-capitalized" requirements, and (iii) California Federal's leverage
ratio was 5.91 percent, $130.2 million in excess of "well-capitalized"
requirements. Therefore, at December 31, 1995 and September 30, 1996,
California Federal met and exceeded all of the requirements of a well
capitalized institution.
The table below presents California Federal's regulatory capital position
compared to industry-wide capital requirements at September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
----------------- ----------------- ------------------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital of California Federal $763.0 5.40% $763.0 5.40% $879.7 11.18%
Bank's minimum regulatory capital
requirements ........................... 211.8 1.50 423.6 3.00 630.3 8.00
-------- ------- -------- ------- -------- --------
Excess over minimum regulatory capital
requirements ........................... $551.2 3.90% $339.4 2.40% $249.4 3.18%
======== ======= ======== ======= ======== ========
</TABLE>
Following is a reconciliation of California Federal's shareholders' equity
to regulatory capital as of September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Shareholders' Equity of California Federal ...................... $804.1 $804.1 $804.1
Net unrealized holding (gains) losses on securities available
for sale ....................................................... -- -- --
Non-allowable capital:
Intangible assets: ............................................. (26.5) (26.5) (26.5)
Investment in non-permissible subsidiaries ..................... (14.6) (14.6) (14.6)
Tier II capital items:
Allowable subordinated debt ................................... -- -- 18.7
Allowable general valuation allowance on loans receivable
(limited to 1.25% of risk-weighted assets) ................... -- -- 98.0
---------- --------- ------------
Regulatory capital of California Federal ........................ $763.0 $763.0 $879.7
========== ========= ============
</TABLE>
During the third quarter of 1996, federal legislation was enacted, which,
among other things, will fund the SAIF through the Special SAIF Assessment
for SAIF members, such as California Federal. The Special SAIF Assessment is
based on California Federal's deposits as of March 31, 1995 at an assessment
rate of 65.7 basis points. During the third quarter of 1996, California
Federal accrued $58.1 million for the Special SAIF Assessment. The Special
SAIF Assessment was payable during the fourth quarter of 1996.
During the first quarter of 1995, California Federal announced its
intention to repurchase up to $50.0 million par value of its preferred stock,
pursuant to applicable regulatory guidelines, and up to $13.6 million of its
10% Subordinated Debentures. During 1995, California Federal repurchased $8.7
million of
OC-107
<PAGE>
the Cal Fed 10% Subordinated Debentures. Subordinated debt, subject to
certain limitations, qualifies as supplementary capital for risk-based
capital purposes. California Federal did not repurchase any preferred stock
during 1995.
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
California Federal's common stock was converted into one share of Cal Fed
common stock. Consequently, California Federal became a wholly-owned
subsidiary of Cal Fed. California Federal's other securities remained
outstanding securities of California Federal. However, during the second
quarter of 1996, California Federal called for redemption all of the
3,740,000 outstanding shares of its California Federal Preferred Stock,
Series A. Except for the conversion of 18,820 shares into 23,336 shares of
Cal Fed's common stock, all shares of the California Federal Preferred Stock,
Series A were redeemed effective June 14, 1996 at a redemption price of
$25.00 per share, plus a dividend of $0.398264 per share.
In December 1995, California Federal contributed approximately $22 million
in capital to Cal Fed 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 in 1996 was reduced by the amount of the contribution.
GOODWILL LITIGATION
See "Business--First Nationwide--Other Activities--Cal Fed Contingent
Litigation Recovery Participation Interests."
CURRENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 addresses the
accounting and reporting standards for stock-based employee compensation
plans. Additionally, SFAS No. 123 applies to transactions in which an entity
issues its equity instruments to acquire goods or services from nonemployees.
These transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments. SFAS No.
123 is effective for transactions entered into in fiscal years that begin
after December 1995. California Federal does not believe that SFAS No. 123
will have a material adverse effect on its financial position or results of
operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 addresses the accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. SFAS No.
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. California Federal has not yet adopted SFAS No.
125. California Federal does not believe that SFAS No. 125 will have a
material adverse effect on its financial position or results of operations.
OC-108
<PAGE>
The following table shows Consolidated Average Balance Sheets for
California Federal for the periods indicated as well as interest income and
expense and average rates earned and paid on each major category of
interest-earning assets and interest-bearing liabilities. Average balances
are predominantly calculated on a daily basis. When information is not
available for calculations to be made on a daily basis, average balances are
calculated on a weekly or monthly basis from the best available data. The
interest rate spread is calculated as the average rate earned on total
interest-earning assets less the average rate paid on total interest-bearing
liabilities.
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE
BALANCE EXPENSE % BALANCE EXPENSE %
--------- ---------- --------- --------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Certificates of deposit ........... $ 65 $ 4 6.15% $ 64 $ 2 3.13%
Federal funds sold ................ 155 9 5.81 470 20 4.26
Investment securities(A) .......... 2,055 119 5.79 2,590 121 4.67
Mortgage-backed securities ....... 2,539 169 6.66 2,390 134 5.61
Loans Receivable: (B)
Real Estate ...................... 8,794 672 7.64 8,599 587 6.83
Equity ........................... 97 8 8.25 309 23 7.44
Commercial banking ............... -- -- -- 23 2 8.70
Consumer ......................... 284 27 9.51 180 19 10.56
--------- ---------- --------- ----------
Total Loans Receivable .......... 9,175 707 7.71 9,111 631 6.92
--------- ---------- --------- ----------
Total Interest-Earning Assets ..... $13,989 $1,008 7.21% $14,625 $908 6.21%
--------- ---------- --------- ----------
All Other Assets ................... 361 605
--------- ---------
Total Assets .................... $14,350 $15,230
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-Bearing Liabilities:
Deposits:
Passbook ......................... $ 537 $ 11 2.05% $ 694 $ 15 2.16%
Money market and NOW accounts ... 2,290 55 2.40 2,987 60 2.01
6-month certificates ............. 503 26 5.17 802 28 3.49
9-month to 1-year ................
certificates ..................... 2,377 134 5.64 2,690 114 4.24
Other certificates ............... 3,502 211 6.03 3,343 170 5.09
Jumbo certificates ............... 65 5 7.69 100 4 4.00
--------- ---------- --------- ----------
Total Deposits .................. 9,274 442 4.77 10,616 391 3.68
--------- ---------- --------- ----------
Borrowings:
FHLB advances ...................... 2,453 154 6.28 1,644 83 5.05
Securities sold under agreements to
repurchase ........................ 1,099 65 5.91 1,524 69 4.52
Short-term borrowings .............. -- -- -- -- -- --
Long-term borrowings ............... 522 35 6.71 434 24 5.53
--------- ---------- --------- ----------
Total Borrowings ................ 4,074 254 6.24 3,602 176 4.88
--------- ---------- --------- ----------
Total Interest-Bearing
Liabilities ....................... $13,348 $ 696 5.21% $14,218 $567 3.98%
--------- ---------- --------- ----------
All other liabilities .............. 162 203
Shareholders' equity ............... 840 809
--------- ---------
Total Liabilities and
Shareholders' Equity ........... $14,350 $15,230
========= =========
Net Interest Income ................ $ 312 $341
========== ==========
Interest Rate Spread ............... 2.00% 2.23%
Net Margin on Average Interest
Earning Assets .................... 2.23% 2.34%
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1993
--------------------------------
INTEREST AVERAGE
AVERAGE INCOME/ RATE
BALANCE EXPENSE %
--------- ---------- ---------
<S> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Certificates of Deposit ........... $69 $2 2.90%
Federal funds sold ................ 84 2 2.38
Investment securities(a) .......... 2,029 93 4.59
Mortgage-backed securities ....... 2,860 160 5.59
Loans Receivable: (b)
Real Estate ...................... 9,530 676 7.09
Equity ........................... 410 31 7.57
Commercial banking ............... 162 10 6.17
Consumer ......................... 392 40 10.20
--------- ----------
Total Loans Receivable .......... 10,494 757 7.22
--------- ----------
Total Interest-Earning Assets ..... $15,536 $1,014 6.53%
--------- ----------
All Other Assets ................... 1,236
---------
Total Assets .................... $16,772
=========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-Bearing Liabilities:
Deposits:
Passbook ......................... $ 745 $ 19 2.55%
Money market and NOW accounts ... 3,461 83 2.40
6-month certificates ............. 1,186 41 3.46
9-month to 1-year ................
certificates ..................... 3,750 154 4.11
Other certificates ............... 3,673 207 5.64
Jumbo certificates ............... 309 12 3.88
--------- ----------
Total Deposits .................. 13,124 516 3.94
--------- ----------
Borrowings:
FHLB advances ...................... 1,413 54 3.83
Securities sold under agreements to
repurchase ........................ 726 23 3.17
Short-term borrowings .............. 18 1 5.56
Long-term borrowings ............... 353 18 5.10
--------- ----------
Total Borrowings ................ 2,510 96 3.83
--------- ----------
Total Interest-Bearing
Liabilities ....................... $15,634 $612 3.91%
--------- ----------
All other liabilities .............. 183
shareholders' equity ............... 955
---------
Total Liabilities and
Shareholders' Equity ........... $16,772
=========
Net Interest Income ................ $402
==========
Interest Rate Spread ............... 2.62%
Net Margin on Average Interest
Earning Assets .................... 2.59%
</TABLE>
- ------------
(A) Includes securities purchased under agreements to resell, securities
available for sale and other securities.
(B) Non-accrual loans, past due loans and restructured loans are included
in the applicable loan categories of this table.
OC-109
<PAGE>
The table below shows the portion of the change in net interest income
between 1995 and 1994 as well as 1994 versus 1993 which is due to changes in
average balances outstanding and to average rates earned and paid on
balances. The amount of the change due to an increase or decrease in average
balances is calculated as the change in average balances multiplied by the
average rate from the preceding year. The amount of the change due to an
increase or decrease in average rates is calculated as the change in average
rates multiplied by the average balance in the preceding year. Any remaining
change is allocated to the above two categories on a pro-rata basis.
<TABLE>
<CAPTION>
1995 VERSUS 1994
-----------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO
CHANGE IN:
-----------------------------
AVERAGE AVERAGE
BALANCE RATE TOTAL
--------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Interest-Earning Assets:
Certificates of deposit ........... $ -- $ 1 $ 1
Federal funds sold ................ (26) 15 (11)
Investment securities(A) .......... (7) 5 (2)
Mortgage-backed securities ....... 9 26 35
Loans receivable:
Real Estate(B) ................... 14 71 85
Equity ........................... (19) 5 (14)
Commercial banking ............... (1) (1) (2)
Consumer ......................... 9 (1) 8
--------- --------- -------
Total Loans Receivable .......... 3 74 77
--------- --------- -------
Total Interest-Earning Assets ..... (21) 121 100
--------- --------- -------
Interest-Bearing Liabilities:
Deposits:
Passbook ......................... (3) (1) (4)
Money market and NOW accounts ... (28) 23 (5)
6-month certificates ............. 5 (6) (1)
9-month to 1-year ................
certificates ..................... (11) 31 20
Other certificates ............... 8 33 41
Jumbo certificates ............... -- -- --
--------- --------- -------
Deposits ........................ (29) 80 51
--------- --------- -------
Borrowings:
FHLB advances .................... 47 24 71
Securities sold under agreements
to repurchase ................... (31) 27 (4)
Short-term borrowings ............ -- -- --
Long-term borrowings ............. 6 6 12
--------- --------- -------
Total Borrowings ................ 22 57 79
--------- --------- -------
Total Interest-Bearing Liabilities (7) 137 130
--------- --------- -------
Change in Net Interest Income ..... $(14) $(16) $(30)
========= ========= =======
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1994 VERSUS 1993
-----------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO
CHANGE IN:
-----------------------------
AVERAGE AVERAGE
BALANCE RATE TOTAL
--------- --------- -------
<S> <C> <C> <C>
Interest-Earning Assets:
Certificates of deposit ........... $ -- $ -- $ --
Federal funds sold ................ 16 2 18
Investment securities(A) .......... 26 2 28
Mortgage-backed securities ....... (25) (1) (26)
Loans receivable:
Real Estate(B) ................... (66) (23) (89)
Equity ........................... (7) (1) (8)
Commercial banking ............... (13) 5 (8)
Consumer ......................... (22) 1 (21)
--------- --------- -------
Total Loans Receivable .......... (108) (18) (126)
--------- --------- -------
Total Interest-Earning Assets ..... (91) (15) (106)
--------- --------- -------
Interest-Bearing Liabilities:
Deposits:
Passbook ......................... (1) (3) (4)
Money market and NOW accounts ... (11) (12) (23)
6-month certificates ............. (13) -- (13)
9-month to 1-year ................
certificates ..................... (44) 4 (40)
Other certificates ............... (18) (19) (37)
Jumbo certificates ............... (9) 1 (8)
--------- --------- -------
Deposits ........................ (96) (29) (125)
--------- --------- -------
Borrowings:
FHLB advances .................... 10 19 29
Securities sold under agreements
to repurchase ................... 33 13 46
Short-term borrowings ............ (1) -- (1)
Long-term borrowings ............. 4 2 6
--------- --------- -------
Total Borrowings ................ 46 34 80
--------- --------- -------
Total Interest-Bearing Liabilities (50) 5 (45)
--------- --------- -------
Change in Net Interest Income ..... $ (41) $(20) $ (61)
========= ========= =======
</TABLE>
- ------------
(A) Includes securities purchased under agreements to resell, securities
available for sale and other investment securities.
(B) Includes loans held for sale.
OC-110
<PAGE>
BUSINESS
GENERAL
After giving effect to the Cal Fed Acquisition, at September 30, 1996, the
Bank 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. The Bank's principal
business consists of operating retail deposit branches and originating and/or
purchasing one to four family real estate loans and, to a lesser extent,
certain consumer loans, and is conducted primarily in California, Florida,
Nevada and Texas. The Bank also actively manages its portfolio of commercial
real estate loans acquired through acquisitions and is active in mortgage
banking and loan servicing. These operating activities are financed
principally with customer deposits, secured short-term and long-term
borrowings, collections on loans, asset sales and retained earnings. At
September 30, 1996, First Nationwide had approximately $16.8 billion in
assets, approximately $8.8 billion in deposits and operated 116 branches.
According to published sources, First Nationwide was ranked the seventh
largest thrift in the United States, in terms of assets, as of September 30,
1996.
The Bank is chartered as a federal stock savings bank under the HOLA and
regulated by the OTS and the FDIC, which, through the SAIF, insures the
deposit accounts of the Bank. The Bank is also a member of the FHLBS.
Revenues are derived from interest charged on loans, interest and
dividends received on securities and mortgage-backed securities, fees
received in connection with loan servicing, securities brokerage and other
customer service transactions, and asset management fees. Expenses primarily
consist of interest on customer deposit accounts, interest on short-term and
long-term borrowings, general and administrative expenses consisting of
compensation and benefits, data processing, occupancy and equipment,
communications, deposit insurance assessments, advertising and marketing,
professional fees and other general and administrative expenses.
BUSINESS STRATEGY
With the Cal Fed Acquisition, the Bank has substantially completed its
business strategy initiated in 1994 by investing in its California franchise
and divesting most of its non-California branches. In addition, the Bank has
significantly expanded its mortgage servicing operations to gain increased
economies of scale. The key elements of the Bank's business strategy
following the Cal Fed Acquisition are as follows.
Concentration and Expansion in California
Beginning with the FN Acquisition in 1994, First Nationwide developed a
strategy to concentrate its retail branch network in California. The
management of the Bank believes that the West Coast region, and California in
particular, offers attractive opportunities to continue to build franchise
value. The Cal Fed Acquisition, the SFFed Acquisition, the Home Federal
Acquisition and the Branch Purchases are consistent with this strategy and,
in the aggregate, have added, or will add, $12.7 billion in deposits. The
SFFed Acquisition, net of the related consolidation of branches, increased
the number of First Nationwide Northern California branches from 37 to 63,
and, based on information as of December 31, 1995, increased the outstanding
balances of First Nationwide's retail deposits in this region by $2.7
billion, from approximately $1.9 billion to approximately $4.6 billion. In
addition, the Branch Purchases added another seven California branches, and
the Home Federal Acquisition increased First Nationwide's number of Northern
California branches by 10 on a net basis so that as of September 30, 1996
First Nationwide had 89 of its 116 branches located in California. The Cal
Fed Acquisition provided the Bank with on a net basis an additional 94
branches located in Southern California and Nevada and will increase the
outstanding balance of the Bank's retail deposits in this region from
approximately $.8 billion as of September 30, 1996 to approximately $8.1
billion. The Cal Fed Acquisition also added, on a net basis, 17 branches and
$1.2 billion in deposits in Northern California. The Bank's retail deposits
in California will have increased from $2.3 billion at the time of the FN
Acquisition in October 1994 to $13.6 billion at
OC-111
<PAGE>
September 30, 1996 after giving effect to the Cal Fed Acquisition.
Management believes that these acquisitions will significantly increase the
Bank's presence on the West Coast, providing additional economies of scale
and diversity of operations within its target California markets.
With the consummation of the Branch Sales, First Nationwide has
consolidated its branch system to California, Texas and Florida. Since the FN
Acquisition in 1994, the Bank's retail deposits outside California will have
decreased from $6.9 billion to $2.2 billion at September 30, 1996 after
giving effect to the Cal Fed Acquisition. As a result of the Branch Sales,
the Bank expects to reduce certain operational costs inherent in its widely
dispersed branch network. The Bank will continue to explore selective
opportunities to expand its California retail branch network.
Mortgage Banking
The Bank, through FNMC, has significantly expanded its mortgage banking
operations and enhanced efficiency. In February 1995, First Nationwide
purchased a larger and more efficient mortgage loan servicing facility
located in Frederick, Maryland as part of the Maryland Acquisition.
Subsequently, all of FNMC's mortgage servicing has been consolidated in
Frederick, Maryland, and the Sacramento, California servicing facility has
been closed. FNMC acquired additional mortgage servicing from LMUSA in the
LMUSA 1995 Purchase during the fourth quarter of 1995 and on January 31, 1996
in the LMUSA 1996 Purchase. The management of First Nationwide estimates that
at September 30, 1996, the existing loan servicing portfolio of FNMC
(excluding loans serviced for First Nationwide) aggregated approximately
$42.7 billion. The Maryland Acquisition and the LMUSA Purchases will provide
the Bank with the opportunity to increase its noninterest income through fees
generated from its mortgage servicing operations. First Nationwide's excess
servicing capacity and existing servicing expertise enabled it to accommodate
the loan servicing portfolios acquired in these transactions without the need
for significant additional investment. Since the FN Acquisition, the Bank's
mortgage servicing portfolio will have increased from $6.7 billion to $46.2
billion at September 30, 1996 after giving effect to the Cal Fed Acquisition.
The Bank intends to increase its origination of residential loans through
enhanced focus on existing distribution channels, principally correspondent
origination and wholesale acquisitions. The LMUSA 1995 Purchase included the
acquisition of a correspondent lending operation of one of the largest
originators of Government National Mortgage Association ("GNMA") loans in the
United States. In order to minimize the exposure to market interest rate
fluctuations typically associated with long-term fixed rate lending, the Bank
intends to continue to retain in its portfolio the majority of its ARMs,
while selling most of its fixed rate mortgage loans.
The Bank intends to continue to retain servicing on loans that it sells.
The number of loans serviced by others and the number of participation loans
are expected to be reduced by cancelling contracts or selling assets
following a cost-benefit analysis. In addition, the Bank intends to continue
to evaluate opportunities to increase its servicing portfolio through
purchases.
The Bank intends to make its loan portfolio more liquid and marketable by
consolidating participation loans and modifying some existing loans in order
to create a standard product. In addition, the Bank intends to increase
front-end loan production fees on loans originated through the retail branch
system.
Protecting Credit Quality
The Bank will continue to originate single-family residential loans and
consumer loans in accordance with stringent underwriting standards. The
management of the Bank expects to continue its participation in affordable
housing programs which extend loans to multi-family projects. In addition,
beginning in 1997 management of the Bank intends to purchase and/or originate
a limited volume of loans secured by multi-family and commercial real estate.
When evaluating acquisition opportunities, the Bank considers the quality
of assets to be acquired along with the strategic location of the branches
and characteristics of the deposit base. First Nationwide has declined to bid
on potential acquisitions where its due diligence investigation raised
concerns about asset quality that could not be mitigated.
OC-112
<PAGE>
First Nationwide's sizeable portfolio of multi-family and commercial real
estate loans increased 31% as a result of the SFFed Acquisition. Management
will continue to actively review this portfolio of seasoned commercial real
estate loans to determine when credit action is necessary. Credit action also
included the sale of eligible loans acquired in the FN Acquisition to Granite
under the Put Agreement. See "--Other Activities--Put Agreement."
The Bank continuously manages its credit risk by assessing the current and
estimated future performance of the real estate markets in which it operates.
The Bank continues to place a high degree of emphasis on the management of
its asset portfolio. The Bank has a comprehensive process for classifying
assets, and asset reviews are performed on a periodic basis. The Bank's asset
portfolio is stratified based on geographic and collateral type
concentrations and delinquency trends. The objective of the review process is
to identify significant trends and determine the levels of loss exposure to
the Bank that would require increases to specific and general valuation
allowances.
Operating Efficiency
First Nationwide has implemented programs to expand its customer base,
increase transaction account volumes and generally enhance the efficiency of
its operations. A bank-wide cost reduction project resulted in the
consolidation of certain administrative and managerial functions and other
measures to be implemented by the end of 1996.
First Nationwide has improved its efficiency ratio from approximately
62.2% on an annualized basis during the fourth quarter of 1994 to
approximately 53.8% on an annualized basis (excluding non-recurring gains and
charges and certain incentive plan accruals) during the third quarter of
1996. The efficiency ratio represents the ratio of noninterest expense to net
interest income and noninterest income. Management anticipates that the Cal
Fed Acquisition will enable the Bank to enhance the value of its franchise
and further improve its operating efficiency. By concentrating its operations
in the West Coast region, the Bank has increased its presence and enhanced
its ability to attract and retain retail customers in its largest market. The
Bank expects to achieve increased efficiency in its combined institution
through the consolidation or elimination of duplicative back office
operations and administrative and management functions, a process it began to
implement immediately upon the closing of the SFFed Acquisition. The Bank
presently estimates that it will save approximately $74 million in
noninterest expense during the first twelve months of operations following
the Cal Fed Acquisition as compared to operating Cal Fed on a stand-alone
basis and approximately $40 million in annual noninterest expense as compared
to operating SFFed on a stand-alone basis. Management has developed a
rationalization plan that was put into effect upon closing the Cal Fed
Acquisition. In connection with the SFFed and the Home Federal Acquisitions,
First Nationwide capitalized acquisition costs of approximately $8.8 million
and $3.5 million, respectively. The Bank expects to capitalize acquisition
costs of approximately $110 million with respect to Cal Fed Acquisition. The
Branch Sales have also improved the efficiencies of First Nationwide's retail
operations by reducing the need for multi-state back office support and by
allowing First Nationwide to concentrate its marketing activities in an area
in which First Nationwide has a larger market presence.
Service to Community
The needs of the communities in which the Bank is located will also be met
through the Bank's Community Reinvestment Act ("CRA") program. The Bank
continues to be committed to the needs of its communities through its CRA
program. First Nationwide received an "outstanding" rating in its most recent
CRA exam completed in 1995.
The implementation of the preceding strategies is subject to numerous
contingencies beyond management's control. These contingencies include
general and regional economic conditions, competition and changes in
regulation and interest rates. Accordingly, no assurance can be given that
any of the Bank's strategies will prove to be effective or that the Bank's
goals will be achieved.
FIRST NATIONWIDE
BACKGROUND
First Nationwide was organized as First Gibraltar in December 1988 to
acquire substantially all of the assets and certain liabilities of the Texas
Closed Banks in a federally assisted transaction. The Texas
OC-113
<PAGE>
Closed Banks were purchased effective December 28, 1988 pursuant to five
substantially similar acquisition agreements and the Assistance Agreement. In
January 1992, certain provisions of the Assistance Agreement were
renegotiated and amended or modified. In connection with such modification,
First Nationwide accrued the present value of the estimated liability at
December 31, 1992 to the FSLIC/RF for the reimbursement by First Nationwide
to the FSLIC/RF in an amount equal to 10% of the gross amount of assistance
received by First Nationwide from the FSLIC/RF and a fee payable by the
FSLIC/RF to First Nationwide for the disposition of a Covered Asset at a
price in excess of 50% of such asset's original book value ("Shared Gains")
over the life of the Assistance Agreement, resulting in a $60.1 million
charge to operations in 1992. See "--Other Activities--The Assistance
Agreement."
On December 31, 1992, First Gibraltar sold or otherwise transferred a
substantial portion of its business operations in Oklahoma, consisting of
approximately $3 million of loans and 27 branches with $809 million in
deposits in the First Gibraltar Oklahoma Sale. A gain of $19 million was
recorded in connection with this sale.
On February 1, 1993, First Gibraltar sold to BankAmerica certain assets,
liabilities and substantially all of the branch operations located in Texas
consisting of approximately $829 million of loans and 130 branches with
approximately $6.9 billion in deposits in the First Gibraltar Texas Sale. A
gain of $141 million was recorded in connection with this sale. In
anticipation of the First Gibraltar Texas Sale, management sold long-term
interest-earning assets, primarily loans and mortgage-backed securities,
based on BankAmerica's intention to acquire primarily shorter-term assets. As
a result, First Gibraltar recognized gains on the sale of interest-earning
assets totalling $203 million during the year ended December 31, 1992.
Concurrently with the First Gibraltar Texas Sale, First Nationwide changed
its name to First Madison.
Following the First Gibraltar Texas Sale, and through September 1994,
First Madison's principal business was the funding of the Covered Assets and
the performance of its obligations under the Assistance Agreement. Subsequent
to the First Gibraltar Texas Sale, First Nationwide also managed four retail
branches in Texas and supplemented its retail deposit base with wholesale
funds from Brokered Deposits and FHLB advances. In June 1995, the FDIC, as
manager for the FSLIC/RF, exercised its right under the Assistance Agreement
to purchase substantially all of the remaining Covered Assets as of June 1,
1995 at the fair market value of such assets and further purchased additional
assets from the remaining Covered Asset portfolio in September 1995. Any
losses sustained by First Nationwide as a result of the FDIC Purchase have
been reimbursed under the Capital Loss Coverage provision of the Assistance
Agreement except for $39 million which the FDIC elected to treat as a Covered
Asset. Proceeds from this transaction were reinvested in the normal course of
business. On August 19, 1996, First Nationwide and the FDIC executed an
agreement which resulted in the termination of the Assistance Agreement. As a
result of the agreement, the FDIC paid First Nationwide the Covered Asset
balance of $39 million. See "Other Activities--The Assistance Agreement."
From August 1991 through March 31, 1993, First Nationwide conducted most
of its mortgage banking operations through FGMH. Effective July 1, 1992, FGMH
acquired all of the outstanding stock of the mortgage banking company Troy
and Nichols, Inc. of Monroe, Louisiana, with a servicing portfolio of 129,000
loans totalling approximately $5.9 billion. This transaction was accounted
for under the purchase method of accounting. On March 31, 1993, the stock of
FGMH was distributed by First Nationwide to its then immediate parent. FGMH
was subsequently sold during 1993 for a gain of approximately $95 million.
On April 14, 1994, First Nationwide entered into the Asset Purchase
Agreement with Old FNB. On October 3, 1994, effective immediately after the
close of business on September 30, 1994, First Nationwide purchased the FNB
Acquired Business in the FN Acquisition for $726.5 million. Effective on
October 1, 1994, First Nationwide changed its name from "First Madison Bank,
FSB" to "First Nationwide Bank, A Federal Savings Bank." On October 7, 1994,
First Nationwide sold the FNB Acquired Business' branch network located in
Illinois consisting of 26 branches with approximately $1.2 billion in
deposits. The $89 million deposit premium received by First Nationwide was
treated as a reduction of intangible assets related to the FN Acquisition.
OC-114
<PAGE>
First Nationwide financed the FN Acquisition and paid related fees and
expenses with: (i) a capital contribution by Holdings funded with the net
proceeds of (a) the issuance of the Holdings Senior Notes and (b) the
issuance of its class C common stock (all of which was redeemed on June 3,
1996), (ii) the net proceeds from the issuance of the 11 1/2% Preferred Stock
and (iii) existing cash and proceeds from securities sold under agreements to
repurchase. See "Certain Transactions."
In December 1994, First Nationwide's wholly owned mortgage bank operating
subsidiary, FNMC, entered into a series of agreements with the Resolution
Trust Corporation as conservator for StanFed to acquire certain of StanFed's
mortgage servicing assets and assume certain of StanFed's mortgage servicing
liabilities for approximately $178 million in the Maryland Acquisition. As a
result of the Maryland Acquisition, FNMC acquired a 1-4 unit residential
mortgage loan servicing portfolio of approximately $11.4 billion (including a
subservicing portfolio of $1.8 billion) and certain other assets and
liabilities. The transaction was consummated on February 28, 1995. In
connection with the Maryland Acquisition, FNMC has moved its mortgage
servicing operations to Maryland from its former location in Sacramento,
California. Costs totalling $5.7 million associated with such consolidation
are included in noninterest expense in First Nationwide's consolidated
statement of operations for the year ended December 31, 1995.
In April 1995, First Nationwide closed substantially all of its retail
mortgage loan production offices. Costs associated with such closures of
approximately $2.1 million are included in noninterest expense in Frist
Nationwide's consolidated statement of operations for the year ended December
31, 1995.
In April 1995, First Nationwide consummated the Tiburon Purchase in which
it acquired approximately $13 million in deposits located in Tiburon,
California from East-West Federal Bank, a federal savings bank. In August
1995, First Nationwide consummated the ITT Purchase in which it acquired
three retail branches located in Orange County, California with deposit
accounts of approximately $356 million from ITT Federal Bank, fsb. On
December 8, 1995, First Nationwide consummated the Sonoma Purchase in which
it acquired four retail branches located in Sonoma County, California with
deposit accounts of approximately $144 million from Citizens Federal Bank, a
Federal Savings Bank. The weighted average deposit premium paid in connection
with the Branch Purchases was 3.78%.
On October 2, 1995, FNMC purchased in the LMUSA 1995 Purchase from LMUSA a
loan servicing portfolio of approximately $11.1 billion (including a
subservicing portfolio of $3.1 billion), a master servicing portfolio of $2.9
billion and other assets, principally existing loans and loan production
operations of LMUSA, for $100 million, payable in installments, and the
assumption of certain indebtedness relating to the acquired loan portfolio.
On January 31, 1996, FNMC purchased in the LMUSA 1996 Purchase LMUSA's
remaining $14.1 billion loan servicing portfolio (including a subservicing
portfolio of $2.4 billion), a master servicing portfolio of $2.7 billion,
$5.9 million in foreclosed real estate, $46.8 million in net other servicing
receivables, $2.6 million in mortgage loans, and $6.2 million in net other
assets for a purchase price of approximately $160.0 million payable in
installments. The initial installment of $49.8 million was paid with existing
cash.
On February 1, 1996, First Nationwide consummated the SFFed Acquisition
pursuant to which First Nationwide acquired SFFed and its wholly owned
federal savings association subsidiary, San Francisco Federal. The aggregate
consideration paid in the SFFed Acquisition was approximately $264 million.
Following completion of the SFFed Acquisition, SFFed was liquidated and San
Francisco Federal was merged into First Nationwide. See "Strategic
Acquisitions and Dispositions--FN and Other Acquisitions--The SFFed
Acquisition."
On June 1, 1996, First Nationwide consummated the Home Federal Acquisition
pursuant to which First Nationwide acquired HFFC and its wholly owned
federally chartered savings association subsidiary, Home Federal. The
aggregate consideration paid in connection with the Home Federal Acquisition
was approximately $67.8 million. See "Strategic Acquisitions and
Dispositions--FN and Other Acquisitions--The Home Federal Acquisition."
On July 27, 1996, Holdings entered into the Merger Agreement providing for
the acquisition of Cal Fed and its subsidiary, California Federal, which as
of September 30, 1996 had approximately $14.1 billion in assets and $8.8
billion in deposits and operated 118 branches in California and Nevada. See
"Strategic Acquisitions and Disposition--The Cal Fed Acquisition."
OC-115
<PAGE>
From January through June of 1996, First Nationwide consummated the
Branch Sales in the following transactions:
<TABLE>
<CAPTION>
CARRYING VALUE AT
RESPECTIVE SALE DATE
-----------------------
SALE
CONSUMMATION NUMBER OF PRE-TAX
BRANCH LOCATION DATE BRANCHES SOLD DEPOSITS ASSETS GAIN
- --------------- -------------- --------------- ------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New York 1/12/96 7 $ 416,476 $ 5,997 $ 32,991
Ohio 1/19/96 28 1,392,561 20,480 130,660
New York 2/23/96 3 270,046 1,838 17,027
New York 3/15/96 5 615,572 8,083 48,933
New Jersey 3/22/96 4 501,262 6,396 35,938
New York 3/22/96 11 637,045 9,465 41,286
Michigan 6/28/96 21 799,226 15,060 56,177
--------------- ------------ --------- ---------
Total 79 $4,632,188 $67,319 $363,012
=============== ============ ========= =========
</TABLE>
The Branch Sales resulted in gains of approximately $363.0 million on a
pre-tax basis through September 30, 1996, which represented a premium of
7.96% of the approximately $4.6 billion of deposits sold. The gains from the
Branch Sales were used, as necessary, to augment the Bank's regulatory
capital to maintain its "well capitalized" status after the SFFed
Acquisition.
LENDING ACTIVITIES
During the time between the First Gibraltar Texas Sale and the FN
Acquisition, First Nationwide's lending activity was limited. Loan
originations focused on second lien home improvement lending, with a limited
number of residential mortgage loans made. In addition, First Nationwide made
several loans to address special community housing needs through its CRA
program.
Since the FN Acquisition, First Nationwide's principal lending activity
has been and the Bank's principal lending activity is expected to be the
origination of adjustable and fixed rate mortgage loans secured by
residential properties. To a lesser extent, the Bank also originates consumer
loans consisting principally of adjustable rate home equity lines of credit.
The current commercial lending activity of the Bank has been limited to
restructuring and refinancing existing portfolio loans, and multi-family
loans originated under its affordable housing program. The Bank also
participates in a number of other affordable housing programs and
initiatives.
The Bank's residential loan origination activities are conducted by FNMC.
Throughout this Offering Circular, references to the Bank and its residential
loan origination servicing activities relate to functions performed by FNMC.
In April 1995, FNMC concluded that the costs of operating retail offices
outweighed the benefits and, accordingly, closed substantially all of its
retail mortgage production offices. Residential loans continue to be
originated through FNMC's wholesale origination offices (wherein loans are
purchased from independent loan brokers) and the Bank's retail branches. FNMC
originates ARMs on single-family residential properties, which in the case of
ARMs originated prior to September 30, 1995, were generally held for
investment, and fixed rate loans, which are generally held for sale to the
secondary mortgage market. In the fourth quarter of 1995, however, all of the
ARMs originated were sold in the secondary market in anticipation of the
SFFed Acquisition. During the nine months ended September 30, 1996, most of
the fixed and variable rate real estate loans originated were sold in the
secondary market to provide funds for the acquisition and divestiture
activity occurring during the period. On October 2, 1995, FNMC acquired the
correspondent loan purchase operation of LMUSA as well as contracts to
administer various housing bond and other private mortgage lending programs.
The Bank generates consumer loan applications at its retail branches. In
addition, the Bank conducts direct-mail solicitations, principally of its
existing customers, for both secured and, to a much lesser extent, unsecured
revolving loans. All consumer loan processing, servicing and collection
operations are centralized at a facility in Oak Brook, Illinois.
OC-116
<PAGE>
The following table reflects, for the periods indicated, the net change
in the total principal balances of loans receivable outstanding, excluding
loans held for sale, for First Nationwide and its subsidiaries:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED ------------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------ ---------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans originated:
Loans to purchase existing property .............. $ 188 $ 959 $ 419 $ 27
Loans for construction, including loans in process 8 -- -- 2
------------------ ---------- --------- -------
Total real estate loans originated .............. 196 959 419 29
Other loans originated ............................. 132 224 61 26
Loans purchased .................................... 3,875 751 11,753 2
------------------ ---------- --------- -------
Total loans originated and purchased ............ 4,203 1,934 12,233 57
Loans sold, securitized, repaid and foreclosed:
Loans sold (1) ................................... (63) (380) (155) (300)
Loans securitized ................................ -- (376) (1,339) --
Loan repayments and payoffs ...................... (1,740) (1,922) (387) (539)
Loan foreclosures ................................ (124) (93) (25) (32)
------------------ ---------- --------- -------
Total loans sold, securitized, repaid and
foreclosed ..................................... (1,927) (2,771) (1,906) (871)
Other changes in loans receivable .................. (466) (308) (40) (51)
------------------ ---------- --------- -------
Net increase/(decrease) in loans receivable (2) .. $ 1,810 $(1,145) $10,287 $(865)
================== ========== ========= =======
</TABLE>
- ------------
(1) Includes loans sold pursuant to the Put Agreement totalling $41.9
million, $199.5 million and $188.1 million during the nine months ended
September 30, 1996 and during the years ended December 31, 1995 and 1994,
respectively.
(2) Excludes allowance for loan losses, purchase accounting adjustments,
unearned discounts and loan fees, and loans in process.
Interest Rates, Terms and Fees
The Bank offers a variety of ARM products with the objectives of (i)
matching, as closely as possible, the interest rate sensitivity of its
interest-earning assets with the interest rate sensitivity of its
interest-bearing liabilities and (ii) maintaining a relatively stable net
interest margin in varied interest rate environments. In response to consumer
demand, and in order to diversify its loan portfolio and help to control its
future interest rate risk, the Bank's loan portfolio includes several ARM
products which vary as to (i) the frequency and amount of periodic interest
rate changes and (ii) the minimum and maximum rates applied to a particular
loan. ARMs have the advantage of reducing an institution's sensitivity to
interest rate fluctuations. However, they also present certain risks not
associated with traditional fixed rate mortgages, such as adjustments in
interest rates which could cause payment increases that some borrowers might
be unable to service.
The Bank attempts to mitigate the credit risks associated with mortgage
lending activities by the use of strict underwriting standards. Substantially
all residential loans originated are underwritten to conform with standards
adopted by the Federal National Mortgage Association ("FNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), GNMA, or other secondary market
investors. Accordingly, the Bank's underwriting standards include LTV ratios
and maximum loan amounts for both fixed rate loans and ARMs that closely
mirror secondary market requirements. Generally, where these standards
differ, specific strong compensating factors are required. With respect to
ARMs, the Bank underwrites the borrower's ability to pay at the maximum
second year payment rate, consistent with secondary market requirements.
In addition to the interest earned on its loans, the Bank charges fees for
loan originations, loan prepayments and modifications, late payments, changes
of property ownership and other similar services.
OC-117
<PAGE>
The amount of this fee income varies with the volume of loan originations,
prepayments, the general economic conditions affecting the portfolio and
other competitive factors affecting the mortgage market.
Generally, late charges are assessed when payments are delinquent. On
loans secured by residential properties, these charges are generally limited
to 4% to 6% of the overdue payment of principal and interest and cannot be
imposed until the payment is more than 15 days late, in accordance with the
contractual terms of the loans and regulatory requirements in effect when the
loans were made.
Composition of Loan Portfolio
The composition of First Nationwide's loan portfolio, excluding Covered
Assets and loans held for sale, is set forth in the following table, at the
dates indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
AT SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
--------------------- -------- -------- ------ ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential ........... $ 6,299 $5,423 $ 5,612 $19 $ 40 $1,891
5+ unit residential ............ 2,293 1,854 2,178 -- -- --
Commercial real estate ......... 2,075 1,716 2,015 10 138 96
Land ........................... 11 9 15 -- -- --
Construction ................... 8 -- 8 -- -- --
--------------------- -------- -------- ------ ------ --------
Total real estate loans ....... 10,686 9,002 9,828 29 178 1,987
Equity-line and consumer loans .. 299 171 492 5 631 866
Non real estate commercial loans -- 2 1 -- 90 136
--------------------- -------- -------- ------ ------ --------
Total loans receivable ......... 10,985 9,175 10,321 34 899 2,989
Less:
Unearned discounts and loan fees 2 (19) -- 3 55 376
Loans in process ............... -- -- -- -- 52 49
Allowance for loan losses ...... 244 210 203 2 14 23
Purchase accounting adjustments,
net .......................... 161 153 151 -- 1 --
--------------------- -------- -------- ------ ------ --------
Loans receivable, net ......... $10,578 $8,831 $ 9,967 $29 $777 $2,541
===================== ======== ======== ====== ====== ========
</TABLE>
OC-118
<PAGE>
The following table presents First Nationwide's real estate loan
portfolio (excluding loans held for sale and loans subject to the Assistance
Agreement), by collateral type, by interest rate type and by state
concentration at December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT
RESIDENTIAL RESIDENTIAL
------------------- -------------------
STATE VARIABLE FIXED VARIABLE FIXED
- --------------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
California ..... $2,729 $238 $ 798 $ 91
New York ....... 404 73 215 115
Illinois ....... 160 76 41 7
Florida ........ 102 46 39 33
Ohio ........... 93 83 28 8
New Jersey ..... 115 28 62 9
Hawaii ......... 198 19 -- 1
Washington ..... 78 8 52 8
Colorado ....... 97 53 1 4
Texas .......... 75 48 2 18
Other states(1) 517 183 242 80
---------- ------- ---------- -------
Total ......... $4,568 $855 $1,480 $374
========== ======= ========== =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COMMERCIAL
AND OTHER TOTAL REAL
------------------- ESTATE % OF
STATE VARIABLE FIXED LOANS TOTAL
- --------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
California ..... $1,128 $141 $5,125 56.93%
New York ....... 48 40 895 9.94
Illinois ....... 40 18 342 3.80
Florida ........ 31 12 263 2.92
Ohio ........... 32 3 247 2.74
New Jersey ..... 8 4 226 2.51
Hawaii ......... 4 -- 222 2.47
Washington ..... 25 1 172 1.91
Colorado ....... -- -- 155 1.72
Texas .......... 1 5 149 1.66
Other states(1) 151 33 1,206 13.40
---------- ------- ------------ --------
Total ......... $1,468 $257 $9,002 100.00%
========== ======= ============ ========
</TABLE>
- ------------
(1) Real estate loans involving property located in 39 states, Puerto Rico
and the District of Columbia; not more than 1.5% of the total amount of
such loans are located in any one state.
The following table summarizes First Nationwide's loan portfolio not
subject to the Assistance Agreement, excluding loans held for sale, at
December 31, 1995, based upon various contractually scheduled principal
payments allocated to the indicated maturity categories. This table does not
reflect expected prepayments.
<TABLE>
<CAPTION>
DUE OVER ONE
WITHIN BUT WITHIN OVER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ------------ ------------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential:
Fixed rate ................. $ 9 $ 57 $ 789 $ 855
Variable rate .............. 4 25 4,539 4,568
5+ unit residential:
Fixed rate ................. 25 129 220 374
Variable rate .............. 97 515 868 1,480
Commercial and other
Fixed rate ................. 21 81 155 257
Variable rate .............. 121 473 874 1,468
---------- ------------ ------------ -------
Total ..................... 277 1,280 7,445 9,002
Commercial and consumer loans:
Fixed rate ................. 19 10 5 34
Variable rate .............. 40 4 95 139
---------- ------------ ------------ -------
Total ..................... 59 14 100 173
---------- ------------ ------------ -------
Total loans receivable .... $336 $1,294 $7,545 $9,175
========== ============ ============ =======
</TABLE>
Residential Lending
The Bank currently offers three primary residential ARM programs, and a
variety of fixed rate programs with maturities ranging from 15 to 30 years.
Adjustable rate programs include loans which: (i) provide for monthly
interest rate adjustments, after the third or sixth month from inception of
the loan, based on the FHLB 11th District Cost of Funds, (ii) provide for
annual rate adjustments based upon the weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity of one year, or (iii)
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<PAGE>
provide for semi-annual rate adjustments based on the weekly average of the
secondary market rates on six-month negotiable certificates of deposit. Some
ARMs offer an option to convert to a fixed rate after the first year through
the fifth year of the loan term. A variety of features are incorporated into
ARM loans to protect borrowers from unlimited adjustments in interest rates
and payments. All ARMs have lifetime caps which limit the amount of rate
increases over the life of the loan. ARMs whose rates adjust annually have
rate caps which limit the amount that rates can change to two percentage
points per year. Loans which adjust monthly based upon the FHLB 11th District
Cost of Funds limit payment changes to no more than 7.5% of the payment
amount per year. This may lead to monthly payments which are less than the
amount necessary to amortize the loan to maturity at the interest rate in
effect for any particular month. In the event that the monthly payment is not
sufficient to pay interest accruing on the loan during the month, this
deficiency is added to the loan's principal balance (i.e., negative
amortization). The total outstanding principal balance for a particular loan
is not allowed to exceed 110% of the original loan amount as a result of
negative amortization. If the loan reaches 110% of the original loan amount,
the loan payment is recalculated to the payment sufficient to repay the
unpaid principal balance in full at the maturity date. As of September 30,
1996, First Nationwide's capitalized interest relative to such residential
loans was approximately $3.4 million. This amount represents approximately
.16% of the approximately $2.2 billion of residential ARMs that have the
potential to experience negative amortization. The Bank also originates 15
and 30 year fully amortizing fixed rate residential loans under a variety of
fixed rate programs, primarily for resale in the secondary mortgage market.
When loans are sold, FNMC normally retains the servicing of the loan. See
"--Mortgage Banking Operations" for a further discussion of these activities.
Multi-family, Commercial and Other Real Estate Lending
While the Bank currently originates multi-family, commercial and other
real estate loans only as they relate to affordable housing programs, the
Bank's loan portfolio includes loans secured by multi-family residential,
commercial, industrial and unimproved real property. Such loans are
principally acquired through acquisitions. The Bank's variable rate
multi-family and commercial real estate loans have a maximum amortized loan
term of 30 years with some loans having balloon payments due in one to
fifteen years. ARMs primarily adjust with the FHLB 11th District Cost of
Funds or the six-month Treasury Bill indices with a monthly or semi-annual
rate adjustment. The terms and characteristics of the ARMs originated for
multi-family and commercial real estate lending purposes are similar to those
for residential lending. As such, many of the same risks and protections
related to residential borrowers are present in the multi-family and
commercial real estate portfolios, including the potential for negative
amortization. Negative amortization for multi-family and commercial real
estate loans is allowed to increase the outstanding principal balance to 110%
of the original loan amount. If the loan reaches 110% of the original loan
amount, all future interest rate increases will increase the monthly payment
to amortize the loan over the remaining life of the loan. At September 30,
1996, First Nationwide's capitalized interest relative to such loans was
approximately $1.5 million, which represents approximately 0.1% of the $1.7
billion of multi-family and commercial real estate loans that have the
potential to experience negative amortization.
Real estate loans secured by multi-family and commercial property
represent a significant portion of the Bank's portfolio. The management of
the Bank periodically reviews the multi-family and commercial real estate
loan portfolio. At September 30, 1996, First Nationwide's multi-family and
commercial real estate loan portfolio totalled $4.4 billion. Included in
First Nationwide's multi-family and commercial real estate loan portfolio at
September 30, 1996 are $29.9 million of loans with credit enhancement wherein
the lead participant subordinated its minority interest in a pool of loans to
First Nationwide's interest in the corresponding pool of loans. No loans are
subject to be repurchased by the seller in the event such loans become 90
days delinquent.
First Nationwide's potential for loss on the multi-family and commercial
loan portfolio acquired from Old FNB and, to a lesser extent, the residential
mortgage loan portfolio acquired from Old FNB, was mitigated by the Put
Agreement entered into by First Nationwide with Granite, an affiliate of Old
FNB, in connection with the FN Acquisition. At September 30, 1996, $429.5
million had been put to Granite,
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<PAGE>
leaving a remaining balance available under the Put Agreement to be put of
$70.5 million. First Nationwide fully utilized the remaining balance on
December 5, 1996. See "--Other Activities--The Put Agreement" for a
description of the Put Agreement.
In addition to managing its own asset portfolio, at September 30, 1996 and
December 31, 1995 First Nationwide and its wholly owned subsidiary, FGB
Realty, managed non-performing loan (principally multi-family and commercial
real estate) and asset portfolios totalling $1.1 billion and $1.3 billion,
respectively, for investors. Revenues related to such activities are
reflected as management fees in First Nationwide's consolidated statements of
operations. A portion of this servicing was acquired from Old FNB which had
sold loans with certain recourse provisions. The recourse liability was
assumed by First Nationwide in the FN Acquisition and at September 30, 1996,
the balance of multi-family and commercial real estate loans sold with
recourse totalled $163 million.
Consumer Lending
The Bank's consumer loan originations are primarily concentrated in home
equity lending. At September 30, 1996, First Nationwide's home equity
portfolio totaled $238 million, representing 80% of the total consumer loan
portfolio of $299 million. The portfolio is geographically dispersed and
correlates closely to retail deposit branch distribution.
The Bank offers an adjustable, prime interest rate-based home equity line
of credit on owner-occupied residential properties. In determining the amount
of credit to be extended, all loans secured by the collateral properties are
aggregated and compared to the appraised value of the properties. The Bank's
policy is to extend credit up to a maximum combined LTV ratio of 80%.
Other consumer loan products include: fixed rate home equity installment
loans; adjustable prime rate-based home equity loans, which while secured,
are based on repayment ability and credit history; auto and boat loans;
unsecured lines of credit; overdraft protection; and loans secured by
certificates of deposit.
Loans Held for Sale
The carrying value of First Nationwide loans held for sale portfolio
consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- ------
(IN MILLIONS)
<S> <C> <C>
Single-family residential mortgage loans .. $ 877 $26
Consumer loans, primarily home equity loans 326 --
-------- ------
$1,203 $26
======== ======
</TABLE>
Loans held for sale are carried at the lower of cost or market value. The
significant increase in single family residential mortgage loans held for
sale is attributed to the higher loan production volumes in 1995 compared to
1994. In addition, substantially all ARMs originated in the fourth quarter of
1995 were sold in the secondary market in anticipation of the SFFed
Acquisition. Prior to that time, most ARMs originated were held by First
Nationwide for investment. The consumer loans held for sale generally
represent loans in states where First Nationwide has sold the retail
deposits.
Origination of Residential Loans
The Bank originates residential loans principally through the efforts of
wholesale origination offices where loans are purchased from independent loan
brokers, and, to a lesser degree, staff loan agents. To promote continuity of
customer service, help meet credit needs and to increase opportunities to
sell customer deposit and other financial services offered by the Bank and
its subsidiaries, loan inquiries from retail branch customers and "walk-in"
applicants are encouraged. These inquiries are initially processed by retail
branch office personnel, with support provided by regional lending offices.
The residential loan agents are compensated principally on a commission
basis. Closed mortgage loans are also acquired by FNMC through a
correspondent lending operation acquired from LMUSA on October 2, 1995.
OC-121
<PAGE>
The majority of real estate loans originated by First Nationwide have LTV
ratios of 80% or less in accordance with its underwriting criteria. First
Nationwide has originated loans with LTV ratios of up to 95%, with the
portion of the loan exceeding 80% guaranteed by private mortgage insurance,
the premiums of which are paid monthly by the borrower. Certain exceptions to
this guideline have been made for low and moderate income borrowers. However,
the principal balance of loans subject to such exceptions is not significant
in terms of the Bank's total loan originations. The value of the property
offered as security for a mortgage loan is determined by a professionally
qualified appraiser approved by the Bank, who may or may not be an employee
of the Bank. As further security for its loan, at the time of loan funding,
the Bank requires title insurance and fire and casualty insurance on all
loans secured by liens on real property. The Bank also requires flood
insurance on any loan secured by real property if the property lies within a
U.S. Housing and Urban Development Department ("HUD")-designated flood hazard
area. The Bank does not originate loans secured by properties located in
HUD-designated flood hazard areas in communities that do not participate in
the National Flood Insurance Program.
Mortgage Banking Operations
Mortgage banking operations have been an integral part of the business
activities of First Nationwide since the FN Acquisition. FNMC was
incorporated in June 1994 as a wholly owned operating subsidiary of the Bank.
In the FN Acquisition, First Nationwide acquired certain of Old FNB's
residential mortgage operations, which were transferred to FNMC in exchange
for a combination of debt and equity held by the Bank.
Mortgage banking activities allow the generation of fee income without the
associated capital retention requirements attributable to traditional real
estate lending activities. Generally, the Bank originates fixed rate
residential loans for sale in the secondary mortgage market. ARMs originated
prior to September 30, 1995 were generally held by First Nationwide for
investment. In the fourth quarter of 1995, however, all of the ARMs
originated were sold or held for sale in the secondary market in anticipation
of the SFFed Acquisition. During the nine months ended September 30, 1996,
most of the fixed and variable rate real estate loans originated were sold in
the secondary market to provide funds for the acquisition and divestiture
activity occurring during the period. The Bank employs forward sale hedging
techniques to minimize the interest rate and pricing risks associated with
the origination and sale of fixed rate loans.
At the time of origination, management identifies residential loans that
are expected to be sold in the foreseeable future. At September 30, 1996,
management had identified $710.2 million of single-family residential real
estate loans as held for sale. These loans have been classified as assets
held for sale in the consolidated statement of financial condition at
September 30, 1996 and are recorded at the lower of aggregate amortized cost
or market value. At September 30, 1996, First Nationwide had forward
commitments to sell loans totalling $529 million. In addition, $144.4 million
of the loans held for sale were funded under pre-existing purchase
commitments to various housing bond programs and the California Public
Employees Retirement System.
The servicing portfolio of FNMC (excluding loans serviced for First
Nationwide) approximated $42.7 billion and 718,945 loans as of September 30,
1996. Substantially all of FNMC's loans are serviced in a 230,000 square-foot
facility in Frederick, Maryland acquired from StanFed.
Since the FN Acquisition, First Nationwide has sold fixed rate and
adjustable rate whole loans secured by residential properties to FNMA, FHLMC,
and private investors. Mortgage loan sales totalled $3.8 billion and $1.4
billion during the nine months ended September 30, 1996 and the year ended
December 31, 1995, respectively.
Old FNB occasionally sold loans under recourse provisions; such liability
was assumed by the Bank in the FN Acquisition. As of September 30, 1996, the
balance of loans sold with certain recourse provisions was $367.7 million.
The Bank, through FNMC, has generally retained the right to service the
loans it has sold. FNMC collects from the borrower payments of principal and
interest and, after retaining a servicing fee, remits the balance to the
investors.
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<PAGE>
In accounting for its mortgage loan sales prior to April 1, 1995, a gain
or loss was recognized based on the sum of three components: (i) the
difference between the cash proceeds of the loan sales and First Nationwide's
book value of the loans; (ii) the "excess servicing," if any; less (iii)
provisions for estimated losses to be incurred from limited recourse
obligations, if any. Excess servicing results in a capitalized asset that
reflects the discounted present value of any difference between the interest
rate received from the borrower and the interest rate passed through to the
purchaser of the loan, less a "normal servicing fee" (dependent upon loan
type), which is retained as compensation for future servicing costs. The
amount of excess servicing recognized in any particular loan sale depends
significantly upon three factors upon which estimates or assumptions must be
employed: (i) the estimated life of the loans, (ii) the discount rate used in
calculating discounted present value and (iii) the "normal servicing fee."
The excess servicing asset is amortized as an offset to servicing fee
income using the interest method adjusted for actual prepayment experience
over the estimated remaining servicing lives of the loans sold. The Bank
monitors the prepayments on the loans serviced for investors and reduces the
balance of the asset if the actual prepayments are in excess of the estimated
prepayment trends used to record the original asset. The Bank's assumptions
relative to prepayment speed, discount and servicing fee rates are revised
periodically to reflect current market conditions and regulatory
requirements.
Effective April 1, 1995, First Nationwide adopted SFAS No. 122. SFAS No.
122 requires that, when a mortgage loan is sold and servicing rights are
retained, a portion of the cost of originating a mortgage loan be allocated
to the mortgage servicing rights based on its fair market value. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General--Accounting Changes" for a description of SFAS No. 122.
At December 31, 1995, FNMC owned rights to service approximately $27.1
billion of whole loans, participation interests and mortgage-backed
securities for others. These loans had an average balance of $52,791, a
weighted average coupon rate of 8.58%, a weighted average maturity of 262
months and a service fee spread of .49%. The greater than 30 day delinquency
rate on these loans at December 31, 1995 was 3.82%. First Nationwide
subserviced for others approximately $3.3 billion of whole loans,
participation interests and mortgage-backed securities. These loans had an
average balance of $60,709, a weighted average coupon rate of 8.36% and a
weighted average remaining maturity of 286 months. The servicing fee
collected on these loans is passed through to the primary servicer with First
Nationwide retaining a flat subservice fee that is netted out of the monthly
remittance. Although First Nationwide has no risk for loans subserviced, the
greater than 30 day delinquency rate on these loans is 7.46%. For the year
ended December 31, 1995, gross revenue for servicing activities totalled
$94.3 million.
In the fourth quarter of 1996, First Nationwide initiated a program to
hedge the reduction in value of its servicing rights in a steeply declining
interest rate environment. The hedge will consist primarily of principal-only
swaps and floors on a 10 year Treasury note rate.
On October 2, 1995, FNMC purchased the stock of Lomas Mortgage Services
Inc. (now known as FNMC Mortgage Services, Inc.), in the LMUSA 1995 Purchase,
which is a 33% owner of Lomas Mortgage Partnership L.P. ("LMP") and its
managing general partner. LMP owns the mortgage servicing rights to
approximately $3.1 billion of loans serviced for FNMA, GNMA, FHLMC and
private investors. LMP's investment in such servicing rights and its other
assets are partially funded by independent bank lines of credit totalling
approximately $27 million. LMP has no employees or physical operations but
discharges its obligations under its servicing contracts under a subservicing
contract with FNMC. See "--General--Background."
NON-PERFORMING ASSETS
First Nationwide's exposure to losses relative to certain assets acquired
in the FN Acquisition that became non-performing or otherwise problematic
prior to November 30, 1996 were mitigated to the extent First Nationwide was
able to put such loans to Granite under the Put Agreement. See "--Other
Activities--The Put Agreement."
Classification of Assets
Savings institutions are required to classify their assets on a regular
basis, establish prudent allowances for loan losses and make quarterly
reports of troubled asset classification to the OTS. Assets
OC-123
<PAGE>
must be classified as "pass," "special mention," "substandard," "doubtful"
or "loss." An asset is generally designated as "special mention" if potential
weaknesses are identified that, if left uncorrected, would result in
deterioration of the repayment prospects for the asset. An asset, or a
portion thereof, is generally classified as "substandard" if it possesses a
well-defined weakness which could jeopardize the timely liquidation of the
asset or realization on the collateral at the asset's book value. Thus, these
assets are characterized by the possibility that the institution will sustain
some loss if the deficiencies are not corrected. An asset, or portion
thereof, is classified as "doubtful" if identified weaknesses make
collectibility or liquidation in full highly questionable and improbable. An
asset, or a portion thereof, that is considered to be uncollectible is
classified "loss." It should be noted that the Bank does not maintain assets
in a loss classification category; rather, the carrying value of all troubled
assets is reduced by any amount considered to be uncollectible. The
appropriate OTS Regional Director has the authority to approve, disapprove or
modify any asset classification or any amount established as an allowance
pursuant to such classification. Savings institutions must maintain adequate
general valuation allowances in accordance with generally accepted accounting
principles and federal regulations for assets classified as "substandard" or
"doubtful" and either immediately write off assets classified as "loss" or
establish specific valuation allowances equal to the amounts classified as
"loss."
The Bank has a comprehensive process for classifying assets, and asset
reviews are performed on a periodic basis. Such reviews are prioritized
according to an asset's risk characteristics, such as loan size, collateral
type and/or location, and potential loan performance problems. The objective
of the review process is to identify significant trends and determine the
levels of loss exposure to the Bank that would require increases to specific
and general valuation allowances.
Loan Portfolio Risk Elements
When a borrower fails to make a contractually required payment on a loan,
the loan is characterized as delinquent. In most cases delinquencies are
cured promptly; however, foreclosure proceedings, and, in some cases, workout
proceedings, are generally commenced if the delinquency is not cured. The
procedures for foreclosure actions vary from state to state, but generally if
the loan is not reinstated within certain periods specified by statute, the
property securing the loan can be acquired through foreclosure by the lender.
While deficiency judgments against the borrower are available in some of the
states in which the Bank originates loans, the value of the underlying
collateral property is usually the principal source of recovery available to
satisfy the loan balance.
In general, loans are placed on nonaccrual status after being
contractually delinquent for more than 90 days. When a loan is placed on
nonaccrual status, all interest previously accrued but not received is
reversed. The Bank may modify or restructure a loan as a result of a
borrower's inability to service the obligation under the original terms of
the loan agreement.
OC-124
<PAGE>
The following table indicates the carrying value of First Nationwide's
loans, excluding loans subject to the Assistance Agreement, which have been
placed on nonaccrual status, as well as the carrying value of foreclosed real
estate, at the dates indicated:
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
SEPTEMBER 30, -----------------------------------------------
1996 1995 1994 1993 1992 1991
--------------- ------- ------- ----------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
Real estate:
1-4 unit residential .......... $ 134 $ 136 $ 133 $ 2 $ 7 $ 52
5+ unit residential ........... 19 23 24 9 -- --
Commercial and other .......... 13 9 11 -- -- --
Land .......................... -- -- 7 -- -- --
Construction .................. -- -- 2 -- -- --
--------------- ------- ------- ----------- ------- -------
Total real estate ............ 166 168 177 11 7 52
Equity-line and consumer ...... 3 3 4 -- 4 2
--------------- ------- ------- ----------- ------- -------
Total nonaccrual loans ...... 169 171 181 11 11 54
Foreclosed real estate, net .... 59 49 37 -- -- --
--------------- ------- ------- ----------- ------- -------
Total non-performing assets . $ 228 (a) $ 220 $ 218 $ 11 $ 11 $ 54
=============== ======= ======= =========== ======= =======
Non-performing loans as a
percentage of First
Nationwide's total loans ....... 1.50% 1.71% 1.81% 37.61%(b) 1.42% 2.12%
=============== ======= ======= =========== ======= =======
Non-performing assets as a
percentage of First
Nationwide's total assets ..... 1.36% 1.50% 1.49% .98% .12% .53%
=============== ======= ======= =========== ======= =======
</TABLE>
- ------------
(a) Of the $228 million in total non-performing assets, approximately $17.3
million were eligible to be sold to Granite pursuant to the Put
Agreement at September 30, 1996. Includes $74.5 million of
non-performing assets acquired in the SFFed and Home Federal
Acquisitions and in the LMUSA 1996 Purchase.
(b) The significant increase in the percentage of non-performing loans to
total loans at December 31, 1993 from December 31, 1992 reflects the
decrease in loans receivable from $899 million at December 31, 1992 to
$34 million at December 31, 1993. The level of total non-performing
assets over that time period remained relatively constant.
Interest income of $3.5 million was received and recognized by First
Nationwide for nonaccrual loans during the nine months ended September 30,
1996, instead of $10.6 million which would have been recognized had the loans
performed in accordance with their original terms. First Nationwide has had
no loans contractually past due 90 days or more on accrual status in the past
five years.
The following table indicates loans classified by First Nationwide as
troubled debt restructurings, net of purchase accounting adjustments, and
excluding loans subject to the Assistance Agreement, at the dates indicated:
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
SEPTEMBER 30, --------------------------------------
1996 1995 1994 1993 1992 1991
--------------- ------ ------ ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Restructured loans:
1-4 unit residential ..... $ 4 $ 8 $ 19 $-- $-- $--
5+ unit residential ....... 66 147 204 -- -- --
Commercial and other ..... 63 79 110 -- -- --
--------------- ------ ------ ------ ------ ------
Total restructured loans $133 $234 $333 $-- $-- $--
=============== ====== ====== ====== ====== ======
</TABLE>
For the nine months ended September 30, 1996, First Nationwide recognized
interest income of $10.9 million on restructured loans instead of the $11.7
million which would have been recognized had the loans been performing in
accordance with their original terms. There were no non-real estate
restructured loans in any of the past five years.
OC-125
<PAGE>
Allowance for Loan Losses
The Bank charges current earnings with a provision for estimated credit
losses on loans receivable to bring the total allowance to a level deemed
appropriate by management. The provision considers both specifically
identified problem loans and credit risks not specifically identified in the
loan portfolio. The allowance for loan losses is based on such factors as the
financial condition of the borrowers, the fair value of the loan collateral,
recourse to guarantors, the estimated net cost of holding and maintaining
properties and collateral prior to the anticipated date of sale, analysis of
delinquency trends, geographic and collateral-type concentrations, past loss
experience, regulatory policies, and other factors related to the
collectibility of the Bank's loan portfolio.
The following table summarizes activity in First Nationwide's allowance
for loan losses during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED ------------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
---------------------- -------- -------- -------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period ...... $210 $203 $ 2 $ 15 $ 24 $ 15
Purchases -- SFFed Acquisition ..... 40 -- -- -- -- --
Purchases -- Home Federal
Acquisition ........................ 5 -- -- -- -- --
Purchases -- FN Acquisition ......... -- -- 202 -- -- --
Provision for loan losses ........... 30 37 6 1 16 18
Charge-offs:
1-4 unit residential ............... (36) (28) (4) -- (11) (6)
5+ unit residential and
commercial real estate (a) ........ (4) -- (4) -- -- --
Consumer and other ................. (4) (5) (1) (1) (7) (5)
Non real estate commercial ......... -- -- -- (1) (1) --
---------------------- -------- -------- -------- -------- --------
Total charge-offs ................ (44) (33) (9) (2) (19) (11)
Recoveries .......................... 3 3 2 1 2 2
---------------------- -------- -------- -------- -------- --------
Net charge-offs .................... (41) (30) (7) (1) (17) (9)
---------------------- -------- -------- -------- -------- --------
Allowance for losses assigned to
loans sold ......................... -- -- -- (13) (8) --
---------------------- -------- -------- -------- -------- --------
Balance at end of period ............. $244 $210 $203 $ 2 $ 15 $ 24
====================== ======== ======== ======== ======== ========
</TABLE>
- ------------
(a) Lack of activity in the nine months ended September 30, 1996 and the
year ended December 31, 1995 is principally due to the existence of the
Put Agreement.
OC-126
<PAGE>
The following table sets forth the allocation of First Nationwide's
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
---------------------- -------- -------- -------- -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Specific reserves:
Real estate loans:
1-4 unit residential .............. $ -- $ 1 $ 4 $-- $ 2 $ 1
5+ unit residential ............... 3 -- -- -- -- --
Commercial real estate ............ 5 -- -- -- -- --
---------------------- -------- -------- -------- -------- ------
Total specific reserves ......... 8 1 4 -- 2 1
---------------------- -------- -------- -------- -------- ------
General reserves:
Real estate loans:
1-4 unit residential ............. 119 115 105 2 13 23
5+ unit residential and
commercial real estate .......... 108 85 85 -- -- --
---------------------- -------- -------- -------- -------- ------
Total real estate loans ......... 227 200 190 2 13 23
Equity-line and consumer loans ... 9 9 9 -- -- --
---------------------- -------- -------- -------- -------- ------
Total general reserves .......... 236 209 199 2 13 23
---------------------- -------- -------- -------- -------- ------
Total allowance for loan losses ... $244 $210 $203 $ 2 $15 $24
====================== ======== ======== ======== ======== ======
</TABLE>
The table below provides First Nationwide's ratios of net charge-offs to
outstanding average loan balances for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
------------------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
1-4 unit residential ..... 0.46% 0.47% 0.06% 1.26% 1.13% 0.38%
5+ unit residential and
commercial real estate .. .08 -- 0.10 0.19 0.01 --
Consumer and other ......... 1.08 1.00 0.23 0.24 0.94 0.57
Non real estate commercial -- -- -- 1.29 1.06 --
</TABLE>
Impaired Loans
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General--Accounting Changes" for a discussion of SFAS
No. 114 and First Nationwide's impaired loans as of September 30, 1996 and
December 31, 1995.
INVESTMENT ACTIVITIES
The Bank is required by OTS regulations to maintain a specified minimum
amount of liquid assets which may be invested in specified securities. The
Bank is also permitted to invest in certain other types of securities.
Securities balances (including cash equivalent securities) exceeding minimum
federal requirements are subject to change over time based on the Bank's
asset/liability funding needs and interest rate risk management objectives.
The Bank's liquidity levels take into consideration anticipated future cash
flows and all available sources of credit. Liquidity is maintained at levels
management believes are appropriate to assure future flexibility in meeting
anticipated funding needs including deposit withdrawal requests, loan funding
commitments, and other investment or restructuring requirements.
During 1993 to 1996 the OTS required members of the FHLBS to maintain
eligible liquid assets as defined by federal regulations in an amount equal
to or greater than 5% of average deposits and
OC-127
<PAGE>
borrowings due within one year. Under applicable law, this liquidity
requirement may be changed from time to time by the OTS to any amount within
the range of 4% to 10%, and the OTS has the authority to prescribe liquidity
requirements for different classes of savings institutions, which classes may
be determined in accordance with criteria selected by the OTS. First
Nationwide was in compliance with this regulation throughout 1996.
Cash Equivalents
The Bank invests in federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits in other banks from time
to time to help meet the Bank's regulatory liquidity requirements and as
temporary holdings until the funds can be otherwise deployed or invested.
Securities Available for Sale
First Nationwide adopted SFAS No. 115 effective January 1, 1994. On
November 15, 1995, the FASB issued the Special Report which provided all
entities an opportunity to reassess their ability and intent to hold
securities to maturity and allowed a one-time reclassification of securities
from held-to-maturity to available-for-sale without "tainting" the remaining
held-to-maturity securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Accounting Changes."
On December 29, 1995, First Nationwide reclassified $1.5 billion and $231.8
million in carrying value of mortgage-backed securities and U.S. government
and agency securities, respectively, from the respective held-to-maturity
categories to securities available for sale, resulting in a net after-tax
increase of $22.5 million in stockholders' equity.
The following summarizes the amortized cost and estimated fair value of
First Nationwide's securities available for sale at the dates indicated (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN (LOSS) VALUE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ....... $ 27,034 $34,172 $ -- $34,172 $ 61,206
Mortgage-backed securities:
GNMA ............................... 70,252 539 (442) 97 70,349
FNMA ............................... 542,543 3,629 (7,275) (3,646) 538,897
FHLMC .............................. 658,511 12,998 (540) 12,458 670,969
Collateralized mortgage obligations 382,406 428 (3,050) (2,622) 379,784
Other ............................... 137 4 -- 4 141
U.S. government and agency
obligations ........................ 508,204 1,105 (2,582) (1,477) 506,727
------------ ------------ ------------ ------------ ------------
Total ............................. $2,189,087 $52,875 $(13,889) 38,986 $2,228,073
============ ============ ============ ============ ============
Estimated tax effect ................ (3,899)
------------
Net unrealized holding gain in
stockholders' equity ............. $35,087
============
</TABLE>
OC-128
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN (LOSS) VALUE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ....... $ 34,000 $ 80,068 $ -- $ 80,068 $ 114,068
Mortgage-backed securities:
GNMA ............................... 14,018 906 -- 906 14,924
FNMA ............................... 294,070 5,643 -- 5,643 299,713
FHLMC .............................. 801,393 19,671 (1) 19,670 821,063
Collateralized mortgage obligations 345,699 793 (4,678) (3,885) 341,814
U.S. government and agency
obligations ........................ 231,794 2,768 (69) 2,699 234,493
------------ ------------ ------------ ------------ ------------
Total ............................. $1,720,974 $109,849 $(4,748) 105,101 $1,826,075
============ ============ ============ ============
FDIC portion of unrealized gain on
marketable equity securities ...... (34,534)
Estimated tax effect ................ (7,055)
------------
Net unrealized holding gain in
stockholders' equity ............. $ 63,512
============
DECEMBER 31, 1994
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------ ------------ ------------ ------------ ------------
Marketable equity securities ....... $ 34,000 $ 11,000 $ -- $ 11,000 $ 45,000
============ ============ ============ ============ ============
</TABLE>
At September 30, 1996 and December 31, 1995, mortgage-backed securities
available for sale included securities totalling $53.1 million and $63.4
million, respectively, which resulted from the securitization of certain
qualifying mortgage loans from First Nationwide's loan portfolio. There were
no such securities classified as available for sale at December 31, 1994 or
1993.
At September 30, 1996 and December 31, 1995, First Nationwide's
mortgage-backed securities available for sale included $1.1 billion and $1.0
billion, respectively, of variable-rate securities. No variable-rate
securities were classified as available for sale at December 31, 1994 or
1993.
At December 31, 1995, First Nationwide's marketable equity securities
available for sale represents approximately 25% of the outstanding common
stock of ACS, representing 5% of the voting power, with an original cost
basis of $34 million. Pursuant to the terms of a settlement agreement dated
June 17, 1991 between First Nationwide, ACS, and the FDIC, the FDIC is
entitled to share in a defined portion of the proceeds from the sale of the
stock, which at December 31, 1995, approximated $34.5 million and which was
recorded in other liabilities. On June 28, 1996, First Nationwide sold
2,000,000 shares of ACS stock for gross proceeds totalling $92.3 million from
which it satisfied its full obligation to the FDIC and recognized a pre-tax
gain totalling $40.4 million. The net unrealized gain on the ACS stock, net
of income taxes, reported as a separate component of stockholders' equity at
September 30, 1996 is $30.7 million. At September 30, 1996, ACS stock closed
at $58.75 per share on The Nasdaq Stock Market, resulting in a total value of
$61.2 million for the ACS shares held by First Nationwide. The ACS stock
represented the only marketable security classified as available for sale at
September 30, 1996.
The Bank maintains a significant portfolio of mortgage-backed securities
as a means of investing in housing-related mortgage instruments without the
costs associated with originating mortgage loans for portfolio retention and
the credit risk of default which arises in holding a portfolio of loans to
maturity. By investing in mortgage-backed securities, management seeks to
achieve a positive spread over the cost of funds used to purchase these
securities. Mortgage-backed securities available for sale are carried at fair
value, with unrealized gains and losses excluded from earnings and reported
in a separate component of stockholders' equity. Premiums and discounts on
the purchase of mortgage-backed securities are
OC-129
<PAGE>
amortized or accreted as a yield adjustment over the life of the securities
using the interest method, with the amortization or accretion effect of
prepayment being adjusted based on revised estimates of future repayments.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings. Mortgage-backed securities issued or guaranteed by
FNMA or FHLMC (except interest-only securities or the residual interests in
CMOs) are weighted at no more than 20% for risk-based capital purposes,
compared to a weight of 50% to 100% for residential loans. See
"Regulation--Regulation of Federal Savings Banks."
The following represents the largest privately issued CMOs held by First
Nationwide at September 30, 1996 (in millions):
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
CARRYING VALUE MARKET VALUE
-------------- --------------
<S> <C> <C>
RESIDENTIAL FUNDING MORTGAGE SECURITIES $69 $68
</TABLE>
First Nationwide held privately issued CMOs with an aggregate carrying
value of $240.6 million at September 30, 1996.
At September 30, 1996, the mortgage-backed securities acquired by First
Nationwide have the highest credit rating from one or more of the national
securities rating agencies. Such credit rating, however, may be subject to
revision or withdrawal at any time by such rating agencies. The
mortgage-backed securities which the Bank purchases and maintains in its
portfolio include certain CMOs. A CMO is a special type of pay-through debt
obligation in which the stream of principal and interest payments on the
underlying mortgages or mortgage-backed securities is used to create classes
with different maturities and, in some cases, amortization schedules and a
residual class of the CMO security being sold, with each such class
possessing different risk characteristics. The residual interest sold
represents any residual cash flows which result from the excess of the
monthly receipts generated by principal and interest payments on the
underlying mortgage collateral and any reinvestment earnings thereon, less
the cash payments to the CMO holders and any administrative expenses. As a
matter of policy, due to the risk associated with residual interests, the
Bank does not invest in the residual interests of CMOs.
Securities Held to Maturity
Substantially all of First Nationwide's securities classified as held to
maturity were reclassified to available for sale at December 29, 1995.
The following summarizes the amortized cost and estimated fair value of
First Nationwide's securities held to maturity at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------------ ------------------------ ------------------------ ------------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. government and
agency obligations $ 4 $ 4 $ -- $ -- $410 $407 $15 $15
Municipal and other
securities ........ -- -- 1 1 2 2 -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total ............ $ 4 $ 4 $ 1 $ 1 $412 $409 $15 $15
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The weighted average stated interest rate on First Nationwide's securities
held to maturity was 6.83%, 8.25%, 5.79% and 3.66% at September 30, 1996 and
December 31, 1995, 1994 and 1993, respectively.
Securities held to maturity at September 30, 1996 mature within one year.
OC-130
<PAGE>
Mortgage-backed Securities Held to Maturity
Substantially all of the Bank's mortgage-backed securities, except for
mortgage-backed securities resulting from the securitization of certain of
First Nationwide's loans, were reclassified from the held-to-maturity
portfolio to the available-for-sale portfolio on December 29, 1995.
A summary of First Nationwide's mortgage-backed securities held to
maturity at the dates indicated is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------------ ------------------------ ------------------------ ------------------------
ESTIMATED ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE COST VALUE
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA ..... $ -- $ -- $ -- $ -- $ 16 $ 16 $ -- $ --
FNMA ..... 1,270 1,283 533 548 1,078 1,060 -- --
FHLMC .... 428 442 988 1,016 1,660 1,647 -- --
CMOs ..... -- -- -- -- 397 370 341 340
Other .... 2 2 3 3 3 3 -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
Total ... $1,700 $1,727 $1,524 $1,567 $3,154 $3,096 $341 $340
=========== =========== =========== =========== =========== =========== =========== ===========
</TABLE>
The weighted average stated interest rate on First Nationwide's
mortgage-backed securities held to maturity was 7.11%, 7.46%, 6.30%, and
6.75% at September 30, 1996, December 31, 1995, 1994 and 1993, respectively.
At September 30, 1996 and December 31, 1995, First Nationwide's
mortgage-backed securities held to maturity included securities totalling
$1.7 billion and $1.5 billion, respectively, which resulted from the
securitization with FNMA and FHLMC of certain qualifying mortgage loans from
First Nationwide's or San Francisco Federal's loan portfolios with full
recourse to First Nationwide. There were $1.4 billion of such securities held
at December 31, 1994. At September 30, 1996, December 31, 1995 and December
31, 1994, respectively, First Nationwide had $1.7 billion, $1.5 billion and
$2.5 billion of variable rate mortgage-backed securities held to maturity. No
variable rate mortgage-backed securities were held at December 31, 1993.
For the years ended December 31, 1995, 1994 and 1993 and the nine months
ended September 30, 1996, First Nationwide did not sell any of its
mortgage-backed securities held to maturity.
Mortgage-backed securities held to maturity are carried at amortized cost
rather than the lower of cost or market, unless there is evidence of a
decline other than a temporary decline in value. Anything other than
temporary declines in value are charged to income in the periods in which the
declines are determined. Premiums and discounts on the purchase of
mortgage-backed securities are amortized or accreted as a yield adjustment
over the life of the securities using the interest method, with the
amortization or accretion effect of prepayment being adjusted based on
revised estimates of future repayments.
The following table summarizes the First Nationwide's mortgage-backed
securities held-to-maturity portfolio and the related weighted average coupon
rate at September 30, 1996, based upon contractual scheduled maturities
allocated to the appropriate maturity categories. This table does not reflect
the scheduled amortization or any anticipated prepayment of the underlying
loans collateralizing such securities in the portfolio.
<TABLE>
<CAPTION>
OVER ZERO OVER THREE OVER FIVE OVER TEN
BUT WITHIN WAC BUT WITHIN WAC BUT WITHI WAC BUT WITHIN WAC OVER WACN
THREE YEARS (1) FIVE YEARS (1) TEN YEARS (1) FIFTEEN YEARS (1) FIFTEEN YEARS (1) TOTAL
------------- ----- ------------ ----- ----------- ----- --------------- ------- --------------- ------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FNMA ... $-- --% $-- --% $-- --% $-- --% $1,270 6.97% $1,270
FHLMC . -- -- -- -- -- -- -- -- 428 7.99 428
Other . -- -- -- -- -- -- 1 10.00 1 7.72 2
------------- ----- ------------ ----- ----------- ----- --------------- ------- --------------- ------- ---------
$-- $-- $-- $ 1 $1,699 $1,700
============= ============ =========== =============== =============== =========
</TABLE>
- ------------
(1) Weighted average coupon rate.
OC-131
<PAGE>
SOURCES OF FUNDS
General
Deposits, sales of securities under agreements to repurchase, advances
from the FHLBs of Dallas and San Francisco, and sales, maturities and
principal repayments on loans and mortgage-backed securities have been the
major sources of funds for use in the Bank's lending and investment
activities and other general business purposes. The management of the Bank
closely monitors rates and terms of competing sources of funds on a daily
basis and utilizes the source which is most cost-effective. The availability
of funds from sales of loans and securities is influenced by the levels of
general interest rates and other market conditions. For additional
information regarding First Nationwide's sources of funds, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--First Nationwide" and First Nationwide's Consolidated Statements
of Cash Flows set forth in the Consolidated Financial Statements of First
Nationwide contained elsewhere in this Offering Circular.
Loan principal and interest payments are a relatively stable source of
funds, while customer deposit inflows and outflows and loan repayments and
prepayments are influenced significantly by the levels of general interest
rates and money market conditions, and may fluctuate widely. Borrowings may
be used to compensate for reductions in normal sources of funds such as
customer deposits.
Deposits
The Bank offers a variety of deposit accounts designed to attract both
short-term and long-term deposits. There are no rate limitations on any type
of deposit account presently offered by the Bank. The ability of the Bank to
retain and attract new deposits is dependent upon the variety and
effectiveness of its customer account products, customer service and
convenience, and prevailing market conditions. The following table shows
First Nationwide's distribution of deposits by type of account at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT SEPTEMBER 30, -------------------------------------------------------------------------
1996 1995 1994 1993
----------------------- ------------------------ ----------------------- ----------------------
PERCENT PERCENT PERCENT PERCENT
AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS
-------- ------------- --------- ------------- -------- ------------- -------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ....... $ 857 9.8% $ 664 6.5% $ 685 7.5% $ 3 0.7%
Demand deposits:
Interest-bearing ....... 481 5.5 684 6.7 667 7.3 5 1.2
Noninterest-bearing ... 828 9.5 697 6.8 352 3.8 4 0.9
Money market deposit
accounts ............... 809 9.2 1,443 14.2 1,927 21.1 48 11.2
-------- ------------- --------- ------------- -------- ------------- -------- -------------
Total transaction
accounts ............. 2,975 34.0 3,488 34.2 3,631 39.7 60 14.0
Term accounts ............ 5,784 66.0 6,696 65.8 5,519 60.3 370 86.0
-------- ------------- --------- ------------- -------- ------------- -------- -------------
8,759 100.0% 10,184 100.0% 9,150 100.0% 430 100.0%
============= --------- ============= ============= =============
Accrued interest payable 32 51 26 2
Purchase accounting
adjustments, net ........ 9 7 21 --
-------- --------- -------- --------
Total ................. $8,800 $10,242 $9,197 $432
======== ========= ======== ========
</TABLE>
Deposit balances, excluding purchase accounting adjustments, averaged $9.4
billion during the nine months ended September 30, 1996, with an average
stated interest rate of 4.68%. The weighted average stated interest rate on
deposits at September 30, 1996 was 4.55%.
Deposit balances averaged $9.9 billion, $2.6 billion and $1.2 billion
during 1995, 1994 and 1993, respectively, with average stated interest rates
of 4.67%, 3.86% and 4.64%, respectively. The weighted average stated interest
rates on deposits at December 31, 1995, 1994 and 1993 were 4.67%, 4.19% and
4.41%, respectively.
OC-132
<PAGE>
The following table presents the average balance and weighted average
rate paid on each deposit type of First Nationwide for the dates indicated,
excluding the impact of purchase accounting adjustments.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996
------------------------
AVERAGE AVERAGE
BALANCE RATE PAID
--------- -----------
<S> <C> <C>
Transaction accounts:
Passbook accounts ... $ 872 3.61%
Demand deposits:
Interest-bearing ... 530 1.03
Noninterest-bearing 893 --
Money market deposit
accounts ............ 993 3.38
Term accounts ......... 6,160 6.03
--------- -----------
Total ............... $9,448 4.68%
========= ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ... $ 666 2.20% $ 179 2.14% $ 192 2.67%
Demand deposits:
Interest-bearing ... 699 1.00 184 .97 42 2.02
Noninterest-bearing 583 -- 93 -- 11 --
Money market deposit
accounts ............ 1,581 3.22 547 2.98 32 2.79
Term accounts ......... 6,398 6.10 1,611 4.91 918 5.24
--------- ----------- --------- ----------- --------- -----------
Total ............... $9,927 4.67% $2,614 3.86% $1,195 4.64%
========= =========== ========= =========== ========= ===========
</TABLE>
The following table sets forth the scheduled maturities of First
Nationwide's term accounts by stated interest rate at September 30, 1996.
<TABLE>
<CAPTION>
SCHEDULED MATURITIES DURING THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 AND
1996 1997 1998 THEREAFTER TOTAL
---------- ---------- -------- -------------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
3.00% or less ............. $ -- $ -- $ -- $ -- $ --
3.01 -- 4.00% ............. 4 3 -- -- 7
4.01 -- 5.00% ............. 254 195 14 6 469
5.01 -- 6.00% ............. 821 2,444 418 179 3,862
6.01 -- 7.00% ............. 154 484 50 137 825
7.01 -- 8.00% ............. 60 242 42 74 418
8.01 -- 9.00% ............. 55 41 3 3 102
9.01 -- 10.00% ............ 99 -- 2 -- 101
10.01 -- 11.00% ........... -- -- -- -- --
11.01 -- 12.00% ........... -- -- -- -- --
12.01 -- 13.00% ........... -- -- -- -- --
---------- ---------- -------- -------------- ----------
Total term accounts .... $1,447 $3,409 $529 $399 $5,784
========== ========== ======== ============== ==========
</TABLE>
The following table sets forth remaining maturities for First Nationwide's
term deposits in amounts of $100,000 or more at September 30, 1996 (in
millions):
<TABLE>
<CAPTION>
<S> <C>
3 months or less ................... $193
Over 3 months but within 6 months . 206
Over 6 months but within 12 months 277
Over 12 months ..................... 186
------
Total ............................ $862
======
</TABLE>
At September 30, 1996, the aggregate amount outstanding of certificates of
deposit of $100,000 or larger at First Nationwide was $862 million, compared
with $690 million at December 31, 1995. Deposits held by foreign investors at
First Nationwide totalled $57 million and $63 million at September 30, 1996
and December 31, 1995, respectively.
OC-133
<PAGE>
The Bank's deposit accounts are held primarily by individuals residing in
the vicinity of its retail branch offices located throughout the country. The
Bank has emphasized, and will continue to emphasize, a retail branch network
for attracting deposits. Key market areas, particularly the West Coast
region, will continue to be targeted for expansion of retail deposits and the
cross-selling of additional consumer products.
When cost-effective relative to other sources of funding, the Bank issues
certificates of deposit through direct placement programs and national
investment banking firms ("Brokered Deposits"). These deposits are usually in
amounts less than $100,000 and are obtained from a diverse customer base.
While these funds are generally more costly than traditional passbook and
money market deposits and more volatile as a source of funds because of their
sensitivity to the rates offered, they supplement retail customer deposits in
raising funds for financing and liquidity purposes. At September 30, 1996,
First Nationwide had approximately $751 million of Brokered Deposits
outstanding, representing 8.58% of total deposits.
The following table presents the scheduled maturity of First Nationwide's
Brokered Deposits and all other retail term deposits at September 30, 1996.
<TABLE>
<CAPTION>
1999 AND
1996 1997 1998 THEREAFTER TOTAL
-------- -------- ------ ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Brokered Deposits .... $ 287 $ 390 $ 5 $ 69 $ 751
Retail term deposits . 1,160 3,019 524 330 5,033
-------- -------- ------ ------------ --------
Total term deposits $1,447 $3,409 $529 $399 $5,784
======== ======== ====== ============ ========
</TABLE>
In April 1995, First Nationwide acquired approximately $13 million in
deposits located in Tiburon, California in the Tiburon Purchase. In August
1995, First Nationwide acquired three retail branches and associated deposit
accounts totalling approximately $356 million located in Orange County,
California in the ITT Purchase. On December 8, 1995, First Nationwide
acquired four retail branches located in Sonoma County, California with
associated deposit accounts of approximately $144 million as of December 7,
1995 in the Sonoma Purchase.
Borrowings
The Bank utilize various borrowings as alternative sources of funds for
their business needs. These sources have included securities sold under
agreements to repurchase, FHLB advances and subordinated debentures. First
Nationwide relied primarily on FHLB advances and securities sold under
agreements to repurchase to replace funding from deposits sold in the Branch
Sales.
OC-134
<PAGE>
Short-term Borrowings
The following table sets forth for First Nationwide each category of
borrowings due within one year: (i) for the periods presented, the average
amount outstanding, the maximum amount outstanding at any month end and the
average interest rate paid, and (ii) at period end, the amount outstanding
and average interest rate paid. Amounts and rates reflected in the table
exclude accrued interest payable and purchase accounting adjustments.
<TABLE>
<CAPTION>
AT OR FOR
AT OR FOR
THE YEAR ENDED
THE NINE MONTHS
DECEMBER 31,
ENDED SEPTEMBER 30, ---------------------------
1996 1995 1994 1993
------------------- -------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding .................... $2,494 $ 862 $ 434 $ 369
Maximum amount outstanding at any month end
during the period ............................... 3,141 1,487 1,909 441
Balance outstanding at end of period ........... 2,533 1,487 1,049 441
Average interest rate during the period ....... 5.84% 7.19% 6.56% 4.26%
Average interest rate at end of period ........ 5.72% 6.12% 7.34% 4.54%
Securities sold under agreements to repurchase:
Average balance outstanding .................... $1,890 $1,351 $ 499 $ 21
Maximum amount outstanding at any month end
during the period ............................... 2,424 1,965 1,880 139
Balance outstanding at end of period ........... 2,055 698 1,880 119
Average interest rate during the period ....... 5.59% 6.53% 3.78% 3.83%
Average interest rate at end of period ........ 5.69% 6.06% 6.51% 3.45%
Real estate notes payable and revolving warehouse
line:
Average balance outstanding .................... $ -- $ -- $ -- $ 3
Maximum amount outstanding at any month end
during the period ............................... -- -- -- 6
Balance outstanding at end of period ........... -- -- -- --
Average interest rate during the period ....... -- -- -- 12.50%
Average interest rate at end of the period .... -- -- -- --
</TABLE>
At September 30, 1996, First Nationwide had additional secured borrowing
capacity of $2.8 billion with the FHLB and other sources. These
collateralized funding sources may also be used to satisfy other funding
requirements.
Securities Sold Under Agreements to Repurchase
The Bank enters into reverse repurchase agreements whereby it sells
marketable U.S. government and mortgage-backed securities and CMOs with a
commitment to repurchase the securities at a specified price and on a
specified date. These agreements are recorded as financings, and the
obligation to repurchase assets sold is reflected as a liability on the
consolidated statement of financial condition. The dollar amount of assets
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are delivered to the dealers who arranged the
transactions. The counterparty to the repurchase agreement may have loaned
the securities to other parties in the normal course of their operations;
however, all agreements require that the identical securities be resold to
the Bank at the maturity of the agreements. In order to reduce possible risks
associated with these borrowing transactions, the reverse repurchase
agreements are generally entered into with national investment banking firms
and major commercial banks which are primary dealers in these securities.
During 1995, First Nationwide reduced the level of funds borrowed under
reverse repurchase agreements from $1.9 billion at December 31, 1994 to $1.0
billion at December 31, 1995 to take advantage of favorable rates offered on
short-term FHLB advances throughout the year and to assume additional
deposits in the Branch Purchases.
OC-135
<PAGE>
FHLB Advances
The FHLB functions in a credit capacity for savings institutions and
certain other home financing institutions. A thrift institution may generally
borrow from its district FHLB through advances secured by its home mortgages
and other assets (principally securities which are obligations of, or
guaranteed by, the U.S. government). A thrift is required to hold a minimum
amount of capital stock of the FHLB based upon a percentage of its
outstanding home mortgage loans and similar obligations, a percentage of its
outstanding advances from the FHLB or a certain percentage of total assets.
Such advances may be made pursuant to several different credit programs made
available from time to time by the FHLB to meet seasonal and other
withdrawals of deposit accounts and to expand lending, each of which has its
own interest rate and range of maturities. The FHLB prescribes the acceptable
uses, as well as limitations on the size of such advances. Depending on the
program, such limitations are based either on a fixed percentage of the
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness.
During 1995, First Nationwide prepaid $250 million in FHLB advances
resulting in a $2 million extraordinary gain on the early extinguishment of
debt, net of tax. During 1994, First Nationwide prepaid $95.2 million in FHLB
advances resulting in an extraordinary gain on the early extinguishment of
debt, net of tax, of approximately $1.4 million.
Interest Rate Swap Agreements
The Bank has used interest rate swap agreements to reduce its interest
rate risk exposure on fixed rate FHLB advances. First Nationwide had interest
rate swap agreements with a notional principal amount of $400 million
outstanding at September 30, 1996. The notional amount does not represent
amounts exchanged by the parties and thus, is not a measure of the Bank's
exposure. The Bank pays the variable rate and receives the fixed rate based
on LIBOR under these agreements. The differential between these two amounts
may change significantly in the future due to fluctuations in market interest
rates.
In order to reduce possible counterparty nonperformance risk, the Bank has
entered into interest rate swap agreements only with national investment
banking firms and the FHLB of San Francisco.
Old FNB Debentures
As part of the FN Acquisition, First Nationwide assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1,
2006 (the "Old FNB Debentures"). At September 30, 1996, the aggregate
principal amount of the Old FNB Debentures outstanding was $92.1 million.
Events of Default under the indenture governing the Old FNB Debentures
(the "Old FNB Indenture") include, among other things: (i) a default in the
payment of interest when due and such default continues for 30 days, (ii) a
default in the payment any principal when due, (iii) the failure to comply
with covenants in the Old FNB Indenture, provided that the trustee or holders
of at least 25% in principal amount of the outstanding Old FNB Debentures
notify the Bank of the default and the Bank does not cure the default within
60 days after receipt of such notice, (iv) certain events of bankruptcy,
insolvency or reorganization of the Bank, (v) the FSLIC/RF (or a comparable
entity) is appointed to act as conservator, liquidator, receiver or other
legal custodian for the Bank and (vi) a default under other indebtedness of
the Bank in excess of $10 million resulting in such indebtedness becoming due
and payable, and such default or acceleration has not been rescinded or
annulled within 60 days after the date on which written notice of such
failure has been given by the trustee to the Bank or by holders of at least
25% in principal amount of the outstanding Old FNB Debentures to the Bank and
the trustee.
SFFed Notes
As part of the SFFed Acquisition, First Nationwide assumed the SFFed
Notes, which bear interest at 11.20% per annum and mature on September 1,
2004. In connection with the assumption of the SFFed Notes, First Nationwide
and all of the holders of the SFFed Notes entered into an agreement amending
certain provisions of the note purchase pursuant to which the SFFed Notes
were sold (as amended, the "Note Purchase Agreement"). On September 12, 1996,
First Nationwide repurchased $44.0 million
OC-136
<PAGE>
aggregate principal amount of the SFFed Notes at a price of approximately
116.45% of the principal amount, plus the accrued interest thereon. At
September 30, 1996, the aggregate principal amount of the SFFed Notes
outstanding was $6.0 million. First Nationwide recorded an extraordinary
loss, net of tax, of $1.6 million in connection with such repurchase.
Events of Default under the Note Purchase Agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any
failure to make any payment of interest when due and such payment is not made
within 15 days after the date such payment was due; (iii) failure to comply
with certain covenants in the Note Purchase Agreement, provided that such
failure continues for more than 60 days; (iv) failure to deliver to holders a
notice of default, notice of event of default, or notice of claimed default
as provided in the Note Purchase Agreement; (v) failure to comply with any
provision of the Note Purchase Agreement, provided that such failure
continues for more than 60 days after notice is delivered to the Bank; (vi) a
default under other indebtedness provided that the aggregate amount of all
obligations in respect of such indebtedness exceeds $15 million; (vii) one or
more final, non-appealable judgements outstanding against the Bank or its
subsidiaries for the payment of money aggregating in excess of $15 million,
any one of which has been outstanding for 45 days and shall not have been
discharged in full or stayed; (viii) any warranty, representation or other
statement contained in the Note Purchase Agreement by the Bank or any of its
subsidiaries being false or misleading in any material respect when made; or
(ix) certain events of bankruptcy, insolvency or reorganization of the Bank
or its subsidiaries.
Consummation of the Cal Fed Acquisition constituted a "Change of Control"
under the Note Purchase Agreement. Accordingly, holders of the SFFed Notes
have the right to compel the Bank to redeem the SFFed Notes held by any such
holder at a redemption price of 100% of the principal amount thereof.
11 1/2% Preferred Stock
In connection with the FN Acquisition, First Nationwide issued 3,007,300
shares of 11 1/2% Preferred Stock. The 11 1/2% Preferred Stock has a stated
liquidation value of $100 per share, plus declared and unpaid dividends, if
any. Cash dividends are noncumulative and are payable at an annual rate of 11
1/2% per share if, when and as declared by the Board of Directors of the
Bank.
The 11 1/2% Preferred Stock ranks prior to the common stock of the Bank
and to all other classes and series of equity securities subsequently issued,
other than any class or series expressly designated as being on a parity with
or senior to the 11 1/2% Preferred Stock as to dividends and liquidating
distributions. The 10 5/8% Preferred Stock and the Bank Preferred Stock will
be on parity with the 11 1/2% Preferred Stock as to dividends and liquidating
distributions.
The terms of the 11 1/2% Preferred Stock provide that the Bank may not
declare or pay any full dividends with respect to any parity stock, such as
the 10 5/8% Preferred Stock and the Bank Preferred Stock, unless and until
the Bank has paid full dividends on the 11 1/2% Preferred Stock for the
immediately preceeding dividend period. The Bank is currently in compliance
with such requirement.
The terms of the 11 1/2% Preferred Stock provide that the Bank may not
declare or pay any dividends or other distributions (other than in shares of
common stock of the Bank or other classes of equity securities of the Bank
ranking junior to the 11 1/2% Preferred Stock (the "Bank Junior Stock")) with
respect to any Bank Junior Stock or repurchase, redeem or otherwise acquire,
or set apart funds for the repurchase, redemption or other acquisition of,
any Bank Junior Stock (including the Common Stock held by Holdings) through a
sinking fund or otherwise, unless and until: (i) the Bank has paid full
dividends on the 11 1/2% Preferred Stock for the four most recent dividend
periods, or funds have been paid over to the dividend disbursing agent of the
Bank for payment of such dividends, and (ii) the Bank has declared a cash
dividend on the 11 1/2% Preferred Stock at the annual dividend rate for the
current dividend period, and sufficient funds have been paid over to the
dividend disbursing agent of the Bank for the payment of a cash dividend for
such current dividend period. The Bank is currently in compliance with both
of such requirements.
Holders of the 11 1/2% Preferred Stock have no voting rights, except as
required by law or in certain limited circumstances.
OC-137
<PAGE>
Except in the event of a change of control, the 11 1/2% Bank Preferred
Stock is not redeemable prior to September 1, 1999. The 11 1/2% Preferred
Stock is redeemable solely at the option of the Bank or its successor or any
acquiring or resulting entity with respect to the Bank (including by any
parent or subsidiary of the Bank, any such successor, or any such acquiring
or resulting entity), as applicable, at any time on and after September 1,
1999, in whole or in part, at $105.75 per share on or after September 1, 1999
and prior to September 1, 2000, and at prices decreasing pro rata annually
thereafter to the stated liquidation value of $100 per share on or after
September 1, 2004, plus declared and unpaid dividends, if any, without
interest. Upon a change of control, the 11 1/2% Preferred Stock is redeemable
on or prior to September 1, 1999 at the option of the Bank or its successor
or any acquiring or resulting entity with respect to the Bank (including by
any parent or subsidiary of the Bank, any such successor, or any such
acquiring or resulting entity), as applicable, in whole, but not in part, at
a price per share equal to: (i) $100, plus (ii) an amount equal to declared
and unpaid dividends, if any, to the date fixed for redemption, without
interest, and without duplication, an additional amount equal to the amount
of dividends that would be payable on the 11 1/2% Preferred Stock in respect
of the period from the first day of the dividend period in which the date
fixed for redemption occurs to the date fixed for redemption (assuming all
such dividends were to be declared), plus (iii) a specified make whole
premium.
OTHER ACTIVITIES
Cal Fed Contingent Litigation Recovery Participation Interests. In July
1995, California Federal distributed to its common shareholders its
Contingent Litigation Recovery Participation Interests (the "Litigation
Interests"), each entitling the holder thereof to receive an amount (the
aggregate of such payments being referred to as the "Recovery Payment") equal
to five millionths of one percent (0.000005%) of the cash payment (the "Cash
Payment"), if any, actually received by the Bank pursuant to a final,
nonappealable judgment in or final settlement of its claim against the United
States in the lawsuit, California Federal Bank v. United States, Civil Action
No. 92-138C (the "California Federal Litigation"), 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 the Bank, computed on a pro forma basis, as a result
of the Bank'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 or other tax attributes held by the Bank or any of its
subsidiaries or affiliated entities) and (iii) the expenses incurred by the
Bank 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.
In the California Federal Litigation, California Federal alleges, among
other things, that the United States breached certain contractual commitments
regarding the computation of its regulatory capital for which California
Federal seeks damages and restitution. California Federal's claims arose from
changes, mandated by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), with respect to the rules for computing
California Federal's regulatory capital. The California Federal Litigation
was stayed pending the resolution on appeal of the Winstar Cases (defined
below), which present issues similar to those presented by the California
Federal Litigation.
On July 1, 1996, the Unites States Supreme Court issued its opinion for
United States v. Winstar Corporation, No. 95-865, which affirmed the
decisions of the United States Court of Appeals for the Federal Circuit and
the United States Court of Federal Claims in various consolidated cases (the
"Winstar Cases") granting summary judgment to the plaintiff thrift
institutions on the liability portion of their breach of contract claims
against the United States. The Supreme Court held that the government
breached certain express contracts when Congress enacted FIRREA, and the
Supreme Court remanded the proceedings for a determination of the appropriate
measure and amount of damages, which as of the date of this Offering Circular
have not been awarded.
The California Federal Litigation is currently stayed, pending the
resolution of a motion by the United States to impose "case management"
measures upon the 122 other cases involving the treatment of regulatory
capital that have been filed in the Claims Court. Accordingly, the United
States has not yet filed an answer to California Federal's complaint in the
California Federal Litigation. However, on
OC-138
<PAGE>
October 30, 1996, California Federal filed a motion for partial summary
judgment as to the Federal government's liability to California Federal for
breach of contract. Although the decision of the Supreme Court has been
rendered, a court may still determine that California Federal's claims
involve sufficiently different facts and/or legal issues as to render the
Winstar Cases inapplicable to the California Federal Litigation and thereby
compel a different conclusion from that of the Winstar Cases.
Pursuant to the Merger Agreement, Cal Fed distributed to common
shareholders entitled to receive the merger consideration one-tenth of a
Secondary Contingent Litigation Recovery Participation Interest (each a
"Secondary Litigation Interest") for each share of Cal Fed common stock held.
Each Secondary Litigation Interest 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, as defined below. "Secondary Recovery
Payment" means sixty percent (60%) of the amount obtained from the following
equation: (A) the Cash Payment, if any, actually received by California
Federal in respect of a final, nonappealable judgment in or final settlement
of the the Bank Litigation, minus (B) the sum of the following: (i) the
aggregate expenses incurred by the Bank in prosecuting the the Bank
Litigation and obtaining such Cash Payment, (ii) any income tax liability of
the Bank, computed on a pro forma basis, as a result of the Bank's receipt of
such Cash Payment (net of any income tax benefit to the Bank, computed on a
pro forma basis, from the payment of a portion of the Secondary Recovery
Payment to the holders of Secondary Litigation Interests), (iii) the expenses
incurred by the Bank 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 the holders of the Litigation
Interests and (v) one hundred twenty-five million dollars ($125,000,000).
"Income tax liability of the Bank 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 the Bank 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 operating loss carryforwards or other tax
attributes of the Bank or any of its subsidiaries or affiliated entities.
"Income tax benefit to the Bank 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 the Bank 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 operating loss carryforwards or other
tax attributes of the Bank or any or its subsidiaries or affiliated entities.
Any distribution with respect to the Litigation Interests will be subject to
the OTS capital distribution regulations.
In connection with the Cal Fed Acquisition, the Bank intends to record as
an asset the estimated after-tax cash recovery, if any, from the California
Federal Litigation that may inure to the Bank, net of amounts payable to
holders of the Litigation Interests and the Secondary Litigation Interests
(the "Goodwill Litigation Asset").
The Goodwill Litigation Asset will be recorded at its estimated fair value
as of the date of consummation of the Cal Fed Acquisition. The quoted market
price of the Litigation Interests and the Secondary Litigation Interests as
of the date of consummation of the Cal Fed Acquisition will be used to
determine the fair value of the Goodwill Litigation Asset. The following
represents the components of the Goodwill Litigation Asset that would have
been recorded had the Cal Fed Acquisition occurred on September 30, 1996 (in
millions):
<TABLE>
<CAPTION>
TOTAL TAX LIABILITY NET
------- --------------- ------
<S> <C> <C> <C>
Gross Asset .................... $323 $(130) $193
Payable to holders of:
Litigation Interests .......... (82) 33 (49)
Secondary Litigation Interests (19) 8 (11)
------- --------------- ------
Goodwill Litigation Asset ..... $222 $ (89) $133
======= =============== ======
</TABLE>
OC-139
<PAGE>
See "Unaudited Pro Forma Financial Data."
The Bank will account for the Goodwill Litigation Asset at the lower of
cost or market. In the event of a cash or other settlement of California
Federal Litigation, the recorded asset and related valuation allowance (if
any), tax liabilities and liabilities recorded for obligations to holders of
the Secondary Litigation Interests and Litigation Interests will be
eliminated, with any difference being reflected in earnings of the
then-current period.
The initial allocation of the purchase price of the Goodwill Litigation
Asset will have no impact on stockholders' equity or regulatory capital. To
the extent that the actual recovery of the Goodwill Litigation Asset exceeds
the carrying value of the Goodwill Litigation Asset, such excess would (i)
increase the liability for income taxes and the liabilities to holders of the
Litigation Interests and the Secondary Litigation Interests, and (ii)
increase the net earnings, stockholders' equity and regulatory capital of the
Bank; and to the extent that the actual recovery of the Goodwill Litigation
Asset is less than the carrying value of the Goodwill Litigation Asset, such
deficit would (x) decrease the liability for income taxes and the liabilities
to holders of the Litigation Interests and the Secondary Litigation Interests
and (y) decrease the net earnings, stockholders' equity and regulatory
capital of the Bank.
The Put Agreement
In connection with the FN Acquisition, Granite and First Nationwide
entered into the Put Agreement. Pursuant to the Put Agreement, First
Nationwide has the right, on a quarterly basis (the "Put Option"), to require
Granite to purchase certain commercial real estate loans, commercial real
estate loans serviced by others and residential mortgage loans with an
original principal balance greater than $250,000, and to take certain actions
to protect First Nationwide from losses with respect to certain Letters of
Credit ("LOC") transactions, in each case, only if such asset was purchased
by the Bank from Old FNB pursuant to the Asset Purchase Agreement. The Put
Option expired on November 30, 1996, when the sum of (x) the total amount
paid by Granite to First Nationwide in connection with all purchases or other
payments made by Granite pursuant to the Put Agreement and (y) the aggregate
purchase price paid by Granite to Old FNB in connection with purchases made
prior to the closing date ("Closing Date") pursuant to the Mortgage Loan Sale
Agreement dated as of November 30, 1993 (the "Mortgage Loan Sale Agreement"),
between Granite and Old FNB, less the total amount paid by First Nationwide
to Granite in connection with purchases made by First Nationwide through
exercise of certain buyback rights, equalled $500 million (the "Maximum
Amount"). First Nationwide could not require Granite to purchase more than
$100 million of residential mortgage loans. Granite's obligations under the
Put Agreement were guaranteed by Ford Motor.
The Put Option was generally triggered in the event that any of the assets
subject to the Put Agreement become non-performing assets (i.e., payments of
interest or principal become 90 days or more contractually past due) at any
time prior to the expiration of the Put Option.
The purchase price paid by Granite for each mortgage loan purchased
pursuant to the Put Agreement was the sum of: (i) the outstanding principal
balance of the loan, (ii) any accrued but unpaid interest on the loan shown
on First Nationwide's books (not to exceed 90 days accrued but unpaid
interest), (iii) amounts owed to First Nationwide for real property taxes,
insurance premiums and similar charges and (iv) reasonable amounts (including
reasonable attorneys' fees and protective advances) expended by First
Nationwide in protecting its security interest or enforcing its rights with
respect to such loan. The amount to be paid by Granite to First Nationwide
with respect to each non-performing LOC for which First Nationwide required
such payment was the amount of any protective advances (the "Protective
Advances") made by First Nationwide in connection with such LOC (but in no
event did the Protective Advances include an amount greater than 90 days
accrued but unpaid interest). In addition, with respect to any such LOC which
had been included in the FNMA Pool (as defined in the Put Agreement), Granite
was required, if so requested by First Nationwide, to take all necessary or
appropriate steps to cause such LOC to be removed from the FNMA Pool and
thereafter Granite would bear all economic risk associated with such LOC (or,
if all required consents for such removal could not be obtained, Granite was
required to take such actions as are necessary to place First Nationwide in
the same economic position as it would have been in had the LOC been so
removed). With respect to certain
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<PAGE>
other non-performing LOCs (including LOCs that were originally part of the
FNMA Pool but were required by FNMA to be removed from such pool prior to the
time such LOCs became non-performing), Granite was required, when requested
by the Bank, to post substitute collateral for the benefit of First
Nationwide, in the form of cash or cash equivalents with a value not less
than the face amount of the LOC, or in any other form deemed reasonably
acceptable by the Bank, in the place of any existing LOC collateral. The
total amount charged against the Maximum Amount with respect to any LOC was
the amount of Protective Advances reimbursed by Granite, together with (x) in
the case of LOCs removed from the FNMA Pool, to the extent not included as
part of the reimbursed Protective Advances, the amounts set forth in clauses
(i)-(iv) of the first sentence of this paragraph with respect to the mortgage
loan underlying the LOC, or (y) in the case of LOCs for which a substitution
of collateral was made, the face amount of the LOC.
If First Nationwide declined on any quarterly put date to sell an eligible
non-performing mortgage loan or to demand the removal or substitution of
collateral, as appropriate, in connection with an eligible LOC, its right to
put such asset or demand such removal or substitution, as the case may be,
were extinguished, except that put rights with respect to: (i) jumbo
residential loans, First Nationwide's interest in certain commercial mortgage
loans serviced by others and certain other loans formerly owned by FNMA were
extended for one additional quarter, and (ii) loans which had matured as of
the Closing Date for which monthly principal and interest payments were being
made as of the Closing Date were extended until the end of the second quarter
following the Closing Date. In the event that, as of November 30, 1996,
Granite had not been required to purchase $500 million of non-performing
assets, First Nationwide had the right to require Granite to purchase any
Putable Assets of First Nationwide, other than assets which previously became
non-performing and which First Nationwide did not require Granite to
purchase, up to the Maximum Amount. At September 30, 1996, First Nationwide
had a remaining available balance under the Put Agreement of $70.5 million,
which First Nationwide fully utilized on December 5, 1996.
The Assistance Agreement
On August 19, 1996, First Nationwide and the FSLIC's successor, the
FSLIC/RF, executed an agreement which resulted in the termination of the
Assistance Agreement. As a result of the agreement, the FSLIC/RF paid First
Nationwide the Covered Asset balance of $39 million and, among other things,
assumed the responsibility for the disposition of several litigation matters
involving Covered Assets which had been retained by First Nationwide
following the FDIC Purchase. First Nationwide recorded income of $25.6
million as a result of this settlement.
Under the terms of the Assistance Agreement, the FSLIC/RF provided capital
loss coverage and a guaranteed yield on the Covered Assets, as well as
indemnification in connection with certain claims.
In 1995, the FSLIC/RF purchased substantially all of the remaining Covered
Assets at the fair market value of such assets in the FDIC Purchase. Under
the terms of the Capital Loss Coverage (as defined herein) provisions of the
Assistance Agreement, losses sustained by First Nationwide from the FDIC
Purchase were reimbursed by the FSLIC/RF. There was no material impact on the
Consolidated Financial Statements of the First Nationwide as a result of the
FDIC Purchase.
First Nationwide's Covered Assets at the dates indicated are summarized by
type as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Loans ....................................... $-- $210
Investments in and advances to subsidiaries -- 7
Real estate owned ........................... -- 129
Other ....................................... 39 4
------ ------
Total Covered Assets ...................... 39 350
FSLIC rebate reserve ........................ -- (38)
------ ------
Covered Assets, net ....................... $39 $312
====== ======
</TABLE>
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<PAGE>
The tax-exempt assistance received by First Nationwide from the FSLIC/RF
included the following provisions:
Guaranteed Yield. The guaranteed yield for a Covered Asset for any quarter
represented the product of the Covered Asset's average book value for such
quarter and a yield which is based on the TCOF, the annualized quarterly
average cost of funds for Texas-based SAIF-insured savings institutions as
reported by the OTS plus a specified basis point spread ("Guaranteed Yield").
Capital Loss Coverage. The FSLIC/RF mitigated the First Nationwide's
exposure to capital losses on Covered Assets by providing for the
reimbursement of capital losses resulting from the liquidation of Covered
Assets at less than their book value ("Capital Loss Coverage").
Covered Asset Recovery. When the liquidation of a Covered Asset resulted
in a recovery in excess of the asset's original book value, the Assistance
Agreement required that 90% of such recovery be remitted to the FSLIC/RF, or
offset against payments due to First Nationwide from the FSLIC/RF ("Covered
Asset Recovery").
Shared Gain. First Nationwide was entitled to a disposition fee on any
Covered Asset liquidated prior to the termination of coverage for net
proceeds in excess of 50% of its original book value.
Indemnification. The Assistance Agreement provided for indemnification of
losses suffered on specific assets acquired by First Nationwide that were not
Covered Assets under the Assistance Agreement. Items payable to First
Nationwide consisted primarily of indemnification of amounts paid in
settlement of certain litigation and reimbursement of specific types of legal
costs and expenses.
FSLIC/RF Reimbursement. First Nationwide agreed to make a payment to the
FSLIC/RF over the ten-year term of the Assistance Agreement in lieu of a
tax-sharing agreement. Such tax benefit payment was implemented on a current
basis, without regard to the actual amount or timing of any such tax benefits
received, through a credit to the FSLIC/RF of 10% of the gross assistance the
FSLIC/RF paid to First Nationwide. This amount, net of 10% of all Covered
Asset Recoveries and Shared Gains, was known as the "FSLIC/RF Reimbursement."
In addition, the FSLIC/RF was entitled to a 10% share of tax benefits
attributable to the use of net operating loss carryovers of the Texas Closed
Banks in reducing the regular tax liability of the affiliated group of which
the Bank is a member. The sharing of tax benefits attributable to the use of
these net operating loss carryovers, however, occurred only when the net
operating loss carryovers were actually used.
In connection with a modification to the Assistance Agreement in January
1992, First Nationwide was paid $45 million. Of such $45 million payment, $41
million, the amount net of certain claims, was included in First Nationwide's
income. Also, in connection with the modification, First Nationwide accrued
the present value of the estimated liability at December 31, 1992 to the
FSLIC/RF for FSLIC/RF Reimbursement over the life of the Assistance
Agreement, resulting in a $60 million charge to operations in 1992. This
liability was fully utilized in 1995 as a result of the FDIC Purchase.
FNMA Letters of Credit
On September 28, 1994, First Nationwide entered into an agreement with
FNMA pursuant to which FNMA provided credit enhancements for certain
bond-financed real estate projects originated by Old FNB. The agreement
requires that the Bank pledge to FNMA collateral in the form of certain
eligible securities which are held by a third party trustee. The collateral
requirement varies based on the balance of the bonds outstanding, losses
incurred (if any), as well as other factors. At September 30, 1996, First
Nationwide had pledged as collateral certain securities available for sale
and short-term investment securities with a carrying value of $97.2 million.
FGB Realty Advisors, Inc.
FGB Realty, a wholly owned subsidiary of the Bank, provides asset
management, disposition and advisory services to institutional owners of real
estate. FGB Realty has performed asset management and disposition services
for a variety of properties which range in product type from single family
homes to complex mixed use developments. Since its formation in 1991, FGB
Realty has become one of the largest full service asset management and
disposition firms in the United States, having managed portfolios in excess
of $7.5 billion. Fee revenues from unaffiliated parties were $14.0 million,
$14.1 million and $8.0 million for the years ended December 31, 1995, 1994
and 1993, respectively. These revenues are included
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in management fees in First Nationwide's respective consolidated statements
of operations. At September 30, 1996 and December 31, 1995, First Nationwide
and FGB Realty managed non-performing loan (principally multi-family and
commercial real estate) and asset portfolios totalling $1.1 billion and $1.3
billion, respectively, for investors.
At December 31, 1995, FGB Realty was responsible for the asset management
and disposition of over 4,500 assets, representing $862 million in commercial
and residential real estate loans located in markets throughout the nation.
FGB Realty has full service offices in Dallas, New York, Tulsa, Phoenix, San
Francisco and Los Angeles.
FN Investment Center
FN Investment Center ("FNIC"), an indirect wholly owned subsidiary of the
Bank which was acquired as part of the FN Acquisition, offers securities and
insurance products to both existing and prospective customers of First
Nationwide. FNIC is subject to the guidelines established by the OTS for
broker-dealer subsidiaries of savings associations, and is a member of the
National Association of Securities Dealers. In addition, FNIC is registered
as a broker-dealer with the SEC and the Securities Investor Protection
Corporation. FNIC receives commission revenue for acting as a broker-dealer
on behalf of its customers, but FNIC does not maintain customer accounts or
take possession of customer securities. Commission revenues of $8.5 million
and $2.0 million for the years ended December 31, 1995 and 1994,
respectively, are included in fees and service charges in First Nationwide's
consolidated statements of operations for such years.
DIVIDEND POLICY OF THE BANK
The dividend policy of the Bank complies with applicable legal and
regulatory restrictions. Before declaring any dividend, the directors of the
Bank consider the following factors: (i) the quality and stability of the
Bank's net income, (ii) the availability of liquid assets to make dividend
payments, (iii) the level of earnings retention as it impacts the Bank's
capital needs and projected growth and funding levels, both internal and
external, and (iv) the adequacy of capital after the payment of a dividend.
Under the Bank's dividend policy, a dividend will not be declared or paid
which would: (i) cause the capital level of the Bank to be reduced below
"well capitalized" levels, or (ii), together with any other dividends
declared during the same calendar year, exceed 100% of the net income to the
date for that calendar year plus 50% of the Bank's surplus capital at the
beginning of that calendar year, so long as the Bank is a Tier 1 association
(as defined herein).
The Bank expects that a substantial portion of any net earnings generated
by the Bank, including net earnings generated as a result of sales of assets
or deposits, that are not needed in its operations or to expand its business
will, subject to the regulatory limitations and the terms of the Existing
Preferred Stock, be distributed to Holdings, its parent company.
EMPLOYEES
At September 30, 1996 First Nationwide and its subsidiaries had
approximately 3,466 employees, compared to approximately 3,221 employees at
September 30, 1995. None of the Bank's employees is represented by any
collective bargaining group and management considers its relations with its
employees to be good. The Bank maintains a comprehensive employee benefits
program providing, among other benefits, health and welfare benefits, long
and short-term disability insurance, and life insurance. Additionally, the
Bank offers employees a defined contribution investment plan which is a
qualified plan under Section 401(a) of the Internal Revenue Code.
During 1995, First Nationwide undertook a project to identify
opportunities for reducing operating costs and enhancing the efficiency of
its operations. Management identified certain employees whose positions were
to be eliminated over the next twelve months. These positions spanned all
areas and business units of First Nationwide. An initial liability for
termination benefits totalling $4 million was established in connection with
this plan, and is included in First Nationwide's consolidated statement of
operations for the year ended December 31, 1995.
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<PAGE>
COMPETITION
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money
market mutual funds and brokerage firms in attracting and retaining deposits.
Competition for deposits from large commercial banks is particularly strong.
Many of the nation's thrift institutions and many large commercial banks have
a significant number of branch offices in the areas in which the Bank
operates.
In addition, there is strong competition in originating and purchasing
real estate and consumer loans, principally from other savings and loan
associations, commercial banks, mortgage banking companies, insurance
companies, consumer finance companies, pension funds and commercial finance
companies. The primary factors in competing for loans are the quality and
extent of service to borrowers and brokers, economic factors such as interest
rates, interest rate caps, rate adjustment provisions, loan maturities, LTV
ratios, loan fees, and the amount of time it takes to process a loan from
receipt of the loan application to date of funding. The Bank's future
performance will depend on its ability to originate a sufficient volume of
mortgage loans in its local market areas and through its wholesale network
and, if it is unable to originate a sufficient volume of mortgage loans, to
purchase a sufficient quantity of high-quality mortgage-backed securities
with adequate yields.
PROPERTIES
The executive offices of the Bank are located at 135 Main Street, San
Francisco, California, 94105, and its telephone number is (415) 904-0100. The
Bank leases the building in which its executive office space is located,
consisting of approximately 99,000 square feet, under a ten-year lease
expiring in 2001. In addition, the Bank leases approximately 288,000 square
feet in a multiple-building administrative facility in West Sacramento,
California under a ten-year lease expiring in 2001. The Bank leases
additional administrative office space in Dallas which includes approximately
41,000 square feet of space under a lease expiring in 1999. In connection
with the move of FNMC's servicing operation to Maryland, one of these four
Sacramento buildings containing approximately 72,000 square feet was vacated.
Since September 30, 1996, management has negotiated with Ford Motor Company
regarding the early termination of the Bank's lease on this building. The
Bank leases space in an office building located at 5700 Wilshire Boulevard,
Los Angeles, California 90036. In addition, in connection with the Cal Fed
Acquisition, the Bank assumed the lease on an approximately 225,000 square
foot facility located in Rosemead, California which it expects to vacate
during the first half of 1997. The lease expires in 2008.
At September 30, 1996, First Nationwide operated a total of 116 retail
branches, and maintained 13 vacant branch facilities which were consolidated
as a result of the Sonoma Purchase and the SFFed and Home Federal
Acquisitions. Of those, 39 were owned and 90 were leased. Some of these
retail branches are multi-purpose facilities, housing loan production and
administrative facilities as well. In addition to the branch locations, at
September 30, 1996 there are 21 separate loan production offices, all of
which are leased and seven of which were vacant, and 25 separate
administrative facilities (two owned and 23 leased). The administrative
facilities include a 230,000 square foot building owned in Frederick,
Maryland, which houses FNMC's mortgage loan servicing operation. A
state-by-state breakdown of all retail branches, administrative facilities
and loan production offices of First Nationwide at September 30, 1996 is
shown in the following table.
OC-144
<PAGE>
<TABLE>
<CAPTION>
ADMINISTRATIVE LOAN PRODUCTION
BRANCHES FACILITIES FACILITIES
--------------------- --------------------- ---------------------
OWNED LEASED OWNED LEASED OWNED LEASED
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arizona ......... -- -- -- 1 -- 2
California ...... 30 72 1 11 -- 9
Florida ......... 6 18 -- 3 -- 1
Georgia ......... -- -- -- -- -- 1
Illinois ........ -- -- -- 2 -- 1
Maryland ........ -- -- 1 2 -- 1
Minnesota ....... -- -- -- -- -- 1
Montana ......... -- -- -- 1 -- --
New York ........ -- -- -- 1 -- --
Oklahoma ........ -- -- -- 1 -- --
Pennsylvania ... -- -- -- -- -- 1
Texas ........... 3 -- -- 1 -- 2
Washington ...... -- -- -- -- -- 2
--------- ---------- --------- ---------- --------- ----------
Total ......... 39 90 2 23 -- 21
========= ========== ========= ========== ========= ==========
</TABLE>
In April 1995, FNMC closed substantially all of its retail mortgage loan
production offices. Costs associated with such closure approximated $2
million and are included in noninterest expense in First Nationwide's 1995
consolidated statement of operations. On a continuing basis, the Bank
evaluates the adequacy of its office premises. As a result, surplus office
facilities may be sold or subleased to maintain cost-effective operations and
minimize vacant facilities. The 21 loan production offices at September 30,
1996 include seven offices housing operations acquired in the LMUSA 1995
Purchase, seven offices housing wholesale lending operations, and seven
vacant facilities. Of the seven vacant loan production offices, two have been
subleased and management is currently screening tenants for the remaining
five.
LEGAL PROCEEDINGS
The Bank is involved in legal proceedings incidental to the normal conduct
of its business. See "Other Activities--Cal Fed Contingent Litigation
Recovery Participation Interests." Although it is impossible to predict the
outcome of any outstanding legal proceedings, management believes that such
legal proceedings and claims, individually or in the aggregate, will not have
a material effect on the financial condition or results of operations of the
Bank.
CALIFORNIA FEDERAL
GENERAL
California Federal maintained 118 full service branches in California and
Nevada at September 30, 1996, offering a broad range of consumer financial
services including demand and term deposits and mortgage and consumer loans.
Subsidiaries of California Federal sell insurance and investment products to
California Federal's customers, and have previously engaged in the real
estate investment and development business. California Federal's executive
offices are located at 5700 Wilshire Boulevard, Los Angeles, California 90036
and its telephone number is (213) 932-4200.
During 1995, California Federal obtained regulatory and shareholder
approval to reorganize into a holding company structure. The reorganization
will provide greater flexibility for meeting future financial and competitive
needs. As a result of the reorganization, which occurred on January 1, 1996,
each share of California Federal's common stock was converted into one share
of Cal Fed common stock. Consequently, California Federal became a
wholly-owned subsidiary of Cal Fed.
California Federal's principal operating activity consists of originating
or purchasing loans secured by residential property of one to four units.
California Federal's primary funding source is savings deposits, which are
insured by the FDIC through the SAIF. California Federal's net earnings are
principally generated by the excess of interest earned over the interest paid
on interest-bearing liabilities less general and administrative expenses.
California Federal's lending and savings operations are currently centered in
California and Nevada. California Federal previously had operations in
Florida and Georgia.
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<PAGE>
During 1995, California Federal made a nontaxable distribution of
Litigation Interests to its common shareholders. The Litigation Interests
represent a right to receive a portion of the net cash proceeds, if any,
resulting from California Federal's pending goodwill lawsuit against the
Federal government. See "Business--First Nationwide--Cal Fed Contingent
Litigation Recovery Participation Interests."
California Federal recorded net earnings of $93.6 million or $1.36 per
common share during 1995. During 1994 and 1993, California Federal recorded
net losses of $423.1 million or $10.10 per share and $145.5 million or $5.98
per share, respectively.
California Federal's return to profitability for the year ended December
31, 1995 reflects the results of its restructuring in prior years to meet the
new capital requirements of the FIRREA and to respond to the collapse of the
real estate markets during the early 1990's.
In early 1994, California Federal adopted a plan designed to improve
California Federal's capital position, improve its profitability and maximize
shareholder value (the "Strategic Plan"). The primary components of the
Strategic Plan included: (i) the raising of additional equity capital by
means of common and preferred stock offerings, (ii) 1994 Bulk Sales and (iii)
the sale of 44 depository branches located in the Southeast Division.
California Federal successfully completed all aspects of the Strategic Plan
during 1994.
During 1994, California Federal, (i) raised $164.2 million, net of
issuance costs, in new capital from the issuance of 1.7 million shares of
California Federal's preferred stock, Series B, (ii) raised $183.3 million,
net of issuance costs, in new capital from the issuance of 21.6 million
shares of California Federal's common stock through a rights offering, (iii)
completed the sale of the Southeast Division and (iv) completed the
accelerated disposition of $1.3 billion of high-risk performing and NPA's.
The 1994 Bulk Sales included $1.3 billion of high-risk performing loans,
NPL's and real estate held for sale acquired in settlement of loans ("REO").
The sale of these assets resulted in a substantial reduction in NPA's and
classified loans. California Federal recorded a $274.8 million loss on the
1994 Bulk Sales.
California Federal completed the sale of the Southeast Division during the
third quarter of 1994. The sale of the Southeast Division resulted in a $3.9
billion reduction in deposits. However, California Federal received a 4.10%
deposit premium which contributed to California Federal recording a $135.0
million net gain from the sale. See "Management's Discussion and Analysis of
Results of Operating and Financial Condition--California Federal."
INTEREST RATE RISK MANAGEMENT
California Federal's earnings are primarily determined by its net interest
income. Net interest income is affected by the interest rate spread, which is
the difference between the rates earned on its interest-earning assets and
rates paid on its interest-bearing liabilities, as well as the relative
amounts of its interest-earning assets and interest-bearing liabilities. When
interest-earning assets exceed interest-bearing liabilities, any positive
interest rate spread will generate net interest income. California Federal's
average interest rate spread for the years ended December 31, 1995, 1994 and
1993 was 2.00%, 2.23% and 2.62%, respectively. During 1995, average
performing interest-earning assets exceeded average interest-bearing
liabilities by $457.7 million, or 3.32% of average performing
interest-earning assets and $19.4 million or 0.14% during 1994. Average
interest-bearing liabilities exceeded average performing interest-earning
assets by $773.6 million or 4.95% of average interest-bearing liabilities
during 1993.
California Federal is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice more rapidly, or on a
different basis, than its interest-earning assets. While having liabilities
that mature or reprice more frequently than assets may be beneficial in times
of declining interest rates, such an asset and liability structure may be
detrimental to operations during periods of rising interest rates. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--California Federal."
In order to reduce interest rate risk, California Federal has emphasized
the origination of adjustable rate mortgage loans that reprice more closely
with its interest-bearing liabilities. California Federal
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<PAGE>
originates fixed rate loans primarily for resale. At December 31, 1995,
88.1% of California Federal's portfolio of loans and mortgage-backed
securities consisted of adjustable rate instruments as compared to 88.9% at
December 31, 1994 and 84.3% at December 31, 1993. During 1995, 79.1% of real
estate loans originated bore adjustable rates compared to 91.4% in 1994 and
69.2% in 1993.
LENDING ACTIVITIES
Since 1990, California Federal has focused its lending operations
primarily on the origination of residential 1-4 loans. During the last
several years, California Federal generally has originated fixed rate
residential 1-4 loans that conform to the underwriting criteria of FNMA,
formerly known as the FHLMC, formerly known as the Federal Home Loan Mortgage
Corporation, primarily for sale, and adjustable rate residential 1-4 loans
primarily to be held in its portfolio of interest earning assets. Prior to
1990, California Federal was active in originating loans secured by income
producing property ("income property loans") but has significantly curtailed
this activity. During 1993, California Federal discontinued its origination
of income property loans including multi-family loans, except in conjunction
with sales of real estate held for sale. Prior to 1994, California Federal
originated loans secured by automobiles as well as secured and unsecured
personal loans ("consumer loans"), through California Thrift and Loan
("CTL"), a former subsidiary of California Federal. During 1995, California
Federal originated consumer loans primarily on an agent basis, and received a
fee for originating the loan from a third party. Prior to 1991, California
Federal was active in originating secured and unsecured loans to corporate
customers ("commercial banking loans"). During 1995, California Federal
initiated a new lending program designed to provide credit to small
businesses located in California ("Business Banking Loans"). The Business
Banking Loan program consists of several products, which include an unsecured
line of credit for a term of up to twelve months, and a loan secured by a
certificate of deposit for a term of no greater than five years. The maximum
amount of the line of credit that California Federal offered during 1995 was
$100,000 and these loans bore an interest rate based upon the prime rate plus
3%. The maximum loan amount for a loan secured by a certificate of deposit
was $250,000. At December 31, 1995, California Federal's outstanding Business
Banking Loan commitments totaled $3.1 million and are included with consumer
loans at December 31, 1995.
California Federal conducts its loan origination functions through its
offices in California and Nevada. Although California Federal has nationwide
lending authority, a substantial portion of California Federal's mortgage
loans are secured by real estate located in California. At December 31, 1995,
$8.1 billion or 87.6% of California Federal's portfolio of real estate loans
was secured by real estate located in California. California Federal has not
originated any loans outside of the United States.
California Federal offers a variety of residential 1-4 fixed rate and
adjustable rate loan programs, including loan programs which begin with a
three year or five year fixed rate period and convert to an adjustable rate
for the remainder of the loan. The adjustable rate residential loan programs
offered by California Federal provide for interest rates that adjust
periodically, commencing within three to six months from the loan's
inception, based on changes in the monthly weighted average cost of funds for
savings institutions in the Eleventh Federal Home Loan Bank District, as
computed monthly by the FHLB or indices that fluctuate with U.S. Treasury
rates. Adjustments to the monthly payment of principal and interest occur
either semi-annually or annually depending on the loan program selected by
the borrower. However, to protect borrowers from unlimited interest rate and
payment increases, the majority of California Federal's adjustable rate loans
have a maximum interest rate change ("interest rate cap") from the initial
reduced interest rate period and/or over the life of the loan. Additionally,
the interest rate may change within a range of a two to six percentage point
increase or decrease in any given period. In certain loan programs, these
protections for borrowers can result in monthly payments which are greater or
less than the amount required to amortize the loan by its maturity at the
interest rate in effect 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. In the event that the monthly payment
exceeds the amount necessary to pay the interest accruing during the month,
the excess is applied to reduce the loan's principal balance, which would
result in an earlier payoff of the loan.
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<PAGE>
Negative amortization may result in an increased risk that the value of
the collateral securing the loan may be insufficient to fully satisfy the
outstanding principal and interest in the case of a default by the borrower.
However, negative amortization also serves to reduce the amount of payment
increase during periods of rising rates. In periods of rapidly rising
interest rates, monthly payments on adjustable rate loans may increase
sharply, resulting in a hardship for borrowers. Negative amortization reduces
the increase in the payments for borrowers. While the outstanding balance of
the loan may increase because of negative amortization, the risk of default
may be decreased as borrowers have a lower debt service burden or a debt
service requirement that increases more slowly than fully amortizing loans.
California Federal also originates certain 15 and 30 year fully amortizing
fixed rate residential 1-4 loans, that conform to the underwriting
requirements of FNMA, primarily for resale in the secondary market. When
loans are sold, California Federal normally retains the right to service the
loan. Substantially all fixed rate loans in California Federal's loan
portfolio contain a "due-on-sale" clause which provides that California
Federal may, subject to certain regulatory restrictions, declare the unpaid
principal amount due and payable upon the resale of the mortgaged property.
Although adjustable rate loans in California Federal's loan portfolio contain
a due-on-sale clause, by their terms they are transferable to a purchaser of
the property if the purchaser meets California Federal's credit standards.
California Federal originates or purchases loans through several
distribution channels, including: (i) through its lending offices located in
California and Nevada ("retail loan production"), (ii) through a network of
brokers who direct their clients to California Federal ("wholesale loan
production"), (iii) through correspondent mortgage banking organizations,
which originate loans, using California Federal's underwriting requirements,
and then sell the loan to California Federal and (iv) purchases of loan
pools.
California Federal utilizes several distribution channels for loan
production in order to maximize its production efforts in a cost effective
manner and to mitigate its dependence upon a single origination source.
Wholesale loan production became a significantly greater source of loan
production during 1995 and 1994, as compared to retail sources. During 1995,
wholesale production of loans totaled $1.0 billion as compared to $1.5
billion during 1994. Retail loan production totalled $621.6 million and
$784.7 million during 1995 and 1994, respectively. Additionally, during 1995
California Federal purchased a greater percentage of its loan production than
in prior years. During 1995, California Federal purchased $578.2 million of
loans, all but $139.9 million of which continued to be serviced by other
financial institutions. California Federal utilized wholesale production and
loan purchases to supplement its loan production.
OC-148
<PAGE>
The table below shows California Federal's total loan originations and
purchases for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate
Residential 1-4:
Fixed rate(A) ...................... $ 456.1 $ 186.2 $ 824.3 $1,211.5 $1,212.2
Adjustable rate .................... 1,674.6 2,235.5 1,404.7 1,178.4 1,249.8
Multi-Family:
Fixed rate ......................... 0.8 3.0 5.7 18.1 9.0
Adjustable rate .................... 41.9 112.4 285.1 185.5 134.6
Commercial Real Estate:
Fixed rate ......................... 1.2 16.3 35.5 47.7 19.8
Adjustable rate .................... 62.2 79.5 45.6 69.3 19.3
Equity ................................ 10.5 22.5 210.5 259.2 257.9
---------- ---------- ---------- ---------- ----------
Total real estate ...................... 2,247.3 2,655.4 2,811.4 2,969.7 2,902.6
Commercial banking .................... -- 0.5 1.9 56.5 96.2
Consumer .............................. 99.3 118.6 129.2 332.2 330.3
---------- ---------- ---------- ---------- ----------
Total loans originated and purchased(B) 2,346.6 2,774.5 2,942.5 3,358.4 3,329.1
Loans refinanced ....................... (100.5) (155.2) (204.5) (298.8) (140.3)
---------- ---------- ---------- ---------- ----------
Net loans booked ....................... $2,246.1 $2,619.3 $2,738.0 $3,059.6 $3,188.8
========== ========== ========== ========== ==========
</TABLE>
- ------------
(A) Includes certain loans that will convert to an adjustable rate after an
initial fixed rate period of 3 or 5 years.
(B) Includes purchases of $578.2 million, $229.2 million, $115.0 million,
$99.7 million and $241.5 million for 1995, 1994, 1993, 1992 and 1991,
respectively.
The table below shows the number and dollar amount of loans originated and
purchased by California Federal. Adjustable rate loan originations and
purchases are presented by rate adjustment index.
OC-149
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------
NUMBER OF AVERAGE LOAN
LOANS AMOUNTS AMOUNT
----------- ------------ --------------
(DOLLARS IN (DOLLARS IN
MILLIONS) THOUSANDS)
<S> <C> <C> <C>
Loans Originated:
Residential 1-4
Wholesale ...............
Fixed .................. 60 $ 11.1 $185.0
3 or 5 year
fixed-- Treasury ....... 757 226.7 299.5
1 year Treasury ........ 39 13.5 346.2
11th District COFI .... 2,692 773.8 287.4
----------- ------------
Residential
1-4--Wholesale ......... 3,548 1,025.1 288.9
Retail
Fixed .................. 1,588 142.4 89.7
3 or 5 year
fixed-- Treasury ....... 366 85.8 234.4
1 year Treasury ........ 35 7.1 202.9
11th District COFI .... 1,897 386.3 203.6
----------- ------------
Residential 1-4--Retail 3,886 621.6 160.0
----------- ------------
Total Residential 1-4 ... 7,434 1,646.7 221.5
Multi-family ............. 57 20.6 361.4
Commercial real estate .. 5 1.8 360.0
Commercial banking ....... -- -- --
Consumer ................. 3,038 99.3 32.7
----------- ------------
Total loans originated ... 10,534 $1,768.4 $167.9
=========== ============
Loans Purchased:
Residential 1-4
Fixed ................... 25 $ 0.6 $ 24.0
1 year Treasury ......... 1,313 382.8 291.5
11th District COFI ..... 522 100.7 192.9
Other ................... 38 10.4 273.7
----------- ------------
Residential 1-4--Retail . 1,898 494.5 260.5
Multi-family ............. 87 22.1 254.0
Commercial real estate .. 130 61.6 473.8
----------- ------------
Total loans purchased .... 2,115 578.2 273.4
=========== ============
Total loans originated and
purchased ................ 12,649 $2,346.6 $185.5
=========== ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
-----------------------------------------
NUMBER OF AVERAGE LOAN
LOANS AMOUNT AMOUNT
----------- ------------ --------------
(DOLLARS IN (DOLLARS IN
MILLIONS) THOUSANDS)
<S> <C> <C> <C>
Loans Originated:
Residential 1-4
Wholesale ...............
Fixed .................. 43 $ 5.2 $ 120.9
3 or 5 year
fixed-- Treasury ....... 342 84.7 247.7
1 year Treasury ........ 915 278.9 304.8
11th District COFI .... 3,951 1,168.9 295.8
----------- ------------
Residential
1-4--Wholesale ......... 5,251 1,537.7 292.8
Retail
Fixed .................. 2,005 145.8 72.7
3 or 5 year
fixed-- Treasury ....... 149 18.5 124.2
1 year Treasury ........ 1,652 276.1 167.1
11th District COFI .... 1,778 344.3 193.6
----------- ------------
Residential 1-4--Retail 5,584 784.7 140.5
----------- ------------
Total Residential 1-4 ... 10,835 2,322.4 214.3
Multi-family ............. 100 54.3 543.0
Commercial real estate .. 25 49.5 1,980.0
Commercial banking ....... 1 0.5 500.0
Consumer ................. 4,838 118.6 24.5
----------- ------------
Total loans originated ... 15,799 $2,545.3 $ 161.1
=========== ============
Loans Purchased:
Residential 1-4
Fixed ................... 36 $ 0.9 $ 25.0
1 year Treasury ......... 283 73.4 259.4
11th District COFI ..... 195 35.6 182.6
Other ................... 73 11.9 163.0
----------- ------------
Residential 1-4--Retail . 587 121.8 207.5
Multi-family ............. 71 61.1 860.6
Commercial real estate .. 12 46.3 3,858.3
----------- ------------
Total loans purchased .... 670 229.2 342.1
=========== ============
Total loans originated and
purchased ................ 16,469 $2,774.5 $ 168.5
=========== ============
</TABLE>
OC-150
<PAGE>
The composition of California Federal's loan portfolio is set forth in
the following table at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential 1-4:
Fixed rate ......................... $ 965.4 $ 686.5 $ 871.1 $ 1,242.5 $ 1,669.2
Adjustable rate .................... 6,312.2 5,856.8 5,189.9 5,416.2 6,808.0
---------- ---------- ---------- ----------- ----------
7,277.6 6,543.3 6,061.0 6,658.7 8,477.2
Multi-Family:
Fixed rate ......................... 67.7 97.5 246.0 321.6 373.3
Adjustable rate .................... 1,278.5 1,360.6 2,019.6 2,099.1 2,293.7
---------- ---------- ---------- ----------- ----------
1,346.2 1,458.1 2,265.6 2,420.7 2,667.0
Commercial Real Estate:
Fixed rate ......................... 53.6 74.8 216.4 224.8 241.4
Adjustable rate .................... 488.4 490.3 740.3 877.8 1,002.4
---------- ---------- ---------- ----------- ----------
542.0 565.1 956.7 1,102.6 1,243.8
Equity .............................. 64.1 79.3 84.5 186.7 337.8
---------- ---------- ---------- ----------- ----------
Total real estate .................. 9,229.9 8,645.8 9,367.8 10,368.7 12,725.8
Commercial banking ................... -- -- 85.2 280.9 403.7
Consumer ............................. 249.6 322.6 433.7 925.5 978.2
---------- ---------- ---------- ----------- ----------
9,479.5 8,968.4 9,886.7 11,575.1 14,107.7
Less:
Undisbursed loan funds .............. 0.1 -- 1.3 4.9 31.4
Deferred loan (costs) fees .......... (13.9) (4.3) 23.8 42.0 52.6
Allowance for loan losses ........... 181.0 211.6 254.3 324.0 332.4
Unearned interest on equity/consumer
loans .............................. 1.3 4.1 10.6 56.9 66.9
Discount on acquired loans .......... 7.4 9.7 13.4 18.0 24.0
Other deferrals ..................... -- -- 11.4 27.2 23.7
---------- ---------- ---------- ----------- ----------
Total loans receivable ............... 9,303.6 8,747.3 9,571.9 11,102.1 13,576.7
Less: Loans held for sale(A) ......... 13.6 1.3 44.3 497.7 209.7
---------- ---------- ---------- ----------- ----------
Loans receivable held for investment $9,290.0 $8,746.0 $9,527.6 $10,604.4 $13,367.0
========== ========== ========== =========== ==========
</TABLE>
- ------------
(A) See the Notes to the consolidated financial statements for further
details.
The reduction in California Federal's loan portfolio since 1991 is due
primarily to (i) reduced levels of originations, (ii) a high level of loan
repayments, (iii) the sale of CTL, a subsidiary that specialized in the
origination of consumer loans, (iv) the sale or securitization of loans, (v)
bulk sale transactions and (vi) California Federal's need to comply with the
capital requirements of FIRREA. During 1994, California Federal sold $1.3
billion of loans through a series of Bulk Sale transactions. The Bulk Sale
transactions were designed to reduce California Federal's credit risk and
concentrations of non-performing and income property loans.
OC-151
<PAGE>
The table below shows the geographic distribution of California Federal's
gross real estate loan portfolio at December 31, 1995, 1994 and 1993,
respectively:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California .... $8,085.7 87.6% $7,467.9 86.4% $7,770.3 83.0%
Florida ....... 514.0 5.6 630.3 7.3 756.5 8.1
Nevada ........ 234.3 2.5 240.8 2.8 288.7 3.1
Georgia ....... 89.6 1.0 103.6 1.2 159.6 1.7
New York ...... 34.5 0.4 30.5 0.3 36.9 0.4
Arizona ....... 33.1 0.4 24.2 0.3 48.2 0.5
New Jersey .... 32.5 0.4 27.9 0.3 38.7 0.4
Texas ......... 27.9 0.3 25.0 0.3 98.0 1.0
Connecticut .. 21.0 0.2 23.0 0.3 27.6 0.3
Washington .... 18.4 0.2 9.5 0.1 39.7 0.4
Colorado ...... 18.0 0.2 5.7 0.1 10.2 0.1
Illinois ...... 12.5 0.1 2.6 -- 3.9 --
Other ......... 108.4 1.1 54.8 0.6 89.5 1.0
---------- -------- ---------- -------- ---------- -------
$9,229.9 100.0% $8,645.8 100.0% $9,367.8 100.0%
========== ======== ========== ======== ========== =======
</TABLE>
The following table presents the composition of California Federal's gross
real estate loan portfolio by state and property type at December 31, 1995:
<TABLE>
<CAPTION>
RESIDENTIAL MULTI- SHOPPING
1-4 UNITS FAMILY CENTERS
------------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
California .... $6,338.4 $1,234.6 $73.1
Florida ....... 467.7 31.5 3.4
Nevada ........ 186.3 41.7 3.2
Georgia ....... 79.7 7.9 0.2
New York ...... 34.4 0.1 --
Arizona ....... 16.2 15.3 0.9
New Jersey .... 32.5 -- --
Texas ......... 24.8 2.5 0.6
Connecticut .. 21.0 -- --
Washington .... 13.5 4.9 --
Colorado ...... 16.4 -- --
Illinois ...... 11.4 1.1 --
Other(A) ...... 99.4 6.6 0.4
------------- ---------- ----------
Total ....... $7,341.7 $1,346.2 $81.8
============= ========== ==========
% of Total .... 79.6% 14.6% 0.9%
============= ========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OTHER
OFFICE COMMERCIAL/ INCOME % OF
BUILDINGS INDUSTRIAL PROPERTY TOTAL TOTAL
----------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
California .... $157.4 $265.4 $16.8 $8,085.7 87.6%
Florida ....... 4.7 5.0 1.7 514.0 5.6
Nevada ........ 2.3 0.2 0.6 234.3 2.5
Georgia ....... 1.2 -- 0.6 89.6 1.0
New York ...... -- -- -- 34.5 0.4
Arizona ....... 0.5 -- 0.2 33.1 0.4
New Jersey .... -- -- -- 32.5 0.4
Texas ......... -- -- -- 27.9 0.3
Connecticut .. -- -- -- 21.0 0.2
Washington .... -- -- -- 18.4 0.2
Colorado ...... 1.6 -- -- 18.0 0.2
Illinois ...... -- -- -- 12.5 0.1
Other(A) ...... 1.2 -- 0.8 108.4 1.1
----------- ------------- ---------- ---------- --------
Total ....... $168.9 $270.6 $20.7 $9,229.9 100.0%
=========== ============= ========== ========== ========
% of Total .... 1.8% 2.9% 0.2% 100.0%
=========== ============= ========== ==========
</TABLE>
- ------------
(A) Includes states with aggregate gross real estate loans that are less
than $11.0 million.
OC-152
<PAGE>
The following table presents California Federal's mortgage and
residential 1-4 equity loan portfolio secured by collateral located in
California at December 31, 1995:
<TABLE>
<CAPTION>
RESIDENTIAL 1-4 MULTI- COMMERCIAL TOTAL
UNITS FAMILY REAL ESTATE REAL ESTATE % OF TOTAL
--------------- ---------- ------------- ------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
County: Los Angeles
- --------------------------
Los Angeles ............... $ 509.4 $ 217.0 $ 22.7 $ 749.1 9.3%
Beverly Hills ............. 184.5 14.4 7.3 206.2 2.5
Long Beach ................ 87.6 103.1 3.7 194.4 2.4
Palos Verdes .............. 134.3 0.7 0.4 135.4 1.7
West Hollywood ............ 83.6 32.0 0.9 116.5 1.4
Santa Monica .............. 79.2 24.7 4.4 108.3 1.3
Pacific Palisades ......... 91.7 1.7 -- 93.4 1.2
Glendale .................. 42.0 39.0 3.1 84.1 1.0
Calabasas ................. 68.8 1.2 -- 70.0 0.9
Pasadena .................. 41.4 11.9 8.8 62.1 0.8
Malibu .................... 56.6 1.8 2.8 61.2 0.8
Torrance .................. 34.1 14.4 10.5 59.0 0.7
Redondo Beach ............. 48.4 7.4 2.0 57.8 0.7
Manhattan Beach ........... 54.3 1.3 0.6 56.2 0.7
Canoga Park ............... 42.8 10.1 2.1 55.0 0.7
Sherman Oaks .............. 32.1 22.4 -- 54.5 0.7
Northridge ................ 49.2 1.1 2.2 52.5 0.6
Van Nuys .................. 23.2 26.3 1.7 51.2 0.6
Encino .................... 45.2 1.6 -- 46.8 0.6
Woodland Hills ............ 44.2 1.4 1.1 46.7 0.6
Rosemead .................. 3.8 1.7 40.2 45.7 0.6
Burbank ................... 28.2 12.0 5.0 45.2 0.5
North Hollywood ........... 20.9 20.8 0.7 42.4 0.5
All Other ................. 767.0 220.2 54.8 1,042.0 12.9
--------------- ---------- ------------- ------------- ------------
Total Los Angeles County 2,572.5 788.2 175.0 3,535.7 43.7
=============== ========== ============= ============= ============
County: Orange
- --------------------------
Huntington Beach .......... 97.2 16.8 17.3 131.3 1.6
Newport Beach ............. 100.1 0.3 3.4 103.8 1.3
Anaheim ................... 42.7 13.0 27.4 83.1 1.0
Santa Ana ................. 37.6 13.6 18.7 69.9 0.9
Mission Viejo ............. 55.9 0.3 2.5 58.7 0.7
South Laguna .............. 58.1 -- -- 58.1 0.7
Orange .................... 34.6 3.6 19.4 57.6 0.7
Irvine .................... 37.9 -- 17.8 55.7 0.7
Costa Mesa ................ 26.6 8.3 2.8 37.7 0.5
All Other ................. 328.9 43.5 58.8 431.2 5.4
--------------- ---------- ------------- ------------- ------------
Total Orange County ..... 819.6 99.4 168.1 1,087.1 13.5
--------------- ---------- ------------- ------------- ------------
Other Counties
- --------------------------
San Mateo ................. 490.0 16.0 5.5 511.5 6.3
San Diego ................. 340.6 148.0 20.5 509.1 6.3
Santa Clara ............... 389.1 21.8 38.3 449.2 5.6
San Francisco ............. 267.4 21.4 12.5 301.3 3.7
Marin ..................... 284.4 7.3 1.4 293.1 3.6
Ventura ................... 260.1 11.0 8.2 279.3 3.5
All Other ................. 914.7 121.5 83.2 1,119.4 13.8
--------------- ---------- ------------- ------------- ------------
Total Other Counties .... 2,946.3 347.0 169.6 3,462.9 42.8
--------------- ---------- ------------- ------------- ------------
Total California ......... $6,338.4 $1,234.6 $512.7 $8,085.7 100.0%
=============== ========== ============= ============= ============
Percentage of Total ..... 78.4% 15.3% 6.3% 100.0%
=============== ========== ============= =============
</TABLE>
OC-153
<PAGE>
The table below shows the composition of the residential 1-4 loan and the
residential 1-4 equity portfolio by year of origination and size of
outstanding balance at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF RESIDENTIAL
1-4 AND EQUITY LOANS
------------------------------------------------------
YEAR OF 100K- 200K- 300K- 400K-
ORIGINATION 0-99K 199K 299K 399K 499K
- -------------- ---------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 65.2 $ 371.2 $ 545.6 $335.1 $225.2
1994 .......... 100.3 389.6 433.7 252.2 148.4
1993 .......... 80.3 167.0 191.2 112.3 63.4
1992 .......... 30.6 68.3 52.7 30.8 22.8
1991 .......... 31.8 84.2 65.8 42.5 29.7
1990 .......... 63.8 150.6 112.1 63.9 41.7
1989 .......... 68.0 86.2 63.3 24.5 12.8
1988 .......... 124.7 204.9 130.5 48.6 24.4
1987 .......... 102.0 62.7 29.6 6.8 7.4
1986 .......... 63.0 43.0 19.6 11.2 5.2
1985 .......... 60.2 45.0 15.8 3.1 2.6
1984 .......... 73.7 35.7 6.6 0.7 0.8
1983 .......... 46.7 16.4 1.8 0.4 0.4
1982 .......... 7.9 1.4 0.2 -- --
1981 .......... 2.6 1.0 -- -- --
Prior to 1981 90.5 3.9 1.0 -- --
---------- ---------- ---------- -------- --------
Total ....... $1,011.3 $1,731.1 $1,669.5 $932.1 $584.8
========== ========== ========== ======== ========
% of Total .... 13.8% 23.6% 22.7% 12.7% 8.0%
========== ========== ========== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 500K- 600K- % OF
ORIGINATION 599K 999K 1,000K+ TOTAL TOTAL
- -------------- -------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
1995 .......... $108.7 $207.4 $ 41.9 $1,900.3 25.9 %
1994 .......... 91.5 239.9 67.9 1,723.5 23.5 %
1993 .......... 27.7 113.6 26.0 781.5 10.6 %
1992 .......... 7.8 67.2 16.5 296.7 4.0 %
1991 .......... 16.3 62.0 20.1 352.4 4.8 %
1990 .......... 26.2 70.0 44.2 572.5 7.8 %
1989 .......... 6.5 18.5 17.0 296.8 4.0 %
1988 .......... 11.3 50.0 17.1 611.5 8.3 %
1987 .......... 2.8 19.0 8.5 238.8 3.3 %
1986 .......... 1.1 -- -- 143.1 2.0 %
1985 .......... 2.3 2.8 1.1 132.9 1.8 %
1984 .......... -- -- -- 117.5 1.6 %
1983 .......... -- -- -- 65.7 0.9 %
1982 .......... -- -- -- 9.5 0.1 %
1981 .......... -- -- -- 3.6 0.1 %
Prior to 1981 -- -- -- 95.4 1.3 %
-------- -------- --------- ---------- --------
Total ....... $302.2 $850.4 $260.3 $7,341.7 100.0%
======== ======== ========= ========== ========
% of Total .... 4.1% 11.6% 3.5 % 100.0%
======== ======== ========= ==========
</TABLE>
The table below shows the composition of the residential 1-4 loan and the
residential 1-4 equity portfolio by year of origination and by the original
LTV as of December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 COMPOSITION OF
RESIDENTIAL 1-4 LOAN PORTFOLIO BY YEAR OF
ORIGINATION
AND ORIGINAL LTV
------------------------------------------
YEAR OF
ORIGINATION 0-50% 51-60% 61-70% 71-80%
- -------------- -------- -------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1995 .......... $132.8 $163.2 $ 300.8 $ 958.3
1994 .......... 143.3 144.5 328.9 843.6
1993 .......... 94.6 89.2 177.8 332.4
1992 .......... 31.4 22.8 82.3 140.0
1991 .......... 23.0 28.3 86.1 185.8
1990 .......... 21.0 38.3 89.3 357.8
1989 .......... 11.3 12.1 32.9 171.0
1988 .......... 15.0 26.5 68.5 361.8
1987 .......... 9.6 13.2 43.5 130.6
1986 .......... 6.9 7.8 18.6 88.1
1985 .......... 7.8 7.0 18.6 83.4
1984 .......... 8.5 6.8 15.6 67.4
1983 .......... 3.6 3.5 8.5 36.7
1982 .......... 1.0 0.8 1.1 3.8
1981 .......... 0.6 0.2 0.4 2.0
Prior to 1981 1.6 2.5 9.1 50.4
-------- -------- ---------- ----------
Total ....... $512.0 $566.7 $1,282.0 $3,813.1
======== ======== ========== ==========
% of Total .... 7.0% 7.7 % 17.5% 51.9%
======== ======== ========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
GREATER
YEAR OF THAN
ORIGINATION 81-90% 91-95% 95% TOTAL % OF TOTAL
- -------------- -------- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
1995 .......... $208.9 $135.4 $0.9 $1,900.3 25.9 %
1994 .......... 173.1 89.7 0.4 1,723.5 23.5 %
1993 .......... 66.7 17.3 3.5 781.5 10.6 %
1992 .......... 17.5 2.7 -- 296.7 4.0 %
1991 .......... 27.4 0.5 1.3 352.4 4.8 %
1990 .......... 63.5 2.4 0.2 572.5 7.8 %
1989 .......... 65.0 3.8 0.7 296.8 4.0 %
1988 .......... 134.6 3.8 1.3 611.5 8.3 %
1987 .......... 33.8 5.8 2.3 238.8 3.3 %
1986 .......... 16.7 4.2 0.8 143.1 2.0 %
1985 .......... 9.5 6.3 0.3 132.9 1.8 %
1984 .......... 12.5 6.2 0.5 117.5 1.6 %
1983 .......... 9.1 3.6 0.7 65.7 0.9 %
1982 .......... 1.6 1.1 0.1 9.5 0.1 %
1981 .......... 0.3 0.1 -- 3.6 0.1 %
Prior to 1981 11.9 3.4 16.5 95.4 1.3 %
-------- -------- ------- ---------- ------------
Total ....... $852.1 $286.3 $29.5 $7,341.7 100.0 %
======== ======== ======= ========== ============
% of Total .... 11.6 % 3.9 % 0.4 % 100.0%
======== ======== ======= ==========
</TABLE>
OC-154
<PAGE>
The table below shows the composition of the delinquent residential 1-4
loan and the delinquent residential 1-4 equity loan portfolio by year of
origination and size of outstanding balance at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF
DELINQUENT RESIDENTIAL 1-4 AND
DELINQUENT EQUITY LOANS
----------------------------------------------
YEAR OF 100K- 200K- 300K- 400K-
ORIGINATION 0-99K 199K 299K 399K 499K
- -------------- -------- -------- -------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 0.2 $ 1.7 $ 1.7 $ -- $ --
1994 .......... 0.2 2.8 1.4 0.6 --
1993 .......... 0.7 1.3 3.2 0.7 2.3
1992 .......... 0.9 1.0 0.7 0.7 1.0
1991 .......... 0.8 2.7 3.8 4.1 1.8
1990 .......... 1.4 6.2 4.7 3.6 2.6
1989 .......... 2.4 4.4 3.1 0.3 0.4
1988 .......... 3.0 6.5 3.7 1.3 1.4
1987 .......... 1.7 1.0 1.2 -- 0.4
1986 .......... 1.1 0.7 0.5 -- 0.5
1985 .......... 1.0 0.3 -- -- --
1984 .......... 1.2 0.9 0.2 -- --
1983 .......... 1.6 0.4 -- -- --
1982 .......... 0.5 -- -- -- --
1981 .......... 0.1 -- -- -- --
Prior to 1981 1.4 0.2 -- -- --
-------- -------- -------- ------- -------
Total ....... $18.2 $30.1 $24.2 $11.3 $10.4
======== ======== ======== ======= =======
% of Total .... 14.3 % 23.7 % 19.0 % 8.9 % 8.2 %
======== ======== ======== ======= =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 500K- 600K- % OF
ORIGINATION 599K 999K 1,000K+ TOTAL TOTAL
- -------------- ------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
1995 .......... $ -- $ 0.6 $ -- $ 4.2 3.3%
1994 .......... -- -- 2.2 7.2 5.7%
1993 .......... 0.5 2.3 1.2 12.2 9.6%
1992 .......... 0.6 3.4 -- 8.3 6.5%
1991 .......... -- 3.1 1.1 17.4 13.7%
1990 .......... 2.9 5.5 5.7 32.6 25.6%
1989 .......... -- -- -- 10.6 8.3%
1988 .......... 0.5 1.3 -- 17.7 13.9%
1987 .......... 0.6 0.9 -- 5.8 4.5%
1986 .......... -- -- -- 2.8 2.2%
1985 .......... -- 0.6 -- 1.9 1.5%
1984 .......... -- -- -- 2.3 1.8%
1983 .......... -- -- -- 2.0 1.6%
1982 .......... -- -- -- 0.5 0.4%
1981 .......... -- -- -- 0.1 0.1%
Prior to 1981 -- -- -- 1.6 1.3%
------- -------- --------- -------- --------
Total ....... $5.1 $17.7 $10.2 $127.2 100.0%
======= ======== ========= ======== ========
% of Total .... 4.0 % 13.9 % 8.0% 100.0%
======= ======== ========= ========
</TABLE>
California Federal's residential 1-4 portfolio at December 31, 1995 is
primarily composed of loans originated during 1995, 1994 and 1993 (60.0%) and
loans with an outstanding balance less than $300,000 (60.1%). California
Federal's delinquencies and resulting 1995 residential 1-4 charge-offs have
primarily resulted from loans originated between 1988 and 1991. Additionally,
larger balance loans (those in excess of $300,000), comprised a substantial
amount of loans in which charge-offs have been recorded.
OC-155
<PAGE>
The table below shows the composition of the multi-family loan portfolio
by year of origination and size of outstanding balance at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF
MULTI-FAMILY LOANS
---------------------------------------------------
YEAR OF 750K- 1,000K- 2,000K- 3,000K-
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K
- -------------- -------- -------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 17.1 $ 2.6 $ 4.9 $ -- $ --
1994 .......... 28.3 1.7 10.7 2.1 3.7
1993 .......... 69.2 24.5 26.9 4.7 --
1992 .......... 21.4 7.1 18.3 8.8 7.2
1991 .......... 15.5 8.9 12.4 -- --
1990 .......... 41.1 16.4 12.2 7.3 3.7
1989 .......... 17.8 3.4 4.5 -- 7.0
1988 .......... 140.5 15.2 22.4 6.7 7.2
1987 .......... 155.9 16.7 24.8 2.3 6.9
1986 .......... 177.6 15.3 12.9 11.3 10.6
1985 .......... 104.4 4.1 13.8 6.6 3.7
1984 .......... 41.8 1.0 1.9 -- --
1983 .......... 25.3 0.9 -- -- --
1982 .......... 1.1 0.9 -- -- --
1981 .......... 0.6 -- -- -- --
Prior to 1981 43.0 2.5 5.4 -- --
-------- -------- --------- --------- ---------
Total ....... $900.6 $121.2 $171.1 $49.8 $50.0
======== ======== ========= ========= =========
% of Total .... 66.9 % 9.0% 12.7 % 3.7% 3.7%
======== ======== ========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 4,000K- 5,000K- % OF
ORIGINATION 4,999K 5,999K 6,000K+ TOTAL TOTAL
- -------------- --------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
1995 .......... $ -- $ -- $ -- $ 24.6 1.8%
1994 .......... -- -- -- 46.5 3.5%
1993 .......... -- -- -- 125.3 9.3%
1992 .......... -- -- -- 62.8 4.7%
1991 .......... -- -- -- 36.8 2.7%
1990 .......... 4.7 -- 6.4 91.8 6.8%
1989 .......... 4.9 -- -- 37.6 2.8%
1988 .......... 4.6 5.3 -- 201.9 15.0%
1987 .......... 14.1 -- -- 220.7 16.4%
1986 .......... 8.1 5.4 -- 241.2 17.9%
1985 .......... -- -- -- 132.6 9.9%
1984 .......... -- -- -- 44.7 3.3%
1983 .......... -- -- -- 26.2 2.0%
1982 .......... -- -- -- 2.0 0.1%
1981 .......... -- -- -- 0.6 --%
Prior to 1981 -- -- -- 50.9 3.8%
--------- --------- --------- ---------- --------
Total ....... $36.4 $10.7 $6.4 $1,346.2 100.0%
========= ========= ========= ========== ========
% of Total .... 2.7% 0.8% 0.5% 100.0%
========= ========= ========= ==========
</TABLE>
The table below shows the composition of the multi-family loan portfolio
by year of origination and by original LTV:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 COMPOSITION OF
MULTI-FAMILY LOAN PORTFOLIO BY
YEAR OF ORIGINATION AND ORIGINAL LTV
-------------------------------------
YEAR OF
ORIGINATION 0-50% 51-60% 61-70% 71-80%
- -------------- ------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1995 .......... $ 2.2 $ 2.1 $ 5.3 $ 9.3
1994 .......... 4.1 7.1 15.7 11.9
1993 .......... 18.1 23.3 42.0 40.3
1992 .......... 2.1 2.2 26.6 31.8
1991 .......... 4.9 2.5 16.3 12.7
1990 .......... 1.9 5.8 37.1 47.0
1989 .......... 0.5 0.9 11.8 23.8
1988 .......... 7.3 11.7 39.9 141.3
1987 .......... 7.7 8.0 52.2 150.9
1986 .......... 5.8 9.0 47.7 175.3
1985 .......... 6.3 8.4 27.8 89.7
1984 .......... 2.6 2.4 18.5 20.9
1983 .......... 1.8 2.8 11.2 10.4
1982 .......... 0.5 1.2 0.2 0.1
1981 .......... -- -- -- 0.6
Prior to 1981 1.0 1.6 12.5 35.8
------- -------- -------- --------
Total ....... $66.8 $89.0 $364.8 $801.8
======= ======== ======== ========
% of Total .... 5.0 % 6.6 % 27.1 % 59.6 %
======= ======== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
GREATER
YEAR OF THAN % OF
ORIGINATION 81-90% 91-95% 95% TOTAL TOTAL
- -------------- -------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C>
1995 .......... $5.7 $ -- $ -- $ 24.6 1.8 %
1994 .......... 7.5 0.2 -- 46.5 3.5 %
1993 .......... 1.3 0.3 -- 125.3 9.3 %
1992 .......... -- 0.1 -- 62.8 4.7 %
1991 .......... 0.2 0.2 -- 36.8 2.7 %
1990 .......... -- -- -- 91.8 6.8 %
1989 .......... 0.6 -- -- 37.6 2.8 %
1988 .......... 1.7 -- -- 201.9 15.0 %
1987 .......... 0.8 -- 1.1 220.7 16.4 %
1986 .......... 2.4 1.0 -- 241.2 17.9 %
1985 .......... 0.4 -- -- 132.6 9.9 %
1984 .......... 0.2 0.1 -- 44.7 3.3 %
1983 .......... -- -- -- 26.2 2.0 %
1982 .......... -- -- -- 2.0 0.1 %
1981 .......... -- -- -- 0.6 -- %
Prior to 1981 -- -- -- 50.9 3.8 %
-------- -------- ------- ---------- --------
Total ....... $20.8 $1.9 $1.1 $1,346.2 100.0%
======== ======== ======= ========== ========
% of Total .... 1.5 % 0.1% 0.1 % 100.0%
======== ======== ======= ==========
</TABLE>
OC-156
<PAGE>
The table below shows the composition of the delinquent multi-family loan
portfolio by year of origination and size of outstanding balance at December
31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF DELINQUENT
MULTI-FAMILY LOANS
---------------------------------------------------
YEAR OF 750K- 1,000K- 2,000K- 3,000K-
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K
- -------------- -------- -------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ -- $ -- $ -- $-- $--
1994 .......... 0.2 -- -- -- --
1993 .......... 0.3 -- -- -- --
1992 .......... 0.6 -- 1.6 -- --
1991 .......... 2.0 -- -- -- --
1990 .......... 1.5 0.8 -- -- --
1989 .......... -- -- -- -- --
1988 .......... 1.9 -- -- -- --
1987 .......... 1.4 0.9 -- -- --
1986 .......... 2.1 0.8 1.1 -- --
1985 .......... 2.0 0.8 -- -- --
1984 .......... 0.3 -- -- -- --
1983 .......... 0.2 -- -- -- --
1982 .......... -- -- -- -- --
1981 .......... -- -- -- -- --
Prior to 1981 0.4 -- -- -- --
-------- -------- --------- --------- ---------
Total ....... $12.9 $ 3.3 $ 2.7 $-- $--
======== ======== ========= ========= =========
% of Total .... 68.2 % 17.5 % 14.3% --% --%
======== ======== ========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 4,000K- 5,000K- % OF
ORIGINATION 4,999K 5,999K 6,000K+ TOTAL TOTAL
- -------------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
1995 .......... $-- $-- $-- $ -- -- %
1994 .......... -- -- -- 0.2 1.0 %
1993 .......... -- -- -- 0.3 1.6 %
1992 .......... -- -- -- 2.2 11.6 %
1991 .......... -- -- -- 2.0 10.6 %
1990 .......... -- -- -- 2.3 12.2 %
1989 .......... -- -- -- -- -- %
1988 .......... -- -- -- 1.9 10.1 %
1987 .......... -- -- -- 2.3 12.2 %
1986 .......... -- -- -- 4.0 21.2 %
1985 .......... -- -- -- 2.8 14.8 %
1984 .......... -- -- -- 0.3 1.6 %
1983 .......... -- -- -- 0.2 1.0 %
1982 .......... -- -- -- -- -- %
1981 .......... -- -- -- -- -- %
Prior to 1981 -- -- -- 0.4 2.1 %
--------- --------- --------- ------- ---------
Total ....... $-- $-- $-- $ 18.9 100.0 %
========= ========= ========= ======= =========
% of Total .... --% --% --% 100.0%
========= ========= ========= =======
</TABLE>
California Federal's multi-family portfolio at December 31, 1995 was
primarily composed of loans originated during the period of 1985 through 1988
(59.2%) and loans less than $750,000 (66.9%). Correspondingly, 98.3% of
California Federal's multi-family loans had an original loan to value ratio
of 80% or less. California Federal's delinquent multi-family loans primarily
consist of lower balance loans, originated between 1984 through 1992. The
1994 Bulk Sales transactions contributed to a reduction in the amount of
delinquent loans and larger balance performing loans.
OC-157
<PAGE>
The table below shows the composition of the commercial real estate loan
portfolio by year of origination and size of outstanding balance at December
31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF COMMERCIAL
REAL ESTATE LOANS
---------------------------------------------------
YEAR OF 750K- 1,000K- 2,000K- 3,000K-
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K
- -------------- -------- -------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 2.4 $ -- $ -- $ -- $ --
1994 .......... 3.8 1.8 5.2 -- --
1993 .......... 3.2 0.9 -- -- --
1992 .......... 1.5 1.0 1.3 -- 6.7
1991 .......... 0.8 -- -- -- --
1990 .......... 0.9 -- -- -- --
1989 .......... 17.1 -- 1.0 4.2 --
1988 .......... 65.3 18.8 26.5 2.2 7.1
1987 .......... 59.7 14.9 33.6 7.4 13.3
1986 .......... 52.6 9.2 16.2 5.1 --
1985 .......... 25.9 9.4 12.8 4.7 --
1984 .......... 4.7 -- 1.2 2.8 --
1983 .......... 0.1 0.8 -- -- --
1982 .......... -- -- -- -- --
1981 .......... -- -- -- -- --
Prior to 1981 15.8 0.8 -- -- --
-------- -------- --------- --------- ---------
Total ....... $253.8 $57.6 $97.8 $26.4 $27.1
======== ======== ========= ========= =========
% of Total .... 46.8 % 10.6 % 18.0% 4.9% 5.0%
======== ======== ========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 4,000K- 5,000K- % OF
ORIGINATION 4,999K 5,999K 6,000K+ TOTAL TOTAL
- -------------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
1995 .......... $ -- $ -- $ -- $ 2.4 0.4 %
1994 .......... 5.0 -- 29.0 44.8 8.3 %
1993 .......... -- -- -- 4.1 0.8 %
1992 .......... -- -- 7.6 18.1 3.3 %
1991 .......... -- -- -- 0.8 0.1 %
1990 .......... -- -- -- 0.9 0.2 %
1989 .......... -- -- 7.8 30.1 5.5 %
1988 .......... 9.1 -- -- 129.0 23.8 %
1987 .......... -- 5.3 -- 134.2 24.8 %
1986 .......... 4.7 -- -- 87.8 16.2 %
1985 .......... -- -- -- 52.8 9.7 %
1984 .......... -- -- -- 8.7 1.6 %
1983 .......... -- -- 10.8 11.7 2.2 %
1982 .......... -- -- -- -- -- %
1981 .......... -- -- -- -- -- %
Prior to 1981 -- -- -- 16.6 3.1 %
--------- --------- --------- -------- ---------
Total ....... $18.8 $5.3 $55.2 $542.0 100.0 %
========= ========= ========= ======== =========
% of Total .... 3.5% 1.0% 10.2% 100.0%
========= ========= ========= ========
</TABLE>
The table below shows the composition of the commercial real estate loan
portfolio by year of origination and by original LTV:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 COMPOSITION OF COMMERCIAL
REAL ESTATE LOAN PORTFOLIO
BY YEAR OF ORIGINATION AND ORIGINAL LTV
-----------------------------------------------
YEAR OF
ORIGINATION 0-50% 51-60% 61-70% 71-80% 81-90%
- -------------- ------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 0.5 $ -- $ 0.4 $ 0.9 $0.6
1994 .......... 1.1 2.9 2.6 36.4 --
1993 .......... 1.2 1.6 -- 0.9 --
1992 .......... 4.7 9.0 0.4 1.0 3.0
1991 .......... -- -- -- 0.1 0.5
1990 .......... 0.1 -- -- 0.6 0.2
1989 .......... 1.5 3.8 10.0 14.8 --
1988 .......... 5.0 11.1 22.1 88.0 2.8
1987 .......... 4.7 10.3 29.8 88.4 0.5
1986 .......... 2.6 6.4 16.3 61.7 0.2
1985 .......... 4.5 2.3 10.3 35.7 --
1984 .......... 0.1 0.5 3.1 4.9 --
1983 .......... 10.9 -- 0.8 -- --
1982 .......... -- -- -- -- --
1981 .......... -- -- -- -- --
Prior to 1981 0.3 0.8 5.4 10.0 0.1
------- -------- -------- -------- --------
Total ....... $37.2 $48.7 $101.2 $343.4 $7.9
======= ======== ======== ======== ========
% of Total .... 6.9 % 9.0% 18.6 % 63.3% 1.5%
======= ======== ======== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
GREATER
YEAR OF THAN % OF
ORIGINATION 91-95% 95% TOTAL TOTAL
- -------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
1995 .......... $ -- $ -- $ 2.4 0.4 %
1994 .......... 1.5 0.3 44.8 8.3 %
1993 .......... 0.4 -- 4.1 0.8 %
1992 .......... -- -- 18.1 3.3 %
1991 .......... 0.2 -- 0.8 0.1 %
1990 .......... -- -- 0.9 0.2 %
1989 .......... -- -- 30.1 5.5 %
1988 .......... -- -- 129.0 23.8 %
1987 .......... -- 0.5 134.2 24.8 %
1986 .......... -- 0.6 87.8 16.2 %
1985 .......... -- -- 52.8 9.7 %
1984 .......... 0.1 -- 8.7 1.6 %
1983 .......... -- -- 11.7 2.2 %
1982 .......... -- -- -- -- %
1981 .......... -- -- -- -- %
Prior to 1981 -- -- 16.6 3.1 %
-------- ------- -------- --------
Total ....... $2.2 $1.4 $542.0 100.0 %
======== ======= ======== ========
% of Total .... 0.4% 0.3 % 100.0%
======== ======= ========
</TABLE>
OC-158
<PAGE>
The table below shows the composition of the delinquent commercial real
estate loan portfolio by year of origination and size of outstanding balance
at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF DELINQUENT
COMMERCIAL REAL ESTATE LOANS
-------------------------------------------------------------
YEAR OF 750K- 1,000K- 2,000K- 3,000K-
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K
- ------------------ ----------- --------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .............. $ -- $-- $ -- $-- $--
1994 .............. -- -- -- -- --
1993 .............. -- -- -- -- --
1992 .............. -- -- -- -- --
1991 .............. 0.2 -- -- -- --
1990 .............. -- -- -- -- --
1989 .............. 0.7 -- 1.3 -- --
1988 .............. 0.4 -- -- -- --
1987 .............. -- -- -- -- --
1986 .............. 0.1 -- -- -- --
1985 .............. -- -- -- -- --
1984 .............. -- -- -- -- --
1983 .............. -- -- -- -- --
1982 .............. -- -- -- -- --
1981 .............. -- -- -- -- --
Prior to 1981 ..... 0.1 -- -- -- --
----------- --------- ----------- ----------- -----------
Total ........... $ 1.5 $-- $ 1.3 $-- $--
=========== ========= =========== =========== ===========
% of Total ........ 53.6 % --% 46.4% --% --%
=========== ========= =========== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 4,000K- 5,000K- % OF
ORIGINATION 4,999K 5,999K 6,000K+ TOTAL TOTAL
- ------------------ ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
1995 .............. $-- $-- $-- $ -- -- %
1994 .............. -- -- -- -- -- %
1993 .............. -- -- -- -- -- %
1992 .............. -- -- -- -- -- %
1991 .............. -- -- -- 0.2 7.1 %
1990 .............. -- -- -- -- -- %
1989 .............. -- -- -- 2.0 71.4 %
1988 .............. -- -- -- 0.4 14.3 %
1987 .............. -- -- -- -- -- %
1986 .............. -- -- -- 0.1 3.6 %
1985 .............. -- -- -- -- -- %
1984 .............. -- -- -- -- -- %
1983 .............. -- -- -- -- -- %
1982 .............. -- -- -- -- -- %
1981 .............. -- -- -- -- -- %
Prior to 1981 ..... -- -- -- 0.1 3.6 %
----------- ----------- ----------- --------- ----------
Total ........... $-- $-- $-- $ 2.8 100.0%
=========== =========== =========== ========= ==========
% of Total ........ --% --% --% 100.0%
=========== =========== =========== =========
</TABLE>
Since 1990, California Federal has not been active in the origination of
commercial real estate loans, except to finance the sale of real estate. At
December 31, 1995 $403.8 million, or 74.5% of California Federal's commercial
real estate loan portfolio was comprised of loans originated between 1985
through 1988. The 1994 Bulk Sales included a substantial amount of delinquent
commercial real estate loans and large performing loans. At December 31,
1995, 53.7% of California Federal's commercial real estate loan portfolio was
concentrated in commercial warehouses and industrial buildings. Many of these
loans are occupied by owner users with balances that are typically $1.0
million or lower.
<PAGE>
The composition of California Federal's gross consumer loan portfolio is
set forth in the following table at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Consumer loans:
Mobile homes ............. $ 66.3 $ 79.6 $ 95.6
Vehicles ................. 21.5 49.4 98.2
Equity credit line ....... 137.8 168.7 203.9
Unsecured ................ 14.6 16.1 20.5
Loans secured by deposits 9.4 8.8 15.5
-------- -------- -------
Total consumer loans .. $249.6 $322.6 $433.7
======== ======== =======
</TABLE>
Since 1993, California Federal has ceased actively originating consumer
loans for its own portfolio. California Federal has continued to originate
consumer loans on an agency basis for other financial institutions.
Additionally, in 1993, California Federal sold CTL, a subsidiary of
California Federal that had specialized in the origination of automobile
loans, further reducing the level of California Federal's consumer loan
portfolio.
OC-159
<PAGE>
At December 31, 1995, $1.1 billion of fixed rate loans and approximately
$8.3 billion of adjustable rate loans were contractually due after one year.
The following table presents the remaining contractual maturities of
California Federal's gross loan portfolio at December 31, 1995:
<TABLE>
<CAPTION>
REMAINING CONTRACTUAL MATURITY
------------------------------------------------------------------------------------------
OVER ONE OVER THREE OVER FIVE OVER TEN
WITHIN BUT WITHIN BUT WITHIN BUT WITHIN BUT WITHIN OVER
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS 15 YEARS 15 YEARS TOTAL
---------- ------------- ------------ ------------ ------------ ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Residential 1-4:
Fixed rate ...... $ 6.0 $11.6 $ 26.1 $ 74.9 $ 71.5 $ 775.3 $ 965.4
Adjustable rate 1.4 1.2 4.1 16.8 35.9 6,252.8 6,312.2
Income property:
Fixed rate ...... 20.4 11.9 24.4 35.1 26.9 2.6 121.3
Adjustable rate 24.0 20.9 153.3 334.3 53.2 1,181.2 1,766.9
Equity ........... 0.7 5.0 4.4 12.4 30.5 11.1 64.1
---------- ------------- ------------ ------------ ------------ ---------- ---------
Total real estate 52.5 50.6 212.3 473.5 218.0 8,223.0 9,229.9
Consumer .......... 36.2 37.4 47.0 68.1 41.7 19.2 249.6
---------- ------------- ------------ ------------ ------------ ---------- ---------
$88.7 $88.0 $259.3 $541.6 $259.7 $8,242.2 $9,479.5
========== ============= ============ ============ ============ ========== =========
</TABLE>
Sales of Loans and Loan Servicing Activities.
From time to time, California Federal sells loans in order to manage the
growth of its loan portfolio, to aid in managing its capital position, to
provide additional sources of cash flow, to enable California Federal to
refine the composition and interest rate sensitivity of its loan portfolio
and for other reasons. California Federal's loans held for sale were $13.6
million and $1.3 million at December 31, 1995 and 1994, respectively.
California Federal continually reviews the composition and level of its loan
origination activity in order to determine the level of loans originated for
sale. Fixed rate residential 1-4 loans that conform to the underwriting
criteria of FHLMC and FNMA, are generally originated for sale, while
originations of adjustable rate mortgage loans and non-conforming fixed rate
loans have been primarily for investment. California Federal has established
desired ranges for portfolio and asset growth based upon numerous factors,
including origination volume and mix, portfolio repayments and payoffs,
desired servicing portfolio levels and regulatory capital requirements. These
factors collectively enter into the determination of the amount of fixed rate
loans originated for sale. California Federal typically does not hold such
loans in its long-term portfolio because of asset/liability management
considerations.
California Federal records gains or losses from the sale of loans that it
continues to service for others by computing the present value of the
difference between the yield on the loans sold and the yield to be paid to
the buyer, reduced by normal servicing fees ("excess servicing"), over the
estimated remaining life of the loans. The present value gain or loss is
based upon market prepayment, default and discount rate assumptions. An asset
(i.e., the present value of excess servicing) equal to the present value gain
is recorded at the time a loan is sold and is amortized over the estimated
remaining life of the loan. California Federal monitors actual prepayments on
the related loans and reduces the balance of the recorded amount of excess
servicing by a charge to earnings if actual prepayments exceed California
Federal's estimate. At December 31, 1995, the amount of capitalized excess
servicing recorded by California Federal was $3.9 million.
In most cases, when loans are sold, California Federal retains the
servicing of the loans for the purchaser. California Federal receives an
annual servicing fee, in the range of 25 to 40 basis points, for servicing
loans for others. California Federal received $12.4 million, $14.6 million,
$18.5 million, $24.8 million and $26.0 million in loan servicing fees for the
years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively. Fees
generated from servicing loans for others are included in fee income in the
consolidated financial statements. The following table summarizes loans
serviced for others at the dates indicated:
OC-160
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
INVESTOR 1995 1994 1993 1992 1991
- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
FNMA ...... $2,323.2 $2,379.0 $2,720.4 $2,764.8 $3,817.4
FHLMC ..... 117.7 137.0 168.8 225.0 243.8
Other ..... 1,341.4 1,943.3 2,446.1 3,261.2 4,504.2
---------- ---------- ---------- ---------- ----------
$3,782.3 $4,459.3 $5,335.3 $6,251.0 $8,565.4
========== ========== ========== ========== ==========
</TABLE>
LOAN PORTFOLIO RISK ELEMENTS
California Federal originates loans with the expectation that borrowers
will honor their repayment obligations. To reduce credit risk, California
Federal maintains underwriting criteria for each of its loan programs. As is
the case with all other lenders, however, certain of California Federal's
borrowers will become unable or unwilling to pay interest or principal when
due. Among the reasons for such defaults may be adverse conditions in the
regional or national economy, unemployment, an oversupply of space for lease
and an increase in vacancies, a decline in real estate values, and other
factors. In such cases, and following efforts to encourage borrowers to cure
their defaults, California Federal normally commences proceedings to
foreclose upon the property securing the loan. Such proceedings may be
delayed by litigation or bankruptcy initiated by the borrower. California
Federal's risk of loss relates both to the frequency of such defaults and to
the severity of loss. The loss is primarily composed of the excess, if any,
of the outstanding principal balance of the loan plus accrued interest over
the value of the collateral at the time of foreclosure. In some instances,
California Federal may be able to recover any loss it incurs from other
assets of the borrower but, generally, this has not been possible. California
Federal also is exposed to loss if the value of the collateral declines
between the time of foreclosure and the time of resale and for the associated
costs of acquiring and disposing of the collateral. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--California Federal."
Loans on which California Federal has ceased the accrual of interest and
loans on which various concessions have been made due to the inability of the
borrower to service the obligation under the original terms of the agreement
constitute the primary components of the portfolio of non-performing loans.
Under certain limited circumstances, prior to 1993, California Federal
continued to accrue interest on loans that were delinquent 90 days or more
("past due loans"). At December 31, 1995, all loans more than 90 days
delinquent were on non-accrual status. California Federal may place a
performing loan on non-accrual status, and/or designate a loan as impaired,
if California Federal believes that a default is probable or the full
collection of principal and interest is doubtful.
Non-accrual loans.
California Federal generally places a loan on non-accrual status whenever
the payment of interest is 90 days or more delinquent, or earlier if the
timely collection of interest and/or principal appears doubtful. Loans on
non-accrual status can be resolved by: (i) the borrower bringing the loan
current, (ii) California Federal and the borrower agreeing to modify the
terms of the loan, or (iii) by foreclosure upon the collateral securing the
loan. The following table presents California Federal's gross non-accrual
loans by state at the dates indicated:
OC-161
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California ..... $188.7 $162.8 $414.0 $575.9 $450.9
Florida ........ 8.5 9.7 33.8 70.9 92.2
Alabama ........ -- -- -- 20.8 22.5
North Carolina -- -- -- 13.2 17.1
Nevada ......... 3.5 1.5 6.2 11.7 32.0
Georgia ........ 1.2 0.9 14.3 8.0 38.3
Other .......... 4.4 3.3 47.1 24.6 59.0
-------- -------- -------- -------- --------
$206.3 $178.2 $515.4 $725.1 $712.0
======== ======== ======== ======== ========
</TABLE>
The following table shows California Federal's portfolio of gross
non-accrual loans by state and type at December 31, 1995:
<TABLE>
<CAPTION>
RESIDENTIAL MULTI- SHOPPING
STATE 1-4 UNITS FAMILY CENTERS OFFICE
- ------------ ------------- -------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
California . $86.6 $82.9 $1.3 $8.8
Florida ..... 7.3 0.4 -- --
Nevada ...... 1.5 1.8 -- --
New York .... 1.2 -- -- --
Georgia ..... 1.0 0.2 -- --
Other(A) .... 2.0 1.0 -- --
------------- -------- ---------- --------
Total ....... $99.6 $86.3 $1.3 $8.8
============= ======== ========== ========
% of Total . 48.3% 41.8% 0.6% 4.3%
============= ======== ========== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OTHER
COMMERCIAL INCOME % OF
STATE INDUSTRIAL PROPERTY CONSUMER TOTAL TOTAL
- ------------ ------------ ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
California . $5.8 $1.0 $2.3 $188.7 91.5 %
Florida ..... -- -- 0.8 8.5 4.1
Nevada ...... -- -- 0.2 3.5 1.7
New York .... -- -- -- 1.2 0.6
Georgia ..... -- -- -- 1.2 0.6
Other(A) .... -- -- 0.2 3.2 1.5
------------ ---------- ---------- -------- --------
Total ....... $5.8 $1.0 $3.5 $206.3 100.0%
============ ========== ========== ======== ========
% of Total . 2.8% 0.5% 1.7% 100.0%
============ ========== ========== ========
</TABLE>
- ------------
(A) Includes states with totals less than $1 million.
Restructured Loans. California Federal, in an effort to maximize the value
of its loans that are not performing under their contractual terms, may
modify such loans at terms that are less favorable than the current market.
Restructured loans have interest rates that may be less than current market
rates or may contain other concessions. Since 1990, California Federal has
generally declined to restructure loans except in special situations where a
recovery seems likely. This policy reflected a determination that in most
cases property values were unlikely to recover during the real estate
downturn. The following table presents gross restructured loans by state at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1994 1993 1992 1991
------ ------ ------- ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California ..... $3.1 $5.8 $14.5 $52.8 $ 5.0
Alaska ......... -- -- -- -- 26.2
Texas .......... -- -- -- 0.8 14.1
Florida ........ -- -- -- 5.9 --
North Carolina -- -- -- 2.5 --
Other .......... 0.2 -- 2.3 2.2 --
------ ------ ------- ------- ------
$3.3 $5.8 $16.8 $64.2 $45.3
====== ====== ======= ======= ======
</TABLE>
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--California Federal."
Potential Problem Loans.
California Federal monitors its loan portfolio in an effort to identify
potential problem loans on a timely basis. Additionally, California Federal's
primary regulator, the OTS, has promulgated a regulation
OC-162
<PAGE>
that requires savings institutions to utilize an internal asset
classification system as a means of reporting problem and potential problem
assets for regulatory supervision purposes. California Federal has
incorporated the OTS' internal asset classifications as a part of its credit
monitoring system. California Federal currently classifies its assets as
Pass, Special Mention, Substandard, Doubtful or Loss.
A Pass asset is considered of sufficient quality to preclude designation
as Special Mention or an adverse classification. Pass assets are generally
protected by the current net worth and paying capacity of the obligor or by
the value of the asset or underlying collateral.
Assets classified as Special Mention have potential weaknesses that
deserve management's close attention. These potential weaknesses, if left
uncorrected, may result in deterioration of the repayment prospects for these
assets or in the institution's credit position at some future date. Special
Mention assets are not considered as adversely classified and do not expose
an institution to sufficient risk to warrant adverse classification.
Assets classified as Substandard are inadequately protected by the current
net worth and paying capacity of the obligor or by the collateral pledged, if
any. Assets so classified have a well-defined weakness or weaknesses. They
are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected.
Assets classified as Doubtful have the weaknesses of those classified as
Substandard, with the added characteristics that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. California
Federal views the Doubtful classification as a temporary category. California
Federal will generally classify assets as Doubtful when inadequate data is
available or when such uncertainty exists as to preclude a Substandard
classification. Therefore, California Federal will normally tend to have a
minimal amount of assets classified in this category.
Assets classified as Loss are considered uncollectible and of such little
value that their continuance as assets without establishment of a specific
allowance or charge-off is not warranted. A Loss classification does not
imply that an asset has absolutely no recovery or salvage value. Rather, it
indicates that it is not practical or desirable to defer establishing a
specific allowance for the worthless portion of such asset even though
partial recovery may be effected in the future. California Federal will
generally classify as Loss the portion of assets with a specific allowance.
Therefore, the amount of an asset classified as Loss includes the total
specific valuation allowance established for the particular asset.
OC-163
<PAGE>
CREDIT LOSS EXPERIENCE
Credit losses are inherent in the business of originating and retaining
real estate, consumer and commercial loans. As previously discussed,
California Federal, in an effort to identify and mitigate the risk of credit
losses in a timely manner, performs periodic reviews of any asset that has
been identified as having potential excess credit risk. California Federal
maintains special departments with responsibility for resolving problem loans
and selling real estate acquired through foreclosure in order to facilitate
this process. Valuation allowances for estimated potential future losses are
established on a specific and general basis. Specific allowances for real
estate secured loans are determined by the excess of the recorded investment
in the loan over the fair market value of the collateral. General valuation
allowances are provided for losses inherent in the loan portfolio which have
yet to be specifically identified. The general valuation allowance is based
upon a number of factors, including: (i) historical loss experience, (ii)
composition of the loan portfolio, (iii) loan classifications, (iv)
prevailing and forecasted economic conditions and (v) management's judgment.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--California Federal--Provision for Losses" and Notes to
the consolidated financial statements of California Federal.
The table below shows California Federal's specific and general allowances
for loan losses by loan type at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Specific Allowance:
Real Estate:
Residential 1-4 ............... $ -- $ 4.1 $ 3.5 $ -- $ --
Income property ............... 24.3 30.4 54.4 55.5 58.0
Total real estate .............. 24.3 34.5 57.9 55.5 58.0
Commercial banking ............. -- -- 0.2 16.3 26.1
-------- -------- -------- -------- -------
Total specific allowance ........ $ 24.3 $ 34.5 $ 58.1 $ 71.8 $ 84.1
-------- -------- -------- -------- -------
General Allowance:
Real Estate:
Residential 1-4 ............... $ 45.0 $ 44.0 $ 49.0 $ 20.0 $ 16.0
Income property ............... 90.0 112.0 121.1 141.9 146.2
-------- -------- -------- -------- -------
Total real estate .............. 135.0 156.0 170.1 161.9 162.2
Commercial banking ............. -- -- 5.0 55.0 54.5
Consumer ....................... 11.7 11.1 11.1 25.3 21.6
Unallocated .................... 10.0 10.0 10.0 10.0 10.0
-------- -------- -------- -------- -------
Total general allowance ......... 156.7 177.1 196.2 252.2 248.3
-------- -------- -------- -------- -------
Total allowance for loan losses $181.0 $211.6 $254.3 $324.0 $332.4
======== ======== ======== ======== =======
</TABLE>
OC-164
<PAGE>
The following table shows the allocation of California Federal's
allowance for loan losses to the various loan types for the periods
indicated:
<TABLE>
<CAPTION>
AMOUNT OF ALLOWANCE
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real Estate:
Residential 1-4 ................ $ 45.0 $ 48.1 $ 52.5 $ 20.0 $ 16.0
Income property ................ 114.3 142.4 175.5 197.4 204.2
-------- -------- -------- -------- --------
Total real estate .............. 159.3 190.5 228.0 217.4 220.2
Commercial banking .............. -- -- 5.2 71.3 80.6
Consumer ........................ 11.7 11.1 11.1 25.3 21.6
Unallocated ..................... 10.0 10.0 10.0 10.0 10.0
-------- -------- -------- -------- --------
Total allowance for loan losses $181.0 $211.6 $254.3 $324.0 $332.4
======== ======== ======== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PERCENT OF LOANS IN
CATEGORY TO TOTAL LOANS
-----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Real Estate:
Residential 1-4 ................ 77.5% 73.8% 62.2% 59.2% 62.5%
Income property ................ 19.9 22.6 32.6 30.4 27.7
-------- -------- -------- -------- -------
Total real estate .............. 97.4 96.4 94.8 89.6 90.2
Commercial banking .............. -- -- 0.9 2.4 2.9
Consumer ........................ 2.6 3.6 4.3 8.0 6.9
Unallocated ..................... -- -- -- -- --
-------- -------- -------- -------- -------
Total allowance for loan losses 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== =======
</TABLE>
The table below shows the activity in the allowance for loan losses for
the years indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
-------- --------- --------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance, January 1, ................ $211.6 $ 254.3 $ 324.0 $ 332.4 $246.6
Provision for loan losses .......... 31.8 74.9(B) 163.5 126.4 175.0
Charge-offs(A) ..................... (72.4) (123.3) (240.5) (141.6) (92.6)
Recoveries ......................... 10.0 5.7 14.4 6.8 3.4
-------- --------- --------- --------- --------
Net charge-offs .................... (62.4) (117.6) (226.1) (134.8) (89.2)
Allowances of sold subsidiary (CTL) -- -- (7.1) -- --
-------- --------- --------- --------- --------
Balance, December 31, .............. $181.0 $ 211.6 $ 254.3 $ 324.0 $332.4
======== ========= ========= ========= ========
Ratio of net charge-offs during the
period to average loans
outstanding during the period .... 0.69% 1.35% 2.21% 1.13% 0.62%
======== ========= ========= ========= ========
</TABLE>
- ------------
(A) Includes 1994 net charge-offs of $60.4 million that were established
prior to designating the associated assets for inclusion in the 1994
Bulk Sales and 1993 net charge-offs of $80.0 million related to the
1993 Bulk Sale. Exclusive of the 1994 and 1993 Bulk Sale charge-offs,
the ratio of net charge-offs to average loans outstanding was 0.66% and
1.46%, respectively.
(B) The $274.8 million loss on assets held for accelerated disposition is
reported as a separate line item on the Consolidated Statements of
Operations of California Federal and is excluded from provision for
loan losses.
OC-165
<PAGE>
The table below presents the components of charge-offs and recoveries by
category for the years indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
--------- ---------- ---------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Charge-offs:
Real estate loans:
Residential 1-4 ....... $(24.8) $ (19.5) $ (44.1) $ (9.3) $ (4.1)
Income property
Multi-family ......... (30.2) (56.1) (64.9) (39.9) (13.0)
Hotels ............... -- (11.6) (16.0) (14.5) (7.6)
Shopping centers .... (4.9) (0.9) (17.3) (2.0) (2.3)
Office buildings .... (5.5) (15.2) (20.4) (18.5) (33.4)
Other ................ (1.6) (6.2) (4.1) (22.9) (1.7)
--------- ---------- ---------- ---------- ---------
Total income property (42.2) (90.0) (122.7) (97.8) (58.0)
--------- ---------- ---------- ---------- ---------
Total real estate loans (67.0) (109.5) (166.8) (107.1) (62.1)
Commercial banking .... -- (6.8) (61.0) (20.2) (15.4)
Consumer ............... (5.4) (7.0) (12.7) (14.3) (15.1)
--------- ---------- ---------- ---------- ---------
Total charge-offs .. $(72.4) $(123.3) $(240.5) $(141.6) $(92.6)
--------- ---------- ---------- ---------- ---------
Recoveries:
Real estate loans:
Residential 1-4 ....... $ 3.1 $ 0.9 $ 1.2 $ 0.1 $ 0.1
Income property .......
Multi-family ......... 5.2 0.9 4.7 3.3 0.1
Hotels ............... -- -- 0.3 -- --
Shopping centers .... 0.1 -- 2.0 -- --
Office buildings .... 0.4 0.3 3.3 0.5 0.4
Other ................ -- 0.4 0.9 -- --
--------- ---------- ---------- ---------- ---------
Total income property 5.7 1.6 11.2 3.8 0.5
--------- ---------- ---------- ---------- ---------
Total real estate loans 8.8 2.5 12.4 3.9 0.6
Commercial banking .... -- 2.1 0.3 0.1 0.7
Consumer ............... 1.2 1.1 1.7 2.8 2.1
--------- ---------- ---------- ---------- ---------
Total recoveries .... 10.0 5.7 14.4 6.8 3.4
--------- ---------- ---------- ---------- ---------
Total net charge-offs $(62.4) $(117.6) $(226.1) $(134.8) $(89.2)
========= ========== ========== ========== =========
</TABLE>
REAL ESTATE HELD FOR SALE
REO results when property collateralizing a loan is foreclosed upon, or
otherwise acquired in satisfaction of the loan. California Federal records
its investment in REO at the lower of (i) appraised value less disposition
cost, (ii) market price or (iii) the historical cost of the REO. California
Federal also maintains a general valuation allowance against its portfolio of
REO.
FIRREA placed severe capital requirements on direct investments in real
estate by savings institutions. In 1990, California Federal determined that
the capital requirements for investing in real estate under FIRREA were such
that the anticipated return on capital from investing in real estate
development would be below its investment requirements. As a result,
California Federal initiated in 1990 and implemented in 1991 a program to
cease its real estate investment activities and to phase-out its real estate
investments over several years. At December 31, 1995, California Federal's
principal real estate investment was a 97 unit, luxury high-rise condominium
project located near the Westwood area of Los Angeles, California (the
"condominium project"). The condominium project had 31 unsold units at
December 31, 1995 and a net book value of $27.3 million. The condominium
project was sold during the third quarter of 1996. California Federal did not
record any profit or loss from the sale.
OC-166
<PAGE>
The following table presents the composition of real estate held for
sale, net of allowances, at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
PROPERTY TYPE 1995 1994 1993
- ----------------- -------------- -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Residential 1-4 . $47.3 $58.6 $188.6
Multi-family ..... 1.5 5.1 64.3
Office buildings 0.3 5.6 35.8
Shopping centers -- -- 5.0
Hotels ........... -- 6.1 27.7
Other ............ 0.4 2.5 30.2
-------------- -------------- --------------
$49.5 $77.9 $351.6
============== ============== ==============
REO .............. $22.2 $39.1 $273.5
REI .............. 27.3 38.8 78.1
-------------- -------------- --------------
$49.5 $77.9 $351.6
============== ============== ==============
</TABLE>
The following table shows the detail of California Federal's net real
estate held for sale by state at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994 1993
------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
California ..... $47.7 $70.9 $293.5
Alabama ........ 0.1 6.1 15.0
Florida ........ 1.2 0.7 19.4
Washington ..... -- -- 9.2
Arizona ........ -- -- 3.0
North Carolina -- -- 6.8
Other .......... 0.5 0.2 4.7
------- ------- --------
$49.5 $77.9 $351.6
======= ======= ========
</TABLE>
The decline in the level of REO was due to the 1994 Bulk Sales which
eliminated $419.2 million of non-performing loans and $822.1 million of
performing loans with high risk characteristics. The sale of these loans has
resulted in a decline in delinquencies and foreclosures and consequently a
lower level of REO. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--California Federal--Operations."
SECURITIES
California Federal's securities are comprised of: (i) short-term liquid
investments, which principally consist of federal funds sold and certificates
of deposit, (ii) securities purchased under agreements to resell, (iii)
securities available for sale, which consists primarily of U.S. Treasury
securities, and (iv) securities held to maturity, which principally consist
of mortgage-backed securities. These securities provide flexibility and risk
diversification beyond real estate secured assets. Additionally, California
Federal is required by federal regulations to maintain a specified minimum
amount of liquid assets which may be invested in certain securities.
California Federal maintains liquidity at a level to assure adequate funds,
taking into account anticipated cash flows and available sources of credit,
to afford future flexibility to meet deposit withdrawal requests and loan
commitments or to make other investments. California Federal has consistently
maintained its liquidity ratio above that required by federal regulations.
OC-167
<PAGE>
SHORT-TERM LIQUID INVESTMENTS
Federal Funds Sold
Federal funds sold are invested with various members of the Federal
Reserve System to maintain short-term liquidity needs. The amount of
short-term liquid assets held by California Federal at any point in time is a
function of many factors, including liquidity requirements, projected cash
requirements and actual cash flows.
The following table presents California Federal's investment in short-term
liquid investments at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
----------------- ----------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ------- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Fed funds sold and commercial paper $70.0 5.80% $330.0 6.28% $302.2 3.19%
Certificates of deposit ............. 4.1 5.19 3.8 3.18 4.6 3.21
-------- ------- -------- ------- -------- -------
$74.1 5.77% $333.8 6.25% $306.8 3.19%
======== ======= ======== ======= ======== =======
</TABLE>
Please see the Notes to the Consolidated Financial Statements of
California Federal liquid investments.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
California Federal invests in repurchase agreements to maximize its yield
on liquid assets. California Federal obtains collateral for repurchase
agreements, which normally consists of U.S. Treasury securities or
mortgage-backed securities guaranteed by agencies of the U.S. government. The
duration of repurchase agreements is typically 30 days or less during which
the collateral consisting of U.S. Treasury securities or mortgage-backed
securities is held by a third party trustee for California Federal. At
December 31, 1995, California Federal held $1.7 billion of repurchase
agreements as compared to $48.2 million at December 31, 1994 and $30.2
million at December 31, 1993. The yield on such securities was 6.01%, 5.70%
and 3.15% at December 31, 1995, 1994 and 1993.
The following table presents California Federal's repurchase agreements at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------------- ----------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ------- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Investment period:
7 days or less .. $1,097.5 6.04% $48.2 5.70% $30.2 3.15%
8-30 days ........ 577.1 5.95 -- -- -- --
---------- ------- -------- ------- -------- -------
$1,674.6 6.01% $48.2 5.70% $30.2 3.15%
========== ======= ======== ======= ======== =======
</TABLE>
The following table presents California Federal's recorded investment in
assets pledged as collateral for repurchase agreements at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994 1993
---------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
U.S. Treasury securities .. $ -- $48.3 $30.4
Mortgage-backed securities 1,704.4 -- --
========== ======= =======
$1,704.4 $48.3 $30.4
========== ======= =======
</TABLE>
See the Notes to the Consolidated Financial Statements of California
Federal.
OC-168
<PAGE>
SECURITIES AVAILABLE FOR SALE
California Federal's securities available for sale consist of U.S.
Treasury securities.
The carrying values and market values of securities available for sale at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
HISTORICAL CARRYING MARKET AVERAGE
COST VALUE VALUE RATE
------------ ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year ........... $150.0 $149.9 $149.9 4.00%
Maturing after 1 year but within
5 years ......................... 50.3 50.4 50.4 7.46
------------ ---------- --------
$200.3 $200.3 $200.3 4.87%
========== ========
</TABLE>
California Federal did not hold marketable equity securities at December
31, 1995.
The carrying values and market values of securities available for sale at
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
HISTORICAL CARRYING MARKET AVERAGE
COST VALUE VALUE RATE
------------ ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year ........... $1,001.2 $ 997.5 $ 997.5 4.64%
Maturing after 1 year but within
5 years ......................... 749.5 734.0 734.0 6.19
------------ ---------- ----------
$1,750.7 $1,731.5 $1,731.5 5.30%
============ ========== ==========
</TABLE>
California Federal did not hold marketable equity securities at December
31, 1994.
The carrying values and market values of securities available for sale at
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
HISTORICAL CARRYING MARKET AVERAGE
COST VALUE VALUE RATE
------------ ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year ........... $242.3 $243.3 $243.3 4.86%
Maturing after 1 year but within
5 years ......................... 636.9 651.1 651.1 5.51
Maturing after 10 years .......... 0.1 0.1 0.1 7.35
------------ ---------- -------- ----------
879.3 894.5 894.5 5.33
Marketable equity securities .... 0.8 0.2 0.2 --
------------ ---------- --------
$880.1 $894.7 $894.7 5.33%
============ ========== ========
</TABLE>
See the Notes to the Consolidated Financial Statements of California
Federal.
SECURITIES HELD TO MATURITY
California Federal invests only in mortgage-backed securities and
corporate debt securities which are rated investment grade by nationally
recognized rating organizations. These securities may be used as collateral
for California Federal's borrowing requirements.
OC-169
<PAGE>
The following table presents California Federal's portfolio of securities
held to maturity at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- -------- ---------- -------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $2,366.7 6.93 % $2,513.7 6.08 % $2,622.0 5.41 %
Corporate obligations ..... -- -- 11.4 9.37 11.5 9.29
---------- ---------- ----------
$2,366.7 6.93 % $2,525.1 6.09 % $2,633.5 5.43 %
========== ========== ==========
</TABLE>
California Federal invests primarily in mortgage-backed securities issued
by agencies of the United States, such as Fannie Mae. These investments are
made by either purchasing such securities or obtaining them by exchanging
pools of mortgage loans originated or purchased by California Federal for the
securities ("securitized loans"). California Federal invests in
mortgage-backed securities primarily to provide a source of collateral in
support of California Federal's funding activities and to strengthen
California Federal's regulatory capital position.
Summarized below are the carrying values of mortgage-backed securities,
net of discounts at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FNMA ............................................. $1,192.7 $1,359.5 $1,348.1
California Federal AA-rated mortgage pass-through
securities ...................................... 802.3 787.1 839.5
Other ............................................ 371.7 367.1 434.4
---------- ---------- ----------
Total Mortgage-backed securities ................. $2,366.7 $2,513.7 $2,622.0
========== ========== ==========
</TABLE>
See Management's Discussion and Analysis of Results of Operations and
Financial Condition--California Federal."
SOURCES OF FUNDS
In addition to funds generated from loan payments and payoffs and from the
sale of loans and securities available for sale, California Federal derives
funds from deposits, FHLB advances, securities sold under agreements to
repurchase, and other short-term and long-term borrowings. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--California Federal."
OC-170
<PAGE>
Deposits
The largest source of funds for California Federal is retail deposits.
California Federal primarily obtains its deposits through a network of its
full service branches located in California and Nevada. Deposits are a cost
effective source of funds and provide a customer base for other products and
services offered by California Federal. California Federal has several types
of deposit accounts designed to attract both short-term and long-term
deposits. The following table sets forth the weighted average interest rates
and the amounts of deposits for California Federal at the dates indicated:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
AT DECEMBER 31, BALANCE AT DECEMBER 31,
------------------------- ----------------------------------
1995 1994 1993 1995 1994 1993
------- ------- ------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
No minimum term-checking:
NOW ............................. --% --% 1.14% $ -- $ -- $ 169.5
Money market .................... 1.24 1.24 1.26 764.2 850.1 972.8
Non-interest bearing commercial -- -- -- 216.9 184.9 243.2
No minimum term-savings:
Passbook Accounts ............... 2.22 2.22 2.20 509.7 578.2 767.1
Money market savings ............ 3.52 3.15 2.55 1,244.2 1,271.0 2,164.5
Certificate Accounts
Original term:
Less than 3 months ............. 4.18 3.10 2.64 150.0 108.3 191.6
3 months to 6 months ........... 5.23 4.03 3.24 812.4 562.7 1,034.5
7 months to 12 months .......... 5.70 4.97 3.92 1,882.9 2,559.6 3,536.3
13 months to 24 months ......... 6.22 4.67 4.74 3,263.6 1,550.6 2,191.7
25 months to 36 months ......... 5.52 5.37 6.08 72.3 76.4 151.3
37 months to 48 months ......... 6.16 6.60 7.02 51.5 82.1 180.2
49 months to 60 months ......... 6.37 6.78 7.32 197.6 221.5 405.1
Over 60 months ................. 7.24 7.33 7.31 311.4 315.5 593.0
---------- ---------- ----------
4.87% 4.02% 3.67% $9,476.7 $8,360.9 $12,600.8
========== ========== ==========
</TABLE>
The following table provides additional deposit information at December
31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Passbook Accounts ........................ $ 509.7 $ 578.2 $ 767.1
Money Market and NOW Accounts ............ 2,008.4 2,121.1 3,306.8
Non-Interest Bearing Commercial Accounts 216.9 184.9 243.2
---------- ---------- ----------
2,735.0 2,884.2 4,317.1
---------- ---------- ----------
Certificate Accounts:
2.00% to 2.99% .......................... 16.5 28.9 201.8
3.00% to 3.99% .......................... 22.5 861.0 3,627.7
4.00% to 4.99% .......................... 208.2 2,352.4 2,875.9
5.00% to 5.99% .......................... 2,545.3 1,605.3 367.6
6.00% to 6.99% .......................... 3,630.4 296.9 344.0
7.00% to 7.99% .......................... 293.0 322.9 848.3
8.00% to 8.99% .......................... 23.3 3.4 5.8
9.00% to 9.99% .......................... 2.5 4.6 6.9
10.00% to 11.99% ........................ -- 1.3 5.7
---------- ---------- ----------
Total Certificate Accounts ............. 6,741.7 5,476.7 8,283.7
---------- ---------- ----------
$9,476.7 $8,360.9 $12,600.8
========== ========== ==========
</TABLE>
OC-171
<PAGE>
At December 31, 1995, deposits of California Federal had the following
remaining contractual maturities:
<TABLE>
<CAPTION>
OVER 3 OVER 6 OVER 12
MONTHS MONTHS MONTHS
BUT BUT BUT
3 MONTHS WITHIN 6 WITHIN 12 WITHIN 24
OR LESS MONTHS MONTHS MONTHS
---------- ---------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Passbook Accounts .............. $ 509.7 $ -- $ -- $ --
Money Market, NOW and
Non-interest Bearing
Commercial Accounts ........... 2,225.3 -- -- --
Certificate Accounts:
2.00% to 2.99% ................ 16.4 0.1 -- --
3.00% to 3.99% ................ 22.4 0.1 -- --
4.00% to 4.99% ................ 110.9 69.7 5.5 8.1
5.00% to 5.99% ................ 903.4 835.2 595.9 121.3
6.00% to 6.99% ................ 238.8 629.8 1,822.1 761.4
7.00% to 7.99% ................ 28.9 51.8 135.7 50.7
8.00% to 8.99% ................ 7.7 2.2 3.6 4.6
9.00% to 9.99% ................ 0.8 0.2 0.4 0.5
---------- ---------- ----------- -----------
Total Certificate Accounts .. 1,329.3 1,589.1 2,563.2 946.6
---------- ---------- ----------- -----------
$4,064.3 $1,589.1 $2,563.2 $946.6
========== ========== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OVER 24
MONTHS
BUT
WITHIN 36 OVER 36
MONTHS MONTHS TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Passbook Accounts .............. $ -- $ -- $ 509.7
Money Market, NOW and
Non-interest Bearing
Commercial Accounts ........... -- -- 2,225.3
Certificate Accounts:
2.00% to 2.99% ................ -- -- 16.5
3.00% to 3.99% ................ -- -- 22.5
4.00% to 4.99% ................ 5.8 8.2 208.2
5.00% to 5.99% ................ 39.9 49.6 2,545.3
6.00% to 6.99% ................ 128.7 49.6 3,630.4
7.00% to 7.99% ................ 18.4 7.5 293.0
8.00% to 8.99% ................ 3.1 2.1 23.3
9.00% to 9.99% ................ 0.3 0.3 2.5
----------- --------- ---------
Total Certificate Accounts .. 196.2 117.3 6,741.7
----------- --------- ---------
$196.2 $117.3 $9,476.7
=========== ========= =========
</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>
DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
3 months or less ................... $ 789.5 $ 681.1 $ 953.4
Over 3 months but within 6 months . 247.2 132.6 312.8
Over 6 months but within 12 months 369.9 249.3 190.3
Over 12 months ..................... 112.2 70.1 152.5
---------- ---------- ---------
$1,518.8 $1,133.1 $1,609.0
========== ========== =========
</TABLE>
The decline in California Federal's deposits from December 31, 1993 to
1994 was due to the sale of the Southeast Division, which resulted in the
sale of $3.9 billion of deposits. The increase in deposits during 1995 was
due to (i) an increase in term deposits offered through California Federal's
retail branches, (ii) the acquisition of three branches and $138.6 million of
deposits from Pacific Heritage Bank and six branches and $359.4 million of
deposits from Continental Savings of America and (iii) the use of brokers to
obtain deposits. Subject to certain regulatory limitations, deposits can be
gathered through brokers, generally the nation's largest investment banking
firms. California Federal had $273.8 million of Brokered Deposits at December
31, 1995. At December 31, 1995 all Brokered Deposits were from individual
investors. Total Brokered Deposits constituted 2.9% of total deposits at
December 31, 1995. California Federal had no Brokered Deposits at December
31, 1994 and 1993.
OC-172
<PAGE>
Borrowings
The borrowings of California Federal, which borrowings are of the Bank
following the consummation of the Cal Fed Acquisition, consisted of the
following at September 30, 1996 (in millions):
<TABLE>
<CAPTION>
<S> <C>
Securities sold under agreements to repurchase ........ $ 962.7
FHLB advances .......................................... 3,261.0
Student Loan Marketing Association advances ........... --
Cal Fed 6 1/2% Convertible Subordinated Debentures Due
2001 .................................................. 2.7
Cal Fed 10% Subordinated Debentures Due 2003 .......... 4.3
Cal Fed 10.668% Subordinated Note Due 1998 ............. 50.0
---------
$4,280.7
=========
</TABLE>
The weighted average rate on such borrowings as of September 30, 1996 was
5.64%.
California Federal utilizes a variety of borrowing sources as an
alternative source of funds. These sources have included FHLB advances,
securities sold under reverse repurchase agreements, federal funds purchased,
convertible subordinated debentures and various other sources.
Federal Home Loan Bank Advances. California Federal borrows funds from the
FHLB from time to time, pledging as security mortgage-backed securities, the
capital stock of the FHLB and certain of its mortgage loans and treasury
notes. Such borrowings may be obtained pursuant to several different credit
programs, and each credit program has its own rate and range of maturities up
to a maximum of 10 years for both fixed and variable rate advances.
Prepayment fees are charged on advances if paid prior to maturity. During
1994, FHLB advances were utilized as a primary source of funds for the sale
of the Southeast Division.
The following table presents California Federal's FHLB advances at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
------------------- ------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Maturing in one year ... $ 880.0 6.16% $2,015.0 6.21% $ 200.0 3.66%
Maturing in two years .. 1,780.0 5.98 500.0 6.36 405.0 3.67
Maturing in three years -- -- -- -- 400.0 3.90
Maturing in four years . 11.0 9.71 -- -- -- --
Maturing in five years . -- -- 11.0 9.71 -- --
Thereafter .............. -- -- -- -- 11.0 9.71
---------- ------- ---------- ------- ---------- -------
$2,671.0 6.06% $2,526.0 6.25% $1,016.0 3.82%
========== ======= ========== ======= ========== =======
</TABLE>
California Federal's FHLB advances were collateralized by loans and
mortgage-backed securities totalling $3.6 billion, $3.7 billion and $2.5
billion at December 31, 1995, 1994 and 1993, respectively.
Securities Sold under Agreements to Repurchase. California Federal enters
into reverse repurchase agreements whereby it sells marketable U.S.
government securities, federal agency securities, or mortgage-backed
securities with a simultaneous commitment to repurchase the same securities
at a specified price at a specified later date. Reverse repurchase agreements
are typically short-term (1 day to 30 days) at a fixed-rate and long-term (up
to 3 years) at a variable rate. Securities sold under agreements to
repurchase are subject to risks relating to the financial strength of the
counterparty to the transaction, the nature of the lien against the
securities subject to the transaction and the disparity between the book
value of the securities sold and the amount of funds obtained. California
Federal deals only with national investment banking firms and major
commercial banks which are primary dealers in U.S. government securities and
has set limits on the amounts and terms of borrowings from any single
institution.
OC-173
<PAGE>
The following table presents California Federal's reverse repurchase
agreements at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, 1995 DECEMBER 31, 1994 1993
----------------- ------------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------- ---------- ------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1 day to 30 days ............. $ -- --% $1,026.2 5.67% $ -- --%
Over 30 days to one year .... 857.3 5.56 724.8 6.15 -- --
Over one year to two years .. -- -- -- -- -- --
Over two years to three year -- -- -- -- 249.8 3.40
-------- ---------- --------
$857.3 5.56% $1,751.0 5.87% $249.8 3.40%
======== ========== ========
</TABLE>
The following table presents the recorded amount of the collateral pledged
to secure California Federal's reverse repurchase agreements at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994 1993
-------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Securities ..................... $ -- $ 692.6 $ --
Mortgage-backed securities .... 908.9 1,080.3 252.6
-------- ---------- --------
$908.9 $1,772.9 $252.6
======== ========== ========
Market value of the collateral $907.5 $1,783.5 $258.6
======== ========== ========
</TABLE>
Student Loan Marketing Association Advances. California Federal has a SLMA
advance outstanding for a total of $200.0 million at December 31, 1995 which
matured on September 18, 1996. The SLMA advance bears interest based upon the
three month LIBOR and reprices quarterly. The advance is secured by
mortgage-backed securities and government securities.
Cal Fed 6 1/2% Convertible Subordinated Debentures Due 2001. The Cal Fed 6
1/2% Convertible Subordinated Debentures bear interest at 6 1/2% per annum
and mature at February 20, 2001. Events of Default under the indenture
governing the Cal Fed 6 1/2% Convertible Subordinated Debentures include,
among other things: (i) any failure to make any payment of interest when due
and such payment is not made within 30 days after the date such payment was
due; (ii) failure to make any payment of principal when due; (iii) default in
the performance, or breach, of any covenant or warranty in the indenture,
provided that such default or breach continues for more than 60 days after
notice is delivered to the Bank; or (iv) certain events of bankruptcy,
insolvency or reorganization of the Bank or its subsidiaries.
Cal Fed 10% Subordinated Debentures Due 2003. The Cal Fed 10% Subordinated
Debentures bear interest at 10% per annum and mature at January 3, 2003.
Events of Default under the indenture governing the Cal Fed 10% Subordinated
Debentures include, among other things: (i) failure to make any payment of
principal when due; (ii) any failure to make any payment of interest when due
and such payment is not made within 30 days after the date such payment was
due; (iii) failure to comply with certain covenants in the indenture; (iv)
failure to comply with certain covenants in the indenture provided that such
failure continues for more than 60 days after notice is delivered to the
Bank; (v) certain events of bankruptcy, insolvency or reorganization of the
Bank; or (vi) the default or any event which, with the giving of notice or
lapse of time or both, would constitute a default under any indebtedness of
the Bank and cause such indebtedness with an aggregate principal amount
exceeding $15 million to accelerate.
Cal Fed 10.668% Subordinated Notes Due 1998. The Cal Fed 10.668%
Subordinated Notes Due 1998 bear interest at 10.668% per annum and mature at
December 22, 1998. Events of Default under the note agreement governing the
Cal Fed 10.668% Subordinated Notes Due 1998 include, among other things, (i)
failure to make any payment of principal when due; (ii) any failure to make
any payment of interest when due and such payment is not made within 10
business days after the date such payment was due; (iii) failure to comply
with certain covenants in the note agreement provided that such failure
continues for more than 60 days after notice is delivered to the Bank; (iv)
the default or any event which,
OC-174
<PAGE>
with the giving of notice or the lapse of time or both, would constitute a
default under any indebtedness of the Bank and cause such indebtedness with
an aggregate principal amount exceeding $15 million to accelerate; and (v)
certain events of bankruptcy, insolvency or reorganization of the Bank.
10 5/8% Preferred Stock. The Bank has outstanding 1,725,000 shares of the
10 5/8% Preferred Stock. The 10 5/8% Preferred Stock has a stated liquidation
value of $100 per share, plus declared and unpaid dividends, if any, without
interest. Cash dividends are noncumulative and are payable at an annual rate
of 10 5/8% per share if, when and as declared by the Board of Directors of
the Bank.
The 10 5/8% Preferred Stock will rank prior to the Common Stock, including
the Common Stock held by Holdings, and to all other classes and series of
equity securities subsequently issued, other than any class or series
expressly designated as being in a parity with or senior to the 10 5/8%
Preferred Stock as to dividends and liquidating distributions. The 11 1/2%
Preferred Stock and the Bank Preferred Stock are on parity with the 10 5/8%
Preferred Stock as to dividends and liquidating distributions.
The terms of the 10 5/8% Preferred Stock provide that the Bank may not
declare or pay any full dividends with respect to any parity stock, such as
the 11 1/2% Preferred Stock and the Bank Preferred Stock, unless and until
the Bank has paid full dividends on the 10 5/8% Preferred Stock for the most
recent dividend period.
The terms of the 10 5/8% Preferred Stock provide that the Bank may not
declare or pay any dividends or other distributions (other than in shares of
common stock of the Bank or other Junior Stock (as defined therein)) with
respect to any Junior Stock (as defined therein) or repurchase, redeem or
otherwise acquire, or set apart funds for the repurchase, redemption or other
acquisition of, any Junior Stock (as defined therein) through a sinking fund
or otherwise, unless and until: (i) the Bank has paid full dividends on the
10 5/8% Preferred Stock for the four most recent dividend periods, or funds
have been paid over to the dividend disbursing agent of the Bank for payment
of such dividends, and (ii) the Bank has declared a cash dividend on the 10
5/8% Preferred Stock at the annual dividend rate for the current dividend
period, and sufficient funds have been paid over to the dividend disbursing
agent of the Bank for the payment of a cash dividend for such current period.
Holders of the 10 5/8% Preferred Stock have no voting rights, except as
required by law or in certain limited circumstances.
Except in the event of a change of control, the 10 5/8% Preferred Stock is
not redeemable prior to April 1, 1999. The 10 5/8% Preferred Stock is
redeemable solely at the option of the Bank or its successor or any acquiring
or resulting entity with respect to the Bank (including by any parent or
subsidiary of the Bank, any such successor or any such acquiring or resulting
entity), as applicable, at any time on or after April 1, 1999, 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 pro rata annually thereafter to a stated
liquidation value of $100 per share on or after April 1, 2003, plus declared
and unpaid dividends, if any, without interest. Upon a change of control, the
10 5/8% Preferred Stock is redeemable on or prior to April 1, 1999 at the
option of the Bank or its successor or any acquiring or resulting entity with
respect to the Bank (including by any parent or subsidiary of the Bank, any
such successor, or any such acquiring or resulting entity), as applicable, in
whole, but not in part, at a price per share equal to $114.50, plus an amount
equal to declared and unpaid dividends (whether or not declared) from the
date of consummation of the change of control to the date fixed for
redemption, without interest.
Other Borrowings. Other borrowings include medium-term notes and other
miscellaneous borrowings, some of which are collateralized by mortgage-backed
securities, mortgage loans and real estate held for investment.
OC-175
<PAGE>
The following table provides additional information on all significant
borrowed funds. Please refer to the consolidated financial statements for
additional information on California Federal borrowings.
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FHLB Advances:
Balance at year-end ....................... $2,671.0 $2,526.0 $1,016.0
Average amount outstanding ................ 2,452.9 1,654.6 1,428.1
Maximum amount outstanding at any
month-end ................................ 2,671.0 2,576.0 1,789.7
Average interest rate for the year ....... 6.28% 5.05% 3.83%
Average interest rate on year-end balance 6.06% 6.25% 3.82%
Securities Sold under Agreements to
Repurchase:
Balance at year-end ....................... $ 857.3 $1,751.0 $ 249.8
Average amount outstanding ................ 1,098.9 1,493.0 695.8
Maximum amount outstanding at any
month-end ................................ 1,336.8 1,751.0 435.1
Average interest rate for the year ....... 5.91% 4.52% 3.17%
Average interest rate on year-end balance 5.56% 5.87% 3.40%
SLMA Advances:
Balance at year-end ....................... $ 200.0 $ 475.0 $ 275.0
Average amount outstanding ................ 462.1 357.8 275.0
Maximum amount outstanding at any
month-end ................................ 475.0 475.0 275.0
Average interest rate for the year ....... 6.27% 4.62% 3.47%
Average interest rate on year-end balance 5.86% 6.43% 3.44%
Subordinated Debentures:
Balance at year-end ....................... $ 57.6 $ 66.5 $ 66.7
Average amount outstanding ................ 60.0 66.6 66.7
Maximum amount outstanding at any
month-end ................................ 66.5 66.6 66.8
Average interest rate for the year ....... 10.41% 10.36% 10.35%
Average interest rate on year-end balance 10.43% 10.36% 10.35%
</TABLE>
COMPETITION
California Federal experiences intense competition in both attracting and
retaining deposits and in originating real estate and consumer loans. The
competition for deposits comes from other savings institutions, commercial
banks, credit unions, thrift and loan associations, issuers of corporate
securities, money market mutual funds and the U.S. Treasury. Competition for
deposits from large savings institutions and commercial banks is particularly
strong. Most of the nation's largest savings institutions and many large
commercial banks are headquartered or have a significant number of offices in
the same areas in which California Federal operates. In addition to offering
competitive interest rates, the principal methods used to attract deposits
include the variety of services offered, the quality of service rendered, the
perceived level of financial strength of the institution, the convenience of
office locations and the hours of service that offices are open to the
public.
Competition in originating real estate and consumer loans comes
principally from other savings institutions, commercial banks, mortgage
banking companies, insurance companies, consumer finance companies and
commercial finance companies. The primary factors in competing for loans are
interest rates, interest rate caps, rate adjustment provisions, loan
maturities, loan fees and the quality and extent of service to borrowers and
brokers.
OC-176
<PAGE>
SUBSIDIARIES
At December 31, 1995, California Federal was permitted by applicable OTS
regulations to invest up to approximately $768 million of its assets in
subsidiary corporations. As of that date, California Federal had invested
approximately $328 million (primarily equity and loans) in subsidiaries. The
principal business activities of California Federal conducted through such
subsidiaries include real estate and financial activities.
Real Estate Activities.
California Federal, principally through its subsidiaries, Cal Fed
Enterprises ("CFE") currently and previously had investments in residential
developments and commercial and industrial developments. CCI is an inactive
single-family residential developer and currently does not own any real
estate investments. CFE is involved in completing the sale of its existing
single family developments. Similarly, CF Management Corp. ("CFMC"), a
subsidiary of California Federal, was the general partner of CF Income
Partners L.P. ("CFIP"), a master limited partnership, engaged in the business
of investing in income-producing residential, commercial and industrial real
properties and real estate development projects. During the first quarter of
1994, CFIP completed the sale of its assets and subsequently liquidated,
settled its indebtedness to California Federal and deeded to California
Federal four properties valued at $6.2 million. That transaction terminated
California Federal's lending relationship with CFIP, settled certain
outstanding litigation surrounding CFIP to which California Federal and CFMC
were a party, and resulted in no additional material loss. During 1995,
California Federal sold the last of the four properties deeded to it by CFIP.
Other Subsidiaries
In addition to subsidiaries engaged in real estate activities, California
Federal also has subsidiaries that are or have been engaged in financial
activities. XCF Acceptance Corporation holds loans which it acquired through
the 1992 merger with CalFed Inc. Prior to the first quarter of 1993, Cal Fed
Credit Inc., ("Cal Fed Credit") was actively involved in the purchase of
loans secured by automobiles and other consumer loans. Since the first
quarter of 1993, Cal Fed Credit has not been engaged in acquiring or
originating new loans. The loans of Cal Fed Credit are serviced by a former
wholly-owned subsidiary of XCF Acceptance Corporation. California Federal
also has a subsidiary that offers alternative investment products to
California Federal's customers on behalf of independent third parties and a
subsidiary which functions as an insurance agency offering a variety of
insurance products.
EMPLOYEES
At December 31, 1995, California Federal had approximately 2,100
employees. None of its employees are represented by any collective bargaining
group. California Federal maintains a comprehensive employee benefits program
providing, among other benefits, hospitalization and major medical insurance,
long and short-term disability insurance, life insurance and reduced loan
rates for qualifying employees. Additionally, California Federal has a
defined benefit plan ("retirement income plan"). Effective May 31, 1993 the
retirement income plan was frozen and all accrued benefits were automatically
100% vested. California Federal also offers qualifying employees the
opportunity to participate in a qualified plan under Section 401(k) of the
Code.
TAXATION
California Federal files a consolidated federal income tax return and a
combined California franchise tax report with its subsidiaries.
In connection with the 1992 corporate restructuring (the "Restructuring"),
California Federal and its affiliates underwent a change in ownership within
the meaning of Section 382 of the Internal Revenue Code for both federal
income and California franchise tax purposes. As a consequence, the
post-Restructuring use of pre-Restructuring net operating loss and other
carryforwards to absorb taxable income and reduce tax liability may be
restricted. In addition, such restrictions may also apply to certain
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losses recognized and deductions incurred during the five year period
following the Restructuring that were economically accrued as of the
Restructuring date. California Federal does not expect that these
restrictions, if applicable, will have a material adverse effect on the
financial condition of California Federal and its affiliates.
Savings institutions are generally subject to federal income taxation in
the same manner as other types of corporations. However, under applicable
provisions of the Internal Revenue Code, a savings institution that meets
certain definitional and other tests ("qualifying institution") can, unlike
most other corporations, use the reserve (versus specific charge-off) method
to compute its deduction for bad debt losses.
Under the reserve method, qualifying institutions are generally allowed to
deduct an amount up to the greater of two alternative computations. Under the
"percentage of taxable income method" computation, a qualifying institution
can claim a bad debt deduction computed as a percentage of taxable income
before such deduction. Alternatively, a qualifying institution may utilize
its bad debt loss experience to compute its annual addition to its bad debt
reserves (the "experience method").
Prior to the enactment of the Tax Reform Act of 1986 ("1986 Act"), many
qualifying institutions, including California Federal, used the percentage of
taxable income method which generally resulted in a lower effective federal
income tax rate than that applicable to other types of corporations. However,
the 1986 Act reduced the maximum percent that could be deducted under the
percentage of taxable income method from 40% to 8% for tax years beginning
after December 31, 1986; thus, many qualifying institutions, including
California Federal, began to use the experience method beginning in 1987. The
amount by which a qualifying institution's actual tax bad debt reserves
exceed an allowable offset computed under the experience method ("excess tax
bad debt reserves") may be subject to recapture and includable in taxable
income.
If amounts appropriated to excess tax bad debt reserves are used for the
payment of nontaxable dividends or other distributions (including
distributions in dissolution, liquidation or redemption of stock), an amount
equal to the distribution plus the tax attributable thereto, but not
exceeding the aggregate amount of excess tax bad debt reserves, will
generally be includable in taxable income. In addition, if an association
fails to meet the definitional or other tests of a qualifying institution,
its total tax bad debt reserves must be recaptured and included in taxable
income.
As a result of the Small Business Job Protection Act of 1996, which
provided for the repeal of the Section 593 reserve method of accounting for
bad debts by thrift institutions which are treated as large banks, Calfornia
Federal will generally be required to take into income the balance of its
post-1987 bad debt reserves over a six year period beginning in 1996 subject
to a two year deferral if certain residential loan tests are satisfied. As of
December 31, 1995, California Federal had tax bad debt reserves totaling $196
million, of which $73 million is subject to recapture into income. California
Federal does not expect to generate substantial amounts of federal taxable
income (after taking into account its net operating loss carryovers) from any
recapture of California Federal's bad debt reserve. Accordingly, the repeal
of the section 593 reserve method of accounting for bad debts by thrift
institutions is not expected to have a material adverse effect on California
Federal.
For California franchise tax purposes, savings institutions are taxed as
"financial corporations." Financial corporations are taxed at the general
corporate franchise tax rate plus an "in lieu" rate based on their statutory
exemption from local business and personal property taxes. California Federal
is also subject to taxation in certain other states in which it operates,
primarily as a result of California Federal's 1982 and subsequent
acquisitions.
See the Notes to the Consolidated Financial Statements of California
Federal.
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PROPERTIES
California Federal maintains executive offices in an office building
leased by California Federal and located at 5700 Wilshire Boulevard, Los
Angeles, California 90036. At December 31, 1995, California Federal operated
full service branches at 31 owned locations and at 94 leased locations. In
addition, California Federal has certain operating and administrative
departments in an approximately 225,000 square foot leased facility located
in Rosemead, California. The lease expires in 2008. The net book value of all
facilities at December 31, 1995 was $51.4 million. Expiration dates of
California Federal's leased full service branches ranged from January 1996 to
January 2055. California Federal's full service branches are located
principally in California. The following table shows the location of
California Federal's full service branches by state at December 31, 1995:
<TABLE>
<CAPTION>
LOCATION NUMBER OF OFFICES
- ---------------------- -----------------
<S> <C>
California:
Los Angeles County .. 57
San Francisco County 20
Orange County ........ 18
San Diego County .... 6
Ventura County ....... 6
Other Counties ....... 12
-----------------
Total California .. 119
Nevada ................ 6
-----------------
125
=================
</TABLE>
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REGULATION
GENERAL
The Bank is a federally chartered and insured stock savings bank subject
to extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings
and loan holding companies. The following description of statutory and
regulatory provisions and proposals, which is not intended to be a complete
description of these provisions or their effects on Holdings or the Bank, is
qualified in its entirety by reference to the particular statutory or
regulatory provisions or proposals.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
Holding Company Acquisitions
Holdings is a registered savings and loan holding company. The HOLA and
OTS regulations generally prohibit a savings and loan holding company,
without prior OTS approval, from acquiring, directly or indirectly, the
ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5%
of the voting shares thereof. These provisions also prohibit, among other
things, any director or officer of a savings and loan holding company, or any
individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition
is approved by the OTS.
Holding Company Activities
Holdings currently operates as a unitary savings and loan holding company.
Generally, there are limited restrictions on the activities of a unitary
savings and loan holding company and its non-savings association
subsidiaries. If Holdings ceases to be a unitary savings and loan holding
company, the activities of Holdings and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid. See
"--Regulation of Federal Savings Banks--Capital Distribution Regulation."
Affiliate Restrictions
Transactions between a savings association and its "affiliates" are
subject to quantitative and qualitative restrictions under Sections 23A and
23B of the Federal Reserve Act. Affiliates of a savings association include,
among other entities, the savings association's holding company and companies
that are under common control with the savings association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount
equal to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates.
In addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to
the savings association or its subsidiary, as those prevailing at the time
for comparable transactions with nonaffiliated companies. A "covered
transaction" is defined to include a loan or extension of credit to an
affiliate; a purchase of investment securities issued by affiliate; a
purchase of assets from an affiliate, with certain exceptions; the acceptance
of securities issued by an affiliate as collateral for a loan or extension of
credit to any party; or the issuance of a guarantee, acceptance or letter of
credit on behalf of an affiliate.
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In addition, under the OTS regulations, a savings association may not
make a loan or extension of credit to an affiliate unless the affiliate is
engaged only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other
than shares of a subsidiary; a savings association and its subsidiaries may
not purchase a low-quality asset from an affiliate; and covered transactions
and certain other transactions between a savings association or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions,
each loan or extension of credit by a savings association to an affiliate
must be secured by collateral with a market value ranging from 100% to 130%
(depending on the type of collateral) of the amount of the loan or extension
of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as
affiliates, except to the extent that the OTS or the Board of Governors of
the Federal Reserve System (the "FRB") decides to treat such subsidiaries as
affiliates. The regulation also requires savings associations to make and
retain records that reflect affiliate transactions in reasonable detail, and
provides that certain classes of savings associations may be required to give
the OTS prior notice of affiliate transactions.
REGULATION OF FEDERAL SAVINGS BANKS
Regulatory System
As a federally insured savings bank, lending activities and other
investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file
periodic reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts
are insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks
The Bank is a member of the FHLBS. Among other benefits, FHLB membership
provides the Bank with a central credit facility. The Bank is required to own
capital stock in an FHLB in an amount equal to the greater of: (i) 1% of its
aggregate outstanding principal amount of its residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each
calendar year, (ii) .3% of total assets, or (iii) 5% of its FHLB advances
(borrowings).
Liquid Assets
Under OTS regulations, for each calendar month, a savings bank is required
to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a
specified percentage of the average daily balance of its net withdrawable
accounts plus short-term borrowings (its liquidity base) during the preceding
calendar month. This liquidity requirement, which is currently at 5.0%, may
be changed from time to time by the OTS to any amount between 4.0% to 10.0%,
depending upon certain factors. OTS regulations also require each savings
association to maintain an average daily balance of short-term liquid assets
equal to not less than 1.0% of the average daily balance of its net
withdrawable accounts and short-term borrowings during the preceding calendar
month. The Bank maintains liquid assets in compliance with these regulations.
Regulatory Capital Requirements
OTS capital regulations require savings banks to satisfy minimum capital
standards: risk-based capital requirements, a leverage requirement and a
tangible capital requirement. Savings banks must meet each of these standards
in order to be deemed in compliance with OTS capital requirements. In
addition, the OTS may require a savings association to maintain capital above
the minimum capital levels. See "--REIT Subsidiary Preferred Stock."
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All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal
to 8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of
core capital. Under the leverage requirement, a savings bank is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. (In
addition, under the prompt corrective action provisions of the OTS
regulations, all but the most highly-rated institutions must maintain a
minimum leverage ratio of 4% in order to be adequately capitalized. See
"--Prompt Corrective Action.") A savings bank is also required to maintain
tangible capital in an amount at least equal to 1.5% of its adjusted total
assets.
Under OTS regulations, a savings bank with a greater than "normal" level
of interest rate exposure must deduct an interest rate risk ("IRR") component
in calculating its total capital for purposes of determining whether it meets
its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the
estimated economic value of the savings association's assets. The interest
rate risk component to be deducted from total capital is equal to one-half of
the difference between an institution's measured exposure and "normal" IRR
exposure (which is defined as 2%), multiplied by the estimated economic value
of the institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation. Based on internal measures of interest
rate risk at December 31, 1995, First Nationwide would not have been required
to deduct an IRR component in calculating total risk-based capital had the
IRR component of the capital regulations been in effect.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS
for individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its
circumstances. The OTS regulations provide that higher individual minimum
regulatory capital requirements may be appropriate in circumstances where,
among others: (1) a savings association has a high degree of exposure to
interest rate risk, prepayment risk, credit risk, concentration of credit
risk, certain risks arising from nontraditional activities, or similar risks
or a high proportion of off-balance sheet risk; (2) a savings association is
growing, either internally or through acquisitions, at such a rate that
supervisory problems are presented that are not dealt with adequately by OTS
regulations; and (3) a savings association may be adversely affected by
activities or condition of its holding company, affiliates, subsidiaries or
other persons or savings associations with which it has significant business
relationships. The Bank is not subject to any such individual minimum
regulatory capital requirement.
First Nationwide's total capital to risk-based assets ratio was 12.93%,
its core capital to risk-based assets ratio was 10.81%, its leverage capital
ratio was 6.71% and its tangible capital ratio was 6.71% at September 30,
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Capital Resources."
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements
A savings bank's failure to maintain capital at or above the minimum
capital requirements may be deemed an unsafe and unsound practice and may
subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is
required to submit a capital plan that addresses the bank's need for
additional capital and meets certain additional requirements. While the
capital plan is being reviewed by the OTS, the savings bank must certify,
among other things, that it will not, without the approval of its appropriate
OTS Regional Director, grow beyond net interest credited or make capital
distributions. If a savings bank's capital plan is not approved, the bank
will become subject to additional growth and other restrictions. In addition,
the OTS, through a capital directive or otherwise, may restrict the ability
of a savings bank not in compliance with the capital requirements to pay
dividends and compensation, and may require such a bank to take one or more
of certain corrective actions, including, without limitation: (i) increasing
its capital to specified levels, (ii)
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reducing the rate of interest that may be paid on savings accounts, (iii)
limiting receipt of deposits to those made to existing accounts, (iv) ceasing
issuance of new accounts of any or all classes or categories except in
exchange for existing accounts, (v) ceasing or limiting the purchase of loans
or the making of other specified investments, and (vi) limiting operational
expenditures to specified levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound
practices or conditions.
Prompt Corrective Action
The prompt corrective action regulation of the OTS, promulgated under
FDICIA, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Under
the regulation, the ratio of total capital to risk-weighted assets, core
capital to risk-weighted assets and the leverage ratio are used to determine
an institution's capital classification. At September 30, 1996, First
Nationwide met the capital requirements of a "well capitalized" institution
under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept Brokered Deposits only with a waiver from the FDIC
and are subject to restrictions on the interest rates that can be paid on
such deposits. Undercapitalized institutions may not accept, renew or
roll-over Brokered Deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic
review of the institution's efforts to restore its capital, (ii) a
requirement that the institution submit a capital restoration plan acceptable
to the appropriate federal banking agency and implement that plan, and that
each company having control of the institution guarantee compliance with the
capital restoration plan in an amount not exceeding the lesser of 5% of the
institution's total assets at the time it received notice of being
undercapitalized, or the amount necessary to bring the institution into
compliance with applicable capital standards at the time it fails to comply
with the plan, and (iii) a limitation on the institution's ability to make
any acquisition, open any new branch offices, or engage in any new line of
business without the prior approval of the appropriate federal banking agency
for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of
the institution at the least possible long-term cost to the deposit insurance
fund. These supervisory actions include: (i) requiring the institution to
raise additional capital or be acquired by another institution or holding
company if certain grounds exist, (ii) restricting transactions between the
institution and its affiliates, (iii) restricting interest rates paid by the
institution on deposits, (iv) restricting the institution's asset growth or
requiring the institution to reduce its assets, (v) requiring replacement of
senior executive officers and directors, (vi) requiring the institution to
alter or terminate any activity deemed to pose excessive risk to the
institution, (vii) prohibiting capital distributions by bank holding
companies without prior approval by the FRB, (viii) requiring the institution
to divest certain subsidiaries, or requiring the institution's holding
company to divest the institution or certain affiliates of the institution,
and (ix) taking any other supervisory action that the agency believes would
better carry out the purposes of the prompt corrective action provisions of
FDICIA.
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Institutions classified as undercapitalized that fail to submit a timely,
acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The
regulation also makes mandatory for significantly undercapitalized
institutions certain of the supervisory actions that are discretionary for
institutions classified as undercapitalized, creates a presumption in favor
of certain discretionary supervisory actions, and subjects significantly
undercapitalized institutions to additional restrictions, including a
prohibition on paying bonuses or raises to senior executive officers without
the prior written approval of the appropriate federal bank regulatory agency.
In addition, significantly undercapitalized institutions may be subjected to
certain of the restrictions applicable to critically undercapitalized
institutions.
The regulation requires that an institution be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with concurrence of the FDIC, determines that other action
would better achieve the purposes of the prompt corrective action provisions
of FDICIA. Any such determination must be renewed every 90 days. A depository
institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth
quarter after the institution initially became critically undercapitalized,
unless the institution's federal bank regulatory agency, with concurrence of
the FDIC, makes certain positive determinations with respect to the
institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized
institutions and to a number of other severe restrictions. For example,
beginning 60 days after becoming critically undercapitalized, such
institutions may not pay principal or interest on subordinated debt without
the prior approval of the FDIC. (However, the regulation does not prevent
unpaid interest from accruing on subordinated debt under the terms of the
debt instrument, to the extent otherwise permitted by law.) In addition,
critically undercapitalized institutions may be prohibited from engaging in a
number of activities, including entering into certain transactions or paying
interest above a certain rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable
to significantly undercapitalized institutions.
Conservatorship/Receivership
In addition to the grounds discussed under "--Prompt Corrective Action,"
the OTS (and, under certain circumstances, the FDIC) may appoint a
conservator or receiver for a savings association if any one or more of a
number of circumstances exist, including, without limitation, the following:
(i) the institution's assets are less than its obligations to creditors and
others, (ii) a substantial dissipation of assets or earnings due to any
violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books,
papers, records or assets or refusal to submit such items for inspection to
any examiner or lawful agent of the appropriate federal banking agency or
state bank or savings association supervisor, (vi) the institution is likely
to be unable to pay its obligations or meet its depositors' demands in the
normal course of business, (vii) the institution has incurred, or is likely
to incur, losses that will deplete all or substantially all of its capital,
and there is no reasonable prospect for the institution to become adequately
capitalized without federal assistance, (viii) any violation of law or unsafe
or unsound practice that is likely to cause insolvency or substantial
dissipation of assets or earnings, weaken the institution's condition, or
otherwise seriously prejudice the interests of the institution's depositors
or the federal deposit insurance fund, (ix) the institution is
undercapitalized and the institution has no reasonable prospect of becoming
adequately capitalized, fails to become adequately capitalized when required
to do so, fails to submit a timely and acceptable capital restoration plan,
or materially fails to implement an accepted capital restoration plan, (x)
the institution is critically undercapitalized or otherwise has substantially
insufficient capital, or (xi) the institution is found guilty of certain
criminal offenses related to money laundering.
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Liability of Commonly Controlled Depository Institutions
In general, savings associations and other depository institutions can be
held liable for any loss which the FDIC incurs or reasonably anticipates
incurring in connection with either the default of a commonly controlled
depository institution or any assistance provided by the FDIC to a commonly
controlled institution in danger of default. A depository institution is
required to pay the amount of such liability upon receipt of written notice
from the FDIC unless such written notice is received more than two years from
the date the FDIC incurred the loss. Liability for the losses of commonly
controlled institutions can lead to the failure of all depository
institutions in a holding company structure if the remaining institutions are
unable to pay the liability assessed by the FDIC.
In general, for purposes of this provision, depository institutions are
deemed to be "commonly controlled" if they are controlled by the same holding
company or if one depository institution is controlled by another; "default"
of a depository institution occurs when there is an official determination
pursuant to which a conservator, receiver or other legal custodian is
appointed for the institution; and a depository institution is deemed to be
"in danger of default" where its federal or state supervisory agency
determines that the institution is not likely to be able to meet the demands
of its depositors or pay its obligations in the normal course of business and
there is no reasonable prospect that it will be able to do so, or determines
that the institution has incurred or is likely to incur losses that will
deplete substantially all of its capital and there is no reasonable prospect
that the institution's capital can be replenished without federal assistance.
The Bank is not currently under common control with any other depository
institution.
Enforcement Powers
The OTS and, under certain circumstances, the FDIC, have substantial
enforcement authority with respect to savings associations, including
authority to bring various enforcement actions against a savings association
and any of its "institution-affiliated parties" (a term defined to include,
among other persons, directors, officers, employees, controlling
stockholders, agents and shareholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring
suspension, removal, prohibition and criminal proceedings against
institution-affiliated parties, and (iv) assess substantial civil money
penalties. As part of a cease-and-desist order, the agencies may require a
savings association or an institution-affiliated party to take affirmative
action to correct conditions resulting from that party's actions, including
to make restitution or provide reimbursement, indemnification or guarantee
against loss; restrict the growth of the institution; and rescind agreements
and contracts.
Capital Distribution Regulation
In addition to the prompt corrective action restriction on paying
dividends, OTS regulations limit certain "capital distributions" by
OTS-regulated savings associations. Capital distributions are defined to
include, in part, dividends and payments for stock repurchases and cash-out
mergers.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has
not been notified by the OTS that it is in need of more than normal
supervision (a "Tier 1 association") may, after prior notice to but without
the approval of the OTS, make capital distributions during a calendar year up
to the higher of: (i) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its surplus capital ratio at
the beginning of the calendar year, or (ii) 75% of its net income over the
most recent four-quarter period. A Tier 1 association may make capital
distributions in excess of the above amount if it gives notice to the OTS and
the OTS does not object to the distribution. A savings association that meets
its regulatory capital requirements both before and after a proposed
distribution but does not meet its fully phased-in capital requirement (a
"Tier 2 association") is authorized, after prior notice to the OTS but
without OTS approval, to make capital distributions in an amount up to 75% of
its net income over the most recent four-quarter period, taking into account
all prior distributions during the same period. Any distribution
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in excess of this amount must be approved in advance by the OTS. A savings
association that does not meet its current regulatory capital requirements (a
"Tier 3 association") cannot make any capital distribution without prior
approval from the OTS, unless the capital distribution is consistent with the
terms of a capital plan approved by the OTS.
At September 30, 1996, First Nationwide qualified as a Tier 1 association
for purposes of the capital distribution rule. The OTS may prohibit a
proposed capital distribution that would otherwise be permitted if the OTS
determines that the distribution would constitute an unsafe or unsound
practice. The requirements of the capital distribution regulation supersede
less stringent capital distribution restrictions in earlier agreements or
conditions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation.
Under the proposed regulation, an institution that would remain at least
adequately capitalized after making a capital distribution, and that was
owned by a holding company, would be required to provide notice to the OTS
prior to making a capital distribution. "Troubled" associations and
undercapitalized associations would be allowed to make capital distributions
only by filing an application and receiving OTS approval, and such
applications would be approved under certain limited circumstances.
Qualified Thrift Lender Test
In general, savings associations are required to maintain at least 65% of
their portfolio assets in certain qualified thrift investments (which consist
primarily of loans and other investments related to residential real estate
and certain other assets). A savings association that fails the qualified
thrift lender test is subject to substantial restrictions on activities and
to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the the Internal Revenue Code as a "domestic building and
loan association." The Bank is a domestic building and loan association as
defined in the Internal Revenue Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios.
In particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family,
and household purposes (other than credit card, small business, and
educational loans) are now included without limit with other assets that, in
the aggregate, may account for up to 20% of total assets. At September 30,
1996, under the expanded QTL test, approximately 89.02% of First Nationwide's
portfolio assets were qualified thrift investments.
FDIC Assessments
The deposits of the Bank are insured by the SAIF of the FDIC, up to
applicable limits, and are subject to deposit premium assessments by the
SAIF. Under the FDIC's risk-based insurance system, SAIF-assessed deposits
have been subject to premiums of between 23 and 31 basis points, depending
upon the institution's capital position and other supervisory factors. The
rate applicable to First Nationwide Bank at September 30, 1996 was 23 basis
points.
Under recent legislation, SAIF-assessable deposits held as of March 31,
1995 are subject to a tax-deductible one-time special assessment at a rate
sufficient to achieve the 1.25% designated reserve ratio of the SAIF as of
October 1, 1996. This Special SAIF Assessment generally was payable no later
than November 29, 1996. The special assessment was 65.7 cents per $100 of
SAIF-assessable deposits and was collected on November 27, 1996. At the 65.7
basis point rate, the cost of the special assessment to the Bank was
approximately $118.2 million on a pre-tax basis and $106.4 million on an
after-tax basis.
Under the new legislation, beginning in January 1997 institutions with
Bank Insurance Fund ("BIF") deposits will be required to share the cost of
funding debt obligations issued by the Financing Corporation ("FICO"), a
corporation established by the federal government in 1987 to finance the
recapitalization of
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<PAGE>
FSLIC. However, until the earlier of December 31, 1999 or the date of
elimination of the thrift charter, the FICO assessment rate for BIF deposits
is only 1/5 of the rate applicable to SAIF deposits. Consequently, the annual
FICO assessments to be added to deposit insurance premiums are expected to
equal approximately 6.4 basis points for SAIF deposits and 1.3 basis points
for BIF deposits from January 1, 1997 through December 31, 1999, and
approximately 2.4 basis points for both BIF and SAIF deposits thereafter.
From January 1, 1997, FICO payments will be paid directly by SAIF and BIF
institutions in addition to deposit insurance assessments.
On October 16, 1996, the FDIC proposed to lower the rates on
SAIF-assessable deposits. The proposed rule would establish SAIF rates
ranging from 0 to 27 basis points as of October 1, 1996. A special interim
schedule of rates ranging from 18 to 27 basis points would apply from October
1, 1996 through December 31, 1996 for those institutions, such as the Bank,
that continue to be subject to FICO assessments until the new FICO funding
mechanism goes into effect on January 1, 1997. Excess assessments collected
under the prior assessment schedule would be refunded or credited with
interest. Following the special assessment and the new FICO funding mechanism
effective January 1, 1997, future SAIF assessment rates are expected to
depend primarily on the rate of any new losses from the SAIF insurance fund.
Under the recent legislation, however, the FDIC is not permitted to establish
SAIF assessment rates that are lower than comparable BIF assessment rates.
Leaving aside the special assessment and the new FICO assessments beginning
January 1, 1997, the Bank paid the minimum SAIF assessment rate of 18 basis
points from October 1, 1996 to December 31, 1996 and expects to pay 0 basis
points from January 1, 1997.
Thrift Charter
Congress has been considering legislation in various forms that would
require federal thrifts, such as the Bank, to convert their charters to
national or state bank charters. Recent legislation requires the Treasury
Department to prepare for Congress by March 31, 1997 a comprehensive study on
development of a common charter for federal savings associations and
commercial banks; and, in the event that the thrift charter was eliminated by
January 1, 1999, would require the merger of the BIF and the SAIF into a
single Deposit Insurance Fund on that date. In the absence of appropriate
"grandfather" provisions, legislation eliminating the thrift charter could
have a material adverse effect on the Bank and its parent holding companies
because, among other things, these holding companies engage in activities
that are not permissible for bank holding companies and the regulatory
capital and accounting treatment for banks and thrifts differs in certain
significant respects. The Bank cannot determine whether, or in what form,
such legislation may eventually be enacted and there can be no assurance that
any legislation that is enacted would contain adequate grandfather rights for
the Bank and its parent holding companies.
Non-Investment Grade Debt Securities
Savings associations and their subsidiaries are prohibited from acquiring
or retaining any corporate debt security that, at the time of acquisition, is
not rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization. The Bank does not own
any non-investment grade debt securities.
Community Reinvestment Act and the Fair Lending Laws
Savings associations have a responsibility under CRA and related
regulations of the OTS to help meet the credit needs of their communities,
including low-and moderate-income neighborhoods. In addition, the Equal
Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending
Laws") prohibit lenders from discriminating in their lending practices on the
basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, as a minimum, result in
regulatory restrictions on its activities, and failure to comply with the
Fair Lending Laws could result in enforcement actions by the OTS, as well as
other federal regulatory agencies and the Department of Justice.
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<PAGE>
New Safety and Soundness Guidelines
The OTS and the other federal banking agencies have established guidelines
for safety and soundness, addressing operational and managerial, as well as
compensation matters for insured financial institutions. Institutions failing
to meet these standards are required to submit compliance plans to their
appropriate federal regulators. The OTS and the other agencies have also
established guidelines regarding asset quality and earnings standards for
insured institutions.
Change of Control
Subject to certain limited exceptions, no company can acquire control of a
savings association without the prior approval of the OTS, and no individual
may acquire control of a savings association if the OTS objects. Any company
that acquires control of a savings association becomes a savings and loan
holding company subject to extensive registration, examination and regulation
by the OTS. Conclusive control exists, among other ways, when an acquiring
party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner
the election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and
loan holding company's voting stock (or 25% of any class of stock) and, in
either case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding Company
Act that acquire or own savings associations are no longer defined as savings
and loan holding companies under the HOLA and, therefore, are not generally
subject to supervision and regulation by the OTS. OTS approval is no longer
required for a bank holding company to acquire control of a savings
association, although the OTS has a consultative role with the FRB in
examination, enforcement and acquisition matters.
Reduction Act
On September 30, 1996, President Clinton signed into law the Reduction
Act. The Reduction Act's principal provisions relate to recapitalization of
the SAIF, but it also contains numerous regulatory relief measures, some of
which are directly applicable to the Bank. Specific provisions of the
Reduction Act are discussed above in "--Qualified Thrift Lender Test,"
"--FDIC Assessments," "--Thrift Charter," and "--Change of Control." The
Reduction Act also contains other provisions to reduce regulatory burdens
associated with compliance with various consumer and other laws applicable to
the Bank, including, for example, provisions designed to coordinate the
disclosure and other requirements under the Truth-in-Lending Act and the Real
Estate Settlement Procedures Act, modify certain insider lending
restrictions, permit OTS to allow exemptions to anti-tying prohibitions and
exempt certain transactions and simplify certain disclosures under the
Truth-in-Lending Act.
REIT Subsidiary Preferred Stock
The Bank filed a 30-day notice on November 29, 1996 with the OTS regarding
the establishment of the Company as an operating subsidiary of the Bank. The
OTS issued a letter dated December 29, 1996 expressing that it will not
object to such establishment.
In conjunction with the operating subsidiary notice, the OTS reviewed
among other things the appropriateness of including the minority interest
represented by the Company's Series A Preferred Shares in the regulatory
capital of the Bank. See "--Regulatory Capital Requirements." In general, as
a minority interest in a consolidated subsidiary, the Series A Preferred
Shares are eligible to be treated as core capital of the Bank, but the OTS
may have the authority to exclude such REIT subsidiary preferred stock from
core capital. The OTS has indicated that it will not exclude REIT subsidiary
preferred stock from the core capital of the parent savings association if
the following prudential standards are met: (i) the REIT subsidiary preferred
stock meets all of the same terms and conditions that preferred stock issued
by the parent savings association must meet in order to be included in core
capital; (ii) the REIT subsidiary preferred stock cannot be redeemed without
the prior written consent of the OTS; (iii) the REIT subsidiary preferred
stock must be converted into or exchanged for a core capital instrument of
the parent savings association if the OTS directs, in writing, that such a
conversion or exchange should occur
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because (a) the parent savings association becomes undercapitalized under
prompt corrective action regulations, (b) the parent savings association is
placed in bankruptcy, reorganization, conservatorship, or receivership, or
(c) the OTS, in its sole discretion, directs in writing such conversion or
exchange in anticipation of the parent savings association becoming
undercapitalized in the near term; (iv) the amount of the parent savings
association's core capital that is composed of REIT subsidiary preferred
stock does not exceed 25% of core capital including such REIT subsidiary
preferred stock (33 1/3% of core capital excluding REIT subsidiary preferred
stock); and (v) the OTS may exclude REIT subsidiary preferred stock from core
capital if it ceases to provide meaningful capital support and a realistic
ability to absorb losses or otherwise raises supervisory concerns, including
OTS concerns about the capital mix or asset structure of the REIT subsidiary
or the parent savings association. The Company expects the Series A Preferred
Shares to be included in the core capital of the Bank.
TAXATION OF THE BANK
For a discussion of recently enacted tax legislation that changes the
Bank's method of accounting for bad debts, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Provision for
Federal and State Income Taxes."
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information (ages as of January 1,
1997) concerning the directors and executive officers of the Bank. All
directors serve terms of one year or until election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------- ----- -----------------------------------------
<S> <C> <C>
Ronald O. Perelman ....... 54 Director
Gerald J. Ford ........... 52 Chairman of the Board, Chief Executive Officer
and Director
Carl B. Webb ............. 46 President, Chief Operating Officer and
Director
Paul M. Bass, Jr. ........ 61 Director
George W. Bramblett, Jr. 56 Director
Bob Bullock .............. 67 Director
Irwin Engelman ........... 61 Director
Howard Gittis ............ 62 Director
Gabrielle K. McDonald ... 54 Director
Lynn Schenk .............. 54 Director
Robert Setrakian ......... 72 Director
Christie S. Flanagan .... 58 Executive Vice President and General Counsel
Kendall M. Fugate ........ 59 Executive Vice President and Information and
Technology Services Director
Roger L. Gordon .......... 54 Executive Vice President
Richard P. Hodge ......... 41 Executive Vice President and Corporate Tax
Director
Walter C. Klein, Jr. .... 53 Executive Vice President; President, FNMC
Lacy G. Newman, Jr. ..... 46 Executive Vice President and Chief Credit
Officer
James R. Staff ........... 49 Executive Vice President and Chief Financial
Advisor
Richard H. Terzian ....... 59 Executive Vice President and Chief Financial
Officer
Peter K. Thomsen ......... 54 Executive Vice President and Retail Banking
Director
Michael R. Walker ........ 51 Executive Vice President--Commercial Real
Estate
Renee Nichols Tucei ..... 40 Senior Vice President and Controller
</TABLE>
Mr. Perelman has been a Director of First Nationwide or the Bank since
1994 and Chairman of the Board of Holdings since its formation in 1994. Mr.
Perelman has been Chairman of the Board and Chief Executive Officer of
MacAndrews & Forbes and various of its affiliates since 1980. Mr. Perelman
also is Chairman of the Board of Andrews Group Incorporated ("Andrews
Group"), Consolidated Cigar Holdings Inc. ("Consolidated Cigar Holdings"),
Meridian Sports Incorporated ("Meridian Sports"), New World Communications
Group Incorporated ("New World"), Power Control Technologies Inc. ("PCT") and
Toy Biz, Inc. ("Toy Biz") and is the Chairman of the Executive Committee of
the Board of Directors of Marvel Entertainment Group, Inc. ("Marvel"), Revlon
Consumer Products Corporation ("Revlon Products") and Revlon, Inc.
("Revlon"). Mr. Perelman is a Director of the following corporations which
file reports pursuant to the Exchange Act: Andrews Group, The Coleman
Company, Inc. ("Coleman"), Coleman Holdings Inc., Coleman Worldwide
Corporation ("Coleman Worldwide"), Consolidated Cigar Corporation
("Consolidated Cigar"), Consolidated Cigar Holdings, First Nationwide,
Holdings, Mafco Consolidated Group Inc. ("Mafco Consolidated"), Mafco
Worldwide Corporation ("Mafco Worldwide"), Marvel, Marvel Holdings Inc.
("Marvel Holdings"), Marvel (Parent) Holdings Inc., ("Marvel Parent"),
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Marvel III Holdings Inc. ("Marvel III"), Meridian Sports, New World, New
World Television Incorporated ("New World Television"), NWCG Holdings
Corporation ("NWCG Holdings"), Parent Holdings, PCT, Revlon, Revlon Products,
Revlon Worldwide Corporation ("Revlon Worldwide") and Toy Biz. (On December
27, 1996, Marvel Holdings, Marvel Parent, Marvel III and Marvel and several
of its subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the United States Bankruptcy Code.)
Mr. Ford has been Chairman of the Board, Chief Executive Officer and a
Director of First Nationwide or the Bank since consummation of the FN
Acquisition and of the Company since its formation in November 1996. Mr. Ford
was Chairman of the Board and a Director of First Madison from 1993 to 1994.
Mr. Ford previously served as Chairman of the Board, Chief Executive Officer
and a Director of First Gibraltar from 1988 through 1993. Mr. Ford served as
the Chairman of the Board, Chief Executive Officer and a Director of First
United Bank Group, Inc. ("First United Bank Group"), from 1993 through 1994.
Mr. Ford is Chairman of the Board and a Director of FNMC, a wholly owned
subsidiary of First Nationwide. Mr. Ford is Chairman of the Board and a
Director of FGB Services, Inc. and Madison Realty Advisors, Inc. ("Madison
Realty"). Mr. Ford has also served in the following capacities over the past
five years: Chairman of the Board, Chief Executive Officer and Director, Ford
Bank Group, Inc. ("Ford Bank Group"); Chairman of the Board, Chief Executive
Officer and Director, United New Mexico Financial Corporation. Mr. Ford is
also Chairman of the Board and Chief Executive Officer of Liberte Investors
Inc., President and a Director of Parent Holdings and a Director of Norwest
Corporation and ACS.
Mr. Webb has been the President, Chief Operating Officer and a Director of
First Nationwide or the Bank since the consummation of the FN Acquisition and
of the Company since its formation in November 1996. Mr. Webb served as
President, Chief Executive Officer and Director of First Madison from 1993
through 1994. Mr. Webb previously served as President, Chief Operating
Officer and a Director of First Gibraltar from 1988 through 1993. Mr. Webb
also serves as a Director of FNMC.
Mr. Bass has been a Director of First Nationwide or the Bank since May,
1993. Mr. Bass is currently the Vice Chairman and Director of First Southwest
Company. Mr. Bass is a Director and Chairman of the Audit Committee of
Keystone Consolidated Industries, and is a Director of Source Services, Inc.
Mr. Bass has served in the following capacities during the past five years:
Director, Endevco, Inc.; Director, Ford Bank Group; and Chairman of the Board
and Director, Pizza Inn, Inc.
Mr. Bramblett has been a Director of First Nationwide or the Bank since
May, 1993. Mr. Bramblett has been associated with the law firm of Haynes &
Boone since 1973 and is currently a Partner and a member of the Executive
Committee of that firm. Mr. Bramblett has served in the following capacities
during the past five years: Member of the Texas Higher Education Coordinating
Board of the Texas College and University System and Trustee of the Baylor
College of Dentistry.
Mr. Bullock has served as a Director of First Nationwide or the Bank since
1994. Mr. Bullock has been Lieutenant Governor of the State of Texas since
1990. Mr. Bullock is Chairman of the Board, Director and President of
JFB-RDB, Inc. Mr. Bullock served as a Director of the Ford Bank Group from
1992 to 1993, and as Director of the First United Bank Group from 1992 to
1993. Prior to 1990, Mr. Bullock served as the State of Texas Comptroller of
Public Accounts. Mr. Bullock has been Of Counsel to the law firm of Scott,
Douglass, Luton and McConnico, L.L.P. since 1992.
Mr. Engelman has been a Director of First Nationwide or the Bank since
1992 and the Executive Vice President and Chief Financial Officer of Holdings
since its formation in 1994. He has been Executive Vice President and Chief
Financial Officer of MacAndrews & Forbes, Marvel Holdings, Marvel Parent,
Marvel III and various other affiliates of MacAndrews & Forbes since February
1992. (On December 27, 1996, Marvel Holdings, Marvel Parent, Marvel III and
several of the subsidiaries of Marvel Holdings filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.) He was
Executive Vice President and Chief Financial Officer of GAF Corporation from
1990 to 1991; Director, President and Chief Operating Officer of Citytrust
Bancorp Inc. from 1988 to 1990; Executive Vice President of the Blackstone
Group LP from 1987 to 1988; and Director and Executive Vice President of
General Foods Corporation for more than five years prior to 1987. Mr.
Engelman is a Director of New World, New World Television and Revlon
Products.
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<PAGE>
Mr. Gittis has been a Director of First Nationwide or the Bank and a Vice
Chairman and a Director of Holdings since 1994. Mr. Gittis has been Vice
Chairman and Director of MacAndrews & Forbes and various of its affiliates
since 1985. Mr. Gittis is a Director of Andrews Group, Consolidated Cigar,
Consolidated Cigar Holdings, Jones Apparel Group, Inc., Loral Space &
Communications Ltd., Mafco Consolidated, Mafco Worldwide, Rutherford-Moran
Oil Corporation, New World, New World Television, NWCG Holdings, Parent
Holdings, PCT, Revlon, Revlon Products and Revlon Worldwide.
Ms. McDonald has served as a Director of First Nationwide or the Bank
since January, 1990. Ms. McDonald also served as a Director of FGB-San
Antonio in 1992. Ms. McDonald currently serves as a Judge on the
International Criminal Tribunal for the former Yugoslavia. Ms. McDonald is
also currently a Professor of Law at the Thurgood Marshall School of Law of
Texas Southern University. Ms. McDonald currently serves as a director of
Freeport McMoRan Inc., McMoRan Oil & Gas Co. and Freeport McMoRan Copper &
Gold Inc. Ms. McDonald was Of Counsel to the Walker & Satterthwaite firm from
1991 to 1993. She was a partner in the law firm of Matthews & Branscomb from
1988 through 1991. Prior to that time, Ms. McDonald served as a United States
District Court Judge for the Southern District of Texas.
Ms. Schenk has been a Director of First Nationwide or the Bank since
November, 1996. Ms. Schenk has been a Senior Consultant to Baker & McKenzie,
San Diego, California since 1995. From January, 1993 to January, 1995 Ms.
Schenk served in the U.S. House of Representatives as Congresswoman
representing the 49th Congressional District in the State of California.
During her term in the House of Representatives, Ms. Schenk served on the
Energy and Commerce Committee and the Merchant Marine and Fisheries
Committee. Ms. Schenk served as the State of California Secretary of
Business, Transportation and Housing prior to 1983. From 1983 until her
election to Congress, Ms. Schenk was in private law practice in California
and served as an independent consultant to various public and private
businesses with respect to government relations. From 1985 to 1993, Ms.
Schenk served as a director of Long Beach Bank, F.S.B. She is currently a
director of IDEC Pharmaceuticals, Inc.
Mr. Setrakian has been a Director of First Nationwide or the Bank since
November 1994. Mr. Setrakian previously served as a Director of Old FNB for
more than 10 years. Mr. Setrakian is presently the Chairman and President of
the William Saroyan Foundation and the Chairman and President of Mid-State
Horticultural Company. He is also a former Chairman and member of the Board
of Governors of the United States Postal Service; former Commissioner of the
Federal Maritime Commission; former Chairman and Chief Executive Officer of
the California Growers Winery, Inc.; and former Chairman and founder of the
National Bank of Agriculture.
Mr. Flanagan has been the Executive Vice President and General Counsel of
First Nationwide or the Bank since the consummation of the FN Acquisition.
Mr. Flanagan has been the Executive Vice President, General Counsel and a
Director of the Company since its formation in November 1996. He also serves
as a Director of FNMC. Mr. Flanagan has been associated with the law firm of
Jenkens & Gilchrist, P.C. and its predecessors since 1968 in various
capacities, including Managing Partner, and he is currently Of Counsel to
that firm.
Mr. Fugate has been an Executive Vice President of First Nationwide or the
Bank since the consummation of the FN Acquisition. Mr. Fugate previously
served as Executive Vice President of Old FNB from 1991 to 1994, and held
various executive positions with Citibank, N.A. and Citibank California, FSB
from 1982 to 1991.
Mr. Gordon has been an Executive Vice President of First Nationwide or the
Bank since February 1996. Mr. Gordon previously was associated with SFFed for
more than five years prior to February 1996, including most recently as
Chairman, President and Chief Executive Officer.
Mr. Hodge has been an Executive Vice President of First Nationwide or the
Bank since January 1996 and has been employed by First Nationwide since
November 1995. Mr. Hodge previously was associated with the public accounting
firm of KPMG Peat Marwick LLP and its predecessors since 1981, including most
recently as a tax partner since 1986.
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<PAGE>
Mr. Klein has been an Executive Vice President of First Nationwide or the
Bank and the President of FNMC since January 1996. He also serves as a
Director of FNMC. Mr. Klein previously was associated with PNC Mortgage Corp.
of America and its predecessor, Sears Mortgage Corporation, since 1986,
including most recently as Chairman and Chief Executive Officer.
Mr. Newman has been Executive Vice President and Chief Credit Officer of
First Nationwide or the Bank since the consummation of the FN Acquisition.
Mr. Newman has also served as President and a Director of FGB Realty and
Madison Realty since 1992. During 1991, Mr. Newman was a Senior Vice
President of J.E. Robert Companies. He served as a Senior Vice President of
Bank of New England Corporation from 1990 to 1991, and served as the
President, Chief Executive Officer and Director of the Seamen's Bank for
Savings from 1989 to 1990.
Mr. Staff has been an Executive Vice President of First Nationwide or the
Bank since October 17, 1994. He also serves as a Director of the Company and
FNMC and as Chairman and Director of FGB Realty. Mr. Staff previously was
associated with the public accounting firm of KPMG Peat Marwick LLP and its
predecessors since 1979, including most recently as Partner-in-charge of
Financial Services for the Southwest-Dallas area.
Mr. Terzian has served as Executive Vice President and Chief Financial
Officer of First Nationwide or the Bank since April 1, 1995. Mr. Terzian has
been the Executive Vice President, Chief Financial Officer and a Director of
the Company since its formation in November 1996. For the five years prior to
that date, Mr. Terzian served as Chief Financial Officer of Dime Bancorp,
Inc. (The Dime Savings Bank of New York, FSB).
Mr. Thomsen has been an Executive Vice President of First Nationwide or
the Bank since the consummation of the FN Acquisition. Mr. Thomsen previously
served as Senior Executive Vice President of Old FNB and a Director from 1992
to 1994. Mr. Thomsen was an Executive Vice President of Old FNB from 1991 to
1992. Mr. Thomsen had been Executive Vice President of Michigan National
Corporation from 1986 to 1991 and a Director from 1989 to 1991, and the
President of Michigan National Bank from 1988 to 1991 and a Director from
1989 to 1991. Mr. Thomsen was Chairman of Independence One Mortgage
Corporation, a subsidiary of Michigan National Bank, from 1986 to 1990.
Mr. Walker has been an Executive Vice President of First Nationwide or the
Bank since the consummation of the FN Acquisition. Mr. Walker served as
Senior Vice President of First Madison from 1993 to 1994. Mr. Walker
previously served as Senior Vice President of First Gibraltar from 1988 to
1993.
Ms. Tucei has been a Senior Vice President and the Controller of First
Nationwide or the Bank since the consummation of the FN Acquisition. Ms.
Tucei previously served as Senior Vice President and Controller of First
Madison from 1993 to 1994. Ms. Tucei was Senior Vice President and Director
of Regulatory Assistance Compliance for First Gibraltar from 1991 to 1993,
and served as Senior Vice President and Manager of Regulatory Assistance
Operations for First Gibraltar from 1989 to 1991.
COMPENSATION OF DIRECTORS
Directors of the Bank who do not receive compensation as officers or
employees of the Bank or any of its affiliates are paid a fee of $3,500 for
each meeting of the Board of Directors they attend and each director who
attends 67% or more of the regular meetings of the Board of Directors during
a fiscal year will receive an additional fee of $9,000. Members of the Audit
Committee of the Board of Directors of the Bank who do not receive
compensation as officers or employees of the Bank or any of its affiliates
are paid a fee of $1,500 for each meeting of the Audit Committee they attend.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain compensation awarded to, earned by
or paid to the Chief Executive Officer of First Nationwide, and the four most
highly paid executive officers of First Nationwide, other than the Chief
Executive Officer, who served as executive officers of First Nationwide at
December 31, 1995 for services rendered in all capacities to First Nationwide
and its subsidiaries during the years ended December 31, 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
------------------------------------
OTHER ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) (2)
- --------------------------- ------ ---------- -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Gerald J. Ford (3)
Chairman & Chief 1995 $750,000 0 $ 7,644 $49,511
Executive Officer 1994 192,358 0 912 4,500
Carl B. Webb
President & Chief 1995 600,000 0 274,351 66,707
Operating Officer 1994 346,434 0 154,496 9,000
1993 269,551 80,000 8,493 12,658
Lacy G. Newman, Jr.
Executive Vice President & 1995 475,000 0 178,457 36,166
Chief Credit Officer 1994 345,334 0 124,916 9,000
1993 300,000 77,200 6,289 11,572
Christie S. Flanagan (3)
Executive Vice President & 1995 350,000 20,000 10,892 44,854
General Counsel 1994 95,725 0 0 0
Peter K. Thomsen (3)
Executive Vice President & 1995 305,000 0 13,441 18,841
Retail Banking Director 1994 76,963 0 6,123 1,361
</TABLE>
- ------------
(1) Includes: (i) the value of group term life insurance, (ii) amounts paid
under relocation programs for Messrs. Webb and Newman, (iii) the value
of the use of First Nationwide-owned automobiles for Messrs. Webb,
Flanagan, Newman and Thompsen, (iv) club dues, (v) personal financial
planning services paid by First Nationwide for Messrs. Ford, Webb,
Newman and Thomsen, and (vi) security expenses paid by First Nationwide
for Messrs. Newman and Thomsen.
(2) Includes: (i) First Nationwide's contributions to the 401(k) plan for
Messrs. Ford, Webb, Flanagan and Newman, (ii) First Nationwide's
contribution to the Supplemental Employees' Investment Plan, and (iii)
premiums on supplemental life insurance paid by First Nationwide for
Messrs. Ford, Webb and Flanagan.
(3) Mr. Ford became Chief Executive Officer of First Nationwide upon the
consummation of the FN Acquisition on October 3, 1994. Messrs. Flanagan
and Thomsen became Executive Vice Presidents on October 3, 1996.
Certain executive officers of First Nationwide have entered into
employment agreements with First Nationwide. See "Certain
Transactions--Executive Employment Agreements." Also, Gerald J. Ford has been
and is presently a party to certain consulting, and similar agreements with
the certain affiliates of First Nationwide, as more fully described in
"Certain Transactions--Transactions with Mr. Ford."
Effective October 1, 1995, Holdings adopted a management incentive plan
(the "Incentive Plan") with respect to certain executive officers of First
Nationwide (the "Participants"). Awards under the
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Incentive Plan are made in the form of performance units. Each performance
unit entitles the Participants to receive cash and/or stock options
("Bonuses") based on the Participant's vested interest in a bonus pool.
Generally, the Incentive Plan provides for the payment of Bonuses, on a
quarterly basis, to the Participants upon the occurrence of certain events.
Bonuses vest at 20% per year beginning October 1, 1995. The aggregate amount
of Bonuses payable under the Incentive Plan is subject to a cap of $50
million. During 1995, expense of $2 million was recorded relative to the
Incentive Plan. Additional expense of $33.6 million was recorded relative to
the Incentive Plan during the nine months ended September 30, 1996.
The following table sets forth information concerning awards made during
1995 to each of the executive officers named in the preceding table under all
long-term incentive plans. There were no long-term incentive plan awards in
1994 or 1993.
LONG-TERM INCENTIVE PLAN AWARDS (1)
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK-PRICE-BASED PLANS
-------------------------------------------
NUMBER OF
SHARES, PERFORMANCE OR
UNITS OR OTHER PERIOD UNTIL
OTHER MATURATION OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS (#) PAYOUT (2) ($) (3) ($) (3) ($) (3)
- -------------------- ----------- ------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Carl B. Webb ........ 500 Ten years $10,127,500 $10,127,500 $25,000,000
Christie S. Flanagan 80 Ten years 1,620,400 1,620,400 4,000,000
Lacy G. Newman, Jr. . 80 Ten years 1,620,400 1,620,400 4,000,000
Peter K. Thomsen ... 50 Ten years 1,012,750 1,012,750 2,500,000
</TABLE>
- ------------
(1) The table above represents awards of performance units pursuant to the
Incentive Plan. Any payout with respect to the performance units would
only be made by Holdings. Units vest at 20% per year beginning on
October 1, 1995.
(2) Payouts of cash awards would be made only if earned and only (i) upon
achievement of a target "Excess Value" prior to December 31, 2004, (ii)
upon an occurrence of a change in control of Holdings or the Bank,
(iii) upon an occurrence of a public offering of common stock of
Holdings or the Bank or (iv) on December 31, 2004. "Excess Value" is a
measure of Holdings' performance tied to the aggregate earnings of
Holdings and the aggregate distributions made to the shareholders of
Holdings.
(3) Generally, the cash payout with respect to a performance unit equals
.0084% of the Excess Value. Upon achievement of the target Excess
Value, the cash payout with respect to each performance unit would be
$20,255. If a payout is triggered otherwise than by achievement of the
target Excess Value, no cash payouts would be made unless the Excess
Value at the time of the event triggering payment exceeds or equals the
amount resulting in a payout of at least $20,255 with respect to each
performance unit. In certain circumstances, in case of a public
offering of common stock of Holdings or the Bank, the payout would be
made, in whole or in part, in options to acquire common stock of
Holdings or the Bank. The number of shares of stock that would be
subject to such options is not determinable at this time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The following directors serve on the Compensation Committee of the Board
of the Bank: Gerald J. Ford, Howard Gittis, Paul Bass and George Bramblett.
During the 1995 and 1994 fiscal years, Mr. Ford was Chairman of the Board of
First Nationwide. In addition, Mr. Ford controls Hunter's Glen, which owns
100% of the class B common stock of Holdings representing 20% of the voting
common stock (representing approximately 15% of the voting power of its
common stock) of Holdings. Mr. Gittis is a director of Holdings and of the
Bank.
OC-195
<PAGE>
OWNERSHIP OF THE COMMON STOCK
All of the Bank's Common Stock is owned by Holdings. Ronald O. Perelman, a
director of the Bank and Chairman of the Board, Chief Executive Officer and a
director of Holdings, 35 East 62nd Street, New York, New York 10021, through
MacAndrews & Forbes, beneficially owns 100% of the class A common stock of
Holdings representing 80% of its voting common stock (representing
approximately 85% of the voting power of its common stock). Hunter's Glen, a
limited partnership controlled by Gerald J. Ford, Chairman of the Board,
Chief Executive Officer and a director of the Bank, 200 Crescent Court, Suite
1350, Dallas, Texas 75201, owns 100% of the class B common stock of Holdings,
representing 20% of its voting common stock (representing approximately 15%
of the voting power of its common stock). See "Certain Transactions."
CERTAIN TRANSACTIONS
RELATIONSHIP WITH MACANDREWS & FORBES
MacAndrews & Forbes is a diversified holding company with interests in
several industries. Through its 83% ownership of Revlon, MacAndrews & Forbes
is engaged in the cosmetics and skin care, fragrance and personal care
products business. MacAndrews & Forbes owns 83% of Coleman, which is engaged
in the manufacture and marketing of recreational outdoor products, portable
generators, power-washing equipment, spas and hot tubs and 65% of Meridian
Sports, a manufacturer and marketer of specialized boats and water sports
equipment. Marvel, a youth entertainment company, is 80% owned by MacAndrews
& Forbes. MacAndrews & Forbes also is engaged in the television broadcast and
programming production business through its approximate 42% ownership of New
World Communications, and through its 85% ownership of Mafco Consolidated, in
the processing of licorice and other flavors, and in the manufacture and
distribution of cigars and pipe tobacco. MacAndrews & Forbes is also in the
financial services business through the Bank. The principal executive offices
of MacAndrews & Forbes are located at 35 East 62nd Street, New York, New York
10021.
TAX SHARING AGREEMENT
For federal income tax purposes, Holdings and the Bank are included in the
Mafco Group, and accordingly their federal taxable income and loss will be
included in the consolidated federal income tax return filed by Mafco
Holdings. Holdings and the Bank also may be included in certain state and
local tax returns of Mafco Holdings or its subsidiaries. The Bank, Holdings
and Mafco Holdings are parties to the Tax Sharing Agreement, effective as of
January 1, 1994, pursuant to which: (i) the Bank will pay to Holdings amounts
equal to the taxes that the Bank would be required to pay if it were to file
a return separately from the Mafco Group, and (ii) Holdings will pay to Mafco
Holdings amounts equal to the taxes that Holdings would be required to pay if
it were to file a consolidated return on behalf of itself and the Bank
separately from the Mafco Group. The Tax Sharing Agreement allows the Bank to
take into account, in determining its liability to Holdings, any net
operating loss carryovers that it would have been entitled to utilize if it
had filed separate returns for each year since the formation of First
Nationwide. The Tax Sharing Agreement also allows Holdings to take into
account, in determining its liability to Mafco Holdings, any net operating
losses that it would have been entitled to utilize if it had filed a
consolidated return on behalf of itself and the Bank for each year since the
formation of First Nationwide.
First Nationwide generated significant federal income tax net operating
losses since its formation. This was due, in part, to the fact that under
applicable federal income tax law, the financial assistance received by First
Nationwide pursuant to the Assistance Agreement was excluded from the taxable
income of First Nationwide. In addition to such tax-free financial
assistance, First Nationwide had been entitled to its normal operating
deductions, including interest expense and certain losses relating to its
loan portfolio. As a result, First Nationwide generated significant net
operating losses for federal income tax purposes even though its operations
were profitable. Furthermore, under the reorganization provisions of the
Code, First Nationwide succeeded to certain net operating loss carryovers of
the Texas Closed Banks.
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<PAGE>
At December 31, 1995, if First Nationwide had filed a consolidated tax
return on behalf of itself and its subsidiaries for each year since the
formation of First Nationwide, it would have had approximately $2.6 billion
of regular net operating losses and approximately $959 million of AMT net
operating losses, both of which First Nationwide would have utilized. A
portion of such losses, to the extent not previously used to offset income,
will expire in the year 2002 and in each year thereafter and will fully
expire in 2007. It is expected that under the Tax Sharing Agreement, the Bank
and Holdings will be able to eliminate a significant portion of the amounts
they otherwise would be required to pay to Holdings and Mafco Holdings,
respectively, under the Tax Sharing Agreement in respect of federal income
tax and, accordingly, it is not expected that the Bank or Holdings will
record significant amounts of federal income tax expense as members of the
Mafco Group. Payments made by First Nationwide under the Tax Sharing
Agreement with the Mafco Group during the year ended December 31, 1995
totalled $5.1 million. There were no such payments in 1994. During 1998, the
Bank and Holdings anticipate that the AMT net operating losses will be fully
utilized and the Bank and Holdings will incur federal income tax expense at a
rate of 20%. Prior to 1998, the Bank and Holdings have incurred and will
continue to incur federal income tax expense at a 2 percent rate because 90
percent of AMT net operating losses were available to offset AMT income.
Under federal tax law, Holdings and the Bank will be subject to several
liability with respect to the consolidated federal income tax liabilities of
the Mafco Group for any taxable period during which Holdings or the Bank are,
as the case may be, a member of such group. Mafco Holdings has agreed,
however, to indemnify Holdings and the Bank for any such federal income tax
liability (and certain state and local tax liabilities) of Mafco Holdings or
any of its subsidiaries (other than Holdings and the Bank) that Holdings or
the Bank is actually required to pay. Therefore, the Tax Sharing Agreement
will not increase the amounts payable by Holdings or the Bank over the
amounts that they would have had to pay if they were not members of the Mafco
Group.
TRANSACTIONS WITH MR. FORD
Madison Financial, Inc. ("Madison Financial"), a corporation formerly
owned by Gerald J. Ford, the Chairman of the Board, Chief Executive Officer
and a director of the Bank, was a party to a Consulting Agreement (the
"Consulting Agreement"), effective as of February 1, 1993, between Madison
Financial and TNIS pursuant to which Madison Financial provided consulting
services to TNIS for a term ending on December 31, 1998. The Consulting
Agreement was terminated in July 1994 in connection with the Exchange
Agreement (as defined herein). Certain costs related to the Consulting
Agreement were charged to Holdings.
The Bank is an indirect subsidiary of First Gibraltar Holdings. In
connection with the offering of the Holdings Senior Notes, First Gibraltar
Holdings incorporated Parent Holdings and a wholly owned subsidiary of Parent
Holdings, Holdings, to hold 100% of the common stock of First Nationwide.
First Gibraltar Holdings contributed all of its shares of capital stock of
First Nationwide to Parent Holdings, which contributed such shares to
Holdings in exchange for 1,000 shares of common stock of Holdings. Holdings
amended its certificate of incorporation to create 800 shares of class A
common stock having one vote per share, 200 shares of class B common stock
having .75 votes per share and 230.3 shares of nonvoting class C common
stock, and Parent Holdings exchanged its 1,000 shares of common stock for 800
shares of class A common stock. Pursuant to the terms of an Exchange
Agreement entered into between Holdings, Mr. Ford and Parent Holdings (the
"Exchange Agreement"), and in connection with the consummation of the FN
Acquisition, Parent Holdings acquired 100% of the class C common stock of
Holdings (all of which was redeemed on June 3, 1996), in exchange for $210
million and Mr. Ford acquired 100% of the class B common stock of Holdings in
exchange for his 6.25% of the class A common stock of First Gibraltar
Holdings and all of the shares of Madison Financial, the sole asset of which
was the Consulting Agreement. In addition, Holdings also assumed indebtedness
of Mr. Ford in the amount of approximately $11.9 million to TNIS (the "Ford
Obligation"), which obligation has been forgiven by TNIS. As a result of the
consummation of the transactions contemplated by the Exchange Agreement, Mr.
Ford owns 100% of the class B common stock of Holdings, representing 20% of
its voting common stock (representing approximately 15% of the voting power
of its voting common stock) and Parent Holdings owns 100% of the class A
common stock of Holdings, representing 80% of its voting common
OC-197
<PAGE>
stock (representing approximately 85% of the voting power of its voting
common stock). Holdings, Parent Holdings and Mr. Ford have entered into a
stockholders agreement (the "Stockholders Agreement") pursuant to which,
among other things, Mr. Ford and Holdings have the right to transfer their
respective shares to certain affiliates. In addition, the Stockholders
Agreement contains other customary provisions regarding restrictions on
transfer and registration rights. On December 29, 1995, Mr. Ford transferred
his shares of class B common stock to Hunter's Glen, which assumed the
obligations under, and will receive the benefits of, the Stockholders
Agreement.
Mr. Ford has entered into a loan agreement with NationsBank of Texas, N.A.
("NationsBank"), whereby NationsBank has loaned Mr. Ford $5 million. Such
loan has a maturity of up to one year and bears interest at a floating
interest rate based on LIBOR. The loan is secured by Mr. Ford's Holdings
Senior Notes. The terms of the loan provide that, in the event of default by
Mr. Ford under such loan or in the event of certain rapid and material
declines in the value of the Holdings Senior Notes pledged as collateral,
NationsBank or any successor or assignee thereof will have the right to
foreclose on the pledged Holdings Senior Notes and sell, or direct Mr. Ford
to sell, such Holdings Senior Notes, to certain Qualified Institutional
Buyers ("QIBs") (as such term is defined in Rule 144A under the Securities
Act) pursuant to Rule 144A under the Securities Act, pursuant to Regulation S
under the Securities Act, to Holdings or pursuant to a shelf registration
statement.
Mr. Ford has entered into an employment agreement with the Bank calling
for his continued employment by the Bank in his current executive capacity
with an annual base salary of $750,000. The term of this agreement extends
through December 31, 1997, and provides for, among other things, a life
insurance policy on the life of Mr. Ford in an amount equal to three times
his base salary.
Mr. Ford has also entered into a consulting agreement with First
Nationwide Management Corp. ("First Nationwide Management"), an affiliate of
the Bank, providing for the payment to him of annual consulting fees of
$750,000 for 1995 and in increasing amounts through 1997, and certain other
related expenses. Pursuant to an arrangement between First Nationwide
Management and Holdings, such consulting fees and other related expenses paid
by First Nationwide Management are charged to Holdings. Such charges amounted
to approximately $964,000 and $155,000 in 1995 and 1994, respectively.
EXECUTIVE EMPLOYMENT AGREEMENTS
In addition to the employment agreement between Mr. Ford and the Bank (see
"--Transactions with Mr. Ford"), Messrs. Webb, Flanagan, Staff, Newman and
Hodge have entered into employment agreements with the Bank calling for their
continued employment by the Bank in their current executive capacities. All
five agreements are substantially similar in their terms except that Messrs.
Webb, Staff and Newman's employment agreements terminate on January 31, 1998,
Mr. Hodge's terminates on December 31, 1998 and Mr. Flanagan's terminates May
31, 1999 and except that Mr. Flanagan's agreement provides for a $20,000
"substitution" bonus which was paid in 1996. Additionally, each employment
agreement provides for a life insurance policy on the life of the insured in
an amount double the base salary payable by the Bank to such individual.
Pursuant to such employment agreements, the annual base salaries payable by
First Nationwide to Messrs. Webb, Flanagan, Staff, Newman and Hodge are
$900,000, $700,000, $550,000, $475,000 and $250,000, respectively.
Pursuant to an Agreement for Provision of Services between First
Nationwide and First Nationwide Management, dated December 1, 1994 (the
"Services Agreement"), a portion of the salaries payable by the Bank to
Messrs. Webb, Flanagan and Staff is charged to First Nationwide Management so
that the annual net base compensation payable by the Bank will be $600,000,
$350,000 and $275,000 for Messrs. Webb, Flanagan and Staff, respectively. All
of such fees paid by First Nationwide Management are charged to Holdings for
services performed by these executives. The total amounts of such fees were
approximately $945,000 and $214,000 in 1995 and 1994, respectively, including
$945,000 and $78,000 in 1995 and 1994, respectively received by the Bank
pursuant to the Services Agreement, which fees are included in the amounts
allocated by First Nationwide Management to Holdings as described in the
first paragraph under "--Services Agreement."
OC-198
<PAGE>
The Bank has also entered into an employment agreement with Mr. Gordon,
effective as of the consummation of the SFFed Acquisition, for a term ending
on January 30, 1999. Pursuant to such employment agreement, the annual base
salary payable by the Bank to Mr. Gordon is $400,000. Mr. Gordon's agreement
also provides for life insurance in an amount on the life of the insured
equal to $714,000.
Effective January 8, 1996, FNMC entered into an employment agreement with
Mr. Klein, for a term ending January 7, 1999. Pursuant to this employment
agreement, Mr. Klein receives a base salary of $300,000 per year. The
agreement also provides for life insurance on the life of the insured in the
amount of $450,000.
SERVICES AGREEMENTS
Effective December 1, 1994, First Nationwide entered into the Services
Agreement with First Nationwide Management whereby selected Bank employees
(including Messrs. Webb, Flanagan, and Staff) provided services for First
Nationwide Management and certain of its subsidiaries. Fees are paid to First
Nationwide under the Services Agreement at the rate of approximately $107,000
per month based on actual services provided and approximated $1,092,000 and
$86,000 for the years ended December 31, 1995 and 1994, respectively.
Effective on June 1, 1995, First Nationwide entered into an agreement
whereby it provides marketing and other support services to TNIS in
connection with the insurance agency business it purchased from a First
Nationwide subsidiary on the same date. Service charges under this agreement
during 1995 were approximately $43,000 per month and during 1996 are
approximately $13,300 per month. Management believes that the terms and
conditions of these arrangements are at least as favorable to the Bank as
those which could be obtained from similar arrangements with an unaffiliated
party.
SALE OF BUSINESS TO TNIS
Effective on June 1, 1995, FNC Insurance Agency, Inc., a wholly owned
subsidiary of First Nationwide, sold that portion of its insurance agency
business related to marketing insurance products to First Nationwide's retail
deposit and consumer loan customers to TNIS for approximately $0.7 million.
Management believes that the terms and conditions of this transaction are at
least as favorable to First Nationwide as might have been obtained in a
similar transaction with an unaffiliated party.
LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
Some of the Bank's executive officers, directors, and members of their
immediate families have engaged in loan transactions with the Bank. Such
loans were made: (i) in the ordinary course of the Bank's business, (ii) on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions between the Bank and
other persons, and (iii) did not involve more than the normal risk of
collectibility or present other unfavorable features.
OC-199
<PAGE>
DESCRIPTION OF THE BANK PREFERRED STOCK
The following summary sets forth the material terms and provisions of the
Bank Preferred Stock, and is qualified in its entirety by reference to the
terms and provisions of the Federal Stock Charter of the Bank (the "Charter")
and the Fourth Supplementary Section to Section 5 of the Charter setting
forth the powers, designations, preferences and rights of the Bank Preferred
Stock.
GENERAL
The Bank Preferred Stock forms a series of the preferred stock of the
Bank, which preferred stock may be issued from time to time in one or more
series with such rights, preferences and limitations as are determined by the
Bank's Board of Directors or, if then constituted, a duly authorized
committee thereof. The Board of Directors has authorized the Bank to issue
the Bank Preferred Stock.
When issued, the Bank Preferred Stock will be validly issued, fully paid
and nonassessable. The holders of the Bank Preferred Stock will have no
preemptive rights with respect to any shares of the capital stock of the Bank
or any other securities of the Bank convertible into or carrying rights or
options to purchase any such shares. The Bank Preferred Stock will not be
convertible into shares of Common Stock or any other class or series of
capital stock of the Bank and will not be subject to any sinking fund or
other obligation of the Bank for their repurchase or retirement.
The registrar for the Bank Preferred Stock will send notices to
shareholders of any meetings at which holders of such shares have the right
to elect directors of the Company.
RANKING
The Bank Preferred Stock will rank prior to the Common Stock and to all
other classes and series of equity securities of the Bank now or hereafter
issued, other than any class or series of equity securities of the Bank
expressly designated as being on a parity with or senior to the Bank
Preferred Stock as to dividend rights and rights upon liquidation, winding up
or dissolution. The Bank has the power to create and issue additional
preferred stock or other classes of stock ranking on a parity with the Bank
Preferred Stock, or that constitute junior stock, without any approval or
consent of the holders of Bank Preferred Stock. The rights of holders of
shares of the Bank Preferred Stock will be subordinate to the rights of the
Bank's general creditors, including its depositors.
DIVIDENDS
Holders of Bank Preferred Stock shall be entitled to receive, if, when and
as declared by the Board of Directors of the Bank out of funds of the Bank
legally available therefor, noncumulative cash dividends at the rate of 9
1/8% per annum of the initial liquidation preference (equivalent to $2.28125
per share per annum). Dividends on the Bank Preferred Stock will be payable,
if declared, quarterly in arrears on March 31, June 30, September 30 and
December 31 (or, if such day is not a business day, on the next business day)
of each year. Each declared dividend shall be payable to holders of record as
they appear at the close of business on the stock register of the Bank on
such record dates, not more than 45 calendar days nor less than 10 calendar
days preceding the payment date thereof, as shall be fixed by the Board of
Directors of the Bank provided, however, that if a redemption date for the
Bank Preferred Stock occurs after a dividend is declared but before it is
paid, such dividend shall be paid as part of the redemption price to the
person to whom the redemption price is paid. Upon the conversion of Series A
Preferred Shares for Bank Preferred Stock, any accrued and unpaid dividends
of the Series A Preferred Shares at the time of the conversion will be deemed
to be accrued and unpaid dividends on the Bank Preferred Stock.
The right of holders of Bank Preferred Stock to receive dividends is
noncumulative. Accordingly, if the Board of Directors does not declare a
dividend payable in respect of any dividend period, holders of the Bank
Preferred Stock will have no right to receive a dividend in respect of such
dividend period, and the Bank will have no obligation to pay a dividend for
such dividend period, whether or not dividends are declared and paid for any
future period.
OC-200
<PAGE>
If any shares of Bank Preferred Stock are outstanding, no full dividends
shall be declared or paid or set apart for payment on any series of capital
stock of the Bank ranking, as to dividends, on a parity with or junior to the
Bank Preferred Stock for any dividend period unless full dividends have been
or contemporaneously are declared and paid or a sum sufficient for the
payment thereof is set apart for such payments on the Bank Preferred Stock
for (i) the immediately preceding dividend period, in the case of parity
stock and (ii) the then-current dividend period in the case of junior stock.
When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) for any dividend period upon the Bank Preferred
Stock and the shares of any parity stock, all dividends declared on the Bank
Preferred Stock and the shares of any other series of capital stock ranking
on a parity as to dividends with the Bank Preferred Stock shall only be
declared pro rata based upon the respective amounts that would have been paid
on the Bank Preferred Stock and any shares of parity stock had dividends been
paid in full.
In addition to the foregoing restriction, the Bank shall not declare, pay
or set apart funds for any dividends or other distributions (other than in
Common Stock or other junior stock) with respect to any Common Stock or other
junior stock or repurchase, redeem or otherwise acquire, or set apart funds
for repurchase, redemption or other acquisition of, any Common Stock or other
junior stock through a sinking fund or otherwise, unless and until (i) full
dividends on the Bank Preferred Stock for the four (4) most recent preceding
dividend periods (or such lesser number of dividend periods during which
shares of Bank Preferred Stock have been outstanding) are declared and paid
or a sum sufficient for payment has been paid over to the dividend disbursing
agent for payment of such dividends and (ii) the Bank has declared a cash
dividend on the Bank Preferred Stock at the annual dividend rate for the
then-current dividend period, and sufficient funds have been paid over to the
dividend disbursing agent for the payment of such cash dividend for such
then-current dividend period.
No dividend shall be paid or set aside for holders of the Bank Preferred
Stock for any dividend period unless full dividends have been paid or set
aside for the holders of each class or series of equity securities, if any,
ranking prior to the Bank Preferred Stock as to dividends for such dividend
period.
REDEMPTION
Except in the case of a Change of Control, the Bank Preferred Stock will
not be redeemable prior to January 31, 2002. On or after such date, the Bank
Preferred Stock will be redeemable by the Bank or its successor or any
acquiring or resulting entity with respect to the Bank (including by any
parent or subsidiary of the Bank, any such successor, or any such acquiring
or resulting entity), as applicable, at its option, in whole or in part, at
any time or from time to time at the redemption prices set forth below in
cash, plus declared and unpaid dividends to the date of redemption without
interest:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE REDEMPTION PRICE
12-MONTH PERIOD PER SHARE OF THE
BEGINNING JANUARY 31, BANK PREFERRED STOCK
- ---------------------- --------------------
<S> <C>
2002 .................. $26.14
2003 .................. 25.91
2004 .................. 25.68
2005 .................. 25.46
2006 .................. 25.23
2007 and thereafter .. 25.00
</TABLE>
If less than all of the outstanding shares of Bank Preferred Stock are to
be redeemed, the Bank will select those shares to be redeemed pro rata, by
lot or by such other methods as the Board of Directors in its sole discretion
determines to be equitable, provided that such method satisfies any
applicable requirements of any securities exchange on which the Bank
Preferred Stock is then listed.
Upon a Change of Control, the Bank Preferred Stock is redeemable on or
prior to January 31, 2002, at the option of the Bank or its successor or any
acquiring or resulting entity with respect to the Bank (including by any
parent or subsidiary of the Bank, any such successor, or any such acquiring
or resulting entity), as applicable, in whole, but not in part, at a
redemption price per share equal to (i) $25.00, plus (ii) an amount equal to
declared and unpaid dividends, if any, to the date fixed for redemption,
without interest, and, without duplication, an additional amount equal to the
amount of dividends that would be
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payable on the Bank Preferred Stock in respect of the period from the first
day of the dividend period in which the date fixed for redemption occurs to
the date fixed for redemption (assuming all such dividends were to be
declared), plus (iii) the Applicable Premium payable in cash.
The Bank or any such successor or acquiring or resulting entity will be
entitled to issue a notice of redemption after the Bank or a parent company
has entered into a definitive binding agreement with a third party that will
result in a Change of Control, provided that (i) the date fixed for
redemption is not earlier than the date on which the related Change of
Control occurs and (ii) the obligation to effect such redemption is
contingent with the occurrence of such Change of Control.
Notice of any optional redemption will be mailed at least 30 days, but not
more than 60 days, prior to any redemption date to each holder of shares of
Bank Preferred Stock to be redeemed at its registered address.
If all funds necessary for such redemption are set aside or delivered to
the redemption agent with irrevocable instructions to effect the redemption,
then all shares so called for redemption will be deemed to be no longer
outstanding and all rights with respect to such shares will terminate, except
for the right to receive the funds so deposited, without interest.
The Bank's ability to redeem shares of Bank Preferred Stock, whether as a
result of a Change of Control or otherwise, is subject to compliance with
applicable regulatory requirements, including those of the OTS, relating to
the redemption of capital instruments.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Bank Preferred Stock will not be entitled to vote.
In the event the holders of Bank Preferred Stock are entitled to vote, each
share of Bank Preferred Stock will be entitled to one vote.
If full dividends on shares of Bank Preferred Stock have not been paid for
six (6) dividend periods, the maximum authorized number of directors of the
Bank shall thereupon be increased by two (2). Subject to compliance with any
requirement for regulatory approval of (or non-objection to) persons serving
as directors, the holders of the Bank Preferred Stock, voting together as a
class with the holders of any parity stock upon which the same voting rights
as those of the Bank Preferred Stock have been conferred and are irrevocable,
will have the exclusive right to elect the two additional directors at the
Bank's next annual meeting of shareholders and at each subsequent annual
meeting until full dividends have been paid or declared and a sum sufficient
for payment thereof is set apart for payment on the Bank Preferred Stock for
four (4) consecutive dividend periods. The term of such directors elected
thereby shall terminate, and the total number of directors shall be decreased
by two (2), upon the first annual meeting of stockholders after the payment
or the declaration and setting aside for payment of full dividends on the
Bank Preferred Stock for four (4) consecutive dividend periods. Any such
director may be removed by, and shall not be removed except by, the vote of
the holders of record of the outstanding Bank Preferred Stock and parity
stock entitled to vote, voting together as a single class without regard to
series, at a meeting of the Bank's stockholders, or of the holders of Bank
Preferred Stock and parity stock so entitled to vote thereon, called for that
purpose. As long as dividends on the Bank Preferred Stock shall not have been
paid for six (6) dividend periods, (i) any vacancy in the office of any such
director may be filled (except as provided in the following clause (ii)) by
an instrument in writing signed by any such remaining director and filed with
the Bank, and (ii) in the case of the removal of any such director, the
vacancy may be filled by the vote of the holders of the outstanding Bank
Preferred Stock and parity stock entitled to vote, voting together as a
single class without regard to series, at the same meeting at which such
removal shall be voted.
So long as any share of Bank Preferred Stock is outstanding, the Bank
shall not, without the consent or vote of the holders of at least two-thirds
of the outstanding shares of Bank Preferred Stock, voting separately as a
class, (a) amend, alter or repeal or otherwise change any provision of the
Charter (including the Supplementary Section establishing the Bank Preferred
Stock) if such amendment, alteration, repeal or change would materially and
adversely affect the rights, preferences, powers or privileges of the Bank
Preferred Stock, or (b) authorize, create or increase the authorized amount
of or
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<PAGE>
issue any class or series of any equity securities of the Bank, or any
warrants, options or other rights convertible or exchangeable into any class
or series of any equity securities of the Bank, ranking prior to the Bank
Preferred Stock, either as to dividend rights or rights on liquidation,
dissolution or winding up of the Bank or (c) merge, consolidate, reorganize
or effect any other business combination involving the Bank, unless the
resulting corporation will thereafter have no class or series of equity
securities either authorized or outstanding ranking prior to the Bank
Preferred Stock as to dividends or as to the distribution of assets upon
liquidation, dissolution or winding up, except the same number of shares of
such equity securities with the same rights, preferences, powers and
privileges as the shares of equity securities of the Bank that are authorized
and outstanding immediately prior to such transaction, and each holder of
Bank Preferred Stock immediately prior to such transaction shall receive
shares with the same rights, preferences, powers and privileges of the
resulting corporation as the Bank Preferred Stock held by such holder
immediately prior thereto.
The creation or issuance of parity stock or junior stock in respect of the
payment of dividends, or the distribution of assets upon liquidation,
dissolution or winding up of the Bank, or an amendment that increases the
number of authorized shares of Preferred Stock, or Bank Preferred Stock or
any junior stock or parity stock, shall not be deemed to be a material and
adverse change requiring a vote of the holders of the Bank Preferred Stock.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Bank, the holders of the Bank Preferred Stock at the time
outstanding will be entitled to receive out of assets of the Bank legally
available for distribution to its stockholders, before any distribution of
assets is made to holders of Common Stock or any other class of stock ranking
junior to the Bank Preferred Stock upon liquidation, subject to the rights of
holders of any class or series of equity securities having preference with
respect to distributions upon liquidation and the Bank's general creditors,
including its depositors, liquidating distributions in the amount of $25.00
per share, plus declared and unpaid dividends thereon, if any, to the date of
liquidation.
After payment of the full amount of the liquidating distributions to which
they are entitled, the holders of the Bank Preferred Stock will have no right
or claim to any of the remaining assets of the Bank. In the event that, upon
any such voluntary or involuntary liquidation, dissolution or winding up, the
available assets of the Bank are insufficient to pay the amount of the
liquidation distributions on all outstanding Bank Preferred Stock and the
corresponding amounts payable on all shares of other classes or series of
capital stock of the Bank ranking on a parity with the Bank Preferred Stock
in the distribution of assets upon any liquidation, dissolution or winding up
of the affairs of the Bank, then the holders of the Bank Preferred Stock and
such other classes or series of capital stock shall share ratably in any such
distribution of assets in proportion to the full liquidating distributions to
which they would otherwise be respectively entitled.
For such purposes, the consolidation or merger or other business
combination of the Bank with or into any other Person, or the sale of all or
substantially all of the assets of the Bank, shall not be deemed to
constitute liquidation, dissolution or winding up of the Bank.
CERTAIN DEFINITIONS
"Applicable Premium" means the greater of (i) $1.14 and (ii) the excess of
(A) the present value of (1) an amount equal to the amount of dividends that
would be payable on the Bank Preferred Stock in respect of the period from
the date fixed for redemption through January 31, 2002 (assuming all such
dividends were to be declared) plus (2) $26.14, computed using a discount
rate equal to the Treasury Rate plus 75 basis points, over (B) $25.00.
"Bank" means California Federal Bank, A Federal Savings Bank as the
surviving entity in the Cal Fed Acquisition until a successor Person shall
have become such pursuant to the applicable provisions of this Certificate of
Designation, and thereafter, "Bank" shall mean each successor Person, and any
other obligor upon the Bank Preferred Stock.
OC-203
<PAGE>
"Change of Control" means the occurrence of any of the following events:
(i) any Person other than a Permitted Holder shall be the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly
or indirectly, of a majority in the aggregate of the total voting power of
the voting stock of the Bank, whether as a result of issuance of securities
of the Bank, any merger, consolidation, liquidation or dissolution of the
Bank, any direct or indirect transfer of securities by a Permitted Holder or
otherwise; or
(ii) a sale, transfer, conveyance or other disposition, in a single
transaction or in a series of related transactions (other than to an
affiliate of the Bank or any of its subsidiaries), in either case occurring
outside the ordinary course of business, of more than 75% of the assets and
75% of the deposit liabilities of the Bank shown on the consolidated balance
sheet of the Bank as of the end of the most recent fiscal quarter ending at
least 45 days prior to such transaction (or the first in such related series
of transactions); or
(iii) a transaction or series of related transactions as a result of which
20% or more of the voting stock or Common Stock (or capital stock convertible
or exchangeable into 20% of the voting stock or Common Stock of the Bank is
held by one or more Persons other than Holdings or its wholly owned
subsidiaries.
"FDIC" means the Federal Deposit Insurance Corporation or any successor
thereto.
"FHLB" means any of the regional Federal Home Loan Banks.
"GAAP" means generally accepted accounting principles, consistently
applied.
"OTS" means the Office of Thrift Supervision or any successor thereto.
"Permitted Holder" means Ronald O. Perelman (or in the event of his
incompetence or death, his estate, heirs, executor, administrator, committee
or other personal representative (collectively, "heirs")) or any Person
controlled, directly or indirectly, by Ronald O. Perelman or his heirs.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Preferred Stock" means, collectively, the Bank Preferred Stock, the 11
1/2% Preferred Stock and the 10 5/8% Preferred Stock.
"Regulatory Capital Requirements" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
regulation, or such higher amount of capital as the Bank, individually, is
required to maintain in order to meet any individual minimum capital standard
applicable to the Bank pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R.
Section 567.3 (and any amendment to either such Section) or any successor law
or regulation.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519)
which has become publicly available at least two business days prior to the
date fixed for redemption (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the period of time to January 31, 2002; provided, however, that if
such period is not equal to the constant maturity of a United States Treasury
security for which a weekly average yield is given, the Treasury Rate shall
be obtained by linear interpolation (calculated to the nearest one-twelfth of
a year) from the weekly average yields of United States Treasury securities
for which such yields are given, except that, if such remaining life is less
than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be
used.
OC-204
<PAGE>
EXCHANGE
The Bank Preferred Stock is to be issued, if ever, in connection with an
exchange of the Series A Preferred Shares issued by the Company. The Series A
Preferred Shares are subject to an automatic exchange, in whole and not in
part, on a share-for-share basis, into Bank Preferred Stock if (i) the Bank
becomes "undercapitalized" under prompt corrective action regulations, (ii)
the Bank is placed into conservatorship or receivership or (iii) the
appropriate federal regulatory agency, in its sole discretion, anticipates
the Bank becoming "undercapitalized" in the near term. The Bank has
registered with the OTS a total of 20,000,000 shares of the Bank Preferred
Stock to cover the exchange, if necessary, of the 18,000,000 Series A
Preferred Shares offered by the Company and the 2,000,000 share
over-allotment option granted to the underwriters of the Series A Preferred
Shares.
LEGAL MATTERS
Certain legal matters with respect to the Bank Preferred Stock will be
passed upon for the Bank by Skadden, Arps, Slate, Meagher & Flom LLP, New
York, New York. Skadden, Arps, Slate, Meagher & Flom LLP has from time to
time represented, and may continue to represent, MacAndrews & Forbes and
certain of its affiliates (including the Bank) in connection with certain
legal matters. Joseph H. Flom, a partner in the firm of Skadden, Arps, Slate,
Meagher & Flom LLP, is a director of Revlon Group Incorporated, a wholly
owned subsidiary of MacAndrews & Forbes.
EXPERTS
The Consolidated Financial Statements of First Nationwide as of December
31, 1995 and 1994, and for each of the years in the three-year period ended
December 31, 1995, have been included herein and in the Offering Circular in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing. The report of KPMG Peat
Marwick LLP refers to a change in accounting for mortgage servicing rights in
1995, a change in accounting for certain investments in debt and equity
securities in 1994 and a change in accounting for income taxes in 1993.
The consolidated statements of financial condition of the FNB Acquired
Business as of December 31, 1993, and the consolidated statements of
operations, equity and cash flows for each of the two years in the period
ended December 31, 1993, have been included herein in reliance upon the
report of Coopers & Lybrand LLP, independent certified public accountants,
given on the authority of that firm as experts in accounting and auditing.
The report of Coopers & Lybrand LLP covering the December 31, 1992
consolidated financial statements refers to a change in accounting for income
taxes and postretirement health benefits.
The consolidated financial statements of SFFed as of December 31, 1995 and
1994, and for each of the three years in the period ended December 31, 1995,
included in this Offering Circular, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein (which
report expresses an unqualified opinion and includes an explanatory paragraph
referring to the acquisition of SFFed), and have been included in reliance
upon the report of such firm given upon their authority as experts in
accounting and auditing.
The Consolidated Financial Statements of California Federal as of December
31, 1995 and 1994, and for each of the years in the three-year period ended
December 31, 1995, have been included herein and in the Offering Circular in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing. The report of KPMG Peat
Marwick LLP refers to a change in accounting for certain acquisitions of
banking or thrift institutions in 1994 and a change in accounting for certain
investments in debt and equity securities in 1993.
OC-205
<PAGE>
INDEX OF DEFINED TERMS *
<TABLE>
<CAPTION>
PAGE
TERM NUMBER
- ----------------------------------- --------
<S> <C>
Acquisitions ....................... 12
ACS ................................ 53
ALCO ............................... 68
AMT ................................ 18
Andrews Group ...................... 190
Applicable Premium ................. 203
ARM ................................ 65
Asset Purchase Agreement ........... 6
Assistance Agreement ............... 6
Bank ............................... 1
Bank Junior Stock .................. 137
Bank Preferred Stock ............... 1
BankAmerica ........................ 6
BIF ................................ 186
Bonuses ............................ 194
Branch Purchases ................... 5
Branch Sales ....................... 5
Brokered Deposits .................. 134
Business Banking Loans ............. 147
Cal Fed ............................ 3
Cal Fed Acquisition ................ 3
Cal Fed Credit ..................... 177
Cal Fed Senior Subordinated Notes . 26
Cal Fed 6 1/2% Convertible
Subordinated Debentures ........... 26
Cal Fed 10% Subordinated Debentures 26
California Federal ................. 3
California Federal Litigation ..... 138
California Federal Preferred Stock,
Series A .......................... 80
Capital Contribution ............... 4
Capital Loss Coverage .............. 142
Cash Payment ....................... 138
CCI ................................ 100
CFE ................................ 177
CFIP ............................... 177
CFMC ............................... 177
Change of Control .................. 203
Charter ............................ 200
Closing Date ....................... 140
CMT ................................ 86
CMOs ............................... 56
Code ............................... 23
COFI ............................... 82
Coleman ............................ 190
Coleman Worldwide .................. 190
commercial banking loans ........... 147
Common Stock ....................... 1
Company ............................ 1
condominium project ................ 166
Consolidated Cigar ................. 190
Consolidated Cigar Holdings ....... 190
Consulting Agreement ............... 197
consumer loans ..................... 147
Covered Assets ..................... 6
Covered Asset Recovery ............. 142
CRA ................................ 113
CTL ................................ 147
11 1/2% Preferred Stock ............ 1
Excess ............................. 75
Excess Purchase Price .............. 33
excess servicing ................... 160
excess tax bad debt reserves ...... 178
Exchange Act ....................... 2
Exchange Agreement ................. 197
Existing Preferred Stock ........... 1
experience method .................. 178
Fair Lending Laws .................. 187
FASB ............................... 21
FDIC ............................... 3
FDIC Purchase ...................... 58
FDICIA ............................. 19
FGB Realty ......................... 59
FGMH ............................... 44
FHLB ............................... 44
FHLB advances ...................... 83
FHLBS .............................. 3
FHLMC .............................. 117
FICO ............................... 186
FIRREA ............................. 138
First Gibraltar .................... 6
First Gibraltar Holdings ........... 6
First Gibraltar Oklahoma Sale ..... 6
First Gibraltar Texas Sale ......... 6
First Madison ...................... 6
First Nationwide ................... 3
First Nationwide Management ....... 198
First United Bank Group ............ 191
FN Acquisition ..................... 6
- ------------
* Does not include terms defined under "Description of the Bank Preferred
Stock--Certain Definitions."
OC-206
<PAGE>
FNB Acquired Business .............. 6
FNIC ............................... 143
FNMA ............................... 117
FNMC ............................... 4
Ford Bank Group .................... 191
Ford Motor ......................... 6
Ford Obligation .................... 197
Form OC ............................ 2
FRB ................................ 181
FSLIC .............................. 6
FSLIC/RF ........................... 6
FSLIC/RF Reimbursement ............. 142
GNMA ............................... 112
Goodwill Litigation Asset .......... 139
Granite ............................ 7
Guaranteed Yield ................... 142
HFFC ............................... 5
HOLA ............................... 3
Holdings ........................... 3
Holdings Preferred Stock ........... 4
Holdings Senior Notes .............. 7
Home Federal ....................... 5
Home Federal Acquisition ........... 5
HUD ................................ 122
Hunter's Glen ...................... 8
Illinois Sale ...................... 28
Incentive Plan ..................... 194
income property loans .............. 147
interest rate cap .................. 147
interest bearing liabilities ...... 81
interest earning assets ............ 80
interest rate spread ............... 81
interest rate sensitivity .......... 85
IRR ................................ 182
IRS ................................ 23
ITT Purchase ....................... 5
leverage capital ratio ............. 75
Litigation Interests ............... 138
LMP ................................ 123
LMUSA .............................. 5
LMUSA Purchases .................... 5
LMUSA 1995 Purchase ................ 5
LMUSA 1996 Purchase ................ 5
LOC ................................ 140
LTV ................................ 22
MacAndrews & Forbes ................ 8
MacAndrews Holdings ................ 6
Madison Financial .................. 197
Madison Realty ..................... 191
Mafco Consolidated ................. 190
Mafco Group ........................ 23
Mafco Holdings ..................... 8
Mafco Worldwide .................... 190
market price ....................... 101
Marvel ............................. 190
Marvel Holdings .................... 190
Marvel III ......................... 191
Marvel Parent ...................... 190
Maryland Acquisition ............... 5
master servicing portfolio ......... 5
Maximum Amount ..................... 140
MBS's .............................. 83
Merger Agreement ................... 3
Meridian Sports .................... 190
Michigan Branch Sale ............... 5
Mortgage Loan Sale Agreement ...... 140
MSRs ............................... 5
NationsBank ........................ 198
negative amortization .............. 147
New World .......................... 190
New World Television ............... 191
1993 Bulk Sale ..................... 89
1994 Bulk Sales .................... 79
1986 Act 178
non-accrual loans .................. 90
Northeast Branch Sales ............. 5
Note Purchase Agreement ............ 136
NPA's .............................. 79
NPL's .............................. 80
NWCG Holdings ...................... 191
NYSE ............................... 1
OTS ................................ 2
Ohio Branch Sale ................... 5
Old FNB ............................ 6
Old FNB Debentures ................. 136
Old FNB Indenture .................. 136
one year gap ....................... 86
Originated ......................... 75
Parent Holdings .................... 7
Participants ....................... 194
past due loans ..................... 161
PCA Requirements ................... 106
PCT ................................ 190
periodic caps ...................... 83
Preferred Stock .................... 1
Protective Advances ................ 140
Purchased .......................... 75
Put Agreement ...................... 7
OC-207
<PAGE>
Put Option ......................... 140
Putable Assets ..................... 21
QIBs ............................... 198
QTL Test ........................... 186
qualifying institutions ............ 178
Recovery Payment ................... 138
Reduction Act ...................... 44
REO ................................ 146
REI ................................ 100
REIT ............................... 7
repurchase agreements .............. 83
reverse repurchase agreements ..... 83
restructured loans ................. 90
Restructuring ...................... 177
retail lending ..................... 103
retail loan production ............. 148
retirement income plan ............. 177
Revlon ............................. 190
Revlon Products .................... 190
Revlon Worldwide ................... 191
SAIF ............................... 3
San Francisco Federal .............. 5
SEC ................................ 1
Secondary Litigation Interest ..... 139
Secondary Recovery Payment ......... 139
Securitized Loans .................. 170
Series A Preferred Shares .......... 1
Services Agreement ................. 198
SFAS ............................... 21
SFFed .............................. 5
SFFed Acquisition .................. 5
SFFed Notes ........................ 26
Shared Gains ....................... 114
SLMA Advances ...................... 105
Sonoma Purchase .................... 5
Southeast Division ................. 79
Special Purpose Corp. .............. 4
Special Report ..................... 21
Special SAIF Assessment ............ 44
StanFed ............................ 27
Stockholders Agreement ............. 198
Strategic Plan ..................... 146
subservicing portfolio ............. 26
Tax Sharing Agreement .............. 22
10 5/8% Notes ...................... 4
10 5/8% Preferred Stock ............ 1
Texas Closed Banks ................. 6
TCOF ............................... 61
Tiburon Purchase ................... 5
Tier 1 association ................. 185
Tier 2 association ................. 185
Tier 3 association ................. 186
TNIS ............................... 9
Toy Biz ............................ 190
wholesale lending .................. 103
wholesale loan production .......... 148
Winstar Cases ...................... 138
</TABLE>
OC-208
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
First Nationwide Bank, A Federal Savings Bank and Subsidiaries
At December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993:
Independent Auditors' Report ............................................................. F-2
Consolidated Statements of Financial Condition ........................................... F-3
Consolidated Statements of Operations .................................................... F-4
Consolidated Statements of Stockholders' Equity .......................................... F-5
Consolidated Statements of Cash Flows .................................................... F-6
Notes to Consolidated Financial Statements ............................................... F-8
At September 30, 1996 and for the nine months ended September 30, 1996 and 1995:
Consolidated Statements of Financial Condition (Unaudited) ............................... F-46
Consolidated Statements of Operations (Unaudited) ........................................ F-47
Consolidated Statements of Cash Flows (Unaudited) ........................................ F-48
Notes to Unaudited Consolidated Financial Statements ..................................... F-50
The FNB Acquired Business
At December 31, 1993 and for the years ended December 31, 1993 and 1992:
Report of Independent Accountants ........................................................ F-57
Consolidated Statements of Financial Condition ........................................... F-58
Consolidated Statements of Operations .................................................... F-59
Consolidated Statements of Equity ........................................................ F-60
Consolidated Statements of Cash Flows .................................................... F-61
Notes to Consolidated Financial Statements ............................................... F-63
SFFed Corp. and Subsidiaries
At December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993:
Independent Auditors' Report ............................................................. F-90
Consolidated Statements of Financial Condition ........................................... F-91
Consolidated Statements of Operations .................................................... F-92
Consolidated Statements of Stockholders' Equity .......................................... F-93
Consolidated Statements of Cash Flows .................................................... F-94
Notes to Consolidated Financial Statements ............................................... F-96
California Federal Bank, A Federal Savings Bank and Subsidiaries
At December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993:
Independent Auditors' Report ............................................................. F-125
Consolidated Statements of Financial Condition ........................................... F-126
Consolidated Statements of Operations .................................................... F-127
Consolidated Statements of Shareholders' Equity .......................................... F-128
Consolidated Statements of Cash Flows .................................................... F-129
Notes to Consolidated Financial Statements ............................................... F-130
At September 30, 1996 and for the nine months ended September 30, 1996 and 1995:
Condensed Consolidated Statements of Financial Condition (Unaudited) ..................... F-182
Condensed Consolidated Statements of Operations (Unaudited) .............................. F-183
Condensed Consolidated Statements of Cash Flows (Unaudited) .............................. F-184
Notes to Unaudited Consolidated Financial Statements ..................................... F-185
Unaudited Pro Forma Financial Data of First Nationwide
Pro Forma Condensed Combined Statement of Financial Condition at September 30, 1996 ...... P-2
Notes to Pro Forma Condensed Combined Statement of Financial Condition ................. P-3
Pro Forma Condensed Combined Statement of Operations for the nine months ended September
30, 1996 ................................................................................. P-8
Notes to Pro Forma Condensed Combined Statement of Operations ............................ P-9
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1995 ........................................................................ P-21
Notes to Pro Forma Condensed Combined Statement of Operations ........................... P-22
</TABLE>
OC-F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Nationwide Bank, A Federal Savings Bank:
We have audited the accompanying consolidated statements of financial
condition of First Nationwide Bank, A Federal Savings Bank and subsidiaries
(the "Bank") as of December 31, 1995 and 1994, and the related consolidated
statements of operations, 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 Bank'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 consolidated 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 First
Nationwide Bank, A Federal Savings Bank 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 3 to the consolidated financial statements, the Bank
adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights" in 1995, No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" in 1994, and No. 109, "Accounting for Income
Taxes" in 1993.
KPMG Peat Marwick LLP
Dallas, Texas
March 8, 1996
OC-F-2
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, 1995 and 1994
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
ASSETS
Cash and amounts due from banks ............................. $ 154,758 $ 145,763
Interest-bearing deposits in other banks .................... 32,772 39,219
Short-term investment securities ............................ 125,035 --
------------- -------------
Cash and cash equivalents .................................. 312,565 184,982
Securities available for sale ............................... 1,826,075 45,000
Securities held to maturity (fair value $1,455 in 1995 and
$409,398 in 1994) .......................................... 1,455 411,859
Mortgage-backed securities held to maturity (fair value
$1,567,197 in 1995 and $3,095,994 in 1994) ................. 1,524,488 3,153,812
Loans held for sale, net .................................... 1,203,412 26,354
Loans receivable, net ....................................... 8,831,018 9,966,886
Covered assets, net ......................................... 39,349 311,603
Investment in Federal Home Loan Bank System ................. 109,943 128,557
Office premises and equipment, net .......................... 93,509 76,109
Foreclosed real estate, net ................................. 48,535 37,369
Accrued interest receivable ................................. 100,604 87,706
Core deposit and other intangible assets .................... 18,606 12,217
Mortgage servicing rights ................................... 241,355 86,840
Other assets ................................................ 286,531 139,859
------------- -------------
Total assets .............................................. $14,637,445 $14,669,153
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .................................................... $10,241,628 $ 9,196,656
Securities sold under agreements to repurchase .............. 969,510 1,883,490
Borrowings .................................................. 2,189,731 2,605,848
Other liabilities ........................................... 276,691 142,562
------------- -------------
Total liabilities ......................................... 13,677,560 13,828,556
------------- -------------
Commitments and contingencies
Stockholders' equity:
11 1/2% Noncumulative perpetual preferred stock, $.01 par
value, 5,000,000 shares authorized, 3,007,300 shares
issued and outstanding .................................... 300,730 300,730
Common stock, $.01 par value, 50,000 shares authorized, 800
shares issued and outstanding ............................. 1 1
Additional paid-in capital ................................. 466,216 464,216
Net unrealized holding gain on securities available for
sale ....................................................... 63,512 11,000
Retained earnings (substantially restricted) ............... 129,426 64,650
------------- -------------
Total stockholders' equity ................................ 959,885 840,597
------------- -------------
Total liabilities and stockholders' equity ................ $14,637,445 $14,669,153
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-3
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ---------- ---------
<S> <C> <C> <C>
Interest income:
Loans receivable ...................................... $ 799,607 $212,553 $ 15,766
Mortgage-backed securities ............................ 212,880 43,015 6,028
Covered assets ........................................ 10,705 29,991 49,128
Loans held for sale ................................... 24,257 583 --
Securities and interest-bearing deposits in other banks 28,055 6,842 24,342
----------- ---------- ---------
Total interest income ................................ 1,075,504 292,984 95,264
----------- ---------- ---------
Interest expense:
Deposits .............................................. 447,359 100,957 55,410
Securities sold under agreements to repurchase ........ 104,957 18,863 805
Borrowings ............................................ 156,960 73,644 18,513
----------- ---------- ---------
Total interest expense ............................... 709,276 193,464 74,728
----------- ---------- ---------
Net interest income .................................. 366,228 99,520 20,536
Provision for loan losses ............................... 37,000 6,226 1,402
----------- ---------- ---------
Net interest income after provision for loan losses ... 329,228 93,294 19,134
----------- ---------- ---------
Noninterest income:
Loan servicing fees, net .............................. 70,265 10,042 8,868
Customer banking fees and service charges ............. 47,493 10,595 2,863
Management fees ....................................... 15,141 13,121 7,855
Gain (loss) on sale of assets ......................... 147 (152) 24,188
Gain on sales of branches ............................. -- -- 140,877
Other income .......................................... 17,927 7,552 6,225
----------- ---------- ---------
Total noninterest income ............................. 150,973 41,158 190,876
----------- ---------- ---------
Noninterest expense:
Compensation and employee benefits .................... 154,288 48,846 24,951
Occupancy and equipment ............................... 49,897 12,247 5,343
Savings Association Insurance Fund ("SAIF") deposit
insurance premium ................................... 22,262 6,813 3,259
Loan expense ........................................... 12,431 1,132 388
Marketing ............................................. 10,810 3,385 166
Data processing ....................................... 9,787 2,888 3,739
Foreclosed real estate operations, net ................ (927) (528) (726)
Amortization of core deposit and other intangible
assets .............................................. 1,474 222 468
Other ................................................. 66,712 20,306 25,804
----------- ---------- ---------
Total noninterest expense ............................ 326,734 95,311 63,392
----------- ---------- ---------
Income before income taxes and extraordinary item ...... 153,467 39,141 146,618
Income taxes ............................................ (55,826) 3,191 2,500
----------- ---------- ---------
Income before extraordinary item ........................ 209,293 35,950 144,118
Extraordinary item--gain on early extinguishment of FHLB
advances, net .......................................... 1,967 1,376 --
----------- ---------- ---------
Net income ........................................... $ 211,260 $ 37,326 $144,118
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-4
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
11 1/2%
FLOATING RATE NONCUMULATIVE
NONCUMULATIVE PERPETUAL
PREFERRED STOCK PREFERRED STOCK
--------------- ---------------
<S> <C> <C>
Balance at January 1, 1993 ... $ 124,500 $ --
Net income .................... -- --
Redemption of preferred stock (124,500) --
Dividends and distributions to
stockholders ................. -- --
--------------- ---------------
Balance at December 31, 1993 . -- --
Net income .................... -- --
Issuance of preferred stock .. -- 300,730
Contribution by parent ........ -- --
Change in net unrealized
holding gains on securities
available for sale ........... -- --
--------------- ---------------
Balance at December 31, 1994 . -- 300,730
Net income .................... -- --
Change in net unrealized
holding gains on securities
available for sale ........... -- --
Dividends paid ................ -- --
Capital contribution .......... -- --
--------------- ---------------
$
Balance at December 31, 1995 . -- $300,730
=============== ===============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL HOLDING GAIN TOTAL
COMMON PAID-IN ON SECURITIES RETAINED STOCKHOLDERS'
STOCK CAPITAL AVAILABLE FOR SALE EARNINGS EQUITY
-------- ------------ ------------------ ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993 ... $ 1 $ 277,069 $ -- $ 71,206 $ 472,776
Net income .................... -- -- -- 144,118 144,118
Redemption of preferred stock -- -- -- -- (124,500)
Dividends and distributions to
stockholders ................. -- (191,500) -- (188,000) (379,500)
-------- ------------ ------------------ ----------- ---------------
Balance at December 31, 1993 . 1 85,569 -- 27,324 112,894
Net income .................... -- -- -- 37,326 37,326
Issuance of preferred stock .. -- (12,144) -- -- 288,586
Contribution by parent ........ -- 390,791 -- -- 390,791
Change in net unrealized
holding gains on securities
available for sale ........... -- -- 11,000 -- 11,000
-------- ------------ ------------------ ----------- ---------------
Balance at December 31, 1994 . 1 464,216 11,000 64,650 840,597
Net income .................... -- -- -- 211,260 211,260
Change in net unrealized
holding gains on securities
available for sale ........... -- -- 52,512 -- 52,512
Dividends paid ................ -- -- -- (146,484) (146,484)
Capital contribution .......... -- 2,000 -- -- 2,000
-------- ------------ ------------------ ----------- ---------------
Balance at December 31, 1995 . $ 1 $ 466,216 $63,512 $ 129,426 $ 959,885
======== ============ ================== =========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-5
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ---------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................. $ 211,260 $ 37,326 $ 144,118
Adjustments to reconcile net income to net cash used in
operating activities:
Adjustments related to the BAC Sale:
Write-off of excess cost over fair value of net assets
acquired .............................................. -- -- 59,506
Write-off of purchase premiums and discounts for assets
and liabilities sold .................................. -- -- (49,013)
Net premium on liabilities sold ......................... -- -- (141,215)
Net premium on assets sold .............................. -- -- (17,363)
Other adjustments ....................................... -- -- 7,208
Amortization of core deposit and other intangible assets . 1,474 222 468
(Accretion) amortization of premiums and discounts, net .. (5,491) 3,156 1,545
Amortization of mortgage servicing rights ................ 33,892 3,604 2,259
Provision for accrued termination and facilities costs ... 12,772 -- --
Provision for loan losses ................................ 37,000 6,226 1,402
Loss (gain) on sales of assets ........................... 17,755 158 (24,373)
Gain on sales of foreclosed real estate .................. (3,010) (728) (1,864)
Extraordinary gain on early extinguishment of FHLB
advances ............................................... (1,967) (1,376) --
Depreciation and amortization ............................ 8,884 2,493 2,118
FHLB stock dividend ...................................... (6,951) (3,188) (1,433)
Capitalization of originated mortgage servicing rights and
excess servicing fees receivable ....................... (17,902) -- --
Purchases and originations of loans held for sale ........ (1,773,437) (40,284) --
Proceeds from the sale of loans held for sale ............ 1,191,281 47,227 --
Increase in other assets ................................. (79,244) (54,854) (65,242)
(Increase) decrease in accrued interest receivable ....... (9,743) 759 752
Increase (decrease) in other liabilities ................. 11,819 (19,434) 38,640
------------- ---------- -----------
Total adjustments ....................................... (582,868) (56,019) (186,605)
------------- ---------- -----------
Net cash flows used in operating activities ............. (371,608) (18,693) (42,487)
------------- ---------- -----------
</TABLE>
(Continued)
OC-F-6
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from investing activities:
Acquisitions and divestitures:
Maryland Acquisition and Lomas 1995 Purchase ............ $ (214,727) $ -- $ --
Branch Acquisitions ..................................... 501,351 -- --
FN Acquisition .......................................... -- (526,813) --
Illinois Branch Sale .................................... -- 31,263 --
BAC Sale ................................................ -- -- (471,998)
Purchases of securities available for sale ............... -- (5,939) --
Proceeds from sales of securities available for sale ..... -- 5,939 --
Purchases of securities held to maturity ................. (157,962) (152,068) (3,473,977)
Proceeds from maturities of securities held to maturity .. 344,475 108,754 --
Purchases of mortgage-backed securities available for sale -- (5,758) --
Proceeds from sales of mortgage-backed securities
available for sale ....................................... -- 5,758 --
Purchases of mortgage-backed securities held to maturity . (19,825) (58,125) (454,327)
Principal payments on mortgage-backed securities held to
maturity ................................................. 570,607 177,926 159,925
Proceeds from sales of mortgage-backed securities held to
maturity ................................................. -- -- 80,205
Proceeds from sales of loans receivable .................. 431,247 154,638 300,156
Net increase in loans receivable ......................... (86,193) (69,025) (38,149)
Decrease in covered assets ............................... 272,254 279,930 243,355
Redemptions of FHLB stock, net of purchases .............. 25,565 28,281 --
Purchases of office premises and equipment ............... (15,744) (2,141) (1,251)
Proceeds from the disposal of office premises and
equipment ................................................. 1,667 1,427 --
Proceeds from sales of foreclosed real estate ............ 71,453 25,763 8,182
Purchase of mortgage servicing rights .................... (774) (444) (1,728)
------------- ------------- -------------
Net cash flows provided by (used in) investing activities 1,723,394 (634) (3,649,607)
------------- ------------- -------------
Cash flows from financing activities:
Net increase (decrease) in deposits ...................... 542,633 (83,851) (432,464)
Proceeds from additional borrowings ...................... 6,151,319 1,250,000 112,100
Principal payments on borrowings ......................... (6,860,569) (2,220,219) (138,874)
Net (decrease) increase in securities sold under
agreements
to repurchase ............................................ (913,103) 534,998 119,144
Issuance of Preferred Stock .............................. -- 288,586 --
Dividends ................................................ (146,483) -- (136,210)
Capital contribution from parent ......................... 2,000 390,791 --
Net cash transferred through dividend of First Gibraltar
Mortgage Holdings ........................................ -- -- (4,295)
Redemption of preferred stock ............................ -- -- (124,500)
------------- ------------- -------------
Net cash flows (used in) provided by financing activities (1,224,203) 160,305 (605,099)
------------- ------------- -------------
Net change in cash and cash equivalents .................... 127,583 140,978 (4,297,193)
Cash and cash equivalents at beginning of year ............. 184,982 44,004 4,341,197
------------- ------------- -------------
Cash and cash equivalents at end of year ................... $ 312,565 $ 184,982 $ 44,004
============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-7
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
First Nationwide Bank, A Federal Savings Bank ("First Nationwide" or
"Bank"), formerly First Madison Bank, FSB ("First Madison"), was organized
and chartered as First Gibraltar Bank, FSB ("First Gibraltar"), a Federal
stock savings bank, in December 1988 for the primary purpose of acquiring
substantially all of the assets and assuming deposit, secured and certain
other liabilities of five insolvent Texas savings and loan associations
("Closed Associations") from the Federal Savings and Loan Insurance
Corporation ("FSLIC"), as receiver. On August 9, 1989, the FSLIC was
abolished and its obligations and rights were assumed by the FSLIC Resolution
Fund ("FSLIC/RF").
Acquisition of the Closed Associations was made pursuant to five
substantially similar acquisition agreements and an assistance agreement
("Assistance Agreement") among the FSLIC/RF, First Gibraltar, First Gibraltar
Holdings Inc. ("First Gibraltar Holdings"), and MacAndrews & Forbes Holdings
Inc. ("M&F Holdings"), and became effective on December 28, 1988. Both First
Gibraltar Holdings and M&F Holdings are indirect parents of First Nationwide.
Assets subject to the Assistance Agreement are known as "Covered Assets." The
Assistance Agreement generally provides for guaranteed yield amounts to be
paid on the book value of the Covered Assets, and pays First Nationwide for
90% of the losses incurred upon disposition of the Covered Assets ("Capital
Loss Provision"). The remaining 10% not reimbursed, net of 10% of all asset
recoveries and certain agreed-upon Covered Asset disposition fees ("Shared
Gain"), is known as the "FSLIC/RF Reimbursement." In January 1992, certain
provisions of the Assistance Agreement were renegotiated and amended or
modified.
On February 1, 1993, First Gibraltar sold to BankAmerica Corporation
certain assets, liabilities and substantially all of the branch operations of
First Gibraltar located in Texas, including $829 million of loans and 130
branches with approximately $6.9 billion in deposits (the "BAC Sale"). A net
gain of $141 million was recorded in connection with this sale. Subsequent to
the BAC Sale, First Gibraltar changed its name to First Madison and its
principal business consisted of funding the Covered Assets and the
performance of its obligations under the Assistance Agreement.
On April 14, 1994, First Madison entered into the Asset Purchase Agreement
(the "Asset Purchase Agreement") with First Nationwide Bank, A Federal
Savings Bank ("Old FN"), an indirect subsidiary of Ford Motor Company ("Ford
Motor"). On October 3, 1994, effective immediately after the close of
business on September 30, 1994, First Madison acquired substantially all of
the assets and certain of the liabilities (the "FN Acquired Business") of Old
FN (the "FN Acquisition") for approximately $715 million based on estimates
prepared by Old FN. On March 2, 1995, an additional $11.5 million was paid to
Old FN pursuant to certain settlement provisions of the Asset Purchase
Agreement. Effective on October 1, 1994, First Madison changed its name to
First Nationwide.
Following the FN Acquisition, the Bank's principal business consists of
operating retail deposit branches and originating and/or purchasing one-to
four-family real estate mortgage loans and, to a lesser extent, certain
consumer loans. First Nationwide actively manages its portfolio of commercial
real estate loans acquired through acquistions and is also active in mortgage
banking and loan servicing. These operating activities are financed
principally with customer deposits, secured short-term and long-term
borrowings, collections on loans and mortgage-backed securities, asset sales
and retained earnings.
During 1995, the FSLIC/RF exercised its right under the Assistance
Agreement to purchase substantially all of the remaining Covered Assets at
the fair market value of such assets (the "FDIC Purchase"). Under the Capital
Loss Provision, losses sustained by First Nationwide from these actions are
reimbursed by the FSLIC/RF and therefore no gain or loss was recorded on the
sale of these assets to the Federal Deposit Insurance Corporation ("FDIC").
(2) ACQUISITIONS
The following represent acquisitions consummated during 1995. In addition,
the Bank has executed various contracts in 1995 for the acquisition of other
thrift institutions and mortgage loan servicing operations, and for the sale
of a significant portion of the retail deposit operations outside California,
as further described in note 32.
OC-F-8
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FN Acquisition
The FN Acquisition was accounted for as a purchase and, accordingly, the
purchase price was allocated to assets and liabilities based on estimates of
fair values at October 3, 1994. Since October 3, 1994, the results of
operations of the FN Acquired Business have been included in First
Nationwide's consolidated statements of operations.
The following is a summary of the assets acquired and liabilities assumed
in connection with the FN Acquisition at October 3, 1994 (in thousands):
<TABLE>
<CAPTION>
OLD FN FAIR FIRST NATIONWIDE
CARRYING VALUE CARRYING
VALUE ADJUSTMENTS VALUE
-------------- ------------- ----------------
<S> <C> <C> <C>
Securities ................................... $ 355,760 $ (3,989) $ 351,771
Mortgage-backed securities ................... 1,615,183 (30,516) 1,584,667
Loans held for sale .......................... 33,527 (72) 33,455
Loans receivable, net ........................ 11,395,622 6,651 11,402,273
Investment in FHLB ........................... 111,654 -- 111,654
Offices premises and equipment ............... 98,075 (13,166) 84,909
Foreclosed real estate, net .................. 48,188 (4,032) 44,156
Accrued interest receivable .................. 86,361 -- 86,361
Cost of mortgage servicing rights, net ...... 50,718 39,282 90,000
Other assets ................................. 82,186 67,304 149,490
Deposits ..................................... (10,047,911) (25,607) (10,073,518)
Securities sold under agreement to repurchase (1,229,296) (416) (1,229,712)
Borrowings ................................... (2,012,574) 33,765 (1,978,809)
Other liabilities ............................ (106,073) (36,250) (142,323)
-------------- ------------- ----------------
481,420 32,954 514,374
Cash and cash equivalents .................... 188,109 -- 188,109
-------------- ------------- ----------------
$ 669,529 $ 32,954 702,483
============== ============= ----------------
Purchase price paid at closing ............... 714,922
----------------
Excess cost over fair value of net assets
acquired .................................... $ 12,439
================
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ESTIMATED
REMAINING
LIVES AT
ACQUISITION DATE
(IN YEARS)
----------------
<S> <C>
Securities ................................... 1 to 5
Mortgage-backed securities ................... 6 to 9
Loans held for sale .......................... --
Loans receivable, net ........................ 2 to 18
Investment in FHLB ........................... --
Offices premises and equipment ............... 3 to 10
Foreclosed real estate, net .................. --
Accrued interest receivable .................. 2 to 7
Cost of mortgage servicing rights, net ...... 2 to 4
Other assets ................................. 2 to 5
Deposits ..................................... 1 to 5
Securities sold under agreement to repurchase --
Borrowings ................................... 1 to 17
Other liabilities ............................ 1 to 5
----------------
Cash and cash equivalents ....................
Purchase price paid at closing ...............
Excess cost over fair value of net assets
acquired ....................................
</TABLE>
The amount paid at closing was based on an estimated purchase price
prepared by Old FN. This estimate was subsequently adjusted, and an
additional $11.5 million, plus interest, was paid to Old FN on March 2, 1995.
As a result of this additional amount paid and other revisions to the
original fair value estimates, the excess of cost over fair value of net
assets acquired was reduced to $6.5 million.
The Bank financed the FN Acquisition and paid related fees and expenses
with (i) a capital contribution by its parent, First Nationwide Holdings Inc.
("FN Holdings"), funded with the net proceeds of (a) the issuance by FN
Holdings of 12 1/4% Senior Notes due 2001 ("Senior Notes"), and (b) the
issuance of FN Holdings' class C common stock to First Nationwide (Parent)
Holdings Inc. ("Parent Holdings"), an indirect subsidiary of M&F Holdings,
(ii) the net proceeds from the issuance of the Bank's 3,007,300 shares of its
11 1/2% Noncumulative Perpetual Preferred Stock ("Preferred Stock"), and
(iii) existing cash and proceeds from securities sold under agreements to
repurchase.
On October 7, 1994 the Bank sold the FN Acquired Business' branch network
in Illinois, with approximately $1.2 billion in deposits, to Household Bank,
f.s.b. (the "Illinois Sale"). The Illinois Sale was
OC-F-9
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
funded with approximately $1.2 billion in borrowings and did not result in
any gain or loss. The following is a summary of the Bank's carrying value of
the assets and liabilities of the branch operations in the Illinois Sale at
date of sale (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Office premises and equipment .......... $ 10,293
Core deposit intangible (other assets) 89,726
Deposits ............................... $(1,218,758)
=============
</TABLE>
The following pro forma financial information combines the historical
results of the Bank and the FN Acquired Business as if the FN Acquisition and
the Illinois Sale had occurred as of the beginning of each year presented.
The pro forma results are not necessarily indicative of the results which
would have actually been obtained if the FN Acquisition and the Illinois Sale
had been consummated in the past nor do they project the results of
operations in any future period (in thousands) (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1994 1993
---------- ----------
<S> <C> <C>
Net interest income $409,914 $514,632
Net income ........ 136,056 209,241
========== ==========
</TABLE>
Maryland Acquisition
On February 28, 1995, the Bank's wholly owned mortgage bank operating
subsidiary, First Nationwide Mortgage Corporation ("FNMC") acquired the
mortgage servicing operations of the former Standard Federal Savings
Association in Frederick, Maryland for approximately $178 million (the
"Maryland Acquisition"). As a result of this transaction, the Bank acquired
certain assets and liabilities and a loan servicing portfolio of
approximately $11.4 billion (including a subservicing portfolio of $1.8
billion). The transaction was accounted for as a purchase. Accordingly, the
accompanying consolidated statement of operations for the period ended
December 31, 1995 includes the results of the acquired mortgage servicing
operations for the period since March 1, 1995.
Branch Acquisitions
In April 1995, First Nationwide acquired approximately $13 million in
deposits located in Tiburon, California, from East-West Federal Bank, a
federal savings bank (the "Tiburon Purchase"). In August 1995, the Bank
acquired three retail branches located in Orange County, California with
deposit accounts totalling approximately $356 million from ITT Federal Bank,
fsb, ( the "ITT Purchase"). On December 8, 1995, the Bank acquired four
retail branches located in Sonoma County, California with deposit accounts of
approximately $144 million from Citizens Federal Bank, a Federal Savings Bank
(the "Sonoma Purchase" and, collectively with the Tiburon Purchase and the
ITT Purchase, the "Branch Acquisitions"). The aggregate amounts received from
the sellers in the Branch Acquisitions totalled $501 million.
Lomas 1995 Purchase
In September 1995, FNMC entered into an agreement to purchase a portion of
Lomas Mortgage USA, Inc.'s ("LMUSA") loan servicing portfolio of
approximately $11.1 billion (including a sub-servicing portfolio of $3.1
billion), a master servicing portfolio of $2.9 billion and other assets,
principally existing loans, loan production operations and ownership of Lomas
Mortgage Services Inc. from LMUSA, a subsidiary of Lomas Financial
Corporation, for $100 million, payable in installments, and the assumption of
the certain indebtedness relating to the acquired loan portfolio totalling
approximately $274 million (the "Lomas 1995 Purchase"). This transaction
closed on October 2, 1995, and FNMC made the first installment payment
totalling $35 million from existing cash. At December 31, 1995, approximately
$64.7 million remains payable to LMUSA and bears interest at the average
federal funds rate plus 1%. The transaction was accounted for as a purchase.
Accordingly, the accompanying consolidated financial statements of operations
include the results of the acquired operations since October 2, 1995.
OC-F-10
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Pro forma financial information for the Maryland and Branch Acquisitions
and the Lomas 1995 Purchase has not been presented because such information
is not considered material to the consolidated financial statements.
Purchase Accounting Adjustments
Premiums and discounts related to interest-earning assets acquired and
interest-bearing liabilities assumed are amortized (accreted) to operations
using the level yield method over the estimated remaining lives of the
respective assets and liabilities. Premiums and discounts relative to
noninterest-earning assets and noninterest-bearing liabilities are amortized
(accreted) to operations using the straight-line method over the estimated
useful lives.
Income before income taxes and extraordinary item for the years ended
December 31, 1995 and 1994 included net amortization (accretion) of premiums
(discounts) of $.9 million and $.6 million, respectively, which resulted from
the application of purchase accounting relative to interest-earning assets
and interest-bearing liabilities assumed in the FN, Maryland and Branch
Acquisitions, and the Lomas 1995 Purchase.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of First Nationwide conform to
generally accepted accounting principles and general practices within the
savings and loan industry. The following summarizes the more significant of
these policies.
(a) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of First Nationwide, a wholly owned subsidiary of FN Holdings, and its
wholly owned subsidiaries not subject to the Assistance Agreement. As
First Nationwide's common stock is wholly owned by FN Holdings, per share
data is not presented. All significant intercompany accounts and
transactions have been eliminated.
Investments in and advances to directly-held subsidiaries at December 28,
1988 are Covered Assets under the provisions of the Assistance Agreement.
Therefore, all significant activity regarding additional investments and
dispositions is subject to FSLIC/RF approval. Because control over such
subsidiaries does not rest solely with First Nationwide and ownership is
temporary in management's view, the assets and liabilities and results of
operations of these entities are not consolidated in the accompanying
consolidated financial statements. The investments in these subsidiaries,
including advances, are recorded as Covered Assets at their guaranteed
values.
(b) Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and amounts due from banks, interest-bearing
deposits in other banks, and other short-term investment securities with
original maturities of three months or less. Savings and loans are
required by the Federal Reserve Bank to maintain non-interest bearing cash
reserves equal to a percentage of certain deposits. The reserve balance
for First Nationwide at December 31, 1995 was $53.6 million.
(c) Securities and Mortgage-backed Securities
First Nationwide's investment in securities consists primarily of U.S.
government and agency securities and mortgage-backed securities. First
Nationwide adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
No. 115"), which specifies the accounting and reporting for all
investments in debt securities and for investments in equity securities
that have readily determinable fair values, effective
OC-F-11
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
January 1, 1994. There was no material impact on the consolidated
financial statements as a result of the adoption of SFAS No. 115 at
January 1, 1994. SFAS No. 115 requires classification of debt and equity
securities, including mortgage-backed securities, into one of three
categories: held to maturity, available for sale or trading securities.
Securities expected to be held to maturity represent securities which
management has the positive intent and ability to hold to maturity and are
reported at amortized cost. Securities bought and held principally for the
purpose of selling them in the near term are classified as trading
securities and reported at fair value, with unrealized gains and losses
included in earnings. All other securities are classified as available for
sale and are carried at fair value, with unrealized holding gains and
losses, net of tax, reported as a separate component of stockholders'
equity until realized. Should an other than temporary decline in the fair
value of a security classified as held to maturity or available for sale
occur, the carrying value of such security would be written down to fair
value by a charge to operations. Realized gains or losses on securities
available for sale are computed on a specific identification basis and are
accounted for on a trade-date basis.
The Financial Accounting Standards Board ("FASB") issued a Special Report
in November 1995, "A Guide to Implementation of Statement 115 on
Accounting for Certain Investments in Debt and Equity Securities" (the
"Special Report"). The Special Report provided all entities an opportunity
to reassess their ability and intent to hold securities to maturity and
allowed a one time reclassification of securities from held-to-maturity to
available-for-sale without "tainting" the remaining held-to-maturity
securities. On December 29, 1995, the Bank reclassified $1.5 billion and
$231.8 million in carrying value of mortgage-backed securities and U.S.
government and agency securities, respectively, from the respective
held-to-maturity categories to securities available for sale.
Amortization and accretion of premiums and discounts relating to
mortgage-backed securities is recognized using the interest method over
the estimated lives of the underlying mortgages with adjustments based on
prepayment experience.
(d) Loans Held for Sale, Net
One-to four-family residential mortgage loans originated and intended for
sale in the secondary market and other loans which are expected to be sold
in the near term are carried at the lower of cost or market value as
determined by outstanding commitments from investors or current investor
yield requirements calculated on an aggregate basis. Net unrealized losses
are recognized in a valuation allowance by charges to income.
(e) Loans Receivable, Net
Loans receivable, net, is stated at unpaid principal balances, less the
allowance for loan losses, and net of deferred loan origination fees and
purchase discounts.
Discounts on one-to four-family residential mortgage loans are amortized
to income using the interest method over the remaining period to
contractual maturity, adjusted for anticipated prepayments. Discounts on
consumer and other loans are recognized over the lives of the loans using
the interest method.
A significant portion of First Nationwide's real estate loan portfolio is
comprised of adjustable-rate mortgages. The interest rate and payment
terms of these mortgages adjust on a periodic basis in accordance with
various published indices. The majority of these adjustable-rate mortgages
have terms which limit the amount of interest rate adjustment that can
occur each year and over the life of the mortgage. During periods of
limited payment increases, negative amortization may occur on certain
adjustable-rate mortgages. See note 29.
The allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on such factors as
the Bank's past loan loss experience, delinquency trends, known and
inherent risks in
OC-F-12
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the portfolio, adverse situations that may affect the borrower's ability
to repay, the estimated value of any underlying collateral, and current
economic conditions. As management utilizes information currently
available to make such evaluation, the allowance for loan losses is
subjective and may be adjusted in the future depending on changes in
economic conditions or other factors. Additionally, regulatory
authorities, as an integral part of their regular examination process,
review the Bank's allowance for estimated losses on a periodic basis.
These authorities may require the Bank to recognize additions to the
allowance based on their judgment of information available to them at the
time of their examination.
Uncollectible interest on loans that are contractually ninety days or
more past due is charged off, or an allowance is established, based on
management's periodic evaluation. The allowance is established by a charge
to interest income equal to all interest previously accrued, and income is
subsequently recognized only to the extent that cash payments are
received. When, in management's judgment, the borrower's ability to make
periodic interest and principal payments resumes, the loan is returned to
accrual status.
(f) Impaired Loans
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards No. 114, "Accounting by Creditors for Impairment of a
Loan" ("SFAS No. 114"), as amended by Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures" ("SFAS No. 118"). Under SFAS No. 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. 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. SFAS No. 114
does not apply to large groups of smaller balance homogeneous loans that
are collectively evaluated for impairment. For First Nationwide, loans
collectively reviewed for impairment include all single-family loans, and
performing multi-family and commercial real estate loans under $500,000,
excluding loans which have entered the workout process. The adoption of
SFAS No. 114, as amended by SFAS No. 118, had no material impact on the
Bank's consolidated financial statements as the Bank's existing policy of
measuring loan impairment was consistent with methods prescribed in these
standards.
The Bank considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of
the loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, First Nationwide considers
large non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high loan-to-value ratios, low debt-coverage ratios, or
other indications that the borrowers are experiencing increased levels of
financial difficulty. The Bank bases the measurement of
collateral-dependent impaired loans, which represent substantially all of
the Company's loan portfolio, on the fair value of the loan's collateral.
The amount, if any, by which the recorded investment of the loan exceeds
the measure of the impaired loan's value is recognized by recording a
valuation allowance.
Cash receipts on impaired loans not performing according to contractual
terms are generally used to reduce the carrying value of the loan, unless
the Company believes it will recover the remaining principal balance of
the loan. Impairment losses are included in the allowance for loan losses
through a charge to provision for loan losses. Adjustments to impairment
losses due to changes in the fair value of collateral of impaired loans
are included in provision for loan losses. Upon disposition of an impaired
loan, loss of principal, if any, is recorded through a charge-off to the
allowance for loan losses.
OC-F-13
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(g) Loan Origination and Commitment Fees and Related Costs
Loan origination fees, net of direct underwriting and closing costs, are
deferred and amortized to interest income using the interest method over
the contractual term of the loans, adjusted for actual loan prepayment
experience. Unamortized fees on loans sold or paid in full are recognized
as income. Adjustable-rate loans with lower initial interest rates during
the introductory period result in the amortization of a substantial
portion of the net deferred fee during the introductory period.
Commitment fees paid to investors, for the right to deliver permanent
residential mortgages in the future to the investors at a specified yield,
are deferred. Amounts are included in the recognition of gain (loss) on
sale of loans as loans are delivered to the investor in proportion to the
percentage relationship of loans delivered to the total commitment amount.
Any unused fee is recognized as an expense at the expiration of the
commitment date, or earlier, if it is determined that the commitment will
not be filled.
Fees received in connection with loan commitments are deferred and
recognized as fee revenue on a straight-line basis over the term of the
commitment. If the commitment is subsequently exercised during the
commitment period, the remaining unamortized commitment fee at the time of
exercise is recognized over the term of the loan as an adjustment to
yield.
Other loan fees and charges, which represent income from the prepayment
of loans, delinquent payment charges, and miscellaneous loan services, are
recognized as income when collected.
(h) Office Premises and Equipment
Land is carried at cost. Premises, equipment and leasehold improvements
are stated at cost, less accumulated depreciation and amortization.
Premises, equipment and leasehold improvements are depreciated or
amortized on a straight-line basis over the lesser of the lease term or
the estimated useful lives of the various classes of assets. Maintenance
and repairs on premises and equipment are charged to expense in the period
incurred.
Closed facilities of the Bank are carried at fair value. In the case of
leased premises that are vacated by the Bank, a liability is established
representing the difference between the net present value of future lease
payments and the net present value of anticipated sublease income, if any,
for the remaining term of the lease.
(i) Foreclosed Real Estate
Real estate acquired through foreclosure is carried at fair value less
estimated disposal costs at the time of foreclosure. Subsequent to
foreclosure, First Nationwide charges current earnings with a provision
for estimated losses when the carrying value of the collateral property
exceeds its fair value.
(j) Core Deposit and Other Intangible Assets
The core deposit intangible asset is amortized over the estimated lives
of existing deposit relationships. Other intangible assets, principally
excess of cost over fair value of net assets acquired in business
combinations accounted for as a purchase, are amortized on a straight-line
basis over the expected period to be benefited of 15 years. First
Nationwide periodically reviews the operations of the businesses acquired
to determine that income from operations continues to support the
recoverability of its intangible assets and the amortization periods used.
(k) Mortgage Servicing Rights
The Bank purchases mortgage servicing rights separately or it may acquire
mortgage servicing rights by purchasing or originating mortgage loans and
selling those loans with servicing rights retained. Generally, purchased
mortgage servicing rights are capitalized at the cost to acquire the
OC-F-14
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
rights and are carried at the lower of cost, net of accumulated
amortization, or fair value. Originated mortgage servicing rights are
capitalized based on the relative fair value of the servicing right to the
fair value of the loan and are recorded at the lower of the capitalized
amount, net of accumulated amortization, or fair value.
The Bank records mortgage servicing rights at cost, net of accumulated
amortization. Mortgage servicing rights are amortized in proportion to,
and over the period of, estimated net servicing income. The Bank uses a
cash flow model to calculate the amortization of mortgage servicing
rights. The amortization of the mortgage servicing rights is analyzed
periodically and is adjusted to reflect changes in prepayment rates and
other estimates.
On May 12, 1995, the FASB issued Statement of Financial Accounting
Standards No. 122, "Accounting for Mortgage Servicing Rights, an amendment
to Statement No. 65" ("SFAS No. 122"). This statement provides guidance
for the recognition of mortgage servicing rights as an asset when a
mortgage loan is sold and servicing rights are retained. The Bank elected
to adopt this standard effective April 1, 1995. The result of the adoption
was to capitalize approximately $17 million in mortgage servicing rights
related to loans originated by the Bank in 1995.
SFAS No. 122 requires that a portion of the cost of originating a
mortgage loan be allocated to the mortgage servicing rights based on its
fair value. To determine the fair value of mortgage servicing rights
created since April 1, 1995, the Bank uses market prices for comparable
mortgage servicing contracts, when available, or alternatively uses a
valuation model that calculates the present value of future net servicing
income. In using this valuation method, the Bank incorporates assumptions
that market participants would use in estimating future net servicing
income, which include estimates of the cost of servicing, the discount
rate, mortgage escrow earnings rate, an inflation rate, ancillary income,
prepayment speeds and default rates and losses.
SFAS No. 122 requires enterprises to measure the impairment of servicing
rights based on the difference between the carrying amount and current
fair value of the servicing rights. In determining impairment, the Bank
aggregates all mortgage servicing rights, including those capitalized
prior to adoption of SFAS No. 122, and stratifies them based on the
predominant risk characteristics of interest rate, loan type and investor
type. A valuation allowance is established for any excess of amortized
cost over the current fair value, by risk stratification, by a charge to
income.
The carrying value of mortgage servicing rights is amortized over the
life of the related loan portfolio. A decline in long-term interest rates
generally results in an acceleration in mortgage loan prepayments. Higher
levels of prepayments would result in an acceleration of the amortization
of mortgage servicing rights, causing a reduction in the Bank's servicing
fee income. Management takes the current and projected interest rate
environment into account in estimating the amount of amortization of
mortgage servicing rights included in the accompanying consolidated
statements of operations. However, further declines in long-term interest
rates could cause the level of prepayments to exceed management's
estimates.
(l) Gains/Losses on Sales of Mortgage Loans
Mortgage loans are generally sold with the mortgage servicing rights
retained by the Bank. Effective with the adoption of SFAS No. 122 on April
1, 1995, the carrying value of mortgage loans sold was reduced by the cost
allocated to the associated mortgage servicing rights. Gains or losses on
sales of mortgage loans are recognized based on the difference between the
selling price and the carrying value of the related mortgage loans sold.
Such gains and losses are adjusted by the amount of excess servicing fees
recorded. Excess servicing exists when the servicing fee on a mortgage
loan sold with servicing retained exceeds a "normal" servicing fee
(typically .25% to .375% per annum of the mortgage loan principal amount).
The gain or loss will be adjusted to provide for the recognition of a
normal service fee rate over the estimated lives of the loans. Deferred
origination fees and expenses, net of commitment fees paid in connection
with the sale of the loans, are recognized at the time of sale in the gain
or loss determination.
OC-F-15
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(m) Servicing Fee Income
Servicing fee income represents the fees earned for servicing mortgage
loans under servicing agreements with the Federal National Mortgage
Association ("FNMA"), the Federal Home Loan Mortgage Corporation
("FHLMC"), the Government National Mortgage Association ("GNMA"), and
certain private investors. The fees are based on a contractual percentage
of the outstanding principal balance or a fixed amount per loan and are
recorded as income when received. Amortization of capitalized excess
servicing is netted against loan servicing fees to reflect a normal
servicing fee. The amortization of mortgage servicing rights is netted
against servicing fee income.
(n) Interest Rate Swap Agreements
The Bank is a party to various interest rate swap agreements as a means
of managing its interest rate exposure relative to the Bank's FHLB
advances. Amounts receivable or payable under these derivative financial
instruments are recognized as adjustments to interest expense of the
hedged liability (FHLB advances). Gains and losses on early termination of
these agreements are included in the carrying amount of the related
liability and amortized over the remaining terms of the liability.
(o) Income Taxes
For Federal income tax purposes, First Nationwide is a member of the
Mafco Holdings Inc. ("Mafco", the indirect parent of FN Holdings)
affiliated group, and accordingly, its Federal taxable income or loss will
be included in the consolidated Federal income tax return filed by Mafco.
First Nationwide may also be included in certain state and local income
tax returns of Mafco or its subsidiaries. First Nationwide's tax sharing
agreement with FN Holdings provides that income taxes will be based on the
separate results of First Nationwide. The agreement generally provides
that First Nationwide will pay to FN Holdings amounts equal to the taxes
that First Nationwide would be required to pay if it were to file a return
separately from the affiliated group. Furthermore, the agreement provides
that First Nationwide shall be entitled to take into account any net
operating loss carryovers attributable to taxable periods prior to January
1, 1994 in determining its tax liability. The agreement also provides that
FN Holdings will pay First Nationwide amounts equal to tax refunds First
Nationwide would be entitled to if it had always filed a separate company
tax return.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforward. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The Bank adopted SFAS No. 109,
"Accounting for Income Taxes", effective January 1, 1993 for which there
was no cumulative effect of that change in the method of accounting for
income taxes in the accompanying 1993 consolidated statement of
operations. 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.
(p) Extraordinary Gain from Extinguishment of Debt
During 1995, First Nationwide prepaid $250 million on FHLB advances
resulting in an extraordinary gain of approximately $2.0 million, net of
income taxes, on the early extinguishment of debt. During 1994, First
Nationwide prepaid $95.2 million in FHLB advances resulting in an
extraordinary gain of approximately $1.4 million, net of income taxes, on
the early extinguishment of debt.
(q) Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect (i) the reported
OC-F-16
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amounts of assets and liabilities, (ii) disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and
(iii) the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(r) Reclassification
Certain amounts within the consolidated financial statements have been
reclassified to conform to the current year presentation.
(s) Newly Issued Accounting Pronouncements
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 No. 121"). SFAS No. 121
provides guidance for recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related
both to assets to be held and used by an entity and assets to be disposed
of. SFAS No. 121 is effective for financial statements for fiscal years
beginning after December 15, 1995. Although the Bank has not yet adopted
SFAS No. 121, management does not expect such adoption to have a material
impact on the Bank's consolidated financial statements.
(4) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION (IN THOUSANDS)
Cash paid for interest for the years ended December 31, 1995, 1994 and
1993 was $677,754, $177,149, and $84,663 respectively.
During the year ended December 31, 1995, noncash activity consisted of the
reclassification of $1.5 billion and $231.8 million historical carrying value
of mortgage-backed securities and U. S. government and agency securities,
respectively, from the held-to-maturity portfolio to the available-for-sale
portfolio (see note 5). In addition, $326.0 million of consumer loans were
reclassified from loans receivable to loans held for sale, transfers from
loans receivable to foreclosed real estate amounted to $79.6 million, and
$376.3 million was transferred from loans receivable to mortgage-backed
securities to be held to maturity representing the securitization of certain
of the Bank's qualifying single-family loans.
During the year ended December 31, 1994, noncash activity consisted of the
transfer of $21.8 million from loans receivable to foreclosed real estate and
the transfer of $1.3 billion from loans receivable to mortgage-backed
securities to be held to maturity representing the securitization of certain
of the Bank's qualifying single-family loans. The transfer to foreclosed real
estate was net of a $4 million write-down, which was recorded as a receivable
from the FSLIC/RF (other assets), resulting from the expiration of coverage
of a multi-family residential commercial loan.
During the year ended December 31, 1993, noncash activity consisted of the
transfer of $50,950 from loans receivable to mortgage-backed securities, the
transfer of $7,136 from loans held for sale to loans receivable, and the
transfer of $9,604 from Covered Assets to loans receivable due to a
commercial loan which expired from coverage. The Bank distributed the common
stock of a subsidiary, First Gibraltar Mortgage Holdings Inc., ("FGMH"), to
First Gibraltar Holdings at its carrying value of $99,781. Net cash and cash
equivalents transferred amounted to $4,295. The Bank also dividended office
premises and equipment totalling $943 and securities totalling $142,566 to
First Gibraltar Holdings. As discussed in note 1, the Bank sold substantially
all of its branch operations to BAT during 1993. The excess of liabilities
transferred over assets was $141,215. Net cash and cash equivalents
transferred to BAT amounted to $471,998.
OC-F-17
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) SECURITIES AVAILABLE FOR SALE
At December 31, 1995 and 1994, securities available for sale and the
related unrealized gain or loss consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ........... $ 34,000 $ 80,068 $ -- $ 80,068 $ 114,068
Mortgage-backed securities:
GNMA .................................. 14,018 906 -- 906 14,924
FNMA .................................. 294,070 5,643 -- 5,643 299,713
FHLMC ................................. 801,393 19,671 (1) 19,670 821,063
Collateralized mortgage obligations .. 345,699 793 (4,678) (3,885) 341,814
U.S. government and agency obligations 231,794 2,768 (69) 2,699 234,493
------------ ------------ ------------ ------------ ------------
Total ................................ $1,720,974 $109,849 $(4,748) 105,101 $1,826,075
============ ============ ============ ============ ============
FDIC portion of unrealized gain on
marketable equity securities .......... (34,534)
Estimated tax effect ................... (7,055)
------------
Net unrealized holding gain in
stockholders' equity ................ $ 63,512
============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
----------- ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
Marketable equity securities $34,000 $11,000 $-- $11,000 $45,000
=========== ============ ============ ============ ==========
</TABLE>
The following represents a summary of the amortized cost, carrying value
and weighted average yield of securities available for sale with related
maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------
WEIGHTED
AMORTIZED CARRYING AVERAGE
COST VALUE YIELD
------------ ------------ ----------
<S> <C> <C> <C>
Marketable equity securities ............. $ 34,000 $ 114,068 --
Mortgage-backed securities ............... 1,455,180 1,477,514 7.41%
U.S. government and agency obligations:
Maturing within 1 year .................. 62,054 62,093 5.70
Maturing after 1 year but within 5 years 169,676 172,336 6.98
Maturing after 5 years through 10 years 64 64 7.25
------------ ------------ ----------
Total .................................. $1,720,974 $1,826,075 7.16%
============ ============ ==========
</TABLE>
As discussed more fully in note 3, the FASB issued the Special Report
which provided all entities an opportunity to reassess their ability and
intent to hold securities to maturity and allowed a one-time reclassification
of securities from held-to-maturity to available-for-sale without "tainting"
the remaining held-to-maturity securities. On December 29, 1995, the Bank
reclassified $1.5 billion and $231.8 million
OC-F-18
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in carrying value of mortgage-backed securities and U.S. government and
agency securities, respectively, from held to maturity to securities
available for sale. This reclassification resulted in a net after-tax
increase in the unrealized gain account in stockholders' equity of $22.5
million.
Proceeds on sales of mortgage-backed securities available for sale during
1994 totalled $6 million. No realized gain or loss was recognized on such
sales.
At December 31, 1995, mortgage-backed securities available for sale
included securities totalling $63.4 million which resulted from the
securitization of certain qualifying mortgage loans from First Nationwide's
loan portfolio.
At December 31, 1995, mortgage-backed securities available for sale
included $979.0 million of variable-rate securities.
U.S. government and agency obligations and mortgage-backed securities
available for sale of $50 million and $39 million, respectively, were pledged
as collateral for various obligations as further discussed in note 29.
Marketable equity securities available for sale represents approximately
25% of the outstanding common stock of Affiliated Computer Services ("ACS"),
representing 5% of the voting power, with an original cost basis of $34
million. Pursuant to the terms of a settlement agreement dated June 17, 1991
between the Bank, ACS, and the FDIC, the FDIC is entitled to share in a
defined portion of the proceeds from the sale of the stock, which, at
December 31, 1995 and 1994, approximated $34.5 million and $0, respectively,
and which is recorded in other liabilities.
(6) SECURITIES HELD TO MATURITY
At December 31, 1995 and 1994 securities held to maturity consist of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Municipal securities $1,455 $-- $-- $1,455
=========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
U. S. government and agency obligations $410,211 $51 $2,524 $407,738
Municipal securities ................... 1,648 12 -- 1,660
----------- ------------ ------------ ------------
$411,859 $63 $2,524 $409,398
=========== ============ ============ ============
</TABLE>
As discussed in note 5 to the consolidated financial statements,
securities with a carrying value of $231.8 million were reclassified from
securities held to maturity to securities available for sale at December 29,
1995.
The weighted average stated interest rates on securities held to maturity
were 8.25% and 5.79% at December 31, 1995 and 1994, respectively.
OC-F-19
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following represents a summary of the carrying values (amortized
cost), estimated fair values, and weighted average yield of securities held
to maturity with related maturities (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
----------- ----------- ----------
<S> <C> <C> <C>
Municipal securities:
Maturing within 1 year .................. $1,250 $1,250 8.25%
Maturing after 1 year but within 5 years 205 205 8.25
----------- ----------- ----------
Total .................................. $1,455 $1,455 8.25%
=========== =========== ==========
</TABLE>
(7) MORTGAGE-BACKED SECURITIES HELD TO MATURITY
At December 31, 1995 and 1994, mortgage-backed securities held to maturity
consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FHLMC ........................... $ 533,208 $15,285 $-- $ 548,493
FNMA ............................ 988,700 27,424 -- 1,016,124
Other mortgage-backed securities 2,580 -- -- 2,580
------------ ------------ ------------ ------------
$1,524,488 $42,709 $-- $1,567,197
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
FHLMC ............................... $1,659,912 $4,865 $17,744 $1,647,033
FNMA ................................ 1,078,323 1,234 19,093 1,060,464
GNMA ................................ 15,712 4 203 15,513
Collateralized Mortgage Obligations 396,820 13 26,894 369,939
Other mortgage-backed securities ... 3,045 -- -- 3,045
------------ ------------ ------------ ------------
$3,153,812 $6,116 $63,934 $3,095,994
============ ============ ============ ============
</TABLE>
As discussed in note 5 to the consolidated financial statements,
mortgage-backed securities with a carrying value of $1.5 billion were
reclassified from mortgage-backed securities held to maturity to securities
available for sale at December 29, 1995.
The weighted average stated interest rates on mortgage-backed securities
to be held to maturity were 7.46% and 6.30% at December 31, 1995 and 1994,
respectively.
At December 31, 1995 and 1994, mortgage-backed securities held to maturity
included securities totalling $1.5 billion and $1.4 billion, respectively,
which resulted from the securitization of certain qualifying mortgage loans
from First Nationwide's loan portfolio. At December 31, 1995 and 1994, these
securities include $1.5 billion and $1.3 billion, respectively, which have
been securitized with FNMA and FHLMC with full recourse to the Bank. At
December 31, 1995 and 1994, mortgage-backed securities held to maturity
included $1.5 billion and $2.5 billion, respectively, of variable-rate
securities.
OC-F-20
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) LOANS RECEIVABLE, NET
At December 31, 1995 and 1994, loans receivable, net, excluding Covered
Assets, included the following (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------- -------------
<S> <C> <C>
Real estate loans:
1-4 unit residential ............................ $5,423,411 $ 5,612,150
5+ unit residential ............................. 1,854,333 2,177,646
Commercial ...................................... 1,716,121 2,015,808
Construction .................................... -- 7,544
Land ............................................ 8,840 15,270
------------- -------------
9,002,705 9,828,418
Undisbursed loan funds .......................... -- (732)
------------- -------------
Total real estate loans ....................... 9,002,705 9,827,686
------------- -------------
Equity-line loans ............................... 110,830 408,964
Other consumer loans ............................ 60,106 82,996
Commercial loans ................................ 1,913 970
------------- -------------
Total consumer and other loans ................ 172,849 492,930
------------- -------------
Total loans receivable ........................ 9,175,554 10,320,616
Deferred fees and unearned premiums (discounts) 19,423 (255)
Allowance for loan losses ....................... (210,484) (202,780)
Purchase accounting discounts, net .............. (153,475) (150,695)
------------- -------------
Total loans receivable, net ................... $8,831,018 $ 9,966,886
============= =============
</TABLE>
The Bank's lending activities are principally conducted in California, New
York and Florida.
As a result of the FN Acquisition, the Bank assumed obligations for
certain loans sold with recourse. The outstanding balances of loans sold with
recourse at December 31, 1995 totalled $333.2 million. The Bank evaluates the
credit risk of loans sold with recourse and if necessary, records a liability
(other liabilities) for estimated losses related to these potential
obligations. No loans were sold with recourse during the years ended December
31, 1995, 1994 and 1993.
The following table indicates the carrying value of loans which have been
placed on nonaccrual status, excluding Covered Assets, as of the dates
indicated (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Nonaccrual loans:
Real estate:
1-4 unit residential ... $135,710 $133,439
5+ unit residential .... 23,253 23,543
Commercial and other ... 9,280 11,334
Land .................... 136 6,850
Construction ............ -- 2,036
---------- ----------
Total real estate .... 168,379 177,202
Non-real estate ........... 3,159 4,002
---------- ----------
Total nonaccrual loans $171,538 $181,204
========== ==========
</TABLE>
OC-F-21
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table indicates the carrying value of loans classified as
troubled debt restructurings, net of purchase accounting adjustments and
excluding Covered Assets, as of December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1995 1994
---------- ---------
<S> <C> <C>
1-4 unit residential real estate $ 8,479 $ 19,026
5+ unit residential real estate 146,971 203,742
Commercial and other real estate 79,000 110,123
---------- ---------
Total restructured loans ..... $234,450 $332,891
========== =========
</TABLE>
At December 31, 1995, the Bank's loan portfolio totalling $9.2 billion is
concentrated in California. The financial condition of the Bank is subject to
general economic conditions such as the volatility of interest rates and real
estate market conditions and, in particular, to conditions in the California
residential real estate market. Any downturn in the economy generally, and in
California in particular, could further reduce real estate values. An
increase in the general level of interest rates may adversely affect the
ability of certain borrowers to pay the interest on and principal of their
obligations. Accordingly, in the event interest rates rise or real estate
market values decline, particularly in California, the Bank may find it
difficult to maintain its asset quality and may require additional allowances
for loss above the amounts currently estimated by management.
For nonaccrual loans and loans classified as troubled debt restructurings,
the following table summarizes the interest income recognized ("Recognized")
and total interest income that would have been recognized had the borrowers
performed under the original terms of the loans ("Contractual") for the years
ended December 31, 1995 and 1994 (in thousands). There were no loans
classified as troubled debt restructurings in 1993.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------------- ---------------------------
RECOGNIZED CONTRACTUAL RECOGNIZED CONTRACTUAL
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Restructured loans $22,098 $33,093 $6,976 $ 8,572
Nonaccrual loans . 6,136 15,329 544 3,806
------------ ------------- ------------ -------------
$28,234 $48,422 $7,520 $12,378
============ ============= ============ =============
</TABLE>
At December 31, 1995 and 1994, respectively, the Bank and its wholly owned
subsidiary, FGB Realty Advisors, Inc., managed principally non-performing
loan and asset portfolios totalling $1.3 billion and $1.6 billion,
respectively, for investors. Revenues related to such activities are included
in management fees in the accompanying statements of operations.
Activity in the allowance for loan losses for the years ended December 31,
1995, 1994 and 1993 is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Balance -- January 1 ........................ $202,780 $ 2,250 $ 14,537
Purchases -- FN Acquisition ................. -- 201,927 --
Provision for loan losses ................... 37,000 6,226 1,402
Allowance for losses assigned to loans sold -- -- (12,918)
Charge-offs ................................. (32,344) (9,676) (1,860)
Recoveries .................................. 3,048 2,053 1,089
---------- ---------- ----------
Balance -- December 31 ...................... $210,484 $202,780 $ 2,250
========== ========== ==========
</TABLE>
OC-F-22
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) IMPAIRED LOANS
The Bank's adoption of SFAS No. 114, as amended by SFAS No. 118 effective
January 1, 1995, had no material impact on the Bank's consolidated financial
statements as the Bank's existing policy of measuring loan impairment was
consistent with methods prescribed in these standards.
At December 31, 1995, the carrying value of loans that are considered to
be impaired under SFAS No. 114 totalled $125.4 million (of which $29.6
million were on nonaccrual status). The average recorded investment in
impaired loans during the year ended December 31, 1995 was approximately
$125.5 million. For the year ended December 31, 1995, the Bank recognized
interest income on those impaired loans of $12.9 million, which included $.2
million of interest income recognized using the cash basis method of income
recognition.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans which comprised the majority of
impaired loans at December 31, 1995, have not been established, because most
would be eligible to be sold to Granite under the Put Agreement (see note
10). There have been no significant multi-family or commercial real estate
loans originated since October 1, 1994.
(10) PUT AGREEMENT
In connection with the FN Acquisition, the Bank assumed generally the same
rights under an agreement ("Put Agreement") Old FN had with Granite
Management and Disposition, Inc. ("Granite"), an indirect subsidiary of Ford
Motor, whereby Old FN had the option to sell ("put") to Granite, on a
quarterly basis, up to approximately $500 million of certain assets,
primarily non-performing commercial real estate loans and residential
mortgage loans with an original principal balance greater than $250,000. The
Put Agreement will expire upon the earlier of (i) November 30, 1996; or (ii)
the date on which the aggregate purchase price of assets which have been
"put" to Granite equals $500 million, including assets "put" to Granite by
Old FN under a similar agreement through October 3, 1994. The purchase price
represents the outstanding principal balance, accrued interest and certain
other expenses. The remaining balance of the Put Agreement at December 31,
1995 was $112.4 million.
(11) RECEIVABLES FROM THE FSLIC/RF -- COVERED ASSETS
Components and Coverage Periods
Covered Assets represent guaranteed amounts to be received by First
Nationwide either from the disposition of the underlying assets or from the
FSLIC/RF. During the coverage period, which varies based on the underlying
asset, First Nationwide is not subject to any loss from the disposition of
such assets other than the 10% FSLIC/RF Reimbursement.
During the coverage period, the FSLIC/RF guarantees to First Nationwide an
agreed-upon yield on Covered Assets ("Guaranteed Yield"). The Guaranteed
Yield is based on a spread that began at 2.25% over the Texas cost of funds
(the average cost of funds of all previous FSLIC-insured institutions whose
main offices are located in Texas as most recently reported by the Office of
Thrift Supervision ("TCOF")) declining to 1.50% over the TCOF over the term
of the Assistance Agreement. The TCOF was 5.63%, 4.46% and 4.07% at December
31, 1995, 1994 and 1993, respectively. The spread over the TCOF was 1.90%,
2.00%, and 2.05% at December 31, 1995, 1994 and 1993, respectively.
Certain provisions of the Assistance Agreement were amended and/or
modified in January 1992. The Bank recorded a FSLIC/RF Reimbursement reserve
in 1992 based on the present value of the FSLIC/RF Reimbursement amount (net
of Shared Gains) to be paid. At December 31, 1994, this reserve was reflected
as a reduction of the related Covered Assets and is evaluated periodically
and adjusted for any change in the expected amounts. The FSLIC/RF
Reimbursement reserve was fully utilized in 1995 as a result of the FDIC
Purchase.
OC-F-23
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In June 1995, the FDIC, as manager of the FSLIC/RF, as successor to the
FSLIC, exercised its rights under the Assistance Agreement to purchase
substantially all of the remaining Covered Assets as of June 1, 1995 at the
fair market value of such assets and further purchased additional assets from
the remaining Covered Asset portfolio in September 1995 as part of the FDIC
Purchase. Under the terms of the Capital Loss Coverage provisions of the
Assistance Agreement, losses sustained by First Nationwide from the FDIC
Purchase were reimbursed by the FSLIC/RF. At December 31, 1995, the Covered
Asset balance of $39.3 million represents amounts which remain unpaid by the
FDIC in connection with the FDIC Purchase. The FDIC has elected to treat this
amount as a Covered Asset, earning Guaranteed Yield, until such time as it is
paid to the Bank.
(12) INVESTMENT IN FHLB
The Bank's investment in FHLB stock is carried at cost. 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
equal to the greater of (i) 1% of the aggregate outstanding principal amount
of its residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each calendar year, (ii) .3% of total assets,
or (iii) 5% of its advances (borrowings) from the FHLB. The Bank was in
compliance with this requirement at December 31, 1995 and 1994.
(13) OFFICE PREMISES AND EQUIPMENT, NET
Office premises and equipment, net at December 31, 1995 and 1994 is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
DEPRECIABLE
LIVES AT
1995 1994 DECEMBER 31, 1995
---------- --------- -----------------
<S> <C> <C> <C>
Land ....................................... $ 17,952 $14,857 --
Buildings and leasehold improvements ...... 46,652 38,240 25
Furniture and equipment .................... 37,697 24,934 10
Capitalized equipment leases ............... -- 819 --
Construction in progress ................... 2,471 2,882 --
---------- --------- -----------------
104,772 81,732
Accumulated depreciation and amortization . (11,263) (5,623)
---------- ---------
Total office premises and equipment, net $ 93,509 $76,109
========== =========
</TABLE>
Depreciation and amortization expense of office premises and equipment for
the years ended December 31, 1995, 1994 and 1993 totalled $8.8 million, $2.5
million and $2.0 million, respectively.
Certain of the office premises and equipment included in the above table
are included in the Branch Sale Agreements, as defined and more fully
described in note 32.
OC-F-24
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
First Nationwide rents certain office premises and equipment under
long-term, noncancelable operating leases expiring at various dates through
2015. Rental expense under such operating leases, included in occupancy and
equipment expense, for the years ended December 31, 1995, 1994 and 1993
totalled $22.6 million, $4.2 million and $1.1 million, respectively. Rental
income from subleasing agreements for the years ended December 31, 1995 and
1994 totalled $2.2 and $.4 million, respectively. At December 31, 1995, the
projected minimum rental commitments, net of sublease agreements, under terms
of the leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
- -------------------
<S> <C>
1996 ............... $12,852
1997 ............... 11,399
1998 ............... 10,488
1999 ............... 8,188
2000 ............... 6,896
2001 and thereafter 11,096
---------
Total ............ $60,919
=========
</TABLE>
During 1995, the Bank established reserves for certain of these rental
expenses as further discussed in note 21.
The above table includes projected minimum rental commitments, net of
sublease agreements, of $2.5 million, $2.2 million, $2.0 million, $1.4
million, $1.1 million, and $5.8 million for the years ended 1996 through
2000, and 2001 and thereafter, respectively, related to facilities subject to
the Branch Sale Agreements, as defined and further described in note 32.
(14) FORECLOSED REAL ESTATE, NET
Foreclosed real estate, net, at December 31, 1995 and 1994 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1995 1994
--------- ---------
<S> <C> <C>
1-4 unit residential real estate .. $33,694 $37,396
Multifamily real estate ............ 14,368 --
Commercial real estate ............. 506 --
Less allowance for losses .......... (33) (27)
--------- ---------
Total foreclosed real estate, net $48,535 $37,369
========= =========
</TABLE>
Activity in the allowance for losses on foreclosed real estate for the
years ended December 31, 1995, 1994 and 1993 is summarized as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
Balance -- January 1 . $ 27 $ 223 $ 358
Charge-offs ........... (53) (248) (135)
Recoveries ............ 59 52 --
------ ------- -------
Balance -- December 31 $ 33 $ 27 $ 223
====== ======= =======
</TABLE>
OC-F-25
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) ACCRUED INTEREST RECEIVABLE
Accrued interest receivable at December 31, 1995 and 1994 is summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Cash and cash equivalents and securities ....... $ 4,387 $ 4,062
Mortgage-backed securities ...................... 21,200 19,268
Loans receivable, including loans held for sale 75,017 64,376
---------- ---------
Total accrued interest receivable ............. $100,604 $87,706
========== =========
</TABLE>
(16) MORTGAGE SERVICING RIGHTS
The following is a summary of activity for mortgage servicing rights
purchased ("Purchased"), originated ("Originated"), and excess servicing fees
receivable ("Excess") for the years ended December 31, 1995, 1994 and 1993
(in thousands):
<TABLE>
<CAPTION>
PURCHASED ORIGINATED EXCESS TOTAL
----------- ------------ --------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 ............. $ 71,951 -- $ 2,718 $ 74,669
Additions ............................. 1,191 -- 537 1,728
Amortization .......................... (2,123) -- (136) (2,259)
Distribution of stock of FGMH to First
Gibraltar Holdings ................... (71,019) -- (3,119) (74,138)
----------- ------------ --------- ----------
Balance at December 31, 1993 ........... -- -- -- --
Additions from FN Acquisition ......... 90,000 -- -- 90,000
Additions -other .................... 168 -- 276 444
Amortization .......................... (3,600) -- (4) (3,604)
----------- ------------ --------- ----------
Balance at December 31, 1994 ........... 86,568 -- 272 86,840
Additions from Maryland Acquisition .. 76,369 -- -- 76,369
Additions from Lomas 1995 Purchase ... 93,362 -- -- 93,362
Additions -other .................... 774 $16,824 1,078 18,676
Amortization .......................... (33,324) (454) (114) (33,892)
----------- ------------ --------- ----------
Balance at December 31, 1995 ........... $223,749 $16,370 $ 1,236 $241,355
=========== ============ ========= ==========
</TABLE>
At December 31, 1995, 1994 and 1993, the outstanding balances of
single-family residential mortgage loan participations, whole loans and
mortgage pass-through securities serviced for other investors by FNMC
totalled $27.1 billion, $7.5 billion and $0.3 billion, respectively. In
addition, the loan servicing portfolio included $3.0 billion of master
servicing at December 31, 1995.
SFAS No. 122 requires enterprises to measure the impairment of servicing
rights based on the difference between the carrying amount of the servicing
rights and their current fair value. At December 31, 1995, no allowance for
impairment of the mortgage servicing rights was necessary. The estimated fair
value of the mortgage servicing rights was $307 million and $91 million at
December 31, 1995 and 1994, respectively.
OC-F-26
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1995 and 1994, servicing advances and other receivables
related to single-family residential mortgage loan servicing, net of
valuation allowances of $6 million and $9 million in 1995 and 1994,
respectively (included in other assets), consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Servicing advances ................ $ 57,359 $16,485
Corporate advances due from banks 73,566 21,111
Other ............................. 35,042 1,729
---------- ---------
$165,967 $39,325
========== =========
</TABLE>
(17) DEPOSITS
A summary of deposits and weighted average contractual interest rates at
December 31, 1995 and 1994 follows (dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------ ----------------------
AVERAGE CARRYING AVERAGE CARRYING
RATE VALUE RATE VALUE
--------- ------------- --------- -----------
<S> <C> <C> <C> <C>
Passbook accounts ............... 2.17% $ 663,880 2.14% $ 685,049
Demand deposits:
Interest-bearing ............... .98 684,079 1.04 666,957
Noninterest-bearing ............ -- 696,918 -- 351,824
Money market deposit accounts .. 3.14 1,443,465 3.11 1,926,851
Term accounts:
3.00% or less .................. 2.82 2,882 2.91 45,055
3.01 -- 4.00% .................. 3.68 112,564 3.57 1,050,648
4.01 -- 5.00 ................... 4.65 367,247 4.52 1,596,827
5.01 -- 6.00 ................... 5.49 3,053,770 5.46 1,113,486
6.01 -- 7.00 ................... 6.52 1,944,418 6.42 703,933
7.01 -- 8.00 ................... 7.34 935,780 7.56 371,446
8.01 -- 9.00 ................... 8.47 123,293 8.45 404,859
9.01 -- 10.00 .................. 9.29 149,434 9.31 173,694
10.01 -- 11.00 ................. 10.57 3,696 10.92 49,434
11.01 -- 12.00 ................. 11.52 788 11.12 8,206
12.01 -- 13.00 ................. 12.27 1,587 12.27 1,641
--------- ------------- --------- -----------
4.67% 10,183,801 4.19% 9,149,910
Accrued interest payable ...... 50,755 25,848
Purchase accounting adjustments 7,072 20,898
------------- -----------
Total deposits ................ $10,241,628 $9,196,656
============= ===========
</TABLE>
The aggregate amount of jumbo certificates of deposit (term deposits) with
a minimum denomination of $100,000 was approximately $690 million and $523
million at December 31, 1995 and 1994, respectively. Brokered certificates of
deposit totalling $965 million and $824 million were included in deposits at
December 31, 1995 and 1994, respectively.
OC-F-27
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of interest expense by deposit category for the years ended
December 31, 1995, 1994 and 1993 follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- --------
<S> <C> <C> <C>
Passbook accounts ................ $ 14,668 $ 3,843 $ 768
Interest-bearing demand deposits 6,953 1,809 879
Money market deposit accounts ... 50,847 16,137 5,498
Term accounts .................... 374,891 79,168 48,265
---------- ---------- --------
$447,359 $100,957 $55,410
========== ========== ========
</TABLE>
At December 31, 1995, term accounts had scheduled maturities as follows
(in thousands):
<TABLE>
<CAPTION>
<S> <C>
1996 ............... $4,928,828
1997 ............... 1,071,908
1998 ............... 157,438
1999 ............... 180,424
2000 ............... 310,302
2001 and thereafter 46,559
------------
$6,695,459
============
</TABLE>
Certain of these deposits are the subject of the Branch Sale Agreements as
defined and more fully described in note 32.
(18) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase collateralized mortgage-backed securities as of December 31, 1995
and 1994 follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
------------------------ ----------------------
RECORDED MARKET INTEREST
VALUE (I) VALUE AMOUNT RATE
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Maturing within 30 days ........ $501,647 $ 511,513 $487,528 5.82%
Maturing 30 days to 90 days ... 236,483 240,152 210,057 6.64
Maturing over 1 year ........... 253,363 254,502 250,000 7.63
---------- ------------ ---------- ----------
Total (ii) ................... 991,493 1,006,167 947,585
Purchase accounting adjustment 554 554 --
Accrued interest payable ...... -- -- 21,925
---------- ------------ ----------
$992,047 $1,006,721 $969,510
========== ============ ==========
</TABLE>
OC-F-28
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
-------------------------- -----------------------
RECORDED MARKET INTEREST
VALUE (I) VALUE AMOUNT RATE
------------ ----------- ----------
<S> <C> <C> <C> <C>
Maturing within 30 days ........ $ 321,965 $ 319,249 $ 306,659 6.07%
Maturing 30 days to 90 days ... 1,231,871 1,226,579 1,168,738 6.22
Maturing 90 days to 1 year .... 438,362 433,454 404,286 7.70
------------ ------------ ----------- ----------
Total (ii) ................... 1,992,198 1,979,282 1,879,683
Purchase accounting adjustment 3,078 3,078 53
Accrued interest payable ...... -- -- 3,754
------------ ------------ -----------
$1,995,276 $1,982,360 $1,883,490
============ ============ ===========
</TABLE>
- ------------
(i) Recorded value includes accrued interest at December 31, 1995 and
1994. In addition, the recorded value at December 31, 1995, includes
adjustments for the unrealized gain or loss on securities available for
sale pursuant to SFAS No. 115.
(ii) Total mortgage-backed securities collateral at December 31, 1995 and
1994 includes $585 million and $876 million, respectively, in recorded
value of loans securitized with full recourse to the Bank. The market
value of such collateral was $600 million and $876 million at December
31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, these agreements had weighted average
stated interest rates of 6.48% and 6.51%, respectively. The underlying
securities were delivered to, and are being held under the control of,
third-party securities dealers. These dealers may have loaned the securities
to other parties in the normal course of their operations, but all agreements
require the dealers to resell to First Nationwide the identical securities at
the maturities of the agreements. Securities sold under agreements to
repurchase averaged $1.6 billion and $499 million during 1995 and 1994,
respectively, and the maximum amount outstanding at any month-end during
these periods was $2.2 billion and $1.9 billion, respectively.
(19) BORROWINGS
Borrowings at December 31, 1995 and 1994 are summarized as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1995 1994
----------------------- -----------------------
CARRYING AVERAGE CARRYING AVERAGE
VALUE RATE VALUE RATE
------------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Fixed-rate borrowings from the FHLB ..... $1,789,811 6.68% $2,242,323 7.61%
Variable-rate borrowings from the FHLB .. 250,000 6.02 275,000 5.93
Subordinated debentures due October 2006 92,100 10.00 92,100 10.00
Federal funds purchased .................. 55,000 6.00 -- --
Other borrowings ......................... 3,755 7.91 4,416 7.94
------------ --------- ------------ ---------
Total borrowings ....................... 2,190,666 6.73 2,613,839 7.52
Accrued interest payable ................. 8,424 -- 15,504 --
Purchase accounting adjustments, net .... (9,359) -- (23,495) --
------------ --------- ------------ ---------
$2,189,731 6.73% $2,605,848 7.52%
============ ========= ============ =========
</TABLE>
OC-F-29
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Maturities and weighted average stated interest rates of borrowings at
December 31, 1995, not including accrued interest payable or purchase
accounting adjustments, are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
BALANCES MATURING AVERAGE RATES
------------------------ ----------------
MATURITIES DURING THE YEARS
ENDING DECEMBER 31 FHLB OTHER FHLB OTHER
- --------------------------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C>
1996 ....................... $1,487,166 $ 55,236 6.12% 6.01%
1997 ....................... 240,000 213 8.61 8.10
1998 ....................... 310,000 200 7.34 8.20
1999 ....................... 250 171 7.75 8.19
2000 ....................... -- 121 -- 8.27
2001 and thereafter ........ 2,395 94,914 7.71 9.94
------------ ---------- ------- -------
Total .................... $2,039,811 $150,855 6.60% 8.49%
============ ========== ======= =======
</TABLE>
Interest expense on borrowings for the years ended December 31, 1995, 1994
and 1993, is summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
FHLB advances ................... $139,051 $71,662 $15,895
Interest rate swap agreements .. (15,177) (8,797) --
Subordinated debentures ......... 9,210 2,303 --
Federal funds purchased ......... 2,268 438 --
Revolving warehouse line ........ -- -- 1,924
Other ........................... 364 101 694
Purchase accounting adjustments 21,244 7,937 --
---------- --------- ---------
Total ......................... $156,960 $73,644 $18,513
========== ========= =========
</TABLE>
The following is a summary of the carrying value of assets pledged as
collateral for FHLB advances at December 31, 1995 (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Real estate loans (primarily residential) $1,643,971
Mortgage-backed securities ............... 905,823
FHLB stock ............................... 109,943
------------
Total .................................. $2,659,737
============
</TABLE>
OC-F-30
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(20) INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements outstanding and their weighted average rates
at December 31, 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
NOTIONAL AVERAGE RATE ESTIMATED
PRINCIPAL ------------------ MATURITY VARIABLE
MATURITY DATE AMOUNT PA RECEIVE IN YEARS RATE INDEX
- -------------- ----------- ------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
April 1996 .... $ 500,000 6.04% 8.19% .26 3-month LIBOR
September 1996 250,000 5.96 4.19 .71 1-month LIBOR
April 1998 .... 400,000 6.00 8.38 2.26 3-month LIBOR
-----------
Total ....... $1,150,000
===========
</TABLE>
Interest rate swap agreements outstanding and their weighted average rates
at December 31, 1994 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED
NOTIONAL AVERAGE RATE ESTIMATED
PRINCIPAL ------------------ MATURITY VARIABLE
MATURITY DATE AMOUNT PAY RECEIVE IN YEARS RATE INDEX
- -------------- ----------- ------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
April 1995 .... $ 500,000 5.06% 7.97% .3 3-month LIBOR
April 1996 .... 500,000 5.64 8.19 1.3 3-month LIBOR
September 1996 250,000 6.14 4.19 1.8 1-month LIBOR
April 1998 .... 400,000 5.56 8.38 3.3 3-month LIBOR
-----------
Total ....... $1,650,000
===========
</TABLE>
The Bank uses interest rate swap agreements to hedge against interest rate
risk inherent in its FHLB advances. Under the agreements, the Bank receives
or makes payments based on the differential between fixed-rate and
variable-rate interest amounts on the notional amount of the agreement. The
notional amounts of these derivatives do not represent amounts exchanged by
the parties and thus, are not a measure of the Bank's exposure through its
use of derivatives. The Bank pays the variable-rate and receives the
fixed-rate under these agreements. The variable interest rates presented in
the table above are based on LIBOR. The current LIBOR rates have been assumed
implicitly, in the aforementioned weighted average receive rate, to remain
constant throughout the term of the respective swaps. Any changes in LIBOR
interest rates would affect the variable-rate information disclosed above.
The Bank is exposed to credit-related losses in the event of
nonperformance by the counterparties to these agreements but does not expect
any counterparties to fail their obligations. The Bank deals only with highly
rated counterparties.
OC-F-31
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(21) ACCRUED TERMINATION AND FACILITIES COSTS
During the year ended December 31, 1995, the Bank recognized liabilities
for certain employee severance and termination costs and facilities costs as
a result of: (i) the relocation of the Bank's mortgage loan servicing
operations to Maryland, (ii) the closure of substantially all the Bank's
retail mortgage loan production offices, (iii) a Bank-wide cost reduction
project, and (iv) branch consolidations due to duplicate facilities resulting
from certain Branch Acquisitions. These accruals have been charged to
noninterest expense in the accompanying consolidated statement of operations
for the year ended December 31, 1995 as follows (in thousands):
<TABLE>
<CAPTION>
COMPENSATION
& EMPLOYEE OCCUPANCY
BENEFITS & EQUIPMENT TOTAL
-------------- ------------- --------
<S> <C> <C> <C>
Servicing relocation ........... $1,800 $3,913 $ 5,713
Closing loan production offices 787 1,294 2,081
Cost reduction project ......... 4,000 446 4,446
Branch consolidations .......... -- 532 532
-------------- ------------- --------
Total liability established . 6,587 6,185 12,772
Charges to liability account .. 4,374 2,239 6,613
-------------- ------------- --------
Balance, December 31, 1995 .. $2,213 $3,946 $ 6,159
============== ============= ========
</TABLE>
As a result of the relocation of the servicing operation to Frederick,
Maryland from Sacramento, California, virtually all California-based loan
servicing employees were terminated. Termination benefits totalling
approximately $1.8 million have been charged against the liability
established. In addition, the relocation resulted in the vacancy of
approximately 108,000 square feet of leased office space in Sacramento. A
$3.9 million liability was established in 1995 representing the estimated
present value of future occupancy expenses, offset by estimates of sub-lease
income over the remaining six-year term of the lease. At December 31, 1995,
approximately $.9 million had been charged against this liability.
In connection with the Bank's closure of substantially all of its retail
mortgage loan production offices, certain employees were terminated.
Termination benefits totalling approximately $.8 million have been charged
against the liability established. In addition, such closure resulted in the
vacancy of 18 leased offices. The $1.3 million liability established in April
1995 represents the estimated present value of future occupancy expenses,
offset by estimates of sub-lease income over the applicable remaining lease
terms. At December 31, 1995, costs totalling approximately $.8 million had
been charged against the liability.
In connection with a project to identify opportunities for reducing
operating costs and enhancing the efficiency of its operations, management
has identified certain employees whose positions will be eliminated. These
positions span all areas and business units of the Bank. An initial liability
for termination benefits totalling $4 million was established, of which $1.8
million had been charged at December 31, 1995 relating to this plan. In
connection with the elimination of these positions, the Bank has identified
opportunities for office space consolidation and has established additional
liabilities totalling $.4 million for lease termination payments, none of
which had been charged at December 31, 1995.
The Bank has identified certain of its retail banking facilities that will
be closed and marketed for sale, with the related operations consolidated
into other retail banking facilities acquired in the Branch Acquisitions.
Accordingly, a liability of $.5 million was established during the year ended
December 31, 1995 to record such facilities at fair value, which amount had
been charged at December 31, 1995.
OC-F-32
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(22) STOCKHOLDERS' EQUITY
(a) Preferred Stock
In connection with the FN Acquisition, the Bank issued 3,007,300 shares of
its 11 1/2% noncumulative perpetual preferred stock ("Preferred Stock") with
a par value of $.01 per share, having a liquidation preference of $300.7
million. This stock has a stated liquidation value of $100 per share. Costs
related to the Preferred Stock issuance were deducted from additional paid-in
capital. At or after September 1, 1999, the Preferred Stock is redeemable at
the option of the Bank, in whole or in part, at $105.75 per share prior to
September 1, 2000, and at prices which will decrease annually thereafter to
the stated liquidation value of $100 per share on or after September 1, 2004,
plus declared but unpaid dividends. Dividends are payable quarterly at an
annual rate of 11.5% per share when declared by the Bank's Board of
Directors. Dividends paid during 1995 totalled $34.6 million.
Floating rate noncumulative preferred stock ("Old Preferred Stock") was
issued by the Bank in December 1989 to First Gibraltar Holdings. The par
value of the Old Preferred Stock was $.01 with 200,000 shares originally
issued and 500,000 shares authorized. The liquidation preference and stated
value was $1,000 per share. During 1990, 75,500 shares were redeemed at
liquidation value. During 1993, the remaining 124,500 shares were redeemed at
liquidation value.
(b) Common Stock
Dividends and distribution on the Bank's common stock in 1995 totalled
$111.9 million. There were no dividends or distributions on common stock in
1994. Dividends and distributions on the Bank's common stock in 1993 totalled
$379.5 million and included certain non-cash assets of the Bank, including
the stock of First Gibraltar Mortgage Holdings Inc. ("FGMH").
(c) Payment of Dividends
The Federal thrift laws and regulations of the OTS limit First
Nationwide's ability to pay dividends on its preferred or common stock. First
Nationwide generally may not pay dividends if, after the payment of the
dividends, it would be deemed "undercapitalized" under the prompt corrective
action standards of the Federal Deposit Insurance Corporation Improvement Act
of 1991. In addition, depending upon the extent to which First Nationwide
meets its fully phased-in regulatory capital requirements, other limitations
will apply to First Nationwide's payment of dividends. The payment of
dividends will also be subject to First Nationwide's dividend policy, which
reflects such legal and regulatory restrictions.
(23) REGULATORY CAPITAL
As a savings institution which is regulated by the OTS, the Bank is
required to comply with capital requirements of the OTS. These regulations
require savings institutions to maintain minimum regulatory tangible capital
equal to 1.5% of adjusted total assets and minimum core capital equal to 3.0%
of adjusted total assets. Additionally, savings institutions are required to
meet a risk-based total capital requirement of 8.0%. At December 31, 1995,
the Bank's regulatory capital levels exceeded the minimum regulatory capital
requirements.
OC-F-33
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(24) FINANCIAL ASSISTANCE PROVIDED BY FSLIC/RF
Financial assistance provided pursuant to the Assistance Agreement for the
years ended December 31, 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
ACTUAL FSLIC/RF GUARANTEED
YIELD ASSISTANCE YIELD
--------- ------------ ------------
<S> <C> <C> <C>
1995
Yield maintenance on Covered Assets:
Loans and accounts receivable ................ $ 7,572 $ (213) $ 7,359
Investments in and advances to subsidiaries . (63) 283 220
Real estate owned ............................ (1,890) 5,016 3,126
--------- ------------ ------------
$ 5,619 5,086 $10,705
========= ============
FSLIC/RF Reimbursement ........................ --
------------
Total effect of FSLIC/RF assistance on the
consolidated statement of operations ........ $ 5,086
============
FDIC Purchase proceeds, write-downs, losses on
Covered Assets and other claims .............. $236,378
============
</TABLE>
<TABLE>
<CAPTION>
ACTUAL FSLIC/RF GUARANTEED
YIELD ASSISTANCE YIELD
--------- ------------ ------------
<S> <C> <C> <C>
1994
Yield maintenance on Covered Assets:
Loans and accounts receivable .............. $21,573 $ (5,543) $16,030
Investments in and advances to subsidiaries (473) 1,178 705
Real estate owned .......................... (1,561) 14,817 13,256
--------- ------------ ------------
$19,539 10,452 $29,991
========= ============
FSLIC/RF Reimbursement ...................... (1,060)
------------
Total effect of FSLIC/RF assistance on the
consolidated statement of operations ...... $ 9,392
============
Write-downs and losses on Covered Assets and
other claims ............................... $71,220
============
</TABLE>
<TABLE>
<CAPTION>
ACTUAL FSLIC/RF GUARANTEED
YIELD ASSISTANCE YIELD
--------- ------------ ------------
<S> <C> <C> <C>
1993
Yield maintenance on Covered Assets:
Loans and accounts receivable .............. $27,458 $ (4,884) $22,574
Investments in and advances to subsidiaries (4,488) 6,029 1,541
Real estate owned .......................... 4,953 19,897 24,850
Other ...................................... 35 128 163
--------- ------------ ------------
$27,958 21,170 $49,128
========= ============
FSLIC/RF Reimbursement ...................... (5,694)
------------
Total effect of FSLIC/RF assistance on the
consolidated statement of operations ...... $15,476
============
Write-downs and losses on Covered Assets and
other claims ............................... $28,076
============
</TABLE>
OC-F-34
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(25) OTHER NONINTEREST INCOME AND EXPENSE
Other noninterest income and expense amounts are summarized as follows for
the years ended December 31, 1995, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Other noninterest income:
Dividends on FHLB stock .............. $ 6,546 $ 3,186 $ 1,438
Disbursement float ................... 2,622 943 149
Other ................................ 8,759 3,423 4,638
--------- --------- ---------
$17,927 $ 7,552 $ 6,225
========= ========= =========
Other noninterest expense:
Professional fees .................... $11,802 $ 2,622 $ 5,906
Telephone ............................ 7,652 2,134 737
Insurance and surety bonds ........... 4,005 2,321 2,370
Postage .............................. 6,856 1,535 801
Printing, copying and office supplies 6,096 2,057 1,103
Employee travel ...................... 5,244 1,249 449
Other ................................ 25,057 8,388 14,438
--------- --------- ---------
$66,712 $20,306 $25,804
========= ========= =========
</TABLE>
(26) INCOME TAXES
Total income tax expense (benefit) for the years ended December 31, 1995,
1994 and 1993 was allocated as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------- --------
<S> <C> <C> <C>
Income before income taxes and extraordinary item $(55,826) $3,191 $2,500
Extraordinary item ................................ 219 119 --
Net unrealized holding gain on securities
available for sale ............................... 7,055 -- --
----------- -------- --------
$(48,552) $3,310 $2,500
=========== ======== ========
</TABLE>
Income tax expense (benefit) attributable to income before income taxes
and extraordinary item for the years ended December 31, 1995, 1994 and 1993
consisted of (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------- --------
<S> <C> <C> <C>
Federal
Current ....... $ 896 $ -- $2,500
Deferred ...... (69,000) -- --
----------- -------- --------
(68,104) -- 2,500
- --------------- ----------- -------- --------
State and local
Current ....... 12,278 -- --
Deferred ...... -- 3,191 --
----------- -------- --------
$ 12,278 $3,191 $2,500
----------- -------- --------
$ (55,826) $3,191 $2,500
=========== ======== ========
</TABLE>
OC-F-35
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The consolidated income tax expense (benefit) for the years ended
December 31, 1995, 1994 and 1993 differs from the amounts computed by
applying the statutory U.S. Federal corporate tax rate of 35% for 1995, 1994
and 1993 to income before income taxes and extraordinary item (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------------ --------- ----------
<S> <C> <C> <C>
Computed "expected" income tax expense ............. $ 53,713 $13,699 $ 51,316
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal income tax
benefit .......................................... 7,980 2,151 --
Tax exempt income ................................. (2,636) (3,493) (5,679)
Amortization of excess cost over fair value of net
assets acquired .................................. -- -- 164
Earnings from nonconsolidated subsidiaries ....... -- -- (11,825)
Loss on sales of real estate owned, net of income
earned ........................................... -- -- (2,193)
Gain on sales of assets and deposits due to
goodwill ......................................... -- -- 19,152
Reduction of net operating losses related to
subsidiary ....................................... -- -- 12,214
Adjustment to prior year's tax expense ............ (2,173) -- --
Adjustment to deferred tax asset .................. 7,865 -- --
Unrealized holding gain on securities available
for sale recognized for tax purposes ............. 15,937 -- --
Other ............................................. (1,383) 307 390
Change in the beginning-oOC-F-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense .................. (135,129) (9,473) (61,039)
------------ --------- ----------
$ (55,826) $ 3,191 $ 2,500
============ ========= ==========
</TABLE>
The significant components of deferred income tax expense (benefit)
attributable to income before income taxes and extraordinary item for the
years ended December 31, 1995, 1994 and 1993 are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
------------ --------- ----------
<S> <C> <C> <C>
Deferred tax expense (exclusive of the effects of
other components listed below) .................. $ 66,129 $12,664 $ 61,039
Decrease in beginning-oOC-F-the-year balance of the
valuation allowance for deferred tax assets .... (135,129) (9,473) (61,039)
------------ --------- ----------
$ (69,000) $ 3,191 $ --
============ ========= ==========
</TABLE>
OC-F-36
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1995 and 1994 are presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .................. $ 907,332 $ 935,849
Foreclosed real estate .......................... -- 8,209
Loans receivable ................................ 6,868 62,833
Securities ...................................... -- 3,850
Miscellaneous reserves .......................... 11,842 5,538
Accrued liabilities ............................. 12,675 1,354
Deferred interest ............................... 4,552 --
State taxes ..................................... 4,243 1,101
Other intangible assets ......................... 47,169 27,498
Alternative minimum tax credit and investment tax
credit carryforwards ............................ 3,529 3,290
Other ............................................ 8,174 4,116
----------- -----------
Total gross deferred tax assets ............... 1,006,384 1,053,638
Less valuation allowance ...................... (798,088) (933,938)
----------- -----------
Net deferred tax assets ....................... 208,296 119,700
----------- -----------
Deferred tax liabilities:
Change in accounting method ..................... 35,043 46,725
Other intangible assets ......................... 41,651 --
Purchase accounting adjustments ................. 56,319 64,684
FHLB stock ...................................... 2,610 3,297
Unrealized gains on securities available for sale 2,503 --
Other ........................................... 3,673 4,994
----------- -----------
Net deferred tax liabilities .................. 141,799 119,700
----------- -----------
Net deferred tax assets and liabilities ....... $ 66,497 $ --
=========== ===========
</TABLE>
The net change in the total valuation allowance for the year ended
December 31, 1995 was a decrease of $135.8 million, of which $135.1 million
is attributable to income before income taxes and extraordinary item and $.7
million is attributable to the extraordinary item. The decrease of $135.1
million attributable to income before income taxes and extraordinary item
consists of $69 million relating to a favorable reassessment, in the fourth
quarter of 1995, of future earnings expectations and $66.1 million relating
to the current year. The valuation allowance for deferred tax assets at
January 1, 1994 was approximately $943.8 million. The net change in the total
valuation allowance for the year ended December 31, 1994 was a decrease of
$9.9 million.
As of December 31, 1994, First Nationwide recorded a valuation allowance
for 100% of the Bank's net deferred tax asset because at that time it was not
more likely than not that such deferred tax asset would be realized. Based on
a favorable earnings trend since the consummation of the FN Acquisition and
future earnings expectations, management changed its judgement about the
realizability of the Bank's net deferred tax assets and recognized a deferred
tax benefit of $69 million in the fourth quarter of 1995. Management believes
that the realization of such asset is more likely than not, based upon the
expectation that First Nationwide will generate the necessary amount of
taxable income in future periods.
At December 31, 1995, if the Bank had filed a consolidated Federal income
tax return on behalf of itself and its subsidiaries for each year since the
formation of the Bank, it would have had regular and
OC-F-37
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
alternative minimum tax net operating losses for Federal income tax purposes
of approximately $2.6 billion and $959 million, respectively, which expire in
2002 through 2007.
(27) EMPLOYEE BENEFIT PLANS
Postretirement Benefits Plan
In connection with the FN Acquisition, the Bank assumed unfunded plans to
provide postretirement medical benefits to certain eligible employees and
their dependents through age 64. In general, early retirement is age 55 with
10 years of service. Retirees participating in the plans pay Consolidated
Omnibus Budget Reduction Act premiums for the period of time they
participate.
The estimated cost for postretirement health care benefits has been
accrued on an actuarial net present value basis, in accordance with the
requirements of Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
The following table sets forth the plans' combined liabilities included in
the Bank's consolidated statements of financial condition at December 31,
1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees .................................... $ -- $ --
Eligible active plan participants ........... 1,177 713
Ineligible active plan participants ........ 1,719 1,164
-------- -------
Accumulated postretirement benefit
obligation (other liabilities) ............ $2,896 $1,877
======== =======
</TABLE>
The projected benefit obligation at December 31, 1995 and 1994 was
determined using a discount rate of 8.00% and 8.75%, respectively. At
December 31, 1995, an increase of 1% in the health care cost trend rate would
cause the accumulated postretirement benefit obligation to increase by $.1
million, and the service and interest costs to increase by less than $.1
million.
Net periodic postretirement benefits cost for the years ended December 31,
1995 and 1994 included the following components (in thousands):
<TABLE>
<CAPTION>
1995 1994
------ ------
<S> <C> <C>
Service cost -benefits attributable to service
during the current period ........................... $340 $ 78
Interest cost on accumulated postretirement benefit
obligation .......................................... 163 37
------ ------
Periodic postretirement benefit cost ............... $503 $115
====== ======
</TABLE>
The initial health care cost trend rate for medical benefits in 1995 was
9.50%, the average trend rate was 7.32%, and the ultimate trend rate was
5.50% which will be reached in seven years. In 1994, the initial health care
cost trend rate for medical and dental benefits were 10% and 8%,
respectively, and the average trend rate used was 7.5%, with an ultimate
trend rate of 6%, to be achieved in ten years.
Investment Plan
In connection with the FN Acquisition, the Bank assumed Old FN's defined
contribution plan. Effective December 31, 1994, the Bank resolved to merge
these plans. The merger was completed in February 1995 upon completion of the
transfer of all funds to the surviving plan. Both plans are qualified
OC-F-38
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
plans under Section 401(a) of the Internal Revenue Code. The plan is
available to substantially all employees with at least one year of
employment. Employee contributions are voluntary. The plan provides for
deferral of up to 12% of qualifying compensation of plan participants. The
Bank's matching contribution was a maximum of 100% of up to the first 3% of
employee deferrals. The annual discretionary employer profit sharing
contribution is a maximum of 3% of eligible compensation. It can be declared
at any level in the range from 0% to 3%. Employees vest immediately in their
own deferrals and any employer profit sharing contributions and vest in
employer matching contributions based on completed years of service. The
Bank's contributions to such plan totalled $2.8 million, $1.5 million, and
$.65 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
(28) INCENTIVE PLAN
Effective October 1, 1995, FN Holdings entered into a management incentive
plan ("Plan") with certain executive officers of the Bank ("Participants").
Awards under the Plan will be made in the form of performance units. Each
performance unit entitles Plan Participants to receive cash and/or stock
options ("Bonuses") based upon the Participants' vested interest in a bonus
pool. Generally, the Plan provides for the payment of Bonuses, on a quarterly
basis, to the Participants upon the occurrence of certain events. Bonuses
vest at 20% per year beginning October 1, 1995 and are subject to a cap of
$50 million.
In accordance with generally accepted accounting principles, Bonuses are
recorded by a charge to compensation and employee benefits and an increase to
additional paid-in capital. During 1995, a liability of $2 million was
recorded relative to the Plan.
(29) COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Bank has various commitments and
contingent liabilities that are not reflected in the accompanying
consolidated financial statements. Loan commitments have off-balance sheet
credit risk because only origination fees and accruals for possible losses
are recognized in the consolidated statement of financial condition until the
commitments are fulfilled. Credit risk represents the accounting loss that
would be recognized at the reporting date if counterparties failed to perform
as contracted. The credit risk amounts are equal to the contractual amounts,
assuming the amounts are fully advanced and that, in accordance with
Statement of Financial Accounting Standards No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk", collateral or
other security is of no value. The Bank does not anticipate any material loss
as a result of these commitments. The Bank applies the same credit standards
used in the lending process to extending these commitments, and periodically
reassesses the customers' creditworthiness through ongoing credit reviews.
The following is a summary of outstanding firm commitments to originate,
purchase and sell loans at December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Commitments to originate and purchase loans:
Fixed-rate ................................ $325,199 $29,583
Variable-rate ............................. 101,355 81,230
Forward commitments to sell loans ........... $572,363 $33,255
========== =========
</TABLE>
On September 28, 1994, First Nationwide entered into an agreement with
FNMA pursuant to which FNMA provided credit enhancements for certain
bond-financed real estate projects originated by Old FN. The agreement
requires that First Nationwide pledge to FNMA collateral in the form of
certain
OC-F-39
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
eligible securities which are held by a third party trustee. The collateral
requirement varies based on the balance of the bonds outstanding, losses
incurred (if any), as well as other factors. At December 31, 1995, First
Nationwide had pledged as collateral certain securities available for sale
and short-term investment securities with a carrying value of $98.6 million.
At December 31, 1995, certain mortgage-backed securities available for
sale with a carrying value of $39.0 million were pledged to FNMA associated
with the sales of certain securitized multi-family loans.
At December 31, 1995, loans receivable included approximately $2.0 billion
of loans that had the potential to experience negative amortization.
Proposed budget reconciliation legislation that contains provisions to
recapitalize the SAIF has been passed by Congress. The legislation includes
provisions for a special assessment, as determined by the FDIC, on
SAIOC-F-assessable deposits of insured depository institutions in an amount
adequate to cause the SAIF to achieve a specified designated reserve ratio.
Under the proposed legislation, the assessment would have been due January 1,
1996. The FDIC has publicly estimated that the amount of the special
assessment needed to recapitalize the SAIF ranges between 85 to 90 basis
points.
The legislation provides that the assessment would be applied to SAIF
deposits held as of March 31, 1995. The SAIOC-F-assessable deposits of the Bank
as of this date, adjusted for the deposit acquisitions and sales discussed in
notes 2 and 32, totalled approximately $8.9 billion. If the assessment is
made at a rate within the estimated range of 85 to 90 basis points, after
giving effect to the deposit acquisitions and sales discussed in notes 2 and
32, the effect on the Bank would be a pre-tax charge in the range of $75 to
$80 million ($68 to $72 million on an after-tax basis) (unaudited). It is
expected that in the event that the SAIF is capitalized pursuant to this
legislation, the assessment rates applicable to SAIOC-F-assessable deposits will
be reduced substantially from the Bank's current rate of 23 cents. The
proposed legislation includes additional provisions that, among other things,
would require BIF member institutions to share pro rata in the obligations of
SAIF members for certain obligations issued by the Financing Corporation, a
corporation established by the federal government in 1987 to finance the
recapitalization of FSLIC. The President has vetoed this budget
reconciliation bill. Such veto, however, was based on issues unrelated to the
provisions dealing with capitalization of the SAIF. Congress and the
President are in negotiations that will affect the outcome of the
legislation. The Bank is unable to predict whether such legislation will be
enacted.
First Nationwide is involved in various claims and lawsuits arising from
the December 28, 1988 acquisition of five savings associations located in
Texas. Under the terms of the Assistance Agreement, FSLIC/RF will indemnify
First Nationwide for any amounts incurred in connection with the
satisfaction, settlement or compromise of such previous claims and lawsuits,
including costs and expenses.
With respect to the FN Acquisition, First Nationwide and Old FN disagree
on two components of the purchase price paid for the FN Acquired Business,
which total approximately $28 million. This $28 million is carried in other
assets in the Bank's consolidated statement of financial condition. The more
significant of the two issues in dispute arises from Old FN's change in net
book value from January 1, 1994, to the close of business on September 30,
1994. In arriving at the cash purchase price, Old FN added back to the book
value of the purchased assets an amount of approximately $24 million which
had been amortized from intangible assets and goodwill for the period from
January 1, 1994 through September 30, 1994, thereby increasing the estimated
cash purchase price by $24 million. First Nationwide believes that the
exclusion of the amortization of intangible assets and goodwill from the
closing net book value is contrary to the express provisions of the Asset
Purchase Agreement. As a result, First Nationwide does not believe that the
addition by Old FN of $24 million to the cash purchase price was proper under
the terms of the Asset Purchase Agreement. First Nationwide and Old FN
commenced the arbitration in December 1995. Although management of First
Nationwide believes that it will prevail on this issue, in the event that
First Nationwide does not so prevail, the result would not be material to the
consolidated financial statements of First Nationwide.
OC-F-40
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The other remaining issue in dispute relates to an outstanding receivable
account, which the Bank maintains was overstated by approximately $4 million
by Old FN at September 30, 1994. Resolution of this issue remains
outstanding. Although management of the Bank believes that it will prevail on
this issue, in the event that it does not do so, the result would not be
material to the consolidated financial statements of First Nationwide.
In addition, First Nationwide is involved in various claims and lawsuits
arising in the ordinary course of business. Management is of the opinion that
the effect, if any, of these claims and lawsuits is not material to the
Bank's consolidated financial statements.
(30) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Bank's financial instruments at December 31, 1995 and 1994 (in thousands).
Statement of Financial Accounting Standards No. 107, "Disclosures of
Financial Instruments," defines the fair value of a financial instrument as
the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation
sale.
<TABLE>
<CAPTION>
1995 1994
--------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents .................... $ 312,565 $ 312,565 $ 184,982 $ 184,982
Securities available for sale ................ 1,826,075 1,826,075 45,000 45,000
Securities held to maturity .................. 1,455 1,455 411,859 409,398
Mortgage-backed securities held to maturity .. 1,524,488 1,567,197 3,153,812 3,095,994
Loans held for sale .......................... 1,203,412 1,209,302 26,354 26,354
Loans receivable, net ........................ 8,831,018 8,971,983 9,966,886 9,832,003
Covered assets ............................... 39,349 39,349 311,603 311,603
Investment in FHLB ........................... 109,943 109,943 128,557 128,557
Accrued interest receivable .................. 100,604 100,604 87,706 87,706
Financial Liabilities:
Deposits ..................................... 10,241,628 10,283,600 9,196,656 9,140,000
Securities sold under agreements to
repurchase .................................. 969,510 978,700 1,883,490 1,883,490
Borrowings:
Gross ....................................... 2,206,035 2,238,300 2,650,238 2,624,000
Interest rate swap agreement (1) ............ (16,304) (32,000) (44,390) (27,000)
------------ ------------- ------------ ------------
Total borrowings .......................... $ 2,189,731 $ 2,206,300 $2,605,848 $2,597,000
============ ============= ============ ============
Off-balance-sheet net unrealized gains
(losses):
Commitments to originate loans ............... $ 1,691 $ --
Forward commitments to sell loans ............ (2,757) 56
</TABLE>
- ------------
(1) Designated as a hedge against FHLB advances.
The carrying amounts in the table are included in the accompanying
consolidated statement of financial position under the indicated captions,
except for off-balance sheet net unrealized gains (losses).
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
OC-F-41
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 judgement was 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, and interest rates,
all of which are subject to changes.
Cash and cash equivalents: Cash and cash equivalents are valued at their
carrying amounts included in the consolidated statement of financial
condition, which are reasonable estimates of fair value due to the relatively
short period to maturity of the instruments.
Securities and mortgage-backed securities: Securities and mortgage-backed
securities are valued at quoted market prices where available. If quoted
market prices are not available, fair values are based on quoted market
prices of comparable instruments.
Loans held for sale: Loans held for sale are valued based on quoted market
prices for mortgage-backed securities backed by similar loans.
Loans receivable, net: Fair values are estimated for loans in groups with
similar financial and risk characteristics. Loans are segregated by type
including residential, multi-family and commercial. Each loan type is further
segmented into fixed and variable interest rate terms and by performing and
non-performing categories in order to estimate fair values.
For performing residential mortgage loans, fair value is estimated by
discounting contractual cash flows adjusted for prepayment estimates using
discount rates based on secondary market sources. The fair value of
performing commercial and multi-family loans is calculated by discounting
scheduled principal and interest cash flows through the estimated maturity
using estimated market discount rates that reflect the credit and interest
rate risk inherent in the respective loan type.
Fair value for non-performing loans is based on discounting estimated cash
flows using a rate commensurate with the risk associated with the estimated
cash flows, or underlying collateral values, where appropriate.
Covered Assets: Since the carrying value of Covered Assets is fully
guaranteed by the FSLIC Resolution Fund, fair value of these financial
instruments approximates the carrying value.
Investment in FHLB: Since no secondary market exists for FHLB stock and
the stock is bought and sold at par by FHLB, fair value of these financial
instruments approximates the carrying value.
Accrued interest: The carrying amounts of accrued interest approximate
their fair values.
Deposits: The fair values of demand deposits, passbook accounts, money
market accounts, and other deposits immediately withdrawable, by definition,
approximate carrying values for the respective financial instruments. For
fixed maturity deposits, the fair value was estimated by discounting expected
cash flows by the current offering rates of deposits with similar terms and
maturities.
Securities sold under agreements to repurchase: The fair value of
securities sold under agreements to repurchase is estimated using a
discounted cash flow analysis based on interest rates currently offered on
such repurchase agreements with similar maturities.
Borrowings: The fair value of borrowings, other than FHLB advances, is
estimated using discounted cash flow analyses based on current incremental
rates for similar borrowing arrangements. The fair values of FHLB advances
are estimated using a discounted cash flow analysis based on interest rates
currently offered on advances with similar maturities. Fair values of the
Bank's interest rate swap agreements, which effectively hedge certain of the
Bank's FHLB advances, are based on the net present value of the estimated
interest due to the Bank as compared to the estimated interest due to the
counterparties of the agreements.
OC-F-42
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Off-balance sheet financial instruments: Fair values of the Bank's
commitments to originate loans is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of
the agreements and the present creditworthiness of the counterparties. For
fixed-rate commitments, fair value also considers the difference between
current levels of interest rates and the committed rates. Fair value of
forward commitments to sell loans are determined using current estimated
replacement costs.
(31) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly financial data for the
years ended December 31, 1995 and 1994 (in thousands) (unaudited):
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1995 1995 1995 1995 TOTAL
-------------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Total interest income ............... $ 277,648 $ 270,516 $ 268,005 $ 259,335 $1,075,504
Total interest expense .............. (179,210) (178,367) (178,857) (172,842) (709,276)
-------------- --------------- ----------- ----------- ------------
Net interest income ................ 98,438 92,149 89,148 86,493 366,228
Provision for loan losses ........... (19,000) (6,000) (5,799) (6,201) (37,000)
-------------- --------------- ----------- ----------- ------------
Net interest income after provision
for loan losses ................... 79,438 86,149 83,349 80,292 329,228
Total noninterest income ............ 45,717 35,636 38,595 31,025 150,973
Total noninterest expense ........... (81,692) (75,594) (90,492) (78,956) (326,734)
-------------- --------------- ----------- ----------- ------------
Income before income taxes and
extraordinary item ................ 43,463 46,191 31,452 32,361 153,467
Income taxes (see note 26) .......... 64,648 (4,620) (3,139) (1,063) 55,826
-------------- --------------- ----------- ----------- ------------
Income before extraordinary item .. 108,111 41,571 28,313 31,298 209,293
Extraordinary item .................. -- -- -- 1,967 1,967
-------------- --------------- ----------- ----------- ------------
Net income ......................... $ 108,111 $ 41,571 $ 28,313 $ 33,265 $ 211,260
============== =============== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1994 1994 1994 1994 TOTAL
-------------- --------------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total interest income ............... $ 252,065 $12,856 $ 13,307 $ 14,756 $ 292,984
Total interest expense .............. (163,053) (9,385) (10,325) (10,701) (193,464)
-------------- --------------- ---------- ----------- -----------
Net interest income ................ 89,012 3,471 2,982 4,055 99,520
Provision for loan losses ........... (6,226) -- -- -- (6,226)
-------------- --------------- ---------- ----------- -----------
Net interest income after provision
for loan losses ................... 82,786 3,471 2,982 4,055 93,294
Total noninterest income ............ 28,651 4,174 4,634 3,699 41,158
Total noninterest expense ........... (73,414) (7,059) (7,279) (7,559) (95,311)
-------------- --------------- ---------- ----------- -----------
Income before income taxes and
extraordinary item ................ 38,023 586 337 195 39,141
Income taxes ........................ (3,191) -- -- -- (3,191)
-------------- --------------- ---------- ----------- -----------
Income before extraordinary item .. 34,832 586 337 195 35,950
Extraordinary item .................. (119) -- 1,495 -- 1,376
-------------- --------------- ---------- ----------- -----------
Net income ......................... $ 34,713 $ 586 $ 1,832 $ 195 $ 37,326
============== =============== ========== =========== ===========
</TABLE>
OC-F-43
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(32) SUBSEQUENT EVENTS (UNAUDITED)
Lomas 1996 Purchase
On January 31, 1996, FNMC consummated an agreement to purchase LMUSA's
remaining $14.1 billion loan servicing portfolio (including a sub-servicing
portfolio of $2.4 billion), a master servicing portfolio of $2.7 billion,
$5.9 million in foreclosed real estate, $45.3 million in net other servicing
receivables, $5.8 million in mortgage loans, and $6.2 million in net other
assets for a purchase price of approximately $160.8 million payable in
installments (the "Lomas 1996 Purchase"). The initial installment of $49.8
million was paid with existing cash.
SFFed Acquisition
On August 27, 1995 the Bank entered into an Agreement and Plan of Merger
(the "Merger Agreement") with SFFed Corp. ("SFFed"), a savings and loan
holding company, pursuant to which the Bank acquired (the "SFFed
Acquisition") SFFed and its wholly owned federal savings association, San
Francisco Federal Savings and Loan Association ("San Francisco Federal"). San
Francisco Federal operated 35 branches in the Northern California area. At
December 31, 1995, San Francisco Federal had approximately $4.0 billion in
assets and approximately $2.7 billion in deposits.
The SFFed Acquisition was consummated on February 1, 1996. Under the
Merger Agreement, holders of SFFed common stock outstanding at the effective
time of the merger (other than shares for which dissenters' rights were
perfected, shares held by First Nationwide and shares held as treasury stock)
received $32 per share. The holders of options on the common stock of SFFed
received for each share subject to an option the difference between $32 and
the applicable per share option price. The aggregate consideration paid under
the Merger Agreement was approximately $264 million. Following completion of
the SFFed Acquisition, SFFed was liquidated and San Francisco Federal was
merged into First Nationwide. The Bank financed the SFFed Acquisition with
existing cash and other borrowings which may ultimately be replaced by
proceeds from the sale of certain mortgage-backed securities or other assets.
Capital Contribution
On February 1, 1996, FN Holdings contributed the net proceeds from the
issuance of its 9 1/8% Senior Subordinated Notes Due 2003 totalling $133
million as additional paid in capital of the Bank to ensure that the Bank
retains its "well-capitalized" status upon consummation of the SFFed
Acquisition and the Lomas 1996 Purchase described in the preceding
paragraphs.
Pending Acquisition -- Home Federal
On December 19, 1995, the Bank entered into a merger agreement with Home
Federal Financial Corporation ("HFFC"), pursuant to which the Bank will
acquire (the "Home Federal Acquisition") HFFC and its wholly owned federally
chartered savings association subsidiary, Home Federal Savings and Loan
Association of San Francisco ("Home Federal"). At December 31, 1995, HFFC had
approximately $718 million in assets and $625 million in deposits and
operated 15 branches in the Northern California area. The aggregate
consideration to be paid in connection with the Home Federal Acquisition is
estimated to approximate $70.6 million. The Home Federal Acquisition is
subject to approval by HFFC's shareholders and regulatory approval by the
Office of Thrift Supervision, and is expected to close in the second quarter
of 1996.
OC-F-44
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Branch Sales
From September through December of 1995, the Bank entered into the
following agreements (the "Branch Sale Agreements") to sell retail deposits
("Deposits") and the related retail banking assets comprised of cash on hand,
loans on deposits and facilities ("Related Assets") in Ohio, New York, New
Jersey and Michigan as follows:
<TABLE>
<CAPTION>
CARRYING VALUE AT
DECEMBER 31, 1995
DATE OF NUMBER OF GENERAL ----------------------------
PURCHASER AGREEMENT BRANCHES LOCATION DEPOSITS RELATED ASSETS
- -------------------------------------- ----------- ----------- -------------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fifth Third Bank of Northeastern Ohio 9/22/95 28 Ohio $1,414,695 $18,480
North Fork Bank ....................... 9/28/95 10 Long Island, 602,014 8,222
New York
Middletown Savings Bank ............... 9/29/95 8 Upstate 485,975 5,594
New York
Independence Savings Bank ............. 10/11/95 3 Brooklyn, New 330,073 3,308
York
Republic National Bank ................ 10/31/95 3 Manhattan, New 282,580 1,795
York
Midlantic Bank ........................ 11/3/95 4 New Jersey 509,597 5,556
Independence Savings Bank ............. 11/15/95 2 Staten Island, 286,723 3,718
New York
Charter One Bank ...................... 12/14/95 21 Michigan 783,965 12,667
----------- ------------ --------------
Total ................................. 79 $4,695,622 $59,340
=========== ============ ==============
</TABLE>
The premiums to be paid by the purchasers in these transactions total
approximately $367 million. These sales are subject to regulatory approval
and are expected to close during the first half of 1996.
As of March 8, 1996, the Bank has consummated the sale of 38 branches
pursuant to the Branch Sale Agreements, totalling $2.1 billion and $28.1
million in carrying value of Deposits and Related Assets at their respective
sale dates, respectively. The Bank financed these sales through additional
borrowings from the FHLB and reverse repurchase agreements. Through March 8,
1996, pre-tax gains totalling $180.9 million have been recognized in
connection with these transactions.
OC-F-45
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and amounts due from banks ............................ $ 119,091 $ 154,758
Interest-bearing deposits in other banks ................... 24,182 32,772
Short-term investment securities ........................... 1,072 125,035
--------------- --------------
Cash and cash equivalents ................................. 144,345 312,565
Securities available for sale, at fair value ............... 567,933 348,561
Securities held to maturity ................................ 4,277 1,455
Mortgage-backed securities available for sale, at fair
value ..................................................... 1,660,140 1,477,514
Mortgage-backed securities held to maturity ................ 1,700,387 1,524,488
Loans held for sale, net ................................... 710,233 1,203,412
Loans receivable, net ...................................... 10,578,170 8,831,018
Covered assets ............................................. -- 39,349
Investment in Federal Home Loan Bank ("FHLB") System ...... 217,529 109,943
Office premises and equipment, net ......................... 92,088 93,509
Foreclosed real estate, net ................................ 58,791 48,535
Accrued interest receivable ................................ 110,811 100,604
Intangible assets .......................................... 144,782 18,606
Mortgage servicing rights, net ............................. 406,669 241,355
Other assets ............................................... 413,306 286,531
--------------- --------------
Total assets ............................................. $16,809,461 $14,637,445
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ................................................... $ 8,799,990 $10,241,628
Securities sold under agreements to repurchase ............. 2,127,574 969,510
Borrowings ................................................. 4,028,416 2,189,731
Other liabilities .......................................... 391,900 276,691
--------------- --------------
Total liabilities ........................................ 15,347,880 13,677,560
--------------- --------------
Commitments and contingencies -- --
Stockholders' equity:
11 1/2% Noncumulative perpetual preferred stock, $100 par
value, 5,000,000 shares authorized, 3,007,300 shares
issued and outstanding ................................... 300,730 300,730
Common stock, $.01 par value, 50,000 shares authorized,
800 shares issued and outstanding ........................ 1 1
Additional paid-in capital ................................ 632,805 466,216
Net unrealized holding gain on securities available for
sale ..................................................... 35,087 63,512
Retained earnings (substantially restricted) .............. 492,958 129,426
--------------- --------------
Total stockholders' equity ................................ 1,461,581 959,885
--------------- --------------
Total liabilities and stockholders' equity ................ $16,809,461 $14,637,445
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-46
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Interest income:
Loans receivable .............................................. $669,459 $603,814
Mortgage-backed securities .................................... 191,602 156,440
Covered assets ................................................ 1,413 9,869
Loans held for sale ........................................... 45,424 6,959
Securities and interest-bearing deposits in other banks ...... 24,680 20,774
---------- ----------
Total interest income ........................................ 932,578 797,856
---------- ----------
Interest expense:
Deposits ...................................................... 323,246 328,879
Securities sold under agreements to repurchase ................ 89,923 77,994
Borrowings .................................................... 173,189 123,193
---------- ----------
Total interest expense ....................................... 586,358 530,066
---------- ----------
Net interest income .......................................... 346,220 267,790
Provision for loan losses ...................................... 29,700 18,000
---------- ----------
Net interest income after provision for loan losses .......... 316,520 249,790
---------- ----------
Noninterest income:
Loan servicing fees, net ...................................... 92,150 48,061
Customer banking fees and service charges ..................... 34,356 34,815
Management fees ............................................... 8,016 11,139
Gain on sale of branches ...................................... 363,012 --
Gain/(loss) on sales of loans, net ............................ 13,005 (1,113)
Gain (loss) on sale of assets ................................. 38,396 (180)
Other income .................................................. 46,526 12,534
---------- ----------
Total noninterest income ..................................... 595,461 105,256
---------- ----------
Noninterest expense:
Compensation and employee benefits ............................ 155,976 117,897
Occupancy and equipment ....................................... 37,441 39,456
Loan expense .................................................. 20,454 6,331
Savings Association Insurance Fund ("SAIF") deposit insurance
premium ...................................................... 77,011 16,360
Data processing ............................................... 8,345 7,195
Marketing ..................................................... 7,697 11,308
Professional fees ............................................. 13,444 8,281
Foreclosed real estate operations, net ........................ (6,841) (232)
Amortization of intangible assets ............................. 6,877 460
Other ......................................................... 49,740 37,986
---------- ----------
Total noninterest expense .................................... 370,144 245,042
---------- ----------
Income before income taxes and extraordinary item .............. 541,837 110,004
Income tax (benefit) expense ................................... (77,523) 8,822
---------- ----------
Income before extraordinary item ............................... 619,360 101,182
Extraordinary item -gain on early extinguishment of debt, net (1,586) 1,967
---------- ----------
Net income ................................................... 617,774 103,149
Preferred stock dividends ...................................... 25,938 25,938
---------- ----------
Net income available to common stockholder ................... $591,836 $ 77,211
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-47
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 617,774 $ 103,149
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of intangible assets ............................. 6,877 460
Accretion of premiums and discounts, net ...................... (11,431) (4,344)
Amortization of mortgage servicing rights ..................... 65,482 19,836
Provision for loan losses ..................................... 29,700 18,000
Provision for accrued termination and facilities costs ....... -- 13,992
(Gain) Loss on sales of assets ................................ (38,396) 180
Gain on sales of branches ..................................... (363,012) --
Loss on sales of loans, net ................................... 41,968 7,380
Gain on sales of foreclosed real estate, net .................. (10,533) (2,033)
Extraordinary loss (gain) on early extinguishment of
debt, net .................................................... 1,586 (1,967)
Depreciation and amortization ................................. 7,905 6,560
FHLB stock dividend ........................................... (3,585) (5,216)
Capitalization of originated mortgage servicing rights and
excess servicing fees receivable ............................. (54,973) (6,267)
Purchases and originations of loans held for sale .............. (3,554,652) (621,565)
Proceeds from the sales of loans held for sale ................. 4,025,868 411,165
Increase in other assets ....................................... (46,017) (10,043)
Decrease (increase) in accrued interest receivable ............ 16,214 (14,687)
(Decrease) increase in other liabilities ....................... (59,303) 38,458
------------- -----------
Total adjustments ............................................. 53,698 (150,091)
------------- -----------
Net cash flows provided by (used in) operating activities .... 671,472 (46,942)
------------- -----------
</TABLE>
OC-F-48
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Cash flows from investing activities:
Acquisitions: ....................................................
SFFed Acquisition ............................................... $ (83,184) $ --
Home Federal Acquisition ........................................ 79,044 --
Mortgage loan servicing operations .............................. (48,305) (178,093)
Retail banking branches and deposits ............................ -- 363,224
Purchases of securities available for sale ....................... (322,569) --
Proceeds from maturities of securities available for sale ....... 127,919 --
Purchases of securities held to maturity ......................... (9,303) (314,368)
Proceeds from maturities of securities held to maturity ......... 1,250 339,225
Purchases of mortgage-backed securities available for sale ...... (149,724) --
Principal payments on mortgage-backed securities available for
sale ............................................................ 411,012 --
Purchases of mortgage-backed securities held to maturity ........ -- (19,825)
Principal payments on mortgage-backed securities held to maturity 309,296 400,096
Proceeds from sales of loans receivable .......................... 65,393 247,364
Net decrease (increase) in loans receivable ...................... 1,280,284 (454,341)
Decrease in covered assets ....................................... 39,349 307,946
(Purchases) redemptions of FHLB stock, net ....................... (65,753) 7,161
Purchases of office premises and equipment ....................... (28,445) (19,853)
Proceeds from disposal of office premises and equipment ......... 4,097 10,071
Proceeds from sales of foreclosed real estate .................... 126,386 51,387
Purchases of mortgage servicing rights ........................... (49,527) (169)
------------- -------------
Net cash flows provided by investing activities ................. 1,687,220 739,825
------------- -------------
Cash flows from financing activities:
Branch Sales ..................................................... (4,585,022) --
Net increase in deposits ......................................... 238,230 571,310
Proceeds from additional borrowings .............................. 6,812,954 3,444,719
Principal payments on borrowings ................................. (5,247,157) (4,492,932)
Net increase (decrease) in securities sold under agreements to
repurchase ...................................................... 341,736 (153,384)
Dividends ........................................................ (254,242) (104,912)
Capital contributions from parent ................................ 166,589 --
------------- -------------
Net cash flows used in financing activities ..................... (2,526,912) (735,199)
Net change in cash and cash equivalents ........................... (168,220) (42,316)
Cash and cash equivalents at beginning of period .................. 312,565 184,982
------------- -------------
Cash and cash equivalents at end of period ........................ $ 144,345 $ 142,666
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-49
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for meeting the requirements
of Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management,
all adjustments have been made that are necessary for a fair presentation of
the financial position and results of operations and cash flows as of and for
the periods presented. All such adjustments are of a normal recurring nature.
The results of operations for the three and nine months ended September 30,
1996 are not necessarily indicative of the results that may be expected for
the entire fiscal year or any other interim period. Certain amounts for the
three and nine month periods in the prior year have been reclassified to
conform with the current period's presentation.
The accompanying consolidated financial statements include the accounts of
First Nationwide Bank, A Federal Savings Bank ("First Nationwide" or "Bank"),
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The statements should be
read in conjunction with the consolidated financial statements included in
the Bank's Annual Report on Form 10-K for the year ended December 31, 1995,
as amended. All terms used but not defined elsewhere herein have meanings
ascribed to them in the Bank's Annual Report on Form 10-K, as amended.
As First Nationwide's common stock is wholly owned by First Nationwide
Holdings Inc. ("FN Holdings"), earnings per share data is not presented.
(2) ACQUISITIONS AND SALES
On February 28, 1995, the Bank (through its wholly owned mortgage bank
operating subsidiary, First Nationwide Mortgage Corporation ("FNMC")),
acquired a 1-4 unit residential mortgage loan servicing portfolio of
approximately $11.4 billion and other assets and liabilities (the "Maryland
Acquisition").
In April 1995, the Bank acquired approximately $13 million in deposits
located in Tiburon, California from East-West Federal Bank, a federal savings
bank (the "Tiburon Purchase"). In August 1995, the Bank acquired three retail
branches located in Orange County, California with deposit accounts totalling
approximately $356 million from ITT Federal Bank, fsb (the "ITT Purchase").
On December 8, 1995, the Bank acquired four retail branches located in Sonoma
County, California with associated deposit accounts of approximately $144
million from Citizens Federal Bank, a Federal Savings Bank (the "Sonoma
Purchase" and, collectively with the Tiburon and ITT Purchases, the "Branch
Purchases").
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA")
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a $2.9 billion master servicing
portfolio in which FNMC monitors the performance and consolidates the
reporting and remittances of multiple servicers for various investors (a
"master servicing portfolio") and other assets (the "LMUSA 1995 Purchase").
On January 31, 1996, FNMC purchased LMUSA's remaining $14.1 billion loan
servicing portfolio (including a sub-servicing portfolio of $2.4 billion), a
master servicing portfolio of $2.7 billion, $5.9 million in foreclosed real
estate, $46.8 million in net other servicing receivables, $2.6 million in
mortgage loans, and $6.2 million in net other assets (including $1.4 million
in cash and cash equivalents) for a purchase price of approximately $160.0
million payable in installments (the "LMUSA 1996 Purchase" and, together with
the LMUSA 1995 Purchase, the "LMUSA Purchases").
OC-F-50
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) ACQUISITIONS AND SALES (Continued)
On February 1, 1996, First Nationwide acquired SFFed Corp. ("SFFed") and
its wholly owned subsidiary, San Francisco Federal Savings and Loan
Association (the "SFFed Acquisition"). The following is a summary of the
assets acquired and liabilities assumed in connection with the SFFed
Acquisition at February 1, 1996:
<TABLE>
<CAPTION>
ESTIMATED
SFFED BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
------------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
$
<S> <C> <C> <C> <C>
Cash and cash equivalents ..................... $ 181,061 -- $ 181,061 --
Mortgage-backed securities .................... 918,817 11,007 929,824 1-5
Loans receivable, net ......................... 2,715,758 (23,245) 2,692,513 2-18
Office premises and equipment ................. 20,581 (11,672) 8,909 3-10
Investment in FHLB System ..................... 31,989 -- 31,989 --
Foreclosed real estate, net ................... 30,018 -- 30,018 --
Accrued interest receivable ................... 22,740 -- 22,740 --
Mortgage servicing rights ..................... 2,238 13,762 16,000 2-4
Other assets .................................. 44,938 (7,773) 37,165 2-5
Deposits ...................................... (2,678,692) (10,950) (2,689,642) 1-5
Securities sold under agreements to repurchase (815,291) (3,640) (818,931) --
Borrowings .................................... (227,203) (8,831) (236,034) 1-17
Other liabilities ............................. (50,805) (5,898) (56,703) 1-5
------------- ------------- ------------- -----------
$ 196,149 $(47,240) 148,909
============= ============= ============= ===========
Purchase price ................................ 264,245
-------------
Excess cost over fair value of net assets
acquired ..................................... $ 115,336
=============
</TABLE>
The purchase price for the SFFed Acquisition was financed with existing
cash of the Bank and other borrowings, some of which were repaid with the
$311.8 million proceeds from the sale of consumer loans on February 23, 1996.
OC-F-51
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) ACQUISITIONS AND SALES (Continued)
On June 1, 1996, the Bank acquired Home Federal Financial Corporation
("HFFC"), and its wholly-owned federally chartered savings association, Home
Federal Savings and Loan Association of San Francisco (the "Home Federal
Acquisition," and together with the SFFed Acquisition, the "1996
Acquisitions"). The aggregate consideration paid in connection with the Home
Federal Acquisition was approximately $67.8 million funded with existing
cash. The following is a summary of the assets acquired and liabilities
assumed in the Home Federal Acquisition at June 1, 1996:
<TABLE>
<CAPTION>
ESTIMATED
HFFC BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
$
<S> <C> <C> <C> <C>
Cash and cash equivalents ................ $ 146,867 -- $ 146,867 --
Mortgage-backed securities ............... 4,053 (65) 3,988 1-5
Loans receivable, net .................... 538,722 3,983 542,705 2-18
Office premises and equipment ............ 4,202 (2,165) 2,037 3-10
Investment in FHLB System ................ 6,259 -- 6,259 --
Foreclosed real estate, net .............. 2,421 (198) 2,223 --
Accrued interest receivable .............. 3,594 -- 3,594 --
Mortgage servicing rights ................ 817 1,657 2,474 2-4
Other assets ............................. 10,016 (202) 9,814 2-5
Deposits ................................. (632,399) (1,875) (634,274) 1-5
Borrowings ............................... (30,000) 241 (29,759) 1-17
Other liabilities ........................ (3,602) (2,940) (6,542) 1-5
----------- ------------- -----------
$ 50,950 $(1,564) 49,386
=========== ============= ===========
Purchase price ........................... 67,823
-----------
Excess cost over fair value of net assets
acquired ................................ $ 18,437
===========
</TABLE>
The 1996 Acquisitions and the LMUSA 1996 Purchase were accounted for as
purchases and, accordingly, their respective purchase prices were allocated
to the assets acquired and liabilities assumed in each transaction based on
estimates of fair values at the date of purchase. Since the respective dates
of purchase, the results of operations related to such assets and liabilities
have been included in the Bank's consolidated statement of operations.
OC-F-52
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) ACQUISITIONS AND SALES (Continued)
From September through December of 1995, First Nationwide entered into
contracts for the sale of its retail deposits ("Deposits") and the related
retail banking assets comprised of cash on hand, loans on deposits, and
facilities (collectively, "Assets") in the states of Ohio, New York, New
Jersey and Michigan (collectively, the "Branch Sale Agreements") at gross
prices which represent an average premium of 7.96% of the deposits sold.
During the nine months of 1996, all of the Branch Sale Agreements were
consummated in a series of transactions, as follows (the "Branch Sales"):
<TABLE>
<CAPTION>
CARRYING VALUE AT
RESPECTIVE SALE DATE
SALE -----------------------
CONSUMMATION NUMBER OF PRE-TAX
BRANCH LOCATION DATE BRANCHES DEPOSITS ASSETS GAIN
- --------------- -------------- ----------- ------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New York ....... 1/12/96 7 $ 416,476 $ 5,997 $ 32,991
Ohio ........... 1/19/96 28 1,392,561 20,480 130,660
New York ....... 2/23/96 3 270,046 1,838 17,027
New York ....... 3/15/96 5 615,572 8,083 48,933
New Jersey ..... 3/22/96 4 501,262 6,396 35,938
New York ....... 3/22/96 11 637,045 9,465 41,286
------------ --------- ---------
Michigan ....... 6/28/96 21 799,226 15,060 56,177
----------- ------------ --------- ---------
79 $4,632,188 $67,319 $363,012
=========== ============ ========= =========
</TABLE>
The Branch Sales were funded with short-term FHLB advances of $2.0 billion
with a weighted average rate of 5.47%, long-term FHLB advances of $.6 billion
with a weighted average rate of 5.41% maturing from April 1997 through March
1998 and securities sold under agreements to repurchase of $1.5 billion with
a weighted average rate of 5.45%, supplemented by cash from operations,
principally the maturity of and principal payments on securities.
The following pro forma financial information combines the historical
results of the Bank as if the SFFed Acquisition, LMUSA Purchases and Branch
Sales had occurred as of the beginning of first period presented (in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Net interest income $350,362 $353,740
Net income ......... 286,716 187,533
========== ==========
</TABLE>
The gains recognized related to the Branch Sales are excluded from the
above table. The pro forma information does not include the effect of the
Maryland Acquisition, the Home Federal Acquisition or the Branch Purchases
because such effect is not material. The pro forma results are not
necessarily indicative of the results which would have actually been obtained
if the SFFed Acquisition, LMUSA Purchases and Branch Sales had been
consummated in the past nor do they project the results of operations in any
future period.
On July 27, 1996, FN Holdings entered into an agreement pursuant to which
the Bank will acquire 100% of the outstanding stock of Cal Fed Bancorp Inc.
("Cal Fed") for approximately $1.2 billion of cash consideration and a
portion of litigation interests owned by Cal Fed (the "Cal Fed Acquisition").
Cal Fed Bancorp Inc., a savings and loan holding company, owns 100% of the
common stock of California Federal Bank, A Federal Savings Bank, which at
June 30, 1996, had total assets of approximately $14.0 billion and
OC-F-53
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) ACQUISITIONS AND SALES (Continued)
deposits of $8.8 billion, and operated 118 branches in California and
Nevada. The acquisition is subject to Cal Fed shareholder and regulatory
approval and is expected to close in the first quarter of 1997.
Pursuant to a merger agreement, dated September 19, 1996 by and between FN
Holdings and FN Escrow (the "FN Escrow Merger"), FN Holdings will acquire the
net proceeds from the September 19, 1996 issuance of FN Escrow's $575 million
of 10 5/8% senior subordinated notes due 2003 (the "Notes"). FN Holdings
expects to use (i) the net proceeds of the Notes of approximately $555
million, together with (ii) the $144.2 million net cash proceeds from the
sale of $150 million aggregate liquidation value of FN Holdings Preferred
Stock to a corporation owned by Gerald J. Ford, Chairman of the Board, Chief
Executive Officer and a Director of the Bank, and (iii) existing cash, to
finance the Cal Fed Acquisition. Upon consummation of the Cal Fed
Acquisition, FN Escrow will be merged with and into FN Holdings. Pursuant to
the FN Escrow Merger, the obligations of FN Escrow under the Notes will be
assumed by FN Holdings.
(3) CASH, CASH EQUIVALENTS, AND STATEMENT OF CASH FLOWS
First Nationwide uses the indirect method to present cash flows from
operating activities. Cash paid for interest for the nine months ended
September 30, 1996 and 1995 was $601.5 million and $491.8 million,
respectively.
During the nine months ended September 30, 1996, noncash activity
consisted of transfers from loans receivable to foreclosed real estate of
$87.4 million, and the transfers of certain consumer loans from loans held
for sale to loans receivable totalling $27.7 million.
During the nine months ended September 30, 1995, noncash activity
consisted of the transfer of $58.5 million from loans receivable to
foreclosed real estate.
(4) STOCKHOLDERS' EQUITY
Preferred stock dividends totalling $25.9 million were declared and paid
during each of the nine months ended September 30, 1996 and 1995. Dividends
on the Bank's common stock during the nine months ended September 30, 1996
and September 30, 1995 totalled $228.3 million and $79.0 million,
respectively.
On February 1, 1996, FN Holdings contributed the net proceeds from the
offering of its 9 1/8% Senior Subordinated Notes Due 2003, totalling $133
million, to the Bank as additional paid-in capital.
Effective October 1, 1995, FN Holdings entered into a management incentive
plan ("Incentive Plan") with certain executive officers of the Bank
("Participants"). Awards under the Incentive Plan will be made in the form of
performance units. Each performance unit entitles Incentive Plan Participants
to receive cash and/or stock options ("Bonuses") based upon the Participants'
vested interest in a bonus pool. Generally, the Plan provides for the payment
of Bonuses, on a quarterly basis, to the Participants upon the occurrence of
certain events. Bonuses vest at 20% per year beginning October 1, 1995 and
are subject to a cap of $50 million. In accordance with generally accepted
accounting principles, Bonuses are recorded by a charge to compensation
expense with an offsetting increase in paid-in capital. Compensation expense
for the nine months ended September 30, 1996 includes $33.6 million related
to the Incentive Plan. No payments have been made under the Incentive Plan.
OC-F-54
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) GAINS ON SALES OF ASSETS
On June 28, 1996, First Nationwide sold 2,000,000 shares of its investment
in common stock of Affiliated Computer Services, Inc. ("ACS") and acquired
the FDIC's interest in the remaining shares of ACS owned by the Bank. A
pre-tax gain of $40.4 million resulted from this transaction.
(6) TERMINATION OF ASSISTANCE AGREEMENT
On August 19, 1996, the Bank and the FSLIC's successor, the FSLIC/RF,
executed an agreement which resulted in the termination of the Assistance
Agreement. As a result of the agreement, the FSLIC/RF paid the Bank the
Covered Asset balance of $39 million and, among other things, assumed the
responsibility for the disposition of several litigation matters involving
Covered Assets which had been retained by the Bank following the FDIC
Purchase. Accordingly, all accounts related to the Assistance Agreement,
including previously established allowances for losses, were extinguished,
resulting in additional noninterest income of $25.6 million.
(7) SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act ("Act") of 1996 was enacted. The Act included a special
assessment ("Special SAIF Assessment") related to the recapitalization of the
SAIF, which was levied based on a rate of 65.7 cents per $100 of SAIOC-F-insured
domestic deposits held as of March 31, 1995. As a result of the Act, First
Nationwide recorded a pre-tax charge of $60.1 million on September 30, 1996.
The portion of the assessment related to deposits sold in Ohio, New York, New
Jersey and Michigan will be borne, pursuant to each sales contract, by the
respective purchasers and accordingly, such amounts are not included in the
expense recorded by First Nationwide. Management expects the 1997 SAIF
deposit premiums to decline to 6.4 cents per $100 of SAIOC-F-insured deposits
per year from the prior rate of 23 cents.
(8) EXTRAORDINARY ITEM
On September 12, 1996, First Nationwide repurchased $44 million aggregate
principal amount of the $50 million in Senior Notes assumed in the SFFed
Acquisition, resulting in an extraordinary loss of $1.6 million, net of
income taxes, on the early extinguishment of such debt. In February 1995,
First Nationwide prepaid $250 million in Federal Home Loan Bank advances,
resulting in an extraordinary gain of $2.0 million, net of income taxes, on
the early extinguishment of such borrowings.
(9) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("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 No. 121"). SFAS No. 121 provides guidance for the recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill related both to assets to be held and used by an
entity and assets to be disposed of. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. The Bank
adopted SFAS No. 121 effective January 1, 1996. Such adoption had no material
impact on the Bank's consolidated financial statements.
On June 28, 1996, FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of
a financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the
OC-F-55
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS (Continued)
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management has not yet completed its analysis of SFAS No. 125 and
is unable to determine the effect, if any, implementation may have on the
Bank's consolidated financial statements.
OC-F-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
First Nationwide Bank, A Federal Savings Bank and
First Madison Bank, FSB
We have audited the accompanying consolidated statements of financial
condition of the acquired business of First Nationwide Bank ("the Acquired
Business"), as of December 31, 1993, and the related consolidated statements
of operations, equity, and cash flows for each of the two years in the period
ended December 31, 1993. The historical financial statements of First
Nationwide Bank ("Old FNB") are the responsibility of the management of Old
FNB. The assumptions discussed in Note 1 under "Basis of Presentation" (to
the extent related to the Asset Purchase Agreement, as defined therein, and
the transactions contemplated thereby) used in preparing the accompanying
consolidated financial statements of the Acquired Business are the
responsibility of the management of First Madison Bank. Our responsibility is
to express an opinion on the financial statements of the Acquired Business
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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Acquired
Business, at December 31, 1993, and the consolidated results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1993, in conformity with generally accepted accounting
principles and the basis of presentation discussed in Note 1.
As discussed in Notes 16 and 18 to the consolidated financial statements,
the Acquired Business changed its method of accounting for income taxes and
postretirement health benefits in 1992.
COOPERS & LYBRAND LLP
San Francisco, California
May 10, 1994
OC-F-57
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
1993
-------------
<S> <C>
ASSETS
Cash and amounts due from depository institutions ............................. $ 230,624
Other short-term investment securities ........................................ 40,000
-------------
Total cash and cash equivalents ............................................. 270,624
Investment securities, net (approximate market value $377 million in 1993) ... 376,429
Mortgage-backed securities, net (approximate market value $1.8 billion in
1993) ........................................................................ 1,776,140
Loans receivable, net ......................................................... 11,408,852
Loans and investment securities held for sale, net ............................ 155,316
Accrued interest receivable ................................................... 84,835
Property acquired in settlement of loans, net ................................. 63,851
Investment in Federal Home Loan Bank system, at cost .......................... 152,629
Office premises and equipment, net ............................................ 108,711
Real estate held for investment and sale, net ................................. 9,691
Goodwill ...................................................................... 216,777
Other assets .................................................................. 282,632
-------------
Total Assets ................................................................ $14,906,487
=============
LIABILITIES AND EQUITY
Liabilities:
Customer deposit ............................................................ $10,561,620
Securities sold under agreements to repurchase .............................. 835,341
Other borrowings ............................................................ 2,477,615
Advance payments by borrowers ............................................... 45,056
Accounts payable and accrued liabilities .................................... 82,196
-------------
Total Liabilities ......................................................... 14,001,828
Contingent Liabilities ........................................................ --
Equity ........................................................................ 904,659
-------------
Total Liabilities and Equity ................................................ $14,906,487
=============
</TABLE>
See Notes to Consolidated Financial Statements.
OC-F-58
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1992
----------- ------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Real estate loans ........................................................... $ 891,588 $1,179,468
Mortgage-backed securities .................................................. 80,458 64,059
Consumer and other loans .................................................... 42,437 51,230
FSLIC/RF notes and investment securities .................................... 32,395 105,226
Short-term investment securities ............................................ 20,101 36,387
Receivable/Transferred Asset ................................................ 18,062 65,050
FSLIC/RF yield maintenance and net earnings on unconsolidated
subsidiaries ............................................................... -- 7,742
----------- ------------
Total interest and dividend income ........................................ 1,085,041 1,509,162
INTEREST EXPENSE
Customer deposits ........................................................... 482,431 755,480
Securities sold under agreements to repurchase .............................. 12,730 5,370
Short-term borrowings ....................................................... 370 3,396
Other borrowings ............................................................ 133,125 176,547
----------- ------------
Total interest expense .................................................... 628,656 940,793
----------- ------------
Net interest income ........................................................... 456,385 568,369
Provision for loan losses ..................................................... 81,506 85,228
----------- ------------
Net interest income after provision for loan losses ........................... 374,879 483,141
OTHER INCOME
Mortgage banking operations, net ............................................ 14,795 40,941
Customer banking fees ....................................................... 52,104 37,558
Other loan fees and charges ................................................. 14,044 13,307
Net gain (loss) on sales of:
Customer deposits ......................................................... 22,281 527
Investment securities ..................................................... 109 7,921
Consumer loans ............................................................ 1,105 (3,094)
Other assets .............................................................. (1,547) (18,959)
Real estate operations, net ................................................... (3,578) (1,330)
Provision for losses on foreclosed property ................................... (45,110) (80,654)
Other ......................................................................... 90,389 50,635
----------- ------------
Total other income ........................................................ 144,592 46,852
OTHER EXPENSE
Compensation and benefits ................................................... 142,568 158,857
Premises and equipment ...................................................... 73,242 92,967
SAIF insurance premiums ..................................................... 31,820 36,036
Communications .............................................................. 15,327 18,919
Marketing and advertising ................................................... 8,928 14,949
Goodwill amortization ....................................................... 16,945 20,496
Other general and administrative ............................................ 43,033 79,377
----------- ------------
Total other expense ....................................................... 331,863 421,601
----------- ------------
Earnings (loss) before income taxes and cumulative effect of accounting
changes ...................................................................... 187,608 108,392
Federal and state income tax expense (benefit) ................................ 40,408 (27,451)
----------- ------------
Earnings before cumulative effect of accounting changes ....................... 147,200 135,843
Cumulative effect of accounting changes, net of income taxes .................. -- 10,128
----------- ------------
Net Earnings .................................................................. $ 147,200 $ 145,971
=========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
OC-F-59
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
EQUITY OF
ACQUIRED BUSINESS
-----------------
<S> <C>
Balance--December 31, 1991 960,863
Capital contribution ..... 40,625
Cash dividends paid ....... (240,000)
Net earnings .............. 145,971
-----------------
Balance--December 31, 1992 907,459
Cash dividends paid ....... (150,000)
Net earnings .............. 147,200
-----------------
Balance--December 31, 1993 $ 904,659
=================
</TABLE>
See Notes to Consolidated Financial Statements.
OC-F-60
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992
------------- -------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS AT JANUARY 1 .......................... $ 2,142,498 $ 596,993
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ................................................... 147,200 145,971
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Cumulative effect of accounting changes ....................... -- (10,128)
Provisions for losses ......................................... 126,616 168,083
Depreciation and amortization ................................. 99,886 105,831
Accretion of fees and discounts and amortization of premiums . (14,718) (60,006)
Gain on sales of loans, mortgage-backed securities and
investment securities ........................................ (5,917) (22,872)
Provision for deferred income taxes ........................... (14,156) (50,747)
Mortgage banking activities:
Loans originated or purchased for resale ..................... (2,129,216) (2,588,452)
Proceeds from sales of loans held for sale ................... 2,189,480 2,665,227
Changes in assets and liabilities:
Decrease in accounts payable and accrued liabilities ........ (178,637) (232,050)
Decrease in accrued interest receivable ...................... 17,089 44,262
Increase (decrease) in accrued interest payable .............. 17,134 (48,688)
Decrease (increase) in accounts receivable ................... 3,796 (53,873)
Other ........................................................ 157,803 295,100
------------- -------------
Net cash provided by operating activities .................... 416,360 357,658
CASH FLOWS FROM INVESTING ACTIVITIES
Principal payments, net of originated loans .................... 480,730 806,826
Proceeds from sales of loans and mortgage-backed securities ... 71,485 321,164
Principal payments on mortgage-backed securities ............... 318,965 203,224
Purchases of loans and mortgage-backed securities .............. (985,881) (583,925)
Decrease (increase) in receivable/transferred assets .......... 330,011 778,239
Changes in real estate held for investment and sale and
property acquired in settlement of loans:
Acquisitions and improvements ................................. (93) --
Sales and disposals, net ...................................... 238,884 407,903
Proceeds from FDIC settlement:
FSLIC/RF notes and accrued interest ........................... -- 2,177,708
Repurchase of assets and other settlement proceeds ........... 357,480 933,848
Changes in investment securities:
Purchases ..................................................... (66,654) (1,329,820)
Maturities and sales .......................................... 234,432 1,332,671
Purchases and sales of premises and equipment, net ............ 27,115 8,505
Other .......................................................... 7,590 50,182
------------- -------------
Net cash provided by investing activities ...................... 1,014,064 5,106,525
------------- -------------
</TABLE>
continued
See Notes to Consolidated Financial Statements
OC-F-61
<PAGE>
THE ACQUIRED BUSINESS
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1992
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Change in customer deposits, net ................... (1,576,627) (2,834,312)
Sale of customer deposits .......................... (2,180,768) (24,599)
Purchase of customer deposits ...................... 233,111 --
Principal payments on borrowings ................... (929,231) (1,110,777)
Net increase (decrease) in short-term borrowings ... 785,432 (15,000)
Proceeds from issuance of borrowings ............... 524,708 284,045
Capital contributions .............................. -- 40,625
Cash dividends paid ................................ (150,000) (240,000)
Other .............................................. (8,923) (18,660)
------------- -------------
Net cash used by financing activities .............. (3,302,298) (3,918,678)
------------- -------------
Net (decrease) increase in cash and cash equivalents (1,871,874) 1,545,505
------------- -------------
CASH AND CASH EQUIVALENTS AT DECEMBER 31 ............. $ 270,624 $ 2,142,498
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
OC-F-62
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--STATEMENT OF ACCOUNTING POLICIES
Basis of Presentation:
First Nationwide Bank, A Federal Savings Bank ("Old FNB") is a federally
chartered capital stock savings bank. Old FNB is a wholly-owned subsidiary of
First Nationwide Financial Corporation ("FNFC") which, in turn, is a
wholly-owned subsidiary of Ford Motor Company ("Ford"). On April 14, 1994,
the "Asset Purchase Agreement" between First Madison Bank, FSB ("First
Madison") and Old FNB was executed. Pursuant to this agreement, Old FNB
agreed to sell substantially all of its assets and liabilities to First
Madison with the exception of certain excluded asset and liability amounts as
defined in the agreement. The excluded assets include, principally, certain
commercial and other mortgages, investments in certain subsidiaries,
foreclosed commercial real estate, and real estate held for development.
Certain liabilities, principally amounts due to affiliated companies and
income taxes payable as of December 31, 1993, were also excluded.
The excess of assets over liabilities acquired by First Madison from Old
FNB represents only a portion of the assets and liabilities of Old FNB.
Accordingly, the stockholder's equity section of Old FNB has been eliminated
and replaced with "equity of the Acquired Business."
These financial statements have been prepared in connection with this
Asset Purchase Agreement. They represent the historical financial statements
of Old FNB adjusted to eliminate the impact of the excluded assets and
liabilities on the financial position and the results of operations and cash
flows for all years presented. In addition, certain assets (including their
impact on the results of operations and cash flows) which were transferred to
FNFC in contemplation of this sale, principally real estate held for
development, non-performing commercial and multi-family mortgages, and a
portfolio of mortgage derivative securities, have been eliminated for all
periods presented. The adjustments to 1992 financial statements also reflect
a reduction in long-term debt (to the extent such debt was eventually paid
down when such assets were transferred) and an increase in an interest
bearing Receivable/Transferred Asset corresponding to the amount transferred.
Interest income (based on the interest rate of investments maturing within
one year) and interest expense (based on the actual rates associated with the
debt reduced) also reflect this adjustment. The resulting entity is referred
to herein as the Acquired Business.
Below is a discussion of the various assets transferred to FNFC and its
subsidiaries.
On June 30, 1993, Old FNB sold approximately $34 million of foreclosed
real estate assets to FN Development Company, Delta ("FND-Delta"), a
wholly-owned subsidiary of FNFC, at net book value.
On December 30, 1993, Old FNB sold approximately $466 million of
commercial and multi-family real estate loans, foreclosed real estate assets
and real estate development assets to Granite Management and Disposition,
Inc. ("GMD"), a subsidiary of FNFC, Epsilon Properties Inc., a wholly-owned
subsidiary of GMD, and FND-Delta, a subsidiary of FNFC, at net book value.
On October 31, 1992, Old FNB sold approximately $453 million of real
estate development assets to FNFC at their net book value.
In September 1992, Old FNB sold approximately $318 million of mortgage
derivative securities to FNFC at a sales price equal to book value of the
securities.
Below is a summary of the impact on the net earnings of Old FNB for the
years ending December 31, 1993 and 1992 related to both the excluded net
assets and transferred assets.
<TABLE>
<CAPTION>
ADJUSTMENTS ADJUSTMENTS NET EARNINGS
FOR THE NET EARNINGS RELATED TO RELATED TO FOR THE
YEAR (LOSS) OF OLD EXCLUDED NET TRANSFERRED ACQUIRED
ENDED FNB ASSETS ASSETS BUSINESS
- ------------ --------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
1993 ........ $82,563 $30,542 $ 34,095 $147,200
1992 ........ $(7,928) $43,167 $110,732 $145,971
</TABLE>
OC-F-63
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
Regulatory Requirements:
FNB is subject to regulation by the Federal Deposit Insurance Corporation
("FDIC") and the OTS, an office of the Department of the Treasury.
As a member of the Federal Home Loan Bank System ("FHLB"), savings and
loans are required to maintain an investment in the capital stock of the
Federal Home Loan Banks. The investment is carried at cost. Savings and loans
also maintain insurance on customer deposit accounts with the Savings
Association Insurance Fund ("SAIF"), which requires semi-annual payments of
deposit insurance premiums. Savings and loans are required by the Federal
Reserve Bank to maintain non-interest bearing cash reserves equal to a
percentage of certain deposits. The average reserve balance for the Acquired
Business was $54 million in 1993.
Principles of Consolidation:
The consolidated financial statements of the Acquired Business include the
accounts of its wholly-owned subsidiaries, FNB Mortgage Corp. ("FNBMC"), FN
Projects, Inc., FN Investment Center, Trans Network Insurance Services, D.L.
Equity Corporation and Master Mortgage Company. All material intercompany
accounts and transactions have been eliminated in consolidation.
Cash, Cash Equivalents and Statement of Cash Flows:
For purposes of reporting cash flows, cash and cash equivalents include
cash due from depository institutions, U.S. Government and agency securities,
federal funds sold, securities purchased under agreements to resell, and
highly liquid short-term debt securities. At December 31, 1993, other
short-term investment securities included $40 million of federal funds sold
with a weighted average interest rate of 2.75%. Cash equivalents include
short-term investments with remaining terms to maturity of three months or
less from the date of acquisition. Other short-term investment securities
include substantially all cash balances held in other financial institutions
which exceed existing deposit insurance coverage.
For purposes of reporting cash flows, short-term investments have an
original term to maturity of three months or less. Cash flows from financial
instruments that are accounted for as hedges of identifiable transactions are
classified in the same category as the cash flows from the items being
hedged.
Disclosures About Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107 ("SFAS No.107"),
"Disclosures about Fair Value of Financial Instruments", requires the
disclosure in the financial statements, or notes thereto, of fair value
information for financial instruments, as defined, whether or not recognized
in the balance sheet, for which it is practical to estimate fair value. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. In that regard, the derived fair
value estimates cannot be substantiated by comparison to independent markets
and, in many cases, could not be realized in immediate settlement of the
instruments. SFAS No. 107 excludes certain financial instruments and all
nonfinancial instruments from disclosure requirements. Accordingly, the
aggregate fair value amounts presented do not represent and should not be
construed to represent, the full underlying value of the Acquired Business.
Investment Securities:
Investment securities are stated at cost, net of any unamortized premiums
or discounts. The Acquired Business has the ability to hold these assets to
maturity. Premiums and discounts on these securities are
OC-F-64
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
amortized over the expected life of the underlying securities using methods
approximating the interest method. Investment securities identified as being
held for sale are stated at the lower of amortized cost or market value.
Gains or losses on the sale of such securities are based on the specific
identification method.
Fair value of investment securities is determined by reference to quoted
market prices, if available. If quoted market prices are not available, fair
value is estimated using quoted market prices for similar securities. For
short-term investments, the carrying amount is a reasonable estimate of fair
value.
Mortgage-backed Securities:
Mortgage-backed securities are stated at cost, net of any unamortized
premiums and discounts. The Acquired Business has the ability to hold these
assets to maturity. Premiums and discounts on these securities are amortized
over the expected life of the underlying mortgages using methods
approximating the interest method. A portion of the mortgage-backed
securities portfolio resulted from the securitization of certain qualifying
mortgage loans in the Acquired Business' portfolio. Gains or losses on the
sale of mortgage-backed securities are based on the specific identification
method.
For mortgage-backed securities, fair value is determined by reference to
quoted market prices, if available. If quoted market prices are not
available, fair value is estimated using quoted market prices for similar
securities.
Loans Receivable:
Loans receivable are recorded at cost, net of discounts and premiums,
undisbursed loan funds, advances to borrowers for taxes and insurance, net
deferred fees and allowance for loan losses. The Acquired Business holds
loans receivable primarily for investment purposes and has both the intent
and ability to hold these loans until maturity. Unforeseen circumstances may
arise in the future that would cause the sale of loans prior to their
maturity. The Acquired Business' real estate loan portfolio consists
primarily of long-term loans (15-30 years) secured by first trust deeds on 1
to 4 unit residences, multi-family property, commercial property, and land.
The Acquired Business also makes first and second trust deed loans with
shorter terms.
A significant portion of the Acquired Business' real estate loan portfolio
is comprised of adjustable-rate mortgages. The interest rate and payment
terms of these mortgages adjust on a periodic basis in accordance with
various published indices. The majority of these adjustable-rate mortgages
have terms which limit the amount of interest rate adjustment that can occur
each year and over the life of the mortgage. During periods of limited
payment increases, negative amortization may occur on certain adjustable-rate
mortgages.
The Acquired Business' loan portfolio also includes consumer and
commercial loans that are collateralized by passbook accounts, mobile homes,
recreational vehicles, motor vehicles and other non-real estate commercial
assets. Finance charges included in consumer loans receivable are deferred
and amortized into income over the term of the loan except in the case of
delinquent installments for which collection is not reasonably assured.
The fair value of performing loans has been estimated by discounting
future cash flows using interest rates that consider the current credit and
interest rate risk inherent in the loans, and current economic and lending
conditions. In general, the fair value of nonperforming loans has been
estimated using management's current estimate of future cash flows from the
underlying collateral discounted at a rate commensurate with the risks of the
specific property identified.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other
OC-F-65
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
termination clauses and may require payment of a fee by the customer. Since
some of the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements.
Interest income is accrued based on the outstanding principal amount of
loans and their contractual terms. Loans are generally placed on non-accrual
status when the borrowers are contractually past due 90 days and when payment
in full of principal or interest is not expected. The accrual of interest is
discontinued and any accrued and unpaid interest is reversed out of current
income when the loans are placed on non-accrual status. Such interest, if
ultimately collected, is credited to interest income in the period of
recovery.
Loan Fees:
The Acquired Business charges fees for originating loans. Loan origination
fees, net of direct underwriting and closing costs, are deferred and
amortized to interest income using the interest method over the contractual
term of the loans, adjusted for actual loan prepayment experience.
Unamortized fees on loans sold or paid in full are recognized as income.
Adjustable-rate loans with lower initial interest rates during the
introductory period result in the amortization of a substantial portion of
the net deferred fee during the introductory period.
Other loan fees and charges, which represent income from the prepayment of
loans, delinquent payment charges, and miscellaneous loan services are
recognized as income when collected.
Allowance for Loan Losses:
The Acquired Business charges current earnings with a provision for
estimated credit losses on loans receivable. The provision considers both
specifically identified problem loans and credit risks not specifically
identified in the loan portfolio. The allowance for loan losses takes into
consideration numerous factors including the financial condition of the
borrowers, the fair value of collateral, recourse to guarantors, the
estimated net cost of holding and maintaining properties and collateral prior
to the anticipated date of sale, analysis of delinquency trends, geographic
and collateral-type concentrations and past loss experience. The allowance
also considers the ability of the Acquired Business to "put" $500 million of
non-performing and classified assets to an affiliate of FNB (also, see Note
10). Losses are charged to the allowance when the loan is considered
uncollectible or at the time of foreclosure. Recoveries on receivables and
loans previously charged-off as uncollectible are credited to the allowance
for loan losses.
Mortgage Banking Activities:
The Acquired Business sells whole loans and participating interests in
whole loans. The Acquired Business is also active in the creation of
mortgage-backed securities through the securitization of the loans it
originates. Mortgage banking activities are undertaken to generate fee
income, to effectively manage the Acquired Business' interest rate risk
levels, overall funding requirements and to meet certain regulatory
requirements and limitations.
During the loan origination process, loans and unfunded loan commitments
identified as held for investment are recorded at cost; loans and commitments
to fund loans identified for sale are carried at the lower of aggregate cost
or market value on an aggregate basis. Commitments to purchase or sell loans
are included in determining aggregate cost or market value. In general, the
Acquired Business originates fixed rate loans and fixed rate mortgage-backed
securities for sale in the secondary market. Adjustable rate
OC-F-66
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
loans and mortgage-backed securities are originated primarily for investment
purposes and the Acquired Business has both the intent and ability to hold
them until maturity. In certain instances, fixed rate loans are held for
investment purposes and adjustable rate loans and mortgage-backed securities
originated are identified as being held for sale.
Forward loan sale commitments are contracts for delayed delivery of
mortgage-backed securities in which the seller agrees to make delivery at a
specified future date of a specified instrument, at a specified price or
yield. The Acquired Business uses forward loan sale commitments in its
mortgage banking operations to reduce the interest rate risk on unfunded
fixed rate loan commitments before they are sold in the secondary market.
This action is taken to effectively manage the total interest rate risk
levels of the Acquired Business' asset/liability structure.
Gains or losses resulting from loan and mortgage-backed securities sales
are recognized at time of sale based on the difference between the net sales
proceeds and the net carrying value of the loans or interests sold. When the
rights to service the underlying loans are retained, the cash gain or loss is
adjusted based on the net present value of the expected amounts to be
received or paid. The Acquired Business calculates these amounts by comparing
the contractual interest rates to be paid by the borrowers and the interest
rates to be paid to the investors, less an amount equal to the present value
of a normal servicing fee. The resulting deferred premium is amortized to
income over the estimated remaining servicing lives of the loans sold using
the interest method, adjusted for actual and anticipated prepayments.
Loans and mortgage-backed securities may be sold with limited recourse
obligations. The credit risk associated with these limited recourse
obligations is generally less than the credit risk the Acquired Business
would have had if it held the loans in its own portfolio.
Real Estate Held for Investment and Sale:
Real estate held for investment and sale consists of partnership
investments which are accounted for by the equity method. Valuation
allowances for estimated losses on real estate are provided when the cost
exceeds net realizable value. Net realizable value is based on current market
conditions and estimated sales values of similar properties, less estimated
holding costs to anticipated date of sale. Net income from real estate
operations includes net gains from the sale of real estate partnerships,
equity in net earnings or losses from real estate partnerships, and
provisions for estimated losses. FNFC has guaranteed First Madison collection
on $5.5 million of the December 31, 1993, balance in real estate held for
investment and sale.
Property Acquired in Settlement of Loans:
Property acquired in settlement of loans is recorded at the lower of cost
or fair value less estimated disposal costs at the time of foreclosure.
Subsequent to foreclosure, the Acquired Business charges current earnings
with a provision for estimated losses when the carrying value of the
collateral property exceeds its estimated fair value. Net operating income or
loss from the properties is recorded in other income.
Interest Rate Exchange Agreements:
The Acquired Business enters into interest rate exchange agreements to
assist in matching interest expense on specific interest-bearing liabilities
with the interest rate adjustments of specific interest-earning assets. These
agreements may consist of interest rate swaps, interest rate caps and
interest rate options. Interest rate swaps are agreements in which the
Acquired Business and third parties agree to exchange interest payments (one
at a variable rate, the other at a fixed rate) on notional principal amounts.
Interest rate caps are agreements under which the Acquired Business will
receive interest
OC-F-67
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
payments from third parties if interest rates exceed certain agreed upon
rates on notional amounts. Interest rate options are contracts that allow the
holder of the option to purchase or sell a financial instrument at a
specified price within a specified period of time from the seller or "writer"
of the option.
The effect on interest expense relating to payments or receipts from
interest rate exchange agreements is recognized currently. Gains or losses at
early termination of these agreements are deferred and amortized to income or
expense over the shorter of the original maturity of the agreement or the
maturity of the hedged assets or liabilities. Fees paid, if any, are
amortized on a straight-line basis over the term of the agreement.
For purposes of calculating fair values under FASB 107, the fair value of
interest rate exchange agreements is the estimated amounts that the Acquired
Business would receive or pay to terminate the agreements at the reporting
date, taking into consideration current interest rates and the current
creditworthiness of the exchange agreement counterparties.
Office Premises and Equipment:
Premises, equipment, leasehold improvements and capitalized software are
stated at cost, less accumulated depreciation and amortization. Premises,
equipment, leasehold improvements and capitalized software are depreciated or
amortized on a straight-line basis over the lesser of the lease term or the
estimated useful lives of the various classes of assets. Maintenance and
repairs on premises and equipment are charged to expense in the period
incurred.
From time to time, the Acquired Business designates certain owned and
leased office facilities as surplus facilities no longer needed to support
ongoing business operations. Valuation allowances are established to adjust
the net carrying value of surplus office facilities to the lower of aggregate
cost or market value.
Financial Instruments with Off-Balance-Sheet Risk:
The Acquired Business is a party to financial instruments with
off-balance-sheet risk in the normal course of business and to meet the
financial needs of its customers. These financial instruments include
commitments to extend credit, options written, regular and standby letters of
credit, interest rate exchange agreements, and forward commitments to
purchase or sell loans, investment securities or mortgage-backed securities.
These instruments may involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the statements of
financial condition. The contract or notional amounts of those instruments
reflect the extent of involvement the Acquired Business has in particular
classes of financial instruments.
The Acquired Business generally uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments, which may require that it obtain collateral that will reduce its
exposure to credit loss. The Acquired Business' exposure to credit loss, in
the event of nonperformance by the other party to the financial instrument,
for commitments to extend credit, and regular and standby letters of credit
is represented by the difference between the contractual commitment amount of
those instruments and the fair value of the collateral. If there is no
collateral, or if the underlying collateral is determined to have little or
no value, or the Acquired Business is not able to obtain possession of the
collateral, the maximum exposure to credit loss is represented by the
contractual commitment. For interest rate exchange transactions, forward
commitments, and options written, the risk associated with these instruments
arises from movements in interest rates and dealing with counterparties and
their ability to meet the terms of the contracts. The notional principal
amounts often are used to express the volume of these transactions, but the
amounts subject to credit risk are much smaller. The Acquired Business
controls the credit risk of its interest rate exchange agreements and forward
commitments through credit approvals, limits, and monitoring procedures.
OC-F-68
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
The market risk associated with the forward sale of unfunded loan
commitments used in the Acquired Business' mortgage banking operations occurs
when the estimated amount of the unfunded loan commitments is not the same as
the outstanding forward commitments to sell loans and mortgage-backed
securities and from the possible inability of counterparties to meet the
terms of their contracts. An increase in interest rates may cause greater
than expected fundings on loan commitments. This could result in a loss since
the unsold loans not covered by forward sale commitments would be required to
be adjusted to the lower of aggregate cost or market value. A decrease in
interest rates may cause lower than expected fundings on loan commitments.
This could result in a loss equal to the fee paid to satisfy the unfulfilled
forward sale commitment. The fair value of commitments to originate, purchase
or sell loans and mortgage-backed securities is estimated using the
difference between current levels of interest rates and the committed rates.
Goodwill and Intangible Assets:
Goodwill resulting from acquisitions is $217 million at December 31, 1993.
A portion of this amount totalling $176 million, is amortized on the
straight-line method over a period of approximately 25 years. The remaining
goodwill of $41 million is amortized using the interest method over the
estimated composite remaining life of the long-term, interest-earning assets
acquired, which is approximately 7 years. The Acquired Business periodically
evaluates its goodwill for possible impairment based on expected net
earnings, on an undiscounted basis, over the remaining life of the goodwill.
Identified intangible assets totalling $75 million at December 31, 1993
resulting from certain acquisitions are amortized using the straight-line
method over an estimated remaining composite life of approximately 5 years.
Core deposit intangible assets totalling $8 million at December 31, 1993 are
amortized using the interest method over an estimated remaining composite
life of approximately 7 years.
Securities Sold Under Agreements of Repurchase:
The Acquired Business enters into sales of securities under agreements to
repurchase ("reverse repurchase agreements"). Reverse repurchase agreements
are treated as financings, and the obligations to repurchase securities sold
are reflected as liabilities in the statements of financial condition. The
securities underlying the reverse repurchase agreements are carried as
assets.
Income Taxes:
Old FNB and its subsidiaries are included with FNFC and Ford in filing
consolidated income tax returns. Income taxes have been computed on the
separate results of the Acquired Business and its subsidiaries based on the
provisions of Old FNB's tax sharing agreements with FNFC and Ford. The
federal tax sharing agreements generally provide that the Acquired Business
will be charged or reimbursed based on the tax effects of its earnings or
losses in the consolidated returns. The state tax sharing agreements provide
that charges or reimbursements will be allocated as if Old FNB and its
subsidiaries filed state taxes on a separate return basis. Deferred income
taxes reflect the estimated future tax effects of temporary differences
between the amount of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws and regulations. The recoverability
of deferred tax assets is evaluated on a consolidated basis with FNFC and
Ford.
New Accounting Standards:
In May 1993, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 114 ("SFAS No. 114"),
"Accounting by Creditors for Impairment of a Loan". The standard requires
that impaired loans be measured based on the present value of expected cash
flows discounted at the loan's effective interest rate. The Acquired Business
does not plan to adopt this standard until January 1, 1995.
OC-F-69
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 1--STATEMENT OF ACCOUNTING POLICIES (Continued)
In May 1993, the FASB issued Statement of Financial Accounting Standards
No. 115 ("SFAS No. 115"), "Accounting for Certain Investments in Debt and
Equity Securities". The standard establishes financial accounting and
reporting requirements for investments in equity securities (excluding those
accounted for under the equity method and investments in consolidated
subsidiaries) that have readily determinable fair values and for all
investments in debt securities. The Acquired Business adopted SFAS No. 115 in
1994. The impact of adoption was not material.
NOTE 2--RECEIVABLES FROM THE FSLIC/RF
In 1988, FNFC and Old FNB acquired several financial institutions in
federally assisted acquisitions. All of the acquired institutions were either
immediately or subsequently merged with and into the Acquired Business. In
connection with the acquisitions, FNFC and Old FNB entered into various
assistance agreements with the FSLIC Resolution Fund ("FSLIC/RF"), a special
fund administered by the FDIC. Under the terms of the assistance agreements,
the FSLIC/RF provided Old FNB with assistance payments consisting primarily
of interest payments on FSLIC/RF notes, and yield maintenance and loss
protection on certain underperforming and other assets including investments
in unconsolidated subsidiaries of the acquired savings and loan institutions.
This revenue provided reimbursement for interim losses without which the
assets could not have been acquired economically. The FSLIC/RF notes were
issued to FNFC and Old FNB at the time of the acquisitions in an amount
generally equal to the tangible negative net worth of the acquired
institutions' assets after reflecting the fair value or mark to market
adjustments on certain assets and liabilities.
Effective June 30, 1992, FNFC and Old FNB entered into a settlement
agreement with the FDIC Manager ("FDIC") which covered the remaining active
assistance agreements with the FSLIC/RF. In accordance with the terms of the
settlement agreement, the FDIC prepaid approximately $2.2 billion in FSLIC/RF
notes and related accrued interest. In addition, the FDIC paid $0.9 billion
primarily for the repurchase of certain covered assets. The FDIC and Old FNB
also reached agreement on certain federal and state tax issues associated
with the covered assets and related assistance payments. There was no gain or
loss recognized on the settlement. The agreement also provided for various
options related to the treatment of approximately $490 million of covered
assets.
Effective January 31, 1993, FNFC and Old FNB reached a final settlement
with the FDIC concerning these remaining covered assets. As part of the final
settlement, Old FNB received the book value of these remaining covered
assets.
With the exception of certain indemnity and audit provisions, the 1992 and
1993 settlement agreements with the FDIC effectively terminate the remaining
active assistance agreements with the FSLIC/RF. Management believes there
will be no adjustments material to the financial statements from the
resolution of the final audit. Future assistance payments from the FSLIC/RF
are curtailed. Certain previously received assistance payments may be
recognized as revenue when the final audits of the assistance agreements and
associated payments are completed and remaining issues resolved.
OC-F-70
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--RECEIVABLES FROM THE FSLIC/RF (Continued)
During 1993, approximately $72 million of FSLIC/RF assistance was
recognized in other income. The amount of FSLIC/RF assistance recognized as
revenue by the Acquired Business in 1992 is reflected in the statement of
operations as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1992
-----------------
(DOLLARS IN THOUSANDS)
<S> <C>
Interest and Dividend Income:
FSLIC/RF notes and investment securities ............... $ 63,417
Real estate loans ...................................... 36,873
Mortgage-backed securities ............................. (1,439)
Consumer and other loans ............................... (327)
FSLIC/RF yield maintenance on unconsolidated
subsidiaries ........................................... 25,518
-----------------
124,042
Other Income:
Net gain on sales of investment securities ............. 44,812
Other .................................................. 40,585
-----------------
85,397
-----------------
Total ................................................. $ 209,439
=================
</TABLE>
NOTE 3--INVESTMENT SECURITIES
Investment securities consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $191,166 $ 698 $ 15 $191,849
Collateralized mortgage obligations .. 182,947 440 852 182,535
Municipal securities .................. 2,316 -- -- 2,316
----------- ------------ ------------ --------------
Total investment securities ......... $376,429 $1,138 $867 $376,700
=========== ============ ============ ==============
</TABLE>
The weighted average interest rate on investment securities was 5.11% at
December 31, 1993. Non-taxable interest recognized on municipal securities
during 1993 and 1992 was $0.7 million and $1 million, respectively.
OC-F-71
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--INVESTMENT SECURITIES (Continued)
At December 31, 1993 investment securities at amortized cost and
estimated market value, have scheduled maturities as follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) DECEMBER 31, 1993
------------------------------------
ESTIMATED WEIGHTED
AMORTIZED MARKET AVERAGE
COST VALUE YIELD
----------- ----------- ----------
<S> <C> <C> <C>
U.S. Government and agency securities:
Maturing within 1 year ................... -- -- --
Maturing after 1 year but within 5 years . $191 $191 4.17%
Maturing after 5 years but within 10 years -- -- --
Maturing after 10 years .................. -- 1 14.00
----------- -----------
191 192 4.19
----------- -----------
Collateralized mortgage obligations:
Maturing within 1 year ................... 1 2 8.92
Maturing after 1 year but within 5 years . 174 173 5.38
Maturing after 10 years .................. 8 8 7.00
----------- -----------
183 183 5.48
Municipal securities:
Maturing after 1 year but within 5 years . 1 1 8.25
Maturing after 5 years but within 10 years -- -- --
Maturing after 10 years .................. 1 1 8.25
----------- -----------
2 2 8.03
All other securities maturing within 1
year ................................... -- -- --
----------- -----------
Total .................................. $376 $ 377 4.83
=========== ===========
</TABLE>
Proceeds from sales of investments in debt securities during 1993 were $41
million, of which $32 million, were related to the sales of investments in
debt securities covered for loss by the FSLIC/RF. There were no material
gains or losses on the sale of investment debt securities in 1993. Gains on
the sale of investments in debt securities not covered for loss were $4
million in 1992. Losses on the sale of investments in debt securities not
covered for loss were $5 million in 1992. Gains on the sale of investments in
debt securities covered for loss were $8 million in 1992. No material losses
were recognized in the sales of investments in debt securities covered for
loss in 1992.
OC-F-72
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consist of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
--------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation $1,236,993 $20,483 $ 946 $1,256,530
Federal National Mortgage Association . 514,915 5,391 348 519,958
Government National Mortgage
Association ........................... 18,609 1,193 1 19,801
Other .................................. 5,623 -- -- 5,623
------------ ------------ ------------ --------------
Total mortgage-backed securities, net $1,776,140 $27,067 $1,295 $1,801,912
============ ============ ============ ==============
</TABLE>
The weighted average interest rate on mortgage-backed securities was 5.52%
at December 31, 1993. Proceeds from sales of mortgage-backed securities
during 1993 were $96 million, of which $90 million were related to the sales
of mortgage-backed securities covered for loss by the FSLIC/RF. During 1993
and 1992, there were no gains or losses realized on sales of mortgage-backed
securities.
At December 31, 1993, $94 million of mortgage-backed securities held
resulted from the securitization of certain qualifying mortgage loans from
the Acquired Business' loan portfolio. At December 31, 1993 the Acquired
Business had $1.5 billion of variable rate mortgage-backed securities. At
December 31, 1993, other mortgage-backed securities contained approximately
$5 million in securities which represent subordinated interests in mortgage
pool securities.
NOTE 5--LOANS RECEIVABLE
Loans receivable consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Real estate loans:
1-4 unit residential .................................... $ 6,533,809
5+ unit residential ..................................... 2,396,385
Commercial .............................................. 2,303,182
Construction ............................................ 24,921
Land .................................................... 10,101
-----------------
11,268,398
Undisbursed loan funds .................................. (7,373)
-----------------
Total real estate loans ................................ 11,261,025
Equity-line loans ......................................... 403,694
Other consumer loans ...................................... 78,027
Commercial loans .......................................... 3,623
-----------------
Total consumer and other loans .......................... 485,344
Amounts advanced to borrowers for taxes and insurance .... 24,732
Unearned fees, unearned income, discounts and premiums,
net ....................................................... (105,007)
Allowance for loan losses ................................. (257,242)
-----------------
Total loans receivable, net ............................. $11,408,852
=================
</TABLE>
OC-F-73
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LOANS RECEIVABLE (Continued)
The weighted average stated interest rate on loans receivable was 6.43%
at December 31, 1993. At December 31, 1993, the Acquired Business had $8.7
billion of variable rate real estate loans. During 1993 the Acquired Business
sold $10 million of various consumer loans and credit card receivables
recognizing a net gain of $1 million and a net loss of $3 million,
respectively. Loans receivable, net, had a fair value of approximately $11.7
billion at December 31, 1993.
The following table indicates the gross amount of loans which have been
placed on nonaccrual status as of the dates indicated:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) AT DECEMBER 31, 1993
--------------------
<S> <C>
Nonaccrual loans:
Real Estate:
1-4 unit residential ... $313
5+ unit residential .... 18
Commercial and other ... 15
Construction ............ --
--------------------
Total real estate .... 346
Non-mortgage ............. 2
--------------------
Total nonaccrual loans $348
====================
</TABLE>
The following table indicates the remaining principal balances of loans
classified as troubled debt restructurings, excluding loans subject to
FSLIC/RF loss coverage, as of the dates indicated:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) AT DECEMBER 31, 1993
--------------------
<S> <C>
Modified and restructured loans:
Real estate:
5+ unit residential ........... $ 255
Commercial and other .......... 111
Construction .................. 14
1-4 unit residential .......... 15
--------------------
Total restructured loans ... $ 395
====================
</TABLE>
At December 31, 1993, there were no commitments to lend additional funds
to borrowers whose loans were on nonaccrual or were restructured.
The following table reflects the amount of nonaccrual, past due and
troubled debt restructured loans including the interest income recognized and
total interest income that would have been recognized had the borrowers
performed under the original terms of the loans.
<TABLE>
<CAPTION>
DECEMBER 31, 1993
------------------------------------------
TOTAL INTEREST
INTEREST INCOME INCOME IF
(DOLLARS IN MILLIONS) BALANCE RECOGNIZED PERFORMING
--------- --------------- --------------
<S> <C> <C> <C>
Troubled debt restructured loans ..................... $395 $33 $36
Nonaccrual loans ..................................... 348 7 26
Accruing loans contractually past due 91 days or more -- -- --
--------- --------------- --------------
$743 $40 $62
========= =============== ==============
</TABLE>
OC-F-74
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LOANS RECEIVABLE (Continued)
The following table summarizes real estate loans net of undisbursed loan
funds by collateral type, interest rate type and state concentration as of
December 31, 1993.
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) 1-4 UNIT RESIDENTIAL 5+ UNIT RESIDENTIAL
-------------------- -------------------
STATE VARIABLE FIXED VARIABLE FIXED
- -------------------------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C>
California ............... $3,151 $ 439 $ 932 $159
New York ................. 538 119 194 210
Florida .................. 138 67 50 72
Illinois ................. 125 105 55 16
Hawaii ................... 311 41 -- --
Ohio ..................... 145 125 29 12
New Jersey ............... 170 47 58 28
Colorado ................. 35 155 2 3
Texas .................... 68 57 3 40
Nevada ................... 14 4 79 26
Other states (1) ......... 565 260 243 186
---------- -------- ---------- -------
Total .................... $5,260 $1,419 $1,645 $752
========== ======== ========== =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TOTAL
COMMERCIAL REAL
(DOLLARS IN MILLIONS) AND OTHER CONSTRUCTION ESTATE
------------------- VARIABLE LOANS(2) % OF TOTAL
STATE VARIABLE FIXED
- -------------------------- ---------- ------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C>
California ............... $1,336 $298 $ 3 $ 6,318 55%
New York ................. 47 49 -- 1,157 10
Florida .................. 75 37 -- 439 4
Illinois ................. 51 30 -- 382 3
Hawaii ................... 4 -- -- 356 3
Ohio ..................... 31 10 -- 352 3
New Jersey ............... 16 11 -- 330 3
Colorado ................. -- -- -- 195 2
Texas .................... 1 5 -- 174 2
Nevada ................... 37 1 -- 161 1
Other states (1) ......... 163 110 15 1,542 14
---------- ------- -------------- --------- ------------
Total .................... $1,761 $551 $18 $11,406 100%
========== ======= ============== ========= ============
</TABLE>
- ------------
(1)There are 40 states, of which no one state has real estate loans in
excess of 1.3% of the total.
(2)The table balances exclude accrued interest receivable, amounts
advanced to borrowers for taxes and insurance, discounts and premiums,
and loss reserves, and include $145 million of loans held for sale.
NOTE 6--LOANS AND INVESTMENT SECURITIES HELD FOR SALE
Assets held for sale at the lower of aggregate amortized cost or estimated
market value, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------
AMORTIZED ESTIMATED
(DOLLARS IN THOUSANDS) COST MARKET VALUE
----------- --------------
<S> <C> <C>
1-4 unit residential real estate loans ............. $145,316 $145,316
Investment securities .............................. 10,000 10,000
Consumer loans ..................................... -- --
----------- --------------
Total loans and investment securities held for sale $155,316 $155,316
=========== ==============
</TABLE>
OC-F-75
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--MORTGAGE BANKING OPERATIONS
Income from mortgage banking operations is comprised of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
(DOLLARS IN THOUSANDS) 1993 1992
---------- ----------
<S> <C> <C>
Net gains on loans and mortgage-backed securities
sales:
Cash gain (loss) ................................ $ (3,440) $ 3,720
Present value of retained yield on loans sold .. 12,978 14,325
Loan servicing fee revenue ....................... 47,306 59,189
Net amortization and write downs of: .............
Present value of retained yield on loans sold .. (30,036) (32,358)
Purchased servicing rights ...................... (12,013) (3,935)
---------- ----------
Income from mortgage banking operations,
net .......................................... $ 14,795 $ 40,941
========== ==========
</TABLE>
Details of certain other mortgage banking activities are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
UNAMORTIZED BALANCES OF:
<S> <C>
Purchased servicing rights .................................... $ 5,052
Present value of excess servicing on loans sold ............... 45,701
Loans serviced for others ...................................... 7,903,767
Remaining balance of loans sold with limited recourse
provisions .................................................... 456,711
</TABLE>
The fair value of the purchased servicing rights and excess servicing on
loans sold was approximately $116 million at December 31, 1993. The cash flow
valuation model used to calculate this amount utilizes assumptions regarding
future net servicing income and current market discount rates. Future net
servicing income is based on many factors including independent investment
banker prepayment rate projections. At December 31, 1993, included in
non-interest bearing demand deposit accounts are approximately $229 million
of unremitted principal and interest due investors and funds held for payment
of taxes and insurance on investor-owned loans.
NOTE 8--ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Investment securities .............. $ 2,184
Mortgage-backed securities ......... 12,738
Loans receivable ................... 69,913
-----------------
Total accrued interest receivable $84,835
=================
</TABLE>
OC-F-76
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--PROPERTY ACQUIRED IN SETTLEMENT OF LOANS:
Property acquired in settlement of loans consists of the following:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Real estate
1-4 unit residential ............................... $ 65,712
5+ unit residential ................................ 13,186
Commercial and other ............................... --
Mobile homes and automobiles ........................ 433
-----------------
79,331
Less allowance for losses ........................... (15,480)
-----------------
Total property acquired in settlement of loans, net $ 63,851
=================
</TABLE>
The above balance in 5+ unit residential real estate represents an amount
for which, upon consummation of the purchase by First Madison of the Acquired
Business, FNFC has partially guaranteed First Madison collection of such
balance.
NOTE 10--LOSS RESERVES
Analysis of the allowance for losses on loans, investment real estate and
foreclosed property is as follows:
<TABLE>
<CAPTION>
LOANS
----------------------------------------
CONSUMER
(DOLLARS IN THOUSANDS) REAL ESTATE AND OTHER COMMERCIAL
------------- ----------- ------------
<S> <C> <C> <C>
Balance--December 31, 1991 . $ 361,728 $ 10,317 $ 7,173
Additions charged to expense 78,552 2,725 3,951
Charge-offs ................. (131,469) (4,682) (6,240)
Recoveries .................. 2,372 1,159 740
------------- ----------- ------------
Balance--December 31, 1992 . 311,183 9,519 5,624
Additions charged to expense 78,550 2,946 10
Charge-offs ................. (153,637) (5,150) (5,011)
Recoveries .................. 12,023 808 377
------------- ----------- ------------
Balance--December 31, 1993 $ 248,119 $ 8,123 $ 1,000
============= =========== ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
INVESTMENT FORECLOSED
TOTAL REAL ESTATE PROPERTY TOTAL
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Balance--December 31, 1991 . $ 379,218 $10,608 $ 71,513 $ 461,339
Additions charged to expense 85,228 2,120 80,654 168,002
Charge-offs ................. (142,391) (9,922) (116,801) (269,114)
Recoveries .................. 4,271 5 18,835 23,111
----------- ------------- ------------ -----------
Balance--December 31, 1992 . 326,326 2,811 54,201 383,338
Additions charged to expense 81,506 2,690 45,110 129,306
Charge-offs ................. (163,798) -- (94,922) (258,720)
Recoveries .................. 13,208 772 11,091 25,071
----------- ------------- ------------ -----------
Balance--December 31, 1993 $ 257,242 $ 6,273 $ 15,480 $ 278,995
=========== ============= ============ ===========
</TABLE>
On December 30, 1993, Old FNB entered into an agreement with GMD, pursuant
to which Old FNB would sell to GMD approximately $500 million in
non-performing and/or classified commercial and multi-family real estate
loans at Old FNB's gross book value, over a period not exceeding
approximately three years. The obligations of GMD under this arrangement are
guaranteed by Ford Motor Company.
Generally, under this agreement, Old FNB will sell to GMD, on a quarterly
basis, all non-performing commercial and multi-family real estate loans, up
to the aggregate $500 million limit. If that limit is not reached by the end
of the three year term, the remaining portion of the $500 million commitment
will be satisfied by Old FNB selling to GMD performing classified commercial
and multi-family real estate loans. The assets that may be sold under this
agreement are limited to commercial and multi-family real estate loans held
by Old FNB as of November 30, 1993. $17 million of such loans were sold to
GMD in the first quarter of 1994.
OC-F-77
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--OFFICE PREMISES AND EQUIPMENT
The components of office premises and equipment are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Land ...................................... $ 21,425
Buildings and leasehold improvements ..... 91,629
Furniture and equipment ................... 146,335
Capitalized equipment leases .............. 1,310
Construction in progress .................. 2,891
-----------------
263,590
Accumulated depreciation and amortization (154,879)
-----------------
Total office premises and equipment, net $ 108,711
=================
</TABLE>
The estimated cost to complete projects included in construction in
progress was $4 million at December 31, 1993. Depreciation and amortization
expense on office premises and equipment for the years ended December 31,
1993 and 1992 was $25 million and $36 million, respectively.
The Acquired Business and its subsidiaries rent premises under long-term,
noncancelable operating leases expiring at various dates through 2064. Rental
expense for the years ended December 31, 1993 and 1992 was $23 million and
$27 million, respectively. Rental income from subleasing agreements was $5
million in each of the years ended December 31, 1993 and 1992. At December
31, 1993, minimum rental commitments, net of sublease agreements, under all
noncancelable operating leases were as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDED THOUSANDS)
- ------------------- --------------------
<S> <C>
1994 ............... $14,834
1995 ............... 12,058
1996 ............... 10,541
1997 ............... 9,872
1998 ............... 8,744
1999 and thereafter 26,025
--------------------
Total ............ $82,074
====================
</TABLE>
At December 31, 1993, future minimum lease payments under all capital
leases together with the present value of the minimum lease payments were as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDED THOUSANDS)
- ------------------------------------- --------------------
<S> <C>
1994 ................................. $ 937
1995 ................................. 894
1996 ................................. 894
1997 ................................. 223
--------------------
Total minimum lease payments ......... 2,948
Less interest portion ................ (1,777)
--------------------
Total capitalized lease obligations $ 1,171
====================
</TABLE>
OC-F-78
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CUSTOMER DEPOSITS
A summary of deposit accounts by category is presented below:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
----------------------------
AVERAGE RATE BALANCE
-------------- ------------
<S> <C> <C>
TYPE OF ACCOUNT
Passbook accounts ............... 2.14% $ 838,922
NOW accounts:
Interest bearing ............... 1.04 761,433
Non-interest bearing ........... -- 788,309
Money market deposit accounts .. 2.51 2,786,381
Term accounts:
3.0% or less .................. 2.78 1,078,875
3.01- 4.00% ................... 3.45 1,739,313
4.01- 5.00 .................... 4.63 506,427
5.01- 6.00 .................... 5.31 261,512
6.01- 7.00 .................... 6.57 258,522
7.01- 8.00 .................... 7.51 524,059
8.01- 9.00 .................... 8.47 525,305
9.01-10.00 .................... 9.34 283,160
10.01-11.00 .................... 10.64 13,358
11.01-12.00 .................... 11.36 89,455
12.01-13.00 .................... 12.28 91,452
13.01-14.00 .................... 13.43 188
------------
10,546,671
Accrued interest payable ........ 12,479
Purchase accounting adjustments 2,470
------------
Total customer deposits ...... $10,561,620
============
</TABLE>
The weighted average stated interest rates on deposits at December 31,
1993 was 3.54%. Brokered certificates of deposits included above totalled
$230 million at December 31, 1993. Deposit month-end balances averaged $12.1
billion during 1993 with a weighted average rate of interest of 4.00%. At
December 31, 1993, deposit liabilities include $283 million of deposits from
affiliated companies and entities. At December 31, 1993, the Acquired
Business had committed to sell customer deposits held in two branches
totalling approximately $35 million.
The fair value of customer deposits at December 31, 1993 is $10.6 billion.
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed maturity term accounts is estimated using the interest rates
currently offered for deposits of similar remaining maturities.
OC-F-79
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CUSTOMER DEPOSITS (Continued)
A summary of deposit interest expense by category is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(DOLLARS IN THOUSANDS) 1993 1992
---------- ---------
<S> <C> <C>
TYPE OF ACCOUNT
Passbook accounts ........................ $ 32,493 $ 28,856
NOW accounts ............................. 11,584 25,154
Money market deposit accounts ............ 78,149 141,917
Term accounts ............................ 361,331 561,124
---------- ---------
483,557 757,051
Interest forfeitures ..................... (1,126) (1,571)
---------- ---------
Total customer deposit interest expense $482,431 $755,480
========== =========
</TABLE>
At December 31, 1993, term accounts have scheduled maturities as follows:
<TABLE>
<CAPTION>
TERM ACCOUNTS
MATURING WITH
(DOLLARS IN THOUSANDS) BALANCES
------------------------
MATURITY TOTAL WEIGHTED
DURING THE YEAR ENDING OVER $100,000 BALANCES AVERAGE
DECEMBER 31, $100,000 AND UNDER MATURING RATE
- ---------------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
1994 .................. $360,710 $3,458,494 $3,819,204 4.36%
1995 .................. 84,698 494,553 579,251 7.42
1996 .................. 66,343 528,031 594,374 7.55
1997 .................. 17,181 196,622 213,803 6.21
1998 .................. 11,184 133,780 144,964 5.60
1999 and thereafter .. 5,859 14,171 20,030 9.53
---------- ------------ ------------
$545,975 $4,825,651 $5,371,626 5.17%
========== ============ ============
</TABLE>
NOTE 13--SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Mortgage-backed securities:
Maturing within 30 days ............................... $554,057
Maturing 30-90 days ................................... 236,291
Maturing 90 days to 1 year ............................ 30,500
Maturing 1-2 years .................................... 13,051
Accrued interest payable .............................. 1,442
-----------------
Total securities sold under agreements to repurchase $835,341
=================
</TABLE>
At December 31, 1993, these agreements had a weighted average interest
rate of 3.73%. The market value of these agreements at December 31, 1993 was
$836 million. The underlying securities were delivered to, and are being held
by securities dealers. These dealers may have loaned the securities to other
parties in the normal course of their operations, but all agreements require
the dealers to resell to the Acquired Business the identical securities at
the maturities of the agreements. Securities sold under agreements to
repurchase averaged $309 million during 1993 and the maximum amount
outstanding at any month-end was $983 million for 1993.
OC-F-80
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued)
At December 31, 1993 the amortized cost of the mortgage-backed securities
subject to the terms of the reverse repurchase agreements was $855 million.
The market value of these securities at December 31, 1993 was $907 million.
The following is a summary by dealer of securities sold under agreements
to repurchase, excluding accrued interest, at December 31, 1993:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
(DOLLARS IN THOUSANDS) AMOUNT DUE MATURITY (DAYS)
------------ ----------------
<S> <C> <C>
First Boston ............. $250,035 27
Goldman Sachs ............ 205,877 8
Merrill Lynch ............ 98,145 10
Morgan Stanley ........... 279,842 125
------------ ----------------
Total .................. $833,899 53
============ ================
</TABLE>
NOTE 14--OTHER BORROWINGS
Other borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
----------------------------
(DOLLARS IN THOUSANDS) BALANCE AVERAGE RATE
------------ --------------
<S> <C> <C>
Fixed rate borrowings from the FHLB $2,350,110 8.52%
Subordinated debentures:
10.00%, due October, 2006 .......... 92,100 10.00
Multi-family housing revenue bonds 20,099 3.79
Capitalized lease obligations ..... 1,171 15.77
Other borrowings ................... 5,665 8.14
------------ --------------
2,469,145 8.54%
Accrued interest payable ............ 19,024
Net discount ........................ (10,554)
------------
Total long-term borrowings .......... $2,477,615
============
</TABLE>
Maturities of other borrowings at December 31, 1993 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
MATURITIES DURING THE BALANCES MATURING AVERAGE RATES
------------------------ ----------------
YEARS ENDING DECEMBER 31 FHLB OTHER FHLB OTHER
- ------------------------ ------------ ---------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1994 .................... $ 680,787 $ 1,258 9.60% 6.63%
1995 .................... 485,710 81 8.74 8.20
1996 .................... 865,968 321 7.30 8.38
1997 .................... 215,000 8,325 8.92 13.49
1998 .................... 100,000 -- 9.85 --
1999 and thereafter .... 2,645 109,050 7.71 8.96
------------ ---------- ------- -------
Total ................. $2,350,110 $119,035 8.52% 9.25%
============ ========== ======= =======
</TABLE>
Short-term borrowings averaged $12 million during 1993, with a weighted
average rate of 3.09%. There were no outstanding short-term borrowings as of
December 31, 1993. Long-term borrowings averaged $2.7 billion during 1993
with a weighted average rate, adjusted for interest income recognized
OC-F-81
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--OTHER BORROWINGS (Continued)
on interest rate exchange agreements, of 5.59%. Included in discounts at
December 31, 1993 are deferred gains on sale of interest rate exchange
agreements totalling $4 million.
At December 31, 1993, advances from Federal Home Loan Banks and other
borrowings had a fair value of approximately $2.6 billion. Fair value of
borrowings is estimated using rates currently offered for liabilities of
similar remaining maturities.
The following is a summary of the carrying value of real estate loans,
mortgage-backed securities, investment securities, and FHLB stock pledged as
collateral for FHLB borrowings:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Real estate loans .......... $4,643,239
Mortgage-backed securities 1,008,222
FHLB stock ................. 152,629
-----------------
Total .................. $5,804,090
=================
</TABLE>
NOTE 15--INTEREST RATE EXCHANGE AGREEMENTS
Interest rate exchange agreements outstanding at December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
YEAR END INTEREST
NOTIONAL RATE
(DOLLARS IN THOUSANDS) PRINCIPAL -------------------
MATURITY DATE AMOUNT PAID RECEIVED VARIABLE RATE INDEX
- ----------------------------- ----------- ------- ---------- -------------------
<S> <C> <C> <C> <C>
Paid Variable/Received Fixed:
April 1994 .................. $500,000 3.38% 7.73% 3 Month LIBOR
April 1995 .................. 500,000 3.38 7.97 3 Month LIBOR
April 1996 .................. 500,000 3.38 8.19 3 Month LIBOR
September 1996 .............. 250,000 3.33 4.19 1 Month LIBOR
April 1998 .................. 400,000 3.38 8.38 3 Month LIBOR
</TABLE>
As of December 31, 1993, interest rate exchange agreements totalling $1.35
billion of notional principal are collateralized by a $30 million third party
letter of credit issued. If terminated at December 31, 1993, the interest
rate exchange agreements would generate a pre-tax gain of approximately $133
million. There were no interest rate cap, collar and floor agreements
outstanding at December 31, 1993.
The net decrease in interest expense on customer deposits and borrowings
from interest rate exchange agreements is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
(DOLLARS IN THOUSANDS) 1993 1992
--------- ---------
<S> <C> <C>
Interest rate exchanges ................. $87,369 $76,280
Amortization of deferred gains and fees 1,985 2,934
Interest rate caps, collars and floors . -- (750)
--------- ---------
$89,354 $78,464
========= =========
</TABLE>
OC-F-82
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--INTEREST RATE EXCHANGE AGREEMENTS (Continued)
Below is a roll forward of deferred gains associated with interest rate
swaps. These gains resulted from the termination of interest rate swaps in
1990 and are being amortized over the original life of the swap terminated.
<TABLE>
<CAPTION>
<S> <C>
Balance as of December 31, 1991 $ 8,740
Amortization .................... 2,934
---------
Balance as of December 31, 1992 5,806
Amortization .................... 1,985
---------
Balance as of December 31, 1993 $ 3,821
=========
</TABLE>
NOTE 16 -- FEDERAL AND STATE TAXES ON INCOME
The components for the provision (recovery) for federal and state income
taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(DOLLARS IN THOUSANDS) 1993 1992(*)
---------- -----------
<S> <C> <C>
Federal and state tax expense (benefit):
Current:
Federal ............................. $ 46,730 $ 21,296
State ............................... 7,834 2,000
---------- -----------
54,564 23,296
Deferred: .............................
Federal ............................. (14,156) (50,747)
State ............................... -- --
(14,156) (50,747)
---------- -----------
Expense (benefit) for the period . $ 40,408 $ (27,451)
========== ===========
</TABLE>
(*)Excludes cumulative effect of changes in accounting principles.
The Acquired Business adopted Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," as of January 1,
1992. The cumulative effect of this change in accounting principle increased
1992 net income by $13 million. Financial statements for prior years were not
restated to apply the provisions of SFAS No.109. The adoption of SFAS No. 109
changes the method of accounting for income taxes from the deferred method
using Accounting Principles Board Opinion No. 11 ("APB No. 11") to an asset
and liability approach.
Under SFAS No. 109, deferred income taxes reflect the estimated tax effect
of temporary differences between the amount of assets and liabilities for
financial reporting purposes and those amounts as measured by tax laws and
regulations. These temporary differences include purchase accounting
valuation adjustments and other items not previously included in the
determination of deferred income taxes under APB No. 11. Accordingly, certain
purchase accounting valuation adjustments and related amortization have been
modified as a result of the adoption of SFAS No. 109. The impact from the
adoption of SFAS No. 109 as it relates to purchase accounting valuation
adjustments was to increase pre-tax income by $14 million and increase income
tax expense by $14 million for the year ended December 31, 1992.
OC-F-83
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16 -- FEDERAL AND STATE TAXES ON INCOME (Continued)
The components of deferred income tax assets and liabilities as of
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
1993 DEFERRED TAX
---------------------------
(DOLLARS IN MILLIONS) ASSETS LIABILITIES
---------- ---------------
<S> <C> <C>
Loss reserves .......................... $ 76 --
Deferred intercompany transactions .... 47 --
Purchase accounting .................... 23 --
Deferred loan servicing ................ -- $(16)
Deferred loan fees ..................... -- (11)
Employee benefit plans ................. 2 --
All other .............................. 15 (38)
---------- ---------------
163 (65)
Valuation allowances ................... (16) --
---------- ---------------
Total ................................ $147 $(65)
===============
</TABLE>
The valuation allowances established relate primarily to state deferred
tax assets. The Acquired Business' net deferred federal tax assets, including
alternative minimum taxes, are expected to be realized in the consolidated
income tax return, in accordance with the terms of its tax sharing agreement.
A reconciliation of statutory tax rates to effective tax rates is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
(DOLLARS IN MILLIONS) 1993 1992
---------------- -----------------
<S> <C> <C> <C> <C>
Tax at statutory federal rate .................... $ 66 35.0% $ 37 34.0%
Effect of:
Payments from the FSLIC/RF ...................... (25) (12.8) (75) (69.6)
Municipal bond interest ......................... (1) (0.5) (1) (0.9)
Amortization of purchase accounting adjustments,
goodwill and intangible assets ................. 6 3.2 6 5.5
Qualifying loan loss reserve liquidation ........ 8 4.3 -- --
Change in tax rate .............................. (5) (2.7) -- --
Other, net ..................................... (14) (7.5) 5 4.6
------ -------- ------- --------
35 19.0 (28) (26.4)
State tax, net of federal income tax effect ..... 5 2.7 1 0.9
------ -------- ------- --------
Income tax expense (recovery) .................... $ 40 21.7% $(27) (25.5)%
====== ======== ======= ========
</TABLE>
During 1993, the Acquired Business recognized $8 million of federal income
tax charges resulting from the partial liquidation of its qualifying loan
loss reserves for which deferred income taxes have not previously been
provided. The liquidation of the qualifying loan loss reserves resulted from
a decline in the balance of qualifying loans and real estate owned. Included
in retained earnings at December 31, 1993 is $187 million which represents
the accumulation of qualifying loan loss reserve deductions and supplemental
reserve deductions for which no provision for federal income taxes has been
made. If in the future these amounts are used for any purpose other than to
absorb losses on bad debts, or if further reductions in qualifying loans and
real estate owned occur, a tax liability will be imposed on Old FNB for these
amounts at the then-current tax rates.
OC-F-84
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--REGULATION
The OTS has established capital regulations requiring all savings
institutions to maintain: (a) tangible capital equal to 1.5% of adjusted
total assets, as defined; (b) core capital equal to 3.0% of adjusted total
assets, as defined; and (c) risk-based capital, equal to 8.0% on December 31,
1993, of risk-weighted assets, as defined.
The following table sets forth the regulatory capital positions as
reported to the OTS by Old FNB at December 31, 1993:
<TABLE>
<CAPTION>
REGULATORY CAPITAL (UNAUDITED)
------------------------------------
CORE
TANGIBLE (LEVERAGE) RISK-BASED
---------- ---------- ------------
<S> <C> <C> <C>
Regulatory capital ratios, as filed with the OTS 6.3% 6.5% 11.1%
========== ========== ============
</TABLE>
The above ratios were calculated using amounts reported to the OTS prior
to the preparation of the Acquired Business' financial statements. The new
management of the Acquired Business intends to continue to comply with all
required capital ratios.
The FDIC Improvement Act of 1992 ("FDICIA") requires each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. In response to this requirement, the OTS adopted final rules,
effective December 19, 1993, based upon FDICIA's five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under FDICIA, the OTS is
required to take supervisory action against institutions that are not deemed
either "well capitalized" or "adequately capitalized." The rules generally
provide that a savings association is "well capitalized" if its total
risk-based capital ratio is 10% or greater, its ratio of core capital to
risk-based assets is 6% or greater, its core capital (leverage) ratio is 5%
or greater, and the institution is not subject to a capital directive.
NOTE 18--EMPLOYEE BENEFIT PLANS
Retirement Plans:
The FNFC Retirement Plan ("Plan") is the primary retirement plan covering
the employees of FNFC, the Acquired Business and their subsidiaries. The Plan
covers substantially all permanent employees who have completed one year of
service. In addition, an unfunded, nonqualified, discretionary plan is
maintained to provide supplemental retirement benefits to certain present and
former senior officers.
During 1991, the Plan benefit formula was modified retroactively to an
effective date of July 1, 1989. Under the Plan's previous benefit formulas,
participants accrued a monthly benefit amount under a defined benefit
formula. Upon revision of the Plan's benefit formulas, the monthly benefit
amount was converted to a lump-sum equivalent value representing the
participant's beginning account balance under the amended plan. Thereafter,
4% of the participant's quarterly eligible compensation is allocated to each
participant's account. Plan net earnings are allocated based on the
participant's account balance. The periodic pension expense for 1993 and 1992
has been calculated using the revised benefit formula and reflects all
adjustments necessary to adopt the provisions of the new Plan.
The Acquired Business' funding policy is to contribute amounts sufficient
to meet funding requirements set forth in U.S. employee benefit and tax laws
plus such additional amounts as the Acquired Business may determine to be
appropriate. A contribution of $0.1 million was made in 1992. No
contributions were required in 1993. All assets are invested with the Ford
Retirement Plan Master Trust. Master Trust assets are principally U.S.
Government and Agency obligations, corporate bonds and notes, and common
stocks.
OC-F-85
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (Continued)
The Plan was previously qualified under 401(a) of the Internal Revenue
Code. The Plan intends to file an application with the IRS for a
determination that the Plan, as amended, satisfies the qualification
requirements of Section 401(a) and related provisions of the Internal Revenue
Code of 1986, as amended. The Plan intends to file the determination letter
application before the required filing due date and to make all such
amendments to the Plan as may be necessary or appropriate to ensure that it
will obtain a favorable determination letter. Pension costs include the
following components:
<TABLE>
<CAPTION>
ENDED DECEMBER 31,
--------------------
(DOLLARS IN THOUSANDS) 1993 1992
--------- ---------
<S> <C> <C>
Benefits credited for service during the year $ 2,099 $ 1,565
Interest cost on projected benefit obligation 2,567 2,690
Actual return on assets ....................... (4,134) (4,470)
Net amortization and deferral ................. (782) (782)
Curtailment (loss) gain ....................... (587) (1,137)
--------- ---------
Net periodic pension cost (credit) ............ $ (837) $(2,134)
========= =========
</TABLE>
Net periodic pension costs at December 31, 1993 and 1992 were computed
using a weighted average discount rate of 8.0%, 8.5% and an expected rate of
return on plan assets of 9.5% for 1993 and 1992.
The projected benefit obligations at December 31, 1993 were determined
using a discount rate of 8%.
OC-F-86
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (Continued)
The status of the retirement plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
--------------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED
(DOLLARS IN THOUSANDS) BENEFITS ASSETS
--------------- ---------------
<S> <C> <C>
Present value of accumulated retirement benefits:
Vested .......................................... $(34,542) $(2,258)
Non-vested ...................................... (2,320) (53)
--------------- ---------------
Accumulated benefits obligation .................. $(36,862) $(2,311)
=============== ===============
Projected benefit obligation ..................... $(36,862) $(2,311)
Plan assets at fair value ........................ 48,500 --
--------------- ---------------
Projected benefit obligation less than
(in excess of) Plan assets ...................... 11,638 (2,311)
Unrecognized net (asset) obligation at
January 1, 1987 (date of adoption) .............. (4,582) 153
Unamortized amendments ........................... (3,475) 760
Unrecognized net amount resulting from
Plan investment experience ...................... (9,592) (913)
--------------- ---------------
Total accrued pension cost ..................... $ (6,011) $(2,311)
=============== ===============
</TABLE>
Since the plan will not be retained by First Madison upon completion of
its acquisition of the Acquired Business, any plan over funding amount will
remain with FNFC.
Postretirement Benefits Plan:
FNB and certain of its subsidiaries sponsor unfunded plans to provide
medical, dental and vision benefits to certain eligible employees and their
dependents from the date of early retirement to a maximum age of 65. In
general, early retirement is age 55 with 10 years of service. Certain
retirees contribute nothing for their coverage; however, all new retirees
participating in the Plan contribute a portion of the premiums until age 65.
The estimated cost for postretirement health care benefits has been
accrued on an actuarially-determined basis, in accordance with the
requirements of Statement of Financial Accounting Standards No. 106, ("SFAS
No. 106"), "Employers' Accounting for Postretirement Benefits Other Than
Pensions". In 1992, Old FNB elected to recognize immediately the full amount
of the accumulated postretirement benefit obligation of this accounting
change, resulting in an adverse effect on income of $3 million in the first
quarter of 1992. The change reflected an unaccrued retiree benefit obligation
liability of approximately $4 million, partially offset by projected tax
benefits of $1 million.
The status of the postretirement plan is as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees ..................................... $2,202
Active employees eligible to retire ........... 1,818
Other active employees ........................ 1,754
-----------------
Total accrued benefit liability .............. $5,774
=================
</TABLE>
OC-F-87
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (Continued)
The projected benefit obligation at December 31, 1993 was determined
using a discount rate of 7.5%. An increase of 1% in the health care cost
trend rate would cause service and interest costs and the accumulated
postretirement benefit obligation to increase by less than $2 million.
Postretirement benefits costs for the years ended December 31, 1993 and
1992 include the following components:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
--------------
(DOLLARS IN THOUSANDS) 1993 1992
------ ------
<S> <C> <C>
Current service cost ................ $288 $249
Interest cost on benefit obligation 389 360
------ ------
Net periodic benefit cost ........... $677 $609
====== ======
</TABLE>
Net periodic benefit cost at December 31, 1993 was computed using a
weighted average discount rate of 7.5%. The initial health care cost trend
rate used was 11.5%, the average trend rate used was 8.7% and the ultimate
trend rate used was 5.5%, with the ultimate rate being achieved in 10 years.
Investment Plan:
At December 31, 1993, FNFC, the Acquired Business and substantially all of
their subsidiaries had a defined contribution plan that is a qualified plan
under Section 401(k) of the Internal Revenue Code ("401(k) Plan"). The 401(k)
Plan has received a favorable determination letter from the IRS. The 401(k)
Plan is available to substantially all employees with at least one year of
employment. Employee contributions are voluntary. Effective January 1, 1993,
the 401(k) Plan has been amended to provide for deferrals of up to twelve
percent of qualifying compensation with a corresponding dollar for dollar
matched employer contribution of the first four percent of eligible employee
contributions. Employees vest immediately in their own contributions, and
vest in the Acquired Business' contributions based on years of service. For
the years ended December 31, 1993 and 1992, the Acquired Business' pre-tax
401(k) Plan contributions were $3 million and $3 million, respectively.
NOTE 19--COMMITMENTS AND CONTINGENCIES
Lending and Investment Commitments:
Outstanding written commitments relating to loans, mortgage-backed
securities and investment securities are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) DECEMBER 31, 1993
-----------------
<S> <C>
Commitments to originate loans:
Variable rate ................................................. $123,725
Fixed rate .................................................... 148,983
Unused lines of credit provided to consumers .................. 327,671
Commitments to purchase loans and mortgage-backed securities:
Variable rate ................................................. --
Fixed rate .................................................... 8,912
Forward commitments to sell loans and mortgage-backed
securities .................................................... 280,187
</TABLE>
Letters of Credit Commitments:
Through year-end 1985, FNBMC entered into partnership agreements with
developers to acquire and develop multi-family rental projects. The projects
are partially funded through tax-exempt mortgage
OC-F-88
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--COMMITMENTS AND CONTINGENCIES (Continued)
revenue bond programs. Commencing in 1984, the Acquired Business began
issuing its letters of credit to guarantee the payment of principal and
interest on bonds issued by various housing authorities, and concurrently
originated and serviced the mortgage loans made by the bond issuers. Should
the Acquired Business be obligated under its letter of credit to redeem the
bonds because of default of a project, the bond trustee is required to assign
the mortgage loan to the Acquired Business. At December 31, 1993, the
Acquired Business had a total of $375 million of such letters of credit
outstanding with remaining terms of 2 to 26 years. Given the uncertainty of
the interaction of these letters of credit with the underlying mortgage loans
and cash flows of collateral properties under future economic conditions, it
is not practicable to estimate the fair value of these letters of credit.
Litigation:
The Acquired Business and its subsidiaries are involved in litigation and
may be subject to claims arising from its operations. The Acquired Business
does not believe that the outcome of these actions, individually or in the
aggregate, will have a material adverse effect on the consolidated financial
position of the Acquired Business.
NOTE 20 -- SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest and Income Taxes Paid:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
(DOLLARS IN THOUSANDS) 1993 1992
---------- ------------
<S> <C> <C>
Interest paid ....... $612,397 $1,008,821
Income taxes paid .. 1,956 2,413
Income tax refunds . 17,708 114,573
</TABLE>
Non-Cash Investing and Financing Activities:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
(DOLLARS IN THOUSANDS) 1993 1992
---------- ----------
<S> <C> <C>
Additions to property acquired in settlement of loans $135,251 $226,320
Loans securitized into mortgage-backed securities ... -- 17,827
</TABLE>
OC-F-89
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of SFFed Corp.
We have audited the accompanying consolidated statements of financial
condition of SFFed Corp. and subsidiaries ("SFFed") as of December 31, 1995
and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
SFFed's management. Our responsibility is to express an opinion on these
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, such consolidated financial statements present fairly, in
all material respects, the financial position of SFFed Corp. and subsidiaries
at December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, on
February 1, 1996, SFFed was acquired by and merged into First Nationwide
Bank, A Federal Savings Bank.
Deloitte & Touche LLP
San Francisco, California
April 15, 1996
OC-F-90
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents (Note 3):
Cash on hand and amounts due from depository institutions ...... $ 26,251 $ 18,306
Federal funds sold .............................................. 4,000 34,900
Securities purchased under agreements to resell ................. 165,000 112,000
------------ ------------
195,251 165,206
Mortgage-backed securities available for sale, at market (Note 4) 72,844 77,458
Mortgage-backed securities held for investment, net (approximate
market value of 1995: $872,475; and 1994: $323,257) (Note 4) ... 859,554 330,578
Loans held for sale, net (Note 6) ................................ 4,393 3,627
Loans receivable held for investment, net (Note 5) ............... 2,714,988 3,011,504
Accrued interest receivable (Notes 4 and 5) ...................... 23,600 18,798
Federal Home Loan Bank stock, at cost (Note 3) ................... 31,579 30,049
Premises and equipment, net (Note 7) ............................. 21,899 22,946
Real estate owned, net (Note 8) .................................. 32,404 25,784
Other assets ..................................................... 26,923 23,986
Excess of cost over fair value of net assets acquired (net of
accumulated amortization of 1995: $8,967; and 1994: $8,298) .... 8,053 8,722
------------ ------------
$3,991,488 $3,718,658
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Customer deposits (Note 9) ....................................... $2,693,243 $2,481,988
Federal funds purchased .......................................... 4,000 35,000
Securities sold under agreements to repurchase (Note 10) ........ 713,362 347,679
Advances from Federal Home Loan Bank of San Francisco (Note 10) . 274,952 580,983
Senior notes (Note 10) ........................................... 49,245 49,158
Advance payments by borrowers for taxes and insurance ........... 2,138 3,425
Taxes on income (Note 11) ........................................ 3,671 602
Other liabilities and accrued expenses ........................... 54,186 23,636
Unearned income .................................................. 1,301 1,643
------------ ------------
3,796,098 3,524,114
------------ ------------
Commitments and contingencies (Note 17)
Stockholders' equity (Notes 4, 10, 11, 12, 14 and 15):
Serial preferred stock--par value $.01 per share; 4,000,000
shares authorized and unissued ............................... -- --
Common stock--par value $.01 per share; 20,000,000 shares
authorized; issued and outstanding--1995: 7,883,247 and 1994:
7,833,282 .................................................... 79 78
Additional paid-in capital ................................... 70,497 69,912
Retained earnings--substantially restricted .................. 126,270 128,512
Unrealized loss on securities available for sale, net of tax . (1,128) (3,449)
Minimum pension liability adjustment, net of tax ............. (328) (509)
------------ ------------
Total stockholders' equity .................................. 195,390 194,544
------------ ------------
Total ...................................................... $3,991,488 $3,718,658
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
OC-F-91
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Interest on loans .......................................... $215,147 $189,984 $191,532
Interest on mortgage-backed securities ..................... 60,024 22,729 21,963
Interest and dividends on investments and FHLB stock ...... 10,685 6,735 4,850
---------- ---------- ----------
Total ..................................................... 285,856 219,448 218,345
---------- ---------- ----------
Interest expense:
Interest on customer deposits (Note 9) ..................... 135,299 101,411 94,803
Interest on Federal Home Loan Bank advances ................ 23,958 24,915 28,303
Interest on senior notes ................................... 5,703 1,756 --
Interest on other borrowings ............................... 41,882 12,861 9,074
---------- ---------- ----------
Total ..................................................... 206,842 140,943 132,180
---------- ---------- ----------
Net interest income ........................................ 79,014 78,505 86,165
Provision for loan losses (Note 5) .......................... 11,094 17,205 6,583
---------- ---------- ----------
Net interest income after provision for loan losses ....... 67,920 61,300 79,582
---------- ---------- ----------
Noninterest income:
Mortgage banking activities (Note 6):
Gain (loss) on sale of real estate loans .................. (205) 491 4,898
Loan servicing income ..................................... 5,460 4,080 2,621
---------- ---------- ----------
Total ..................................................... 5,255 4,571 7,519
Loan, deposit and other fees ............................... 5,291 5,853 6,773
Income from real estate partnerships ....................... 267 79 953
Other income ............................................... 1,410 171 858
---------- ---------- ----------
Total ..................................................... 12,223 10,674 16,103
---------- ---------- ----------
Noninterest expense:
Compensation and benefits (Notes 2, 14 and 15) ............ 35,518 35,979 36,616
Occupancy and equipment (Note 17) .......................... 13,865 12,953 13,252
Advertising and promotion .................................. 2,094 2,446 1,859
Outside data processing .................................... 4,540 4,065 3,849
Deposit insurance premiums and regulatory assessments ..... 6,811 6,178 5,867
Provision for losses on real estate owned and other (Note
5) ......................................................... 4,874 8,524 7,067
Real estate owned operations, net .......................... 2,138 5,897 6,353
Deferred loan origination costs ............................ (4,497) (7,016) (8,077)
Amortization of excess of cost over fair value of net
assets acquired ........................................... 669 708 709
Other expense (Note 2) ..................................... 12,763 10,368 10,391
---------- ---------- ----------
Total ..................................................... 78,775 80,102 77,886
---------- ---------- ----------
Income (loss) before income taxes .......................... 1,368 (8,128) 17,799
Income tax expense (benefit) (Note 11) ...................... 1,568 (3,400) 7,905
---------- ---------- ----------
Net income (loss) ........................................... $ (200) $ (4,728) $ 9,894
========== ========== ==========
Earnings (loss) per share (Note 1) .......................... $ (0.03) $ (0.60) $ 1.24
========== ========== ==========
Dividends per share ......................................... $ 0.26 $ 0.28 $ 0.15
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
OC-F-92
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
--------------------------------------------------------------------------------
UNREALIZED
RETAINED LOSS ON MINIMUM
EARNINGS SECURITIES PENSION
SUBSTANTIALLY AVAILABLE LIABILITY
ADDITIONAL RESTRICTED FOR SALE, ADJUSTMENT,
COMMON PAID-IN (NOTES 11, 12 NET OF TAX NET OF TAX
STOCK CAPITAL AND 15) (NOTE 4) (NOTE 14) TOTAL
-------- ------------ --------------- ------------ ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31, 1992 $77 $68,824 $126,704 $195,605
Stock option and
restricted stock
activity ............... 1 568 569
Cash dividends ........... (1,166) (1,166)
Unrealized gain on
securities available for
sale, net of tax ....... $ 3,149 3,149
Net income ............... 9,894 9,894
-------- ------------ --------------- ------------ ------------- ----------
Balances, December 31, 1993 78 69,392 135,432 3,149 208,051
Stock option and
restricted stock
activity ............... 520 520
Cash dividends ........... (2,192) (2,192)
Net change in unrealized
loss on securities
available for sale, net
of tax ................. (6,598) (6,598)
Minimum pension liability
adjustment, net of tax . $(509) (509)
Net loss ................. (4,728) (4,728)
-------- ------------ --------------- ------------ ------------- ----------
Balances, December 31, 1994 78 69,912 128,512 (3,449) (509) 194,544
Stock option and
restricted stock
activity ............... 1 585 586
Cash dividends ........... (2,042) (2,042)
Net change in unrealized
loss on securities
available for sale, net
of tax ................. 2,321 2,321
Net change in minimum
pension liability
adjustment, net of tax . 181 181
Net loss ................. (200) (200)
-------- ------------ --------------- ------------ ------------- ----------
Balances, December 31, 1995 $79 $70,497 $126,270 $(1,128) $(328) $195,390
======== ============ =============== ============ ============= ==========
</TABLE>
See Notes to Consolidated Financial Statements.
OC-F-93
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ (200) $ (4,728) $ 9,894
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of premises and equipment ..... 3,206 3,226 3,043
Amortization of excess of cost over fair value of net assets
acquired .................................................... 669 708 709
Provision for losses, net .................................... 15,968 25,729 13,650
Change in deferred income taxes .............................. 4,195 (2,660) (5,050)
Increase in interest payable ................................. 16,872 5,356 1,293
Increase in interest receivable .............................. (4,802) (1,996) (142)
Dividend income on FHLB stock ................................ (1,530) (1,322) (737)
(Gain) loss on sale of real estate loans, net ................ 205 (491) (4,898)
Amortization of deferred loan fees ........................... (1,778) (2,667) (3,271)
Proceeds from sales of loans originated for sale ............ 46,623 130,824 434,242
Originations of loans held for sale .......................... (58,402) (153,709) (472,847)
Net change in other assets/liabilities ....................... 8,587 (21,137) 2,226
Increase (decrease) in income taxes payable .................. (1,126) (1,040) 4,476
----------- ----------- -----------
Net cash provided by (used in) operating activities .......... 28,487 (23,907) (17,412)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments received on mortgage-backed securities
available for sale ........................................... 8,467 37,233 --
Principal payments received on mortgage-backed securities held
for investment ............................................... 73,668 31,669 77,610
Purchases of mortgage-backed securities held for investment .. (104,472) (4,074) (10,053)
Maturities of investment securities ........................... -- -- 13,270
Purchases of investment securities ............................ -- -- (6,040)
Principal payments received on loans receivable held for
investment ................................................... 245,990 367,463 385,560
Originations of loans held for investment ..................... (469,761) (795,217) (693,488)
Loans purchased ............................................... (12,386) (1,307) (542)
Proceeds from redemption of FHLB stock ........................ -- -- 2,103
Purchases of FHLB stock ....................................... -- (622) (1,118)
Sales of premises and equipment ............................... 214 43 92
Purchases of premises and equipment ........................... (2,373) (2,791) (2,924)
Sales of real estate .......................................... 24,900 44,923 58,536
Investment in and acquisition of real estate .................. (1,771) (1,738) (3,512)
Other, net .................................................... 754 (3,861) 254
----------- ----------- -----------
Net cash used in investing activities ......................... (236,770) (328,279) (180,252)
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
OC-F-94
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits ................. $ 286,369 $(169,676) $ (92,625)
Certificate account deposits ............................... 458,162 896,549 538,089
Certificate account withdrawals ............................ (533,276) (544,995) (416,881)
Increase (decrease) in borrowings with maturities of three
months or less ............................................ (20,848) 53,397 57,941
Proceeds from long-term borrowings ......................... 1,047,876 809,710 624,368
Principal payments on long-term borrowings ................. (998,289) (688,979) (494,194)
Proceeds from issuance of common stock ..................... 376 404 488
Payment of dividends ....................................... (2,042) (2,192) (1,166)
----------- ------------ -----------
Net cash provided by financing activities .................. 238,328 354,218 216,020
----------- ------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .................. 30,045 2,032 18,356
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............. 165,206 163,174 144,818
----------- ------------ -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR ................... $ 195,251 $ 165,206 $ 163,174
=========== ============ ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest on customer deposits .......................... $ 135,557 $ 100,626 $ 95,663
Interest on borrowings ................................. 54,542 32,402 34,061
Income taxes ........................................... -- 466 8,479
Non-cash investing activities:
Transfers of loans to real estate owned ................ 39,242 58,295 43,809
Loans converted to mortgage-backed securities .......... 499,657 91,958 142,136
Mortgage-backed securities transferred to
available-for-sale portfolio ......................... -- -- 379,135
Mortgage-backed securities transferred from
available-for-sale portfolio to held-for-investment
portfolio ............................................ -- 258,344 --
Loans transferred from held-for-sale portfolio to
held-for-investment portfolio ........................ 11,013 77,195 --
</TABLE>
See Notes to Consolidated Financial Statements.
OC-F-95
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
SFFed Corp. ("SFFed") and its wholly owned subsidiary; San Francisco Federal
Savings and Loan Association (the "Association") and its subsidiaries;
Franciscan Financial Corporation, Development Credit Corporation, Capital
Conveyance Company and Capital CMO Services and the subsidiary of Franciscan
Financial Corporation; San Francisco Auxiliary Corporation. All significant
intercompany transactions have been eliminated.
PRIMARY BUSINESS ACTIVITIES
SFFed's principal business is attracting deposits from the general public
and using such funds, along with borrowings from various other sources, to
originate real estate loans secured by deeds of trust, other loans and to
make short-term investments. SFFed's revenues are primarily interest received
from its loan portfolio, investment securities and mortgage-backed securities
and fees related to originating and servicing loans.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, SFFed considers all highly
liquid investments purchased with an initial maturity of three months or less
to be cash equivalents.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
SFFed enters into purchases of securities under agreements to resell
(repurchase agreements). The amounts advanced under these agreements
represent short-term loans.
MORTGAGE-BACKED SECURITIES ("MBS")
SFFed has converted certain qualifying real estate loans in its portfolio
to Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA") MBS. Additionally, SFFed has purchased MBS
through established securities dealers. Effective December 31, 1993 SFFed
adopted Statement of Financial Accounting Standards No. 115 Accounting for
Certain Investments in Debt and Equity Securities ("SFAS 115"). In accordance
with the provision of SFAS 115, SFFed has identified MBS as either held for
investment or available for sale. SFFed does not have any trading securities.
Premiums and discounts on purchased MBS are amortized or accreted over the
expected life of the underlying mortgages using the interest method.
MBS HELD FOR INVESTMENT
SFFed has the positive intent and ability to hold these MBS to maturity.
These MBS are reported at cost, net of any applicable premium or discount.
Transfers of MBS available-for-sale to MBS held-for-investment portfolio are
recorded at fair value. The related net unrealized holding gains or losses,
net of applicable income taxes, at the date of transfer are reported as a
separate component of stockholders' equity and amortized over the remaining
contractual life of these securities using the interest method.
MBS AVAILABLE FOR SALE
These MBS are reported at their aggregate fair value. Net unrealized gains
and losses are excluded from earnings and reported, net of applicable income
taxes, as a separate component of stockholders'
OC-F-96
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
equity until realized. Gains and losses from the sale of MBS available for
sale are determined using the specific identification method. Any permanent
decline in the fair value of individual securities held for investment and
available for sale below their cost would be recognized through a write-down
of the individual securities to their fair value by a charge to earnings as a
realized loss.
LOANS HELD FOR SALE
During the period of origination, real estate loans are designated as held
either for sale or investment purposes. Loans held for sale are carried at
the lower of cost or estimated market value, determined on an aggregate
basis. Transfers of loans held for sale to the held-for-investment portfolio
are recorded at the lower of cost or market value on the transfer date.
Net unrealized losses are recognized through a valuation allowance by
charges to income.
IMPAIRED AND NON-PERFORMING LOANS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114"), in May 1993 and Statement of Financial
Standards No. 118, Accounting for Creditors for Impairment of a Loan-Income
Recognition and Disclosures ("SFAS 118") (an amendment of SFAS 114), in
October 1994. SFFed adopted SFAS 114 and SFAS 118 effective January 1, 1993.
SFFed, in accordance with the methods prescribed under SFAS 114, considers a
loan 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. 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 loan losses. SFFed has defined residential 1-4 loans and
consumer loans as homogenous loans. Homogenous loans that have had a
modification of terms are individually reviewed to determine if they meet the
definition of a troubled debt restructuring. SFFed's loans are secured
primarily by real estate and therefore, measurement of impairment is based
upon the fair value of the property collateralizing the loan. Where
impairment is determined to be permanent, a charge-off is recorded; where
impairment may be temporary, an allowance is established. SFFed, before the
adoption of SFAS 114, measured loan impairment with the methods prescribed in
this pronouncement. As a result, no additional loss provisions were required
by adoption of SFAS 114.
All loans designated by SFFed as "impaired" are either placed on
non-accrual status or are designated as restructured and are included with
those loans reported as non-performing. SFFed's non-performing loans consist
of loans on which SFFed has ceased the accrual of interest ("non-accrual
loans") and loans on which various concessions have 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 SFFed'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 or the risk of default is probable.
ALLOWANCE FOR LOAN LOSSES
SFFed maintains a loan monitoring system which provides a means for the
timely identification of impaired loans and to permit the evaluation of the
adequacy of the allowance for losses. SFFed has established valuation
allowances for estimated losses on specific loans ("specific allowances") and
for the
OC-F-97
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
inherent risk in the loan portfolio which has yet to be specifically
identified ("general allowances"). Specific allowances are provided when a
decline in the value of an impaired loan is identified, based upon the excess
of the outstanding loan amount over the fair value of the related collateral
plus holding and selling costs. General allowances are established based upon
the inherent risk in the loan portfolio that has not been specifically
identified. In conjunction with a review of the loan portfolio, the allowance
for loan losses is evaluated quarterly and maintained at a level believed
adequate by management to absorb estimated probable losses. In evaluating the
general allowance for loan losses, management considers various factors
including historical loss experience, the level and trend of delinquent real
estate conditions, and the composition of the loan portfolio. Losses incurred
upon initial acquisition of real estate owned through foreclosure are charged
to the allowance for loan losses.
While management uses currently available information in evaluating and
adjusting the allowance for loan losses, additions to the allowance may be
required because of changes in future economic, real estate and other
conditions beyond SFFed's control.
INTEREST ON LOANS
Interest on loans is credited to income when earned. Interest is not
recognized on loans that are considered to be uncollectible or in the process
of foreclosure. In general, loans are placed on non-accrual status when they
become 90 days delinquent and a reserve is established for previously accrued
but uncollected interest on such loans. Interest income received on
non-accrual loans is recognized during the year using the cash basis method
of income recognition.
LOAN ORIGINATION FEES
SFFed charges fees for originating loans. These fees, net of certain
related direct loan origination costs, are recognized as an adjustment of the
loan's yield over the contractual life of the loan using the interest method,
which results in a constant rate of return. When a loan is paid-off or sold,
the unamortized balance of any related fees and costs is recognized as
income. Other loan fees and charges representing service costs are reported
in income when collected or earned.
SALES OF LOANS
Gains or losses resulting from sales of loans or interests in loans are
recorded at the time of sale and are determined by the difference between the
net sales proceeds and the carrying value of the assets sold. When the right
to service the loans is retained, a gain or loss is recognized based upon the
net present value of expected amounts to be received or paid resulting from
the difference between the contractual interest rates received from the
borrowers and the rate paid to the buyer, taking into account estimated
prepayments on such loans. Excluded from the net present value portion of the
gain or loss is an amount equal to the present value of a normal servicing
fee. The net asset resulting from the present value computation, representing
deferred revenue or expense, is amortized to operations over the estimated
remaining life of the loan using a method that approximates the interest
method. The balance of deferred revenue and expense has been adjusted as
necessary for loan prepayments in excess of, or below, estimated prepayments
(See Note 6). Any loans held for sale by SFFed are carried at the lower of
cost or market.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation of office property and equipment is computed
using the straight-line method over the
OC-F-98
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
estimated useful lives of the various classes of assets. Amortization of
leasehold improvements is provided for using the straight-line method over
the remaining term of the lease or the estimated useful life of the asset,
whichever is less. Maintenance and repairs are charged to expense and
improvements are capitalized.
REAL ESTATE OWNED
Real estate acquired in settlement of loans is initially recorded at the
lower of the unpaid loan balance or fair value at the date acquired.
Subsequent adjustments, if any, are made when the carrying value exceeds
estimated fair value. Costs related to the development of such properties are
capitalized and holding costs are charged to expense. Real estate acquired
for sale or development is carried at the lower of cost or estimated net
realizable value. The carrying value of this real estate includes capitalized
development and construction costs. The carrying value is reviewed
periodically and adjusted when it exceeds net realizable value. Interest is
capitalized on funds disbursed during the development and construction period
for real estate projects.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
Goodwill is stated net of accumulated amortization and is being amortized
using the straight-line method over periods ranging from 5 to 25 years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
SFFed enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements
are treated as financing arrangements, and the obligations to repurchase
securities sold are reflected as a liability in the consolidated statements
of financial condition. The securities underlying the agreements remain in
the asset accounts.
TAXES ON INCOME
SFFed accounts for income taxes in accordance with the provisions of the
Statement of Financial Accounting Standards No. 109 Accounting for Income
Taxes ("SFAS 109"). SFAS 109 requires the use of an asset and liability
approach whereby deferred income taxes are computed by applying enacted tax
laws and rates applicable to future periods to the temporary differences
between the tax bases of assets and liabilities and their carrying values for
financial reporting purposes. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that
includes the enactment date. Future tax benefits attributable to temporary
differences are recognized to the extent the realization of such benefits is
more likely than not.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares
outstanding (including the dilutive effect of unexercised stock options):
7,855,919, 7,827,665 and 7,956,090 for 1995, 1994 and 1993, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued several
Statements of Financial Accounting Standards, ("SFAS's") which are described
below. SFFed has not assessed the impact of these Statements on its financial
position or its result of operations because of SFFed's acquisition by First
Nationwide Bank, A Federal Savings Bank (see Note 2).
OC-F-99
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
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"), was issued in March 1995. The Statement addresses the
accounting for the impairment of long-lived assets, such as premises,
furniture and equipment, certain identifiable intangibles and goodwill
related to those assets. Long-lived assets and certain identifiable
intangibles are to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized when the sum of the future cash
flows (undiscounted and without interest charges expected from the use of the
asset and its eventual disposition) is less than the carrying amount of the
asset. The Statement also requires that long-lived assets and identifiable
intangibles, except for assets of a discontinued operation held for disposal,
be accounted for at the lower of cost or fair value less cost to sell. SFAS
121 is effective for financial statements for periods beginning after
December 15, 1995.
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
Accounting for Mortgage Servicing Rights ("SFAS 122"). SFAS 122 requires that
an enterprise that acquires servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes these mortgage loans
with servicing rights retained should allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. SFAS 122 is effective
for financial statements for periods beginning after December 15, 1995.
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), was
issued in October 1995. This Statement prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock and stock appreciation rights. The Statement
defines a "fair value based method" of accounting for employee stock options
and encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation for those plans using the "intrinsic value
based method" under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("Opinion No. 25").
Under the fair value based method, compensation cost is measured at the
grant date of the option based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date over
the amount an employee must pay to acquire the stock. Under Opinion No. 25,
no compensation cost is recognized.
SFAS 123 requires that an employer's financial statements include certain
disclosures about stock-based compensation agreements regardless of the
method used to account for them. An employer that continues to apply the
accounting provisions of Opinion No. 25 will disclose pro forma amounts that
reflect the difference between compensation cost, if any, included in results
of operations and the related cost measured by the fair value based method,
including tax effects, that would have been recognized in the statement of
operations if the fair value based method had been used. SFAS 123 is
effective for transactions entered into after December 15, 1995.
USE OF FINANCIAL ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
OC-F-100
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
RECLASSIFICATIONS
Certain of the 1994 and 1993 consolidated financial statement amounts have
been reclassified to conform to the 1995 presentation.
NOTE 2 -- ACQUISITION BY FIRST NATIONWIDE BANK
On August 27, 1995, SFFed entered into an Agreement and Plan of Merger
(the "Merger Agreement") with First Nationwide Bank, A Federal Savings Bank
("First Nationwide"), pursuant to which SFFed was acquired.
The acquisition by and merger into First Nationwide was consummated on
February 1, 1996. Under the Merger Agreement, holders of SFFed common stock
outstanding at the effective time of the merger (other than shares for which
dissenter's rights were perfected, shares held by First Nationwide and shares
held as treasury stock) received $32 per share. The holders of options on the
common stock of SFFed received for each share subject to an option the
difference between $32 and the applicable per share option price. The
aggregate consideration paid by First Nationwide under the Merger Agreement
was approximately $264,000,000. In connection with the acquisition by First
Nationwide, at December 31, 1995, SFFed accrued approximately $9,600,000 of
investment banker and legal fees, contract termination costs, severance and
other employee related costs.
NOTE 3 -- CASH AND INVESTMENTS
SFFed's banking depositories apply an imputed interest credit to balances
left on deposit which is used as an offset to charges for banking services
rendered. The Association is required by the Federal Reserve System to
maintain noninterest-bearing cash balances against some of its customer
certificate and transaction deposit accounts. The required reserves averaged
$3,016,000 during the year ended December 31, 1995. SFFed does not maintain
compensating balances with banks.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The following is a summary of these securities:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at end of period, comprised of mortgage-backed
securities ..................................................... $165,000 $112,000
========== ==========
Average balance during each year ................................ $149,412 $102,983
Maximum balance at any month end ................................ 175,000 138,000
Weighted average interest rate .................................. 6.12% 6.12%
Weighted average days to maturity ............................... 4 4
</TABLE>
These agreements are collateralized by mortgage-backed securities and
loans. At December 31, 1995 and 1994, all agreements to resell securities
were for securities identical to those purchased and were executed with five
primary dealers. The related collateral was held by the dealers arranging the
transactions.
FEDERAL HOME LOAN BANK STOCK
At December 31, 1995 and 1994, this investment consisted of 315,795 and
300,492 shares, respectively, of Federal Home Loan Bank of San Francisco
(FHLB) $100 par value capital stock at cost. The amount of stock owned meets
the last annual regulatory determination. The FHLB capital stock is pledged
to secure borrowings from the FHLB.
OC-F-101
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 4 -- MORTGAGE-BACKED SECURITIES [MBS]
SFFed has classified a portion of its MBS portfolio as "available for
sale" as of December 31, 1995 and 1994. At December 31, 1995 and 1994 the
available-for-sale MBS portfolio is reported in the accompanying Consolidated
Statements of Financial Condition at fair value. The held-for-investment MBS
portfolio is reported at amortized cost. At December 31, 1995, SFFed
reflected an unrealized loss on the MBS available for sale portfolio, net of
tax, of $1,128,000 as a decrease to stockholders' equity. At December 31,
1994 the unrealized loss on the MBS portfolio of $3,449,000, net of tax.
The carrying amount of MBS and their approximate fair values at December
31, 1995 and 1994 were as follows:
MBS available for sale:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Adjustable rate . $46,668 $ 533 -- $47,201
Fixed rate ...... 25,328 539 $ (224) 25,643
----------- ------------ ------------ ---------
Total ........ $71,996 $1,072 $ (224) $72,844
=========== ============ ============ =========
Weighted average
interest rate . 6.53%
===========
DECEMBER 31, 1994
Adjustable rate . $50,242 -- $(1,662) $48,580
Fixed Rate ...... 30,218 $ 127 (1,467) 28,878
----------- ------------ ------------ ---------
$80,460 $ 127 $(3,129) $77,458
=========== ============ ============ =========
Weighted average
interest rate . 6.17%
===========
</TABLE>
MBS held for investment are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Adjustable rate ................ $776,397 $ 9,220 $ (79) $785,538
Fixed rate ..................... 83,157 3,780 -- 86,937
----------- ------------ ------------ ----------
Total .......................... $859,554 $13,000 $ (79) $872,475
=========== ============ ============ ==========
Weighted average interest rate 7.32%
===========
DECEMBER 31, 1994
Adjustable rate ................ $324,757 -- $(7,136) $317,621
Fixed rate ..................... 5,821 $ 23 (208) 5,636
----------- ------------ ------------ ----------
$330,578 $ 23 $(7,344) $323,257
=========== ============ ============ ==========
Weighted average interest rate 5.92%
===========
</TABLE>
OC-F-102
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The scheduled maturities of MBS available for sale and MBS held for
investment at December 31, 1995, were as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD FOR INVESTMENT
---------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due from one year to five years $12,158 $11,934 -- --
Due from five years to ten years 894 937 -- --
Due after ten years ............. 58,944 59,973 $859,554 $872,475
----------- --------- ----------- ----------
Total ....................... $71,996 $72,844 $859,554 $872,475
=========== ========= =========== ==========
</TABLE>
The amortized cost of SFFed's MBS portfolio, pledged as collateral in
conjunction with various borrowings and transactions, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Collateral for:
Local government agency deposits .......... $ 550 $ 545
Securities sold under agreements (Note 10) 791,665 371,679
FNMA servicing ............................ 4,638 18,599
---------- ----------
Total .................................. $796,853 $390,823
========== ==========
</TABLE>
At December 31, 1995 and 1994, accrued interest receivable on MBS amounted
to $5,836,000 and $2,160,000, respectively.
MBS converted from SFFed originated loans included in the amortized cost
of MBS available for sale and held for investment at December 31, 1995
totalled $36,056,000 and $740,158,000, respectively (December 31, 1994,
$41,285,000 and $284,087,000).
In accordance with the provisions of SFAS 115, the MBS portfolio has been
classified in the accompanying Consolidated Statements of Financial Condition
according to management's intent. At June 30, 1994, as a result of a revision
of its long-term business plans, SFFed transferred $258,344,000 of its MBS
from the available-for-sale portfolio to its held-for-investment portfolio.
The unrealized holding loss at the date of transfer, in the amount of
$3,055,000, is being amortized as a yield adjustment over the remaining life
of these MBS. At December 31, 1995, the unrealized holding loss related to
this transfer is reflected as a $1,620,000, net of tax, reduction in
stockholders' equity.
OC-F-103
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 5 -- LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
One-to-four family residential loans .... $1,535,791 $1,764,572
Multi-family residential loans ........... 628,410 648,491
Commercial property loans ................ 465,466 500,106
Construction and improved land loans .... 40,230 54,489
------------ ------------
Total ................................ 2,669,897 2,967,658
Consumer loans ........................... 94,749 91,928
Loans secured by savings accounts ....... 7,528 6,689
------------ ------------
Total ................................ 2,772,174 3,066,275
Less:
Undisbursed loan funds .................. (16,468) (12,557)
Deferred loan fees, net ................. (1,160) (4,292)
Discounts and premiums, net ............. (955) (1,093)
Allowance for loan losses ............... (38,603) (36,829)
------------ ------------
Loans receivable held for investment, net $2,714,988 $3,011,504
============ ============
Weighted average interest rate ........... 7.88% 6.90%
============ ============
</TABLE>
The above classifications are net of participation interests in loans sold
and loans serviced for others.
The following is an analysis, by property type, of commercial real estate
loans included above:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Office buildings $225,130 $233,234
Warehouses ....... 93,628 100,813
Shopping centers 17,610 53,970
Motels ........... 20,098 15,958
General purpose . 53,709 24,281
Mobile home parks 9,007 10,449
Other ............ 46,284 61,401
---------- ----------
Total ........ $465,466 $500,106
========== ==========
</TABLE>
OC-F-104
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Certain of SFFed's real estate loans are pledged as collateral for
borrowings from various sources, as summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Collateral for:
FHLB advances (Note 10) ........................ $1,016,450 $1,109,092
Deposits of state and local government agencies 3,502 4,887
------------ ------------
Total ....................................... $1,019,952 $1,113,979
============ ============
</TABLE>
At December 31, 1995 and 1994, accrued interest receivable on loans
amounted to $17,389,000 and $16,184,000, respectively.
Over 99% of SFFed's loan portfolio is secured by property within the state
of California. Additionally, 61% of SFFed's loan portfolio is secured by
property located within the greater San Francisco Bay Area. Accordingly, the
ultimate collectibility of SFFed's loan portfolio is susceptible to changes
in the regional economics and real estate markets within Northern California
and, to a lesser extent, in Southern California.
On occasion, SFFed restructures major loans, generally because of a
borrower's financial difficulties. Interest rate and cash payment concessions
and an extension of a loan's maturity may be granted in such restructurings.
Information concerning impaired loans that were past due for three months
or more or in the process of foreclosure, (nonaccrual loans), and
restructured loans, is summarized as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Balance at year end ................................ $40,976 $44,809 $81,067
Interest foregone .................................. 3,259 3,829 4,362
Restructured loans:
Balance at year end (1) ............................ 4,304 29,639 33,044
Actual interest income recognized .................. 1,123 2,305 2,284
Pro-forma interest income using original loan terms 1,119 2,358 2,387
</TABLE>
- ------------
(1) Ending balances are shown of net of nonaccrual loans. During the second
quarter of 1995, SFFed re-evaluated its policies on restructured loans
and determined that several loans that had been restructured were
current for several years. As such, the December 31, 1995 balance does
not include these loans.
At December 31, 1995, the aggregate investment in loans considered to be
impaired under SFAS 114 was $45,280,000. Included in this amount is
$12,463,000 of impaired loans for which the related allowance for loan losses
was $3,665,000 and $32,817,000 of loans for which no allowance was considered
necessary. The average recorded investment in impaired loans during the year
ended December 31, 1995 was approximately $61,225,000. For the year ended
December 31, 1995, SFFed recognized interest income on those impaired loans
of $1,123,000. Interest income recognized during the year using the cash
basis method of income recognition cannot be practicably determined.
OC-F-105
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
At December 31, 1994, SFFed's aggregate investment in loans considered
impaired under SFAS 114 was $74,448,000. Included in this amount is
$18,069,000 of impaired loans for which the related allowance for loan losses
was $2,430,000 and $56,379,000 of loans for which no allowance was considered
necessary. SFFed recognized approximately $2,305,000 of interest income on
these loans in 1994.
Activity in the allowance for losses on loans, real estate owned and other
transactions is summarized as follows:
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER TOTAL
LOANS LOANS LOANS
------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1992 ..... $ 33,194 $ 717 $ 33,911
Provision for losses (recoveries) 6,279 304 6,583
Charge-offs ...................... (3,290) (603) (3,893)
Recoveries ....................... 25 171 196
------------- ---------- ----------
Balance at December 31, 1993 ..... 36,208 589 36,797
Provision for losses ............. 16,828 377 17,205
Charge-offs ...................... (16,830) (605) (17,435)
Recoveries ....................... 59 203 262
------------- ---------- ----------
Balance at December 31, 1994 ..... 36,265 564 36,829
Provision for losses ............. 10,169 925 11,094
Charge-offs ...................... (8,895) (945) (9,840)
Recoveries ....................... 262 258 520
------------- ---------- ----------
Balance at December 31, 1995 ..... $ 37,801 $ 802 $ 38,603
============= ========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
REAL ESTATE
OWNED OTHER(1) TOTAL
------------- -------- ----------
<S> <C> <C> <C>
Balance at December 31, 1992 ..... $ 6,645 $ 838 $ 41,394
Provision for losses (recoveries) 7,134 (90) 13,627
Charge-offs ...................... (5,975) -- (9,868)
Recoveries ....................... -- -- 196
------------- -------- ----------
Balance at December 31, 1993 ..... 7,804 748 45,349
Provision for losses ............. 8,336 188 25,729
Charge-offs ...................... (4,980) (200) (22,615)
Recoveries ....................... -- -- 262
------------- -------- ----------
Balance at December 31, 1994 ..... 11,160 736 48,725
Provision for losses ............. 3,832 1,042 15,968
Charge-offs ...................... (1,902) (28) (11,770)
Recoveries ....................... -- -- 520
------------- -------- ----------
Balance at December 31, 1995 ..... $13,090 $1,750 $ 53,443
============= ======== ==========
</TABLE>
- ------------
(1) The 1995, 1994 and 1993 provision for losses (recoveries) included
$1,042,000, $188,000 and ($90,000), respectively, related to real
estate development projects.
NOTE 6 -- MORTGAGE BANKING
Loans held for sale are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------------------- --------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Adjustable-rate single-family loans -- -- $3,627 $3,627
Fixed-rate single-family loans ..... $4,393 $4,393 -- --
---------- -------- ---------- --------
Total .............................. $4,393 $4,393 $3,627 $3,627
========== ======== ========== ========
</TABLE>
SFFed services loans for others amounting to $1,829,863,000,
$1,454,344,000 and $1,518,546,000 at December 31, 1995, 1994 and 1993,
respectively, and are not included in the accompanying Consolidated
Statements of Financial Condition. Income from loan servicing amounted to
$5,460,000, $4,080,000 and $2,621,000 for the years ended December 31, 1995,
1994 and 1993, respectively. Custodial balances maintained in connection with
loans serviced for others were approximately $12,399,000, $8,310,000 and
$31,902,000 at December 31, 1995, 1994 and 1993, respectively.
Activity in the net deferred premiums resulting from sales of loans,
participation interests in loans and securitization of loans when servicing
rights are retained for the three years ended December 31, is summarized as
follows:
OC-F-106
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year ............................. $ 2,803 $ 3,424 $ 5,361
Additions to gain on sale of loans ....................... 12 175 364
Amortization charged to loan servicing income:
Regular ................................................. (1,447) (1,696) (1,826)
(Increase) decrease due to changes in actual and
estimated prepayments ................................... 980 900 (475)
--------- --------- ---------
Balance at end of year ................................... $ 2,348 $ 2,803 $ 3,424
========= ========= =========
</TABLE>
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- ESTIMATED
1995 1994 USEFUL LIVES
---------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land ........................................... $ 4,811 $ 4,811 --
Buildings ...................................... 10,170 10,064 40 years
Leasehold improvements ......................... 14,717 13,754 Life of lease
Furniture and equipment ........................ 22,347 23,447 5-20 years
Construction in progress ....................... 57 131 --
---------- -------- ---------------
Total ...................................... 52,102 52,207
Less accumulated depreciation and amortization (30,203) 29,261
---------- --------
Net ........................................ $ 21,899 $22,946
========== ========
</TABLE>
Depreciation and amortization expense amounted to $3,206,000, $3,226,000
and $3,043,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
NOTE 8 -- REAL ESTATE OWNED
Real estate owned is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate acquired through foreclosure and held for sale or development $ 45,494 $ 36,944
Less allowance for losses (Note 5) ....................................... (13,090) (11,160)
---------- ----------
Net .................................................................. $ 32,404 $ 25,784
========== ==========
</TABLE>
Real estate acquired by foreclosure during 1995 and 1994, as adjusted to
the lower of cost or fair value, amounted to $34,580,000 and $47,436,000,
respectively.
OC-F-107
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 9 -- CUSTOMER DEPOSITS
Customer deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994
---------------------- ----------------------
AMOUNT % AMOUNT %
------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Passbook accounts:
0.01 to 4.50% ........................ $ 572,848 21.3% $ 76,250 3.1%
NOW and money market deposit accounts:
0.01 to 6.00% ........................ 279,867 10.4 490,153 19.7
------------ -------- ------------ --------
Demand deposits ....................... 852,715 31.7 566,403 22.8
------------ -------- ------------ --------
Certificate accounts:
Less than 3.00% ...................... 15,022 0.6 33,858 1.4
3.00 to 4.99% ........................ 132,192 4.9 863,911 34.8
5.00 to 6.99% ........................ 1,548,151 57.4 921,283 37.1
7.00 to 8.99% ........................ 144,910 5.4 95,133 3.8
9.00 to 10.99% ....................... 196 -- 1,350 0.1
11.00% and above ..................... 57 -- 50 --
------------ -------- ------------ --------
Total certificate accounts ............ 1,840,528 68.3 1,915,585 77.2
------------ -------- ------------ --------
Total customer deposits ............... $2,693,243 100.0% $2,481,988 100.0%
============ ======== ============ ========
Weighted average interest rate ....... 5.13% 4.61%
======== ========
</TABLE>
Noninterest bearing deposits were $29,061,000 and $23,335,000 at December
31, 1995 and 1994, respectively.
A summary of certificate accounts by maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994
---------------------- ---------------------
AMOUNT % AMOUNT %
------------ -------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maturity within one year $1,108,847 60.3% $1,316,580 68.7%
One to two years ......... 243,006 13.2 334,842 17.5
Two to three years ....... 127,333 6.9 156,595 8.2
Three or more years ..... 361,342 19.6 107,568 5.6
------------ -------- ------------ -------
Total ................ $1,840,528 100.0% $1,915,585 100.0%
============ ======== ============ =======
</TABLE>
Customer deposits include approximately $387,385,000 and $373,347,000 of
accounts with balances in excess of $100,000 at December 31, 1995 and 1994,
respectively.
At December 31, 1995 and 1994, accrued interest payable on customer
deposits, included in other liabilities in the accompanying Statements of
Financial Condition, was $363,000 and $491,000, respectively.
OC-F-108
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
A tabulation of interest expense on customer deposits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Demand deposits ...... $ 29,580 $ 14,592 $19,590
Certificate accounts 105,719 86,819 75,213
---------- ---------- ---------
$135,299 $101,411 $94,803
========== ========== =========
</TABLE>
NOTE 10 -- BORROWINGS
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
SFFed enters into agreements with broker-dealers and other financial
institutions to repurchase securities previously sold. These agreements are
effectively short-term borrowings secured by MBS (see Note 4). Securities
sold under the terms of these agreements are held by the securities dealers
who arrange the transactions.
Information related to securities sold under agreements to repurchase is
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at end of period ......... $713,362 $347,679
========== ==========
Average balance during each year $658,953 $261,368
Maximum balance at any month end 871,722 347,679
Weighted average interest rate .. 6.14% 5.74%
</TABLE>
At December 31, 1995, $659,442,000 of SFFed's agreements mature in one
year or less, and $53,920,000 mature in 1998.
ADVANCES FROM THE FEDERAL HOME LOAN BANK OF SAN FRANCISCO
Each Federal Home Loan Bank ("FHLB") is authorized to make advances to its
member associations, subject to such regulations and limitations that the
Federal Housing Finance Board may prescribe. SFFed's borrowings from the FHLB
consist of notes payable with interest rates ranging from 4.11% to 9.10%. The
maturity and weighted average interest rate of the advances outstanding at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
YEAR ENDING DECEMBER 31: THOUSANDS)
- -------------------------------
<S> <C>
1996 ........................... $266,969
1997 ........................... 7,500
1998 ........................... --
1999 ........................... --
2000 ........................... --
Thereafter ..................... 483
--------------------
$274,952
====================
Weighted average interest rate 6.90%
====================
</TABLE>
OC-F-109
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
At December 31, 1995 and 1994, SFFed had pledged certain real estate
loans (see Note 5), mortgage-backed securities (see Note 4) and SFFed's
investment in stock of the FHLB of San Francisco (see Note 3) to secure FHLB
advances.
MORTGAGE-BACKED BONDS
In September 1994, SFFed retired the collateralized mortgage obligation at
face value and incurred a loss of $347,000.
SENIOR NOTES
In September 1994, SFFed issued $50,000,000 of its senior notes due
September 1, 2004. The notes are reported net of unamortized issuance costs.
The notes bear interest at the rate of 11.20% payable semi-annually on March
1 and September 1. Under the terms of the notes, SFFed may not make any
prepayments of principal, except that in the event of a change in control of
SFFed, SFFed shall offer to prepay the notes in full. SFFed may contribute up
to $34,000,000 from the proceeds of the note sale to the Association in the
form of equity capital and by December 31, 1995 SFFed had so contributed
$30,000,000.
The note agreement contains certain restrictive covenants which, among
other things, (1) require SFFed to maintain certain capital levels, (2)
restrict the amount of funds available for payment of dividends on SFFed's
stock or for the repurchase of its stock and (3) establish a maximum ratio of
non-performing assets (as defined) to consolidated total assets. If an event
of default occurs, including failure to comply with any restrictive covenant,
the notes may become immediately payable in full. SFFed was in compliance
with all terms of the note agreement at December 31, 1995.
NOTE 11 -- TAXES ON INCOME
The provision (benefit) for taxes on income in the accompanying
Consolidated Statements of Operations is comprised of the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal income tax ....... $ (760) $ (357) $ 9,338
California franchise tax (15) (383) 3,617
-------- ---------- ---------
Total ................. (775) (740) 12,955
-------- ---------- ---------
Deferred:
Federal income tax ....... 873 (1,748) (3,453)
California franchise tax 1,470 (912) (1,597)
-------- ---------- ---------
Total ................. 2,343 (2,660) (5,050)
-------- ---------- ---------
Total:
Federal income tax ....... 113 (2,105) 5,885
California franchise tax 1,455 (1,295) 2,020
-------- ---------- ---------
Total ................. $1,568 $(3,400) $ 7,905
======== ========== =========
</TABLE>
OC-F-110
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The liability for taxes on income at December 31, 1995 and 1994 in the
accompanying Consolidated Statements of Financial Condition includes a net
deferred tax liability totalling $1.9 million for 1995 and a net deferred tax
asset totalling $2.3 million for 1994, that have been provided for the
temporary differences between the tax bases and financial statement carrying
amounts of assets and liabilities. Tax benefits attributable to temporary
differences are recognized to the extent that realization of such benefits is
more likely than not. The major sources of these temporary differences
comprising SFFed's net deferred tax liability and net deferred tax (asset) at
December 31, 1995 and 1994, respectively, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Loan fee income and discounts deferred for tax
purposes ..................................... $ 18,508 $ 17,243
FHLB stock dividends ........................... 3,244 2,311
Deferred servicing-related premiums on loans ... 933 999
Tax basis versus financial statement basis
depreciation expense ......................... 2,701 2,846
Investments in partnerships .................... 54 179
Other .......................................... -- 682
---------- ----------
Gross deferred tax liabilities .................. 25,440 24,260
---------- ----------
GROSS DEFERRED TAX ASSETS:
Federal tax basis loss carryovers .............. (12) (648)
Deferred interest on restructured loans ........ (605) (692)
Accrued pension plan contributions ............. (6,160) (4,380)
Book basis loss reserves ....................... (13,349) (17,052)
Minimum pension liability adjustment ........... (241) (376)
CMO investment trust ........................... (972) (887)
Unrealized loss on securities available for sale (709) (2,507)
Contract accruals .............................. (1,373) --
Other .......................................... (106) --
---------- ----------
Gross deferred tax assets ....................... (23,527) (26,542)
---------- ----------
Net deferred tax liability (asset) .............. $ 1,913 $ (2,282)
========== ==========
</TABLE>
OC-F-111
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The differences between the federal statutory income tax rate and the
effective rate of SFFed's tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- --------- -------
<S> <C> <C> <C>
Federal statutory tax rate ...................... 35.0% (35.0)% 35.0%
Increase (reduction) in tax rate resulting from:
California franchise tax, net of federal
benefit ..................................... 7.5 (7.5) 7.4
Amortization and write-down of intangible asset 20.9 3.1 1.4
Change in base year tax bad debt reserve ...... -- (5.0) (3.4)
Deferred tax adjustment resulting from tax rate
change ...................................... -- -- 1.1
Capitalized merger costs ...................... 84.9 -- --
Interest on officer's life insurance .......... (14.6) -- --
California enterprise zone deduction .......... (9.0) -- --
Other ......................................... (10.1) 2.6 2.9
-------- --------- -------
Effective tax rate .............................. 114.6% (41.8)% 44.4%
======== ========= =======
</TABLE>
Under the Internal Revenue Code, the Association in determining taxable
income is allowed a special bad debt deduction based on a percentage of
taxable income (8% for 1995, 1994 and 1993) or on specific experience
formulas. The Association used the experience method in 1995, 1994 and 1993
in determining the federal income tax bad debt deduction for tax return
purposes for each respective year.
A deferred tax liability has not been recognized for the amount of the
Association's tax bad debt reserves that arose in tax years beginning before
December 31, 1987. These reserves amounted to approximately $15.9 million at
both December 31, 1995 and 1994. The amount of the unrecognized deferred tax
liability on such reserves at both December 31, 1995 and 1994 was
approximately $5.6 million. This deferred tax liability could be recognized
if, in the future, (1) that portion of the Association's retained earnings
represented by these reserves is used for purposes other than to absorb
losses from bad debts, including dividends or distributions in liquidation,
(2) the Association fails to meet the definition of a "qualified savings
institution," or (3) there is a change in the federal tax law.
During 1994 the Internal Revenue Service (IRS) completed its examination
of SFFed's tax returns for the years 1989 and 1990. The IRS had previously
completed its examination of SFFed's tax returns for 1987 and 1988. As a
result of these examinations the IRS has proposed adjustments, primarily
related to timing differences as to the recognition of income and expense for
tax return purposes. The most significant proposed adjustment relates to
deferred loan fee income. SFFed filed a formal protest with the IRS in 1994
contesting the results of the audit of 1989 and 1990 (SFFed had previously
filed a protest with regards to the results of 1987 and 1988 examinations).
Taxes associated with the proposed adjustments which are being protested
amount to approximately $23.5 million. SFFed believes that the income tax
returns are substantially correct as originally filed. SFFed has established
a deferred tax liability in prior periods for substantially all the items
included in the IRS proposed adjustments. Accordingly, SFFed's exposure is
limited to interest on any tax deficiency that may finally be assessed. SFFed
believes that any additional tax and interest thereon which may be due will
not have a materially adverse effect on the consolidated financial position
or results of operations of SFFed.
OC-F-112
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 12 -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
Office of Thrift Supervision (OTS) regulations issued pursuant to the
Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA)
specify minimum tangible, core and risk-based capital requirements for thrift
institutions. The amount of the Association's net worth included in its
minimum regulatory capital requirements is not available for the payment of
dividends and may only be used to cover any future losses. Various
adjustments are required to be made to stockholder's equity and total assets
for computing these capital ratios, depending on an institution's capital and
asset structure (see the following table). For purposes of computing the
risk-based capital requirement, the regulations assign a degree of credit
risk to each of a thrift's assets and off-balance sheet liabilities, ranging
from zero to 100%.
Under Section 38 of the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), federal banking authorities are required to take prompt
corrective action against undercapitalized financial institutions, imposing a
series of increasing constraints on the operations of such institutions,
depending on the level of their undercapitalization. There are five capital
levels specified by FDICIA, ranging from well capitalized to critically
undercapitalized. OTS regulations set forth the minimum capital ratios for
each of these levels. Based upon qualitative judgments made during its most
recent examination of an institution, the OTS may downgrade an institution's
capital level by one step (e.g., a well capitalized institution can be
reclassified as adequately capitalized). Under these regulations, the
Association is deemed to be well capitalized at December 31, 1995.
The Association's regulatory capital position at December 31, 1995 and
1994 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- --------------------------
TANGIBLE, TANGIBLE,
CORE, CORE,
TIER 1 TOTAL TIER 1 TOTAL
RISK-BASED RISK-BASED RISK-BASED RISK-BASED
CAPITAL (1) CAPITAL CAPITAL (1) CAPITAL
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital per Association financial statements ..... $231,966 $231,966 $219,225 $219,225
Adjustments for regulatory capital purposes:
Goodwill (2) ..................................... (8,054) (8,054) (8,722) (8,722)
Investment in nonincludable subsidiaries (2) .... (8,924) (8,924) (8,205) (8,205)
Unrealized loss on securities available for sale,
net of tax ...................................... 1,128 1,128 3,449 3,449
General valuation allowances ...................... -- 27,829 -- 26,771
------------ ------------ ------------ ------------
Regulatory capital .............................. $216,116 $243,945 $205,747 $232,518
============ ============ ============ ============
</TABLE>
- ------------
(1) For the Association, there are no differences in these regulatory
capital computations.
(2) Also deducted from total assets for regulatory test purposes.
OC-F-113
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
ACTUAL MINIMUM
DECEMBER 31, 1995 REQUIREMENT
------------------- -------------------
CAPITAL RATIO CAPITAL RATIO
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIRREA Capital Standards:
Tangible ................................... $216,116 5.43% $ 59,717 1.50%
Core (leverage) ............................ 216,116 5.43 199,433 3.00
Risk-based ................................. 243,945 10.92 178,720 8.00
FDICIA Capital Standards (well capitalized):
Leverage ................................... $216,116 5.43% $199,056 5.00%
Tier 1 risk-based .......................... 216,116 9.67 134,041 6.00
Total risk-based ........................... 243,945 10.92 223,401 10.00
</TABLE>
<TABLE>
<CAPTION>
ACTUAL MINIMUM
DECEMBER 31, 1994 REQUIREMENT
------------------- -------------------
CAPITAL RATIO CAPITAL RATIO
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIRREA Capital Standards:
Tangible .................................. $205,747 5.54% $ 55,666 1.50%
Core (leverage) ........................... 205,747 5.54 111,332 3.00
Risk-based ................................ 232,518 10.84 171,662 8.00
FDICIA Capital Standards (well
capitalized):
Leverage .................................. $205,747 5.54 $185,552 5.00
Tier 1 risk-based ......................... 205,747 9.59 128,746 6.00
Total risk-based .......................... 232,518 10.84 214,577 10.00
</TABLE>
During 1995, SFFed contributed $5,000,000 from the senior note proceeds to
the Association as equity capital. During 1994, SFFed contributed $30,000,000
to the Association as equity capital, including $25,000,000 of the proceeds
from the sale of its senior notes. See Note 10 concerning certain covenants
included in the senior note agreement.
In August 1994, the OTS issued a regulation adding an interest rate risk
component to the risk-based capital requirement for thrifts. Those thrifts
that have an above normal interest rate risk exposure will be subject to take
a deduction from the total capital available in computing their risk-based
capital requirement. The regulation, which was to become effective as of
December 31, 1994, has been postponed indefinitely, pending the testing of an
OTS appeals process at certain institutions and the impositions of similar
requirements by federal banking agencies. Based upon its December 31, 1995
computations, SFFed does not currently have an above normal interest rate
risk.
At periodic intervals, both the OTS and the FDIC routinely examine the
Association's financial statements as part of their legally prescribed
oversight of the savings and loan industry. Based on these examinations, the
regulators can direct that the Association's financial statements be adjusted
in accordance with their findings. No such adjustments were required by the
regulators as a result of their most recent examination of the Association
which was completed in March 1995.
Pursuant to a quarterly dividend policy initiated in 1993, SFFed paid cash
dividends totalling $2,042,000 or $0.26 per share on its common stock during
1995 compared with $0.28 per share in 1994 and $0.15 per share in 1993.
OC-F-114
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 13 -- PARENT COMPANY FINANCIAL INFORMATION
SFFed and its subsidiary file a consolidated federal income tax return in
which the taxable income or loss of SFFed is combined with that of its
subsidiary. SFFed's share of income tax expense is based on the amount which
would be payable if separate returns were filed. Accordingly, SFFed's equity
in the net income or loss of its subsidiary is excluded from the computation
of the provision for income taxes for financial statement purposes.
SFFed's statements of financial condition and related statements of
operations and cash flows are as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash ..................................................................... $ 234 $ 169
Note receivable from subsidiary .......................................... 11,770 24,170
Tax benefit .............................................................. 3,613 893
Other assets ............................................................. 2,022 1,018
Investment in subsidiary ................................................. 231,966 219,225
---------- ----------
Total ................................................................ $249,605 $245,475
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses ......................................................... $ 4,970 $ 1,773
Senior notes (Note 10) ................................................... 49,245 49,158
Stockholders' equity (see Consolidated Statements of Financial Condition) 195,390 194,544
---------- ----------
Total ................................................................ $249,605 $245,475
========== ==========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME
Dividend from subsidiary .......................................... $ -- $ -- $1,000
Interest on investments ........................................... 1,151 835 238
--------- ---------- --------
1,151 835 1,238
--------- ---------- --------
EXPENSES
General and administrative ........................................ 3,464 576 395
Interest on senior notes .......................................... 5,703 1,756 --
Federal and state income tax benefit .............................. (2,577) (605) (79)
--------- ---------- --------
6,590 1,727 316
--------- ---------- --------
Income (loss) before undistributed net income (loss) of subsidiary (5,439) (892) 922
Undistributed net income (loss) of subsidiary ..................... 5,239 (3,836) 8,972
--------- ---------- --------
Net income (loss) ................................................. $ (200) $(4,728) $9,894
========= ========== ========
</TABLE>
OC-F-115
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ (200) $ (4,728) $ 9,894
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Undistributed net (income) loss of subsidiary ................ (5,239) 3,836 (8,972)
Amortization of organization expense ......................... -- -- 42
Income tax benefit ........................................... (2,577) (605) (79)
Net change in other assets/liabilities ....................... 2,401 705 378
--------- ---------- ---------
Net cash provided by (used in) operating activities ........... (5,615) (792) 1,263
--------- ---------- ---------
Cash flows from investing activities:
Maturities of investment securities ........................... -- -- 13,270
Purchases of investment securities ............................ -- -- (6,040)
Note receivable from subsidiary ............................... 12,400 (16,800) (7,370)
Capital contributions to subsidiary ........................... (5,000) (30,000) --
Other, net .................................................... (54) -- (106)
--------- ---------- ---------
Net cash provided by (used in) investing activities ........... 7,346 (46,800) (246)
--------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ........................ 376 404 488
Proceeds from issuance of senior notes ........................ -- 49,158 --
Payment of dividends .......................................... (2,042) (2,192) (1,166)
--------- ---------- ---------
Net cash provided by (used in) financing activities ........... (1,666) 47,370 (678)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents .......... 65 (222) 339
Cash and cash equivalents at Beginning of Year ................. 169 391 52
--------- ---------- ---------
Cash and cash equivalents at End of Year ....................... $ 234 $ 169 $ 391
========= ========== =========
</TABLE>
NOTE 14 -- PENSION PLANS AND OTHER RETIREMENT BENEFITS
PENSION PLANS
The Association has five noncontributory pension plans: A qualifying
defined benefit plan covering substantially all employees over the age of 21
who meet minimum service requirements, and four nonqualifying supplemental
plans to provide eligible plan members benefits, based on compensation and
length of service, greater than permitted by the terms of the qualified plan.
Assets of the qualified plan are maintained by a trustee and administered by
the Association's advisory committee. Such assets consist primarily of money
market funds, government securities, corporate bonds and common stocks. The
nonqualifying plans have no assets. The Association has voluntary agreed to
make contributions to each Plan sufficient to provide for the payment of
pension benefits to Plan participants.
During the third quarter of 1995, SFFed recorded an approximate $1.7
million reduction of retirement plan expenses reflecting a net curtailment
gain arising from the suspension of SFFed's defined benefit retirement plan.
The gain is net of the costs of enhancing certain retirement benefits under
that plan immediately before it was suspended and net of certain other costs
associated primarily with enhancing benefits provided under SFFed's defined
contribution (401(k)) plan. During the fourth quarter
OC-F-116
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
of 1995, SFFed recorded an approximate $1.4 million increase in retirement
plan expenses arising from the suspension of SFFed's nonqualified
supplemental retirement plans related to the anticipated acquisition of SFFed
as discussed in Note 2.
Net periodic pension cost and its components are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -benefits earned ........ $ 875 $ 1,897 $ 1,810
Interest on projected benefit obligation 2,814 2,756 2,410
Return on plan assets ................... (1,887) (1,531) (1,640)
Other components -net ................. 280 819 602
Curtailment gain -qualified plan ..... (1,689) -- --
Curtailment loss -unqualified plans .. 1,406 -- --
--------- --------- ---------
Net periodic pension cost ............... $ 1,799 $ 3,941 $ 3,182
========= ========= =========
</TABLE>
Assumptions used were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Discount rate .................................. 7.25% 8.00% 6.50%
Rate of increase in compensation levels ....... 5.00 5.00 5.00
Expected long-term rate of return on assets (1) 8.00 8.00 8.50
</TABLE>
OC-F-117
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The following table shows the funded status and amounts recognized in the
Consolidated Statements of Financial Condition:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
----------
(IN THOUSANDS)
<S> <C> <C>
QUALIFIED PLAN -- ASSETS LESS THAN ACCUMULATED BENEFITS
Actuarial present value of benefit obligations:
Vested benefits ........................................ $ 31,022 $ 23,257
Nonvested benefits ..................................... 543 734
---------- ----------
Accumulated benefit obligation ........................ $ 31,565 $ 23,991
========== ==========
Projected benefit obligation for service rendered to
date ................................................... $ 31,565 $ 28,627
Plan assets at fair value ............................... (28,098) (21,787)
---------- ----------
Plan assets less than projected benefit obligation ..... 3,467 6,840
Unrecognized net loss from past experience different
from that assumed ...................................... (928) (1,520)
Unrecognized net asset being recognized over 13 years .. 437 546
Unrecognized prior service cost ......................... -- (680)
Adjustment required to recognize minimum liability ..... 491 --
---------- ----------
Accrued pension cost (included in "Other Liabilities") . $ 3,467 $ 5,186
========== ==========
NONQUALIFIED PLANS -- ACCUMULATED BENEFITS EXCEED ASSETS
Actuarial present value of benefit obligations:
Vested benefits ........................................ $ 7,171 $ 5,847
Nonvested benefits ..................................... -- 7
---------- ----------
Accumulated benefit obligation ........................ $ 7,171 $ 5,854
========== ==========
Projected benefit obligation for service rendered to
date ................................................... $ 7,171 $ 7,678
Plan assets at fair value ............................... -- --
---------- ----------
Plan assets less than projected benefit obligation ..... 7,171 7,678
Unrecognized net loss from past experience different
from that assumed ...................................... (1,069) (1,668)
Unrecognized net obligation being recognized over 15
years .................................................. (202)
Unrecognized prior service cost ......................... (667)
Adjustment required to recognize minimum liability ..... 1,069 916
---------- ----------
Accrued pension cost (included in "Other Liabilities") . $ 7,171 $ 6,057
========== ==========
</TABLE>
In accordance with the provisions of Statement of Financial Accounting
Standards No. 87 (SFAS 87), Employer's Accounting for Pensions, SFFed has
recognized an additional pension liability of $570,000 and $885,000 in 1995
and 1994, respectively, representing the excess of the accumulated benefit
obligation over the fair value of pension plan assets and accrued pension
liability. As required by SFAS 87, in 1995, this liability, net of an income
tax benefit of $242,000, has been reflected as a $328,000 reduction of
stockholders' equity and in 1994, this liability, net of an income tax
benefit of $376,000, has been
OC-F-118
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
established by a $509,000 reduction of stockholders' equity. This additional
liability is a result of a change in the discount rate used in the
measurement of pension plan benefits and a reduction in the expected
long-term rate of return on pension plan assets.
OTHER POSTRETIREMENT BENEFITS
Effective January 1, 1993, SFFed adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 106 ("SFAS
106") Employers' Accounting for Postretirement Benefits Other than Pensions.
Under SFAS 106, the cost of postretirement benefits other than pensions (e.g.
health care) must be recognized on an accrual basis as employees perform
services to earn the benefits. Many of the provisions and concepts of SFAS
106 are similar to current standards on accounting for pensions. Based on the
transition provisions of SFAS 106, the accumulated postretirement benefit
obligation at the date of adoption (the transition obligation) may be
recognized in income as the cumulative effect of an accounting change in the
period of adoption or delayed and amortized over future periods as a
component of net periodic postretirements cost. The transition obligation at
January 1, 1993 has been estimated at $4.0 million, which SFFed is amortizing
to expense over 20 years as permitted by SFAS 106. SFFed has estimated that
accounting for covered benefits on an accrual basis, as required by SFAS 106,
rather than the pay-as-you-go method previously used by SFFed, increased
expense for 1993 by approximately $0.4 million. During the fourth quarter of
1995, SFFed recorded an approximate $1.9 million increase in retirement
medical benefits expenses resulting from the curtailment of the plan due to
the anticipated acquisition of SFFed, as discussed in Note 2.
NOTE 15 -- EMPLOYEE INCENTIVE AND COMPENSATION PLANS
SFFed's Stock Incentive Plan, which was amended in 1994 to increase the
number of shares reserved thereunder for issuance by 500,000 shares, provides
for up to 1,271,500 shares of common stock to be issued to directors and key
employees of SFFed and its subsidiaries. Directors of SFFed are granted
options for 10,000 shares of common stock upon their initial election to the
Board of Directors. The Plan provides that stock options may be either
incentive stock options ("ISO"), as defined by Section 422 of the Internal
Revenue Code, or nonstatutory options which do not satisfy the provisions of
Code Section 422. The Plan also provides for the issuance of stock
appreciation rights ("SAR") and restricted stock.
ISOs may be granted at an option price not less than fair market value as
of the date of grant and nonstatutory options at a price determined by the
Stock Option Committee provided for in the Plan. Stock options may be
exercised with cash, shares of SFFed's common stock, or a combination of cash
and common stock equal to the option price.
In 1990 a stock option plan for non-employee directors (Directors' Plan)
was established to allow those directors the choice of receiving nonstatutory
options in lieu of their annual retainer fees. In 1994 the Directors' Plan
was amended permitting participants to elect to receive nonstatutory options
in lieu of their attendance fees as well as retainer fees. In addition, the
Directors' Plan was further amended to provide an option pricing model
generally accepted by the financial community as reflective of the fair
market value of the interest received by the Directors in exchange for the
cash compensation. The exercise price of options granted under this plan is
$1.00 per share. The maximum number of shares of common stock which may be
issued under the Directors' Plan is 200,000 shares, provided that the
aggregate number of shares of common stock issuable under this plan and
SFFed's Stock Incentive Plan shall not exceed 1,271,500 shares.
SARs are only granted in conjunction with all or any part of any stock
option granted under the Plan. A SAR entitles the holder to receive cash,
shares of SFFed's common stock or a combination thereof, at the discretion of
SFFed, equal to the excess of the fair market value at the date of exercise
over the option price of the related stock option. Exercise of a SAR cancels
the related stock option.
OC-F-119
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
During 1992 certain key employees agreed to convert their existing SARs
for limited stock appreciation rights ("LSAR"). LSARs are subject to the same
terms and conditions as SARs but are exercisable only if there is a change of
control of SFFed.
Restricted stock is subject to such restrictions against sale, transfer or
other disposition, as may be determined at the time of making the award.
Employees forfeit all shares of restricted stock if they leave the employ of
SFFed and its subsidiaries prior to the lapse of restrictions.
All nonstatutory options and related SARs granted may be exercised prior
to a dissolution or liquidation of SFFed or a sale of substantially all the
assets of SFFed or a merger or consolidation in which SFFed is not the
surviving entity.
No ISOs have been granted through December 31, 1995. Nonstatutory options,
restricted stock, SARs and LSARs granted, exercised or terminated are
summarized as follows:
<TABLE>
<CAPTION>
TOTAL RESTRICTED
SHARES STOCK OPTIONS
---------- ------------ ----------
<S> <C> <C> <C>
Outstanding at December 31, 1992 ... 594,453 6,603 587,850
Granted ............................ 6,096 -- 6,096
Exercised .......................... (49,915) -- (49,915)
Restrictions lapsed ................ (2,996) (2,996) --
Terminated/cancelled ............... (44,780) -- (44,780)
---------- ------------ ----------
Outstanding at December 31, 1993 ... 502,858 3,607 499,251
Granted ............................ 103,146 -- 103,146
Exercised .......................... (33,379) -- (33,379)
Restrictions lapsed ................ (2,691) (2,691) --
Terminated/cancelled ............... (6,118) -- (6,118)
---------- ------------ ----------
Outstanding at December 31, 1994 (2) 563,816 916 562,900
Granted ............................ 117,508 20,000 97,508
Exercised .......................... (29,965) -- (29,965)
Restrictions lapsed ................ (916) (916) --
Terminated/cancelled ............... (1,264) -- (1,264)
---------- ------------ ----------
Outstanding at December 31, 1995 (2) 649,179 20,000 629,179
========== ============ ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRICE
SARS (1) LSARS PER SHARE
---------- ---------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 ... 61,143 272,536
Granted ............................ -- -- $ 1.00
Exercised .......................... (24,826) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25-14.13
Terminated/cancelled ............... (18,037) -- 6.38-17.00
---------- ----------
Outstanding at December 31, 1993 ... 18,280 272,536
Granted ............................ -- 86,550 1.00-18.88
Exercised .......................... (5,918) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25-14.13
Terminated/cancelled ............... (1,124) (20,682) 6.38-17.00
---------- ----------
Outstanding at December 31, 1994 (2) 11,238 338,404
Granted ............................ -- 87,600 1.00-20.25
Exercised .......................... (1,264) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25
Terminated/cancelled ............... (511) (9,000) 6.38-17.00
---------- ----------
Outstanding at December 31, 1995 (2) 9,463 417,004
========== ==========
</TABLE>
- ------------
(1) All SARs are related to options. The exercise of SARs results in a
surrender of the related option.
(2) Options and SARs exercisable at December 31, 1995 were 444,177 and
9,463, respectively.
The number of shares available for future options was 393,045 and 510,533
at December 31, 1995 and 1994, respectively. See Note 2 regarding the
treatment of options in connection with the acquisition of SFFed by First
Nationwide.
Incentive Plans are maintained to provide a means of awarding incentive
compensation to most officers and employees, including loan agents. The Plans
are nonqualified plans and all disbursements are paid from the general assets
of SFFed. For the years ended December 31, 1995, 1994 and 1993 SFFed's
expense under these plans amounted to approximately $183,000, $422,000 and
$1,726,000, respectively. SFFed maintains a savings plan for its employees
and the employees of its subsidiaries. The plan allows participants to make
contributions by salary deductions equal to 15% or less of their salary
pursuant to Section 401(k) of the Internal Revenue Code. Employee
contributions are matched by SFFed at the rate
OC-F-120
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
of 50% of such contributions up to 2% of the employee's salary. SFFed's
matching contributions, under the terms of the plan, must be used to purchase
SFFed's common stock. SFFed contributions to the plan amounted to $413,000,
$347,000 and $316,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
NOTE 16 -- ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of SFFed's financial
instruments is in accordance with the provisions of Statement of Financial
Accounting Standards No. 107 ("SFAS 107") Disclosures about Fair Value of
Financial Instruments. The valuation methods used by SFFed are set forth
below.
The accuracy and usefulness of the fair value information disclosed herein
is limited by the following factors.
o Because no market exists for a significant portion of SFFed's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in these
assumptions could significantly affect the estimates.
o These estimates do not reflect any premium or discount that could
result from offering for sale at one time SFFed's entire holding of
a particular financial asset.
o SFAS 107 excludes from its disclosure requirements certain financial
instruments and various significant assets and liabilities that are
not considered to be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of
SFFed.
OC-F-121
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The carrying amounts and the estimated fair values of SFFed's financial
instruments at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .............. $ 195,251 $ 195,251 $ 165,206 $ 165,206
Federal Home Loan Bank stock ........... 31,579 31,579 30,049 30,049
Mortgage-backed securities ............. 932,398 945,319 408,036 400,715
Loans held for sale .................... 4,393 4,393 3,627 3,627
Loans receivable held for investment .. 2,714,988 2,708,195 3,011,504 2,942,263
Excess servicing ....................... 2,348 25,825 2,803 14,175
LIABILITIES
Demand deposits ........................ 852,715 852,715 566,403 566,403
Certificate accounts ................... 1,840,528 1,852,308 1,915,585 1,899,119
Borrowings ............................. 1,041,559 1,049,860 1,012,820 1,006,902
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to originate loans and
related hedging program (unrealized
gain) ................................. -- 46 -- 371
</TABLE>
The following methods and assumptions were used by SFFed in computing the
estimated fair values in the above table:
Cash and Cash Equivalents and Federal Home Loan Bank Stock and Demand
Deposits: The carrying amounts of these financial instruments approximate
their fair values.
Mortgage-Backed Securities: Fair values of these securities are based on
year-end quoted market prices.
Loans Held for Sale: The fair value of these loans has been based on
market prices of similar loans traded in the secondary market.
Loans Receivable Held for Investment: For fair value estimation purposes,
these loans have been categorized by type of loan (e.g., one-to-four unit
residential) and then further segmented between adjustable or fixed rates and
performing or nonperforming. Where possible, the fair value of these groups
of loans has been based on secondary market prices for loans with similar
characteristics. The fair value of the remaining loans has been estimated by
discounting the future cash flows using current interest rates being offered
for loans with similar terms to borrowers of similar credit quality.
Excess Servicing (Deferred Premium on Sales and Securitization of
Loans): Fair value of this asset has been estimated by reference to market
loan prepayment assumptions and interest rates for similar pools of loans.
Certificate Accounts and Borrowings: Fair values have been estimated using
projected cash flows discounted at replacement rates offered at each year end
for instruments of similar remaining maturities.
Commitments to Originate Loans and Related Hedging Program: The fair value
of the amount of commitments to originate loans considered likely to fund has
been estimated based on current secondary market prices for similar loans. No
loans were being originated for sale at December 31, 1995 and 1994.
OC-F-122
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
The fair value estimates disclosed above were based on market prices and
other available information at year-end 1995 and 1994, respectively. No
detailed valuation has been performed since December 31, 1995 and, although
SFFed is not aware of any changes that could significantly impact these
estimates, current fair value estimates could be materially different from
the year-end 1995 amounts presented above.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
Outstanding commitments relating to loans and MBS are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Commitments to originate loans ..... $31,341 $ 76,928
Commitments to sell loans ........... 1,014 1,423
Commitments to convert loans to MBS -- 199,784
Commitments to purchase MBS ......... -- 100,000
Forward commitments to sell loans .. 4,500 --
</TABLE>
At December 31, 1995 SFFed's commitments to originate loans included
$10,977,000 of fixed-rate loans at interest rates ranging from 6.38% to
7.88%, and were outstanding for no more than 30 days.
SFFed on occasion has securitized (received MBS for loans) and sold loans
with recourse provisions. In 1995, SFFed did not have any sales of loans or
MBS with recourse. The principal balance of loans that have been securitized
or sold with recourse at December 31, 1995 and 1994 were $478,348,000 and
$11,796,000, respectively.
As part of the normal course of business, SFFed has entered into forward
transactions in order to reduce its exposure to fluctuations in interest
rates associated with originating loans for sale. At December 31, 1995
forward commitments to sell loans was $4,500,000.
LITIGATION
SFFed is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultations with counsel, the ultimate disposition of these matters will
not have a materially adverse effect on SFFed's consolidated financial
position or results of operations.
LEASE COMMITMENTS
Certain branches and offices are leased by SFFed under the terms of
operating leases expiring at various dates through the year 2029. Lease
rental expense amounted to $7,223,000, $7,173,000 and $8,009,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. Future
approximate minimum lease payments under the terms of the existing operating
leases are as follows:
OC-F-123
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
OFFICE AND
NET SUBLEASES EQUIPMENT
--------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ending December 31:
1996 ................... $ 6,966 $ 514 $ 7,480
1997 ................... 6,778 414 7,192
1998 ................... 5,677 382 6,059
1999 ................... 5,287 240 5,527
2000 ................... 5,032 99 5,131
Thereafter ............. 6,067 297 6,364
--------- ----------- ------------
$35,807 $1,946 $37,753
========= =========== ============
</TABLE>
Legislation is currently pending in Congress which would recapitalize the
Savings Association Insurance Fund ("SAIF") in order to bring it into parity
with the FDIC's other insurance fund, the Bank Insurance Fund ("BIF"). The
legislation would require an assessment of all SAIOC-F-insured institutions of
approximately 0.85% to 0.90% of their March 31, 1995 customer deposit
balances. If such legislation had been enacted by law by December 31, 1995,
the Association would have been assessed approximately $23,100,000 to
$24,400,000, on a pre-tax basis. After paying the one-time assessment, it
would be expected that SFFed would pay significantly reduced insurance
premiums on its customer deposits. SFFed is unable to predict whether such
legislation will be enacted.
OC-F-124
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
California Federal Bank, F.S.B.:
We have audited the accompanying consolidated statements of financial
condition of California Federal Bank, F.S.B. and subsidiaries (the "Bank") as
of December 31, 1995 and 1994, 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. These consolidated
financial statements are the responsibility of the Bank'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
California Federal Bank, F.S.B. 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 Bank 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
OC-F-125
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 SHAREHOLDERS' 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
=========== ===========
Shareholders' equity
Preferred stock, Series A ............................................. 93.5 93.5
Preferred stock, Series B ............................................. 172.5 172.5
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 Shareholders' Equity ......................................... 887.5 798.3
----------- -----------
Total Liabilities and Shareholders' Equity ......................... $14,320.6 $14,182.4
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-126
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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) ........................................... $ 93.6 $(423.1) $ (145.5)
Preferred dividends ............................................... 25.6 16.9 3.8
--------- ---------- ----------
Net earnings (loss) available for common shareholders ............ $ 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.
OC-F-127
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Preferred stock:
Balance at beginning of year ......................................... $ 266.0 $ 93.5 $ --
Issuance of preferred stock, series A ............................... -- -- 93.5
Issuance of preferred stock, series B ............................... -- 172.5 --
--------- --------- ---------
Balance at end of year ............................................... 266.0 266.0 93.5
--------- --------- ---------
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 cost of preferred stock, Series A .......................... -- -- (4.5)
Issuance cost of preferred stock, Series B .......................... -- (8.3) --
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
--------- --------- ---------
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
Dividends on preferred stock, Series A ($1.94 per share in 1995,
$1.94 per share in 1994 and $1.02 per share in 1993) ............... (7.2) (7.2) (3.8)
Dividends on preferred stock, Series B ($10.625 per share in 1995,
$5.61 per share in 1994 and none in 1993) .......................... (18.4) (9.7) --
Net earnings (loss) ................................................. 93.6 (423.1) (145.5)
--------- --------- ---------
Balance at end of year ............................................... (266.3) (334.3) (105.7)
--------- --------- ---------
Total Shareholders' Equity ............................................ $ 887.5 $ 798.3 $ 890.7
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-128
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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) ............................................. $ 93.6 $ (423.1) $ (145.5)
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 ................... 170.4 1,244.2 428.4
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 ................. -- 164.2 89.0
Payment of dividends on preferred stock ........................ (25.6) (16.9) (3.8)
----------- ----------- -----------
Net cash provided (used) by financing activities ........... 57.8 (709.9) (1,418.4)
----------- ----------- -----------
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.
OC-F-129
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of California
Federal Bank, A Federal Savings Bank 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.
During 1995, the Bank 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 Bank's common
stock was converted into one share of Cal Fed Bancorp Inc. common stock.
Consequently, the Bank became a wholly-owned subsidiary of Cal Fed Bancorp
Inc. The Bank's other securities remain outstanding securities of the Bank.
However, while the Bank's 7 3/4% noncumulative convertible preferred stock,
Series A remains an outstanding security of the Bank; 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.
In December 1995, the Bank 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 the Bank's
consolidated regulatory capital at December 31, 1995, the Bank'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. 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.
OC-F-130
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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
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CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 Mae ("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 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.
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CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 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
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CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 or 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 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.
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CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 as 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.
PREMISES AND EQUIPMENT, DEPRECIATION AND CAPITALIZATION OF INTEREST
Maintenance and repairs on premises and equipment are changed 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.
OC-F-135
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 applications 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.
SHAREHOLDERS' 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.
During the 1995 fourth quarter, the Bank 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 the Bank's
common stock was converted into one share of Cal Fed Bancorp Inc. common
stock. Consequently, the Bank became a wholly-owned subsidiary of Cal Fed
Bancorp Inc. The Bank's other equity securities remain outstanding securities
of the Bank. However, the Bank's 7 1/2% noncumulative convertible preferred
stock, Series A is convertible into shares of Cal Fed Bancorp Inc. common
stock if converted.
OC-F-136
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The par value of the Bank's 7 3/4% noncumulative convertible preferred
stock, Series A, 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 Bank's Board of Directors. 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 the Bank,
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 the Bank at any time on or after March 31, 1996, in whole or in part, at
par value plus declared but unpaid dividends.
During 1994, the Bank 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 Bank's Board of Directors. 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 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, 1994 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.
On February 28, 1993, the Bank completed a one-for-five reverse stock
split (the "Reverse Stock Split") of all classes of the Bank's 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 shareholders 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.
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").
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CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 value 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 leads 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 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.
OC-F-138
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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"). 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
OC-F-139
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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. These 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 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,
OC-F-140
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
OC-F-141
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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
----------------------------------------------------- -----------------------------------------------------
WEIGHTED AVG. WEIGHTED AVG.
CARRYING WEIGHTED AVG. MATURITY CARRYING WEIGHTED AVG. MATURITY
VALUE RATE (DAYS) VALUE RATE (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>
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:
OC-F-142
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (Continued)
<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 $148.2
========== ========
</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>
UNREALIZED
HISTORICAL CARRYING HOLDING
COST VALUE GAINS
------------ ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year $150.0 $149.9 $ --
Maturing after 1 year
but within 5 years ... 50.3 50.4 0.1
------------ ---------- ------------
$200.3 $200.3 $0.1
============ ========== ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED
UNREALIZED HOLDING WEIGHTED
HOLDING GAINS MARKET AVERAGE
LOSSES (LOSSES) VALUE RATE
------------ ------------ -------- ----------
U.S. (DOLLARS IN MILLIONS)
TREASURY
SECURITIES:
<S> <C> <C> <C> <C>
Maturing within 1 year $(0.1) $(0.1) $149.9 4.99%
Maturing after 1 year
but within 5 years ... -- 0.1 50.4 7.46
------------ ------------ --------
$(0.1) $ -- $200.3 4.87%
============ ============ ========
</TABLE>
<PAGE>
The carrying values, market values and weighted average rate of securities
available for sale at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
UNREALIZED
HISTORICAL CARRYING HOLDING
COST VALUE GAINS
------------ ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year $1,001.2 $ 997.5 $--
Maturing after 1 year
but within 5 years .... 749.5 734.0 --
------------ ---------- ------------
$1,750.7 $1,731.5 $--
============ ========== ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED UNREALIZED WEIGHTED
HOLDING HOLDING MARKET AVERAGE
LOSSES LOSSES VALUE RATE
------------ ------------ ---------- ----------
U.S.
TREASURY
SECURITIES:
<S> <C> <C> <C> <C>
Maturing within 1 year $ (3.7) $ (3.7) $ 997.5 4.64%
Maturing after 1 year
but within 5 years .... (15.5) (15.5) 734.0 6.19
------------ ------------ ----------
$(19.2) $(19.2) $1,731.5 5.30%
============ ============ ==========
</TABLE>
OC-F-143
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 as 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,
------------------
1994 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").
OC-F-144
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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
--------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FNMA .................... $1,192.7 $17.9 $ (0.2) $1,210.4
California Federal
AA-rated mortgage
pass-through securities 803.3 1.3 (5.2) 798.4
Other ................... 371.7 1.5 (20.7) 352.5
---------- ------------ ------------ ----------
2,366.7 20.7 (26.1) 2,361.3
---------- ------------ ------------ ----------
Guaranteed investment
contracts ................. -- -- -- --
---------- ------------ ------------ ----------
$2,366.7 $20.7 $(26.1) $2,361.3
========== ============ ============ ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1994
--------------------------------------------------
GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE
---------- ------------ ------------ ----------
MORTGAGE-BACKED SECURITIES:
<S> <C> <C> <C> <C>
FNMA .................... $1,359.5 $0.4 $(46.4) $1,313.5
CALIFORNIA FEDERAL
AA-RATED MORTGAGE
PASS-THROUGH SECURITIES 787.1 -- (21.1) 766.0
Other ................... 367.1 -- (20.8) 346.3
---------- ------------ ------------ ----------
2,513.7 0.4 (88.3) 2,425.6
---------- ------------ ------------ ----------
Guaranteed investment
contracts ................. 11.4 -- -- 11.4
---------- ------------ ------------ ----------
$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
colleteral type, at December 31, 1995:
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL
LOAN TO VALUE LOAN TO VALUE
ORIGINAL RATIO GREATER RATIO GREATER
SECURITIZED LOANS LOAN TO VALUE THAN 98% THAN 98%
WITH RECOURSE RATIO LESS THAN WITH WITHOUT
COLLATERALIZED BY 98% 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.
OC-F-145
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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>
OC-F-146
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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
Loss: 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.
OC-F-147
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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>
RESIDENTIAL 1-4 EQUITY
---------------------- ----------------
DECEMBER 31, DECEMBER 31,
---------------------- ----------------
STATE 1995 1994 1995 1994
- -------------- ---------- ---------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
California .... $6,288.9 $5,574.7 $49.5 $24.8
Florida ....... 456.4 533.3 11.3 45.8
Nevada ........ 183.4 182.9 2.9 7.1
Georgia ....... 79.6 92.0 0.1 1.4
New York ...... 34.4 30.3 -- --
Arizona ....... 16.1 5.9 0.1 0.1
New Jersey .... 32.5 27.9 -- --
Texas ......... 24.8 19.5 -- --
Connecticut .. 21.0 23.0 -- --
Washington .... 13.5 4.5 -- --
Colorado ...... 16.4 3.0 -- --
Illinois ...... 11.3 1.3 0.1 --
Other (1) ..... 99.3 45.0 0.1 0.1
---------- ---------- ------- -------
$7,277.6 $6,543.3 $64.1 $79.3
========== ========== ======= =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
INCOME PROPERTY
------------------------------------------
MULTI-FAMILY COMMERCIAL
---------------------- ------------------
DECEMBER 31, DECEMBER 31,
---------------------- ------------------
STATE 1995 1994 1995 1994
- -------------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C>
California .... $1,234.6 $1,338.1 $512.7 $530.3
Florida ....... 31.5 34.5 14.8 16.7
Nevada ........ 41.7 42.8 6.3 8.0
Georgia ....... 7.9 8.1 2.0 2.1
New York ...... 0.1 0.2 -- --
Arizona ....... 15.3 16.5 1.6 1.7
New Jersey .... -- -- -- --
Texas ......... 2.5 4.1 0.6 1.4
Connecticut .. -- -- -- --
Washington .... 4.9 5.0 -- --
Colorado ...... -- -- 1.6 2.7
Illinois ...... 1.1 1.3 -- --
Other (1) ..... 6.6 7.5 2.4 2.2
---------- ---------- -------- --------
$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.
OC-F-148
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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.
OC-F-149
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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>
OC-F-150
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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
or 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 -- 10.1 10.0
----------- ----------- -------- ----------- ----------- -------
Total ............. $24.3 $156.7 $181.0 $34.5 $177.1 $211.6
=========== =========== ======== =========== =========== =======
</TABLE>
OC-F-151
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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.
OC-F-152
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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.
OC-F-153
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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>
OC-F-154
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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>
OC-F-155
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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>
OC-F-156
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 form 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-ANNUAL 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"). These transactions resulted in
a $228.2 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.
OC-F-157
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 28.6 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>
OC-F-158
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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: ADVANCE 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>
OC-F-159
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: ADVANCE 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. These
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
banker-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.
OC-F-160
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 $65.5
======= =======
</TABLE>
Accrued interest related to subordinated debentures at December 31, 1995
and 1994 totaled $0.4 million and $0.8 million, respectively.
OC-F-161
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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
Subordinate 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 utilities 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
reassure and monitor the sensitivity of net interest income under varying
interest rate securities. 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 assured range of interest rates.
OC-F-162
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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
MONTHS AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
TYPE OF INTEREST RATE NOTIONAL TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT AMOUNT MATURITY THE BANK THE 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
MONTHS AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
TYPE OF INTEREST RATE NOTIONAL TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT AMOUNT MATURITY THE BANK THE BANK 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 hold 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 values 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.
OC-F-163
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 is 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 containing 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>
OC-F-164
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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
would 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.
OC-F-165
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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
OC-F-166
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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.
OC-F-167
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 comparing 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.
OC-F-168
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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.
OC-F-169
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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.
NOTE 23: SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
The Bank's shareholders' equity at December 31, 1995 and 1994 was
comprised of (i) common stock, (ii) 7 3/4% convertible preferred stock,
Series A and (iii) 10 5/8% noncumulative perpetual preferred stock, Series B.
OC-F-170
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (Continued)
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, the Bank 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 Bank's common stock was converted into one share of Cal Fed Bancorp Inc.
common stock. Consequently, the Bank became a wholly-owned subsidiary of Cal
Fed Bancorp Inc.
7 3/4% Noncumulative Convertible Preferred Stock, Series A, Par Value $25.00
Per Share
In March 1993, the Bank 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 Bank's equity capital,
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 the Bank, in whole or in
part, at par value plus declared but unpaid dividends.
10 5/8% Noncumulative Perpetual Preferred Stock, Series B, Par Value $100.00
Per Share
In March 1994, the Bank 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 Bank's equity capital,
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 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.
Common Stock Warrants
In December 1992, the Bank issued 13,879,865 warrants to purchase Bank
common stock during June 1994. Throughout June 1994, warrant holders were
entitled to purchase one share of the Bank's common stock 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 Bank's common stock. The exercised
warrants provided the Bank with $23.3 million of additional equity capital
during 1994.
OC-F-171
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (Continued)
Participation Interests
During 1995, the Bank 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 the Bank, resulting from the Bank's pending goodwill lawsuit
against the federal government. In the lawsuit, the Bank alleges that the
United States breached certain contractual commitments regarding the
computation of its regulatory capital and deprived the Bank of certain of its
property without just compensation in violation of the United States
constitution. The Bank's claims arose from changes, mandated by FIRREA, with
respect to the rules for computing the Bank's regulatory capital. The Bank's
shareholders 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, the Bank 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 Bank's capital ratios as compared to the
industry-wide minimum capital requirements at December 31, 1995:
<TABLE>
<CAPTION>
CALIFORNIA REGULATORY EXCESS
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."
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.
OC-F-172
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL (Continued)
At December 31, 1995, (i) the Bank's total risk-based capital ratio was
12.36 percent, $183.3 million in excess of "well-capitalized" requirements,
(ii) the Bank's Tier I risk-based capital ratio was 10.90 percent, $380.1
million in excess of "well-capitalized" requirements, and (iii) the Bank's
leverage ratio was 5.91 percent, $130.2 million in excess of
"well-capitalized" requirements. Therefore, at December 31, 1995, the Bank
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 Bank's shareholder's equity 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 the Bank ........................ $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 the Bank .......................... 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, the Bank'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.
OC-F-173
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: SHAREHOLDERS' EQUITY 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, the Bank had $16.7 million included in the
regulatory capital relating to such investments and extensions of credit.
Restriction on Shareholders' Equity and Dividends
The payment of dividends, stock repurchases, and other capital
distributions by the Bank 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 those 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).
OC-F-174
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 $7 ..... -- -- --
Unrecognized prior service cost ............................ -- -- --
Adjustment required to recognize minimum liability ........ -- -- -
------------- ------------- -------------
Pension (asset) liability 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>
OC-F-175
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 $7 ..... -- (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) Those amounts relate to both the supplemental plan and the outside
directors plan.
(B) These amounts related 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.
OC-F-176
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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) (4.5)
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.
OC-F-177
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 shareholders 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
those 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
OC-F-178
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: STOCK INCENTIVE PLANS (Continued)
activity, giving effect for the one-for-five revenue 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 shareholders 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 $ 1.800-$15.875 1,318,500 $1.000-$15.875 -- --
Granted ............. 35,000 9.875- 12.750 287,280 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 (357,000) 13.875- 15.875
Exercised ........... (1,400) 12.125 -- -- -- --
----------- ---------------- ----------- ---------------- ----------- ----------------
Balance, December 31 1,432,300 $ 1.000-$15.875 1,411,450 $1.000-$15.875 1,318,980 $ 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 expenses. 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 shareholders 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>
OC-F-179
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. 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 30,
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 -- --
----------- ---------- --------------- --------------
Net earnings ............. $ 14.7 $ 21.7 $ 31.9 $ 25.3
=========== ========== =============== ==============
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 -- --
----------- ---------- --------------- --------------
(Loss) earnings before the cumulative effect of
change in accounting for goodwill ............. (322.4) 10.5 149.5 13.0
Cumulative effect of change in accounting for
goodwill ...................................... (273.7) -- -- --
----------- ---------- --------------- --------------
Net (loss) earnings ............................ $(596.1) $ 10.5 $149.5 $ 13.0
=========== ========== =============== ==============
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.
OC-F-180
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 27: SUBSEQUENT EVENT
On January 1, 1996, the Bank merged into a subsidiary of Cal Fed Bancorp
Inc. As a result of the reorganization, each share of the Bank's common stock
was converted into one share of Cal Fed Bancorp Inc. common stock.
Consequently, the Bank became a wholly owned subsidiary of Cal Fed Bancorp
Inc. The Bank's preferred stock, Series A and preferred stock, Series B
remain securities of the Bank. However, the preferred stock, Series A is
convertible by the holders into Cal Fed Bancorp Inc. common stock, at any
time, at the conversion price of $20.16 per share. At or after March 31,
1996, the Preferred Stock, Series A is redeemable at the option of the Bank,
in whole or in part, at par value plus declared but unpaid dividends.
The Statement of Financial Condition of Cal Fed Bancorp Inc., as of
January 1, 1996 is presented on a consolidated basis below:
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
JANUARY 1, 1996
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Cash ............................................ $ 273.7
Short-term liquid investments ................... 74.1
Securities purchased under agreements to resell 1,674.6
Securities available for sale ................... 200.3
Securities held to maturity ..................... 2,366.7
Loans receivable held for sale .................. 13.6
Loans receivable held for investment ............ 9,290.0
FHLB stock ...................................... 135.7
Interest receivable ............................. 79.5
Premises and equipment, net ..................... 71.2
Real estate held for sale ....................... 49.5
Prepaid expenses and other assets ............... 91.7
----------
Total Assets ................................... $14,320.6
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ....................................... $ 9,476.7
Advances from Federal Home Loan Banks .......... 2,671.0
Securities sold under agreements to repurchase . 857.3
SLMA Advances .................................. 200.0
Subordinated debentures ........................ 57.6
Interest payable ............................... 29.4
Other liabilities .............................. 141.1
----------
Total Liabilities ............................. 13,433.1
----------
Minority interest in preferred stock of subsidiary 266.0
Stockholders' Equity:
Preferred stock ............................... --
Common stock .................................. 49.2
Additional paid-in capital .................... 838.6
Retained earnings (deficit) ................... (266.3)
----------
Total Stockholders' Equity ................... 621.5
----------
Total Liabilities and Stockholders' Equity ... $14,320.6
==========
</TABLE>
OC-F-181
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
UNAUDITED 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 STOCKHOLDERS' EQUITY
Deposits ..................................................... $ 8,763.6 $ 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 ............................................ 254.9 141.1
--------------- --------------
Total Liabilities ........................................ 13,322.6 13,433.1
--------------- --------------
Stockholders' Equity
Preferred Stock, Series A ................................... -- 93.5
Preferred Stock, Series B ................................... 172.5 172.5
Common stock ................................................ * 49.2
Additional paid-in capital .................................. 865.7 838.6
Net unrealized holding losses on securities available for
sale ....................................................... -- --
Retained (deficit) .......................................... (234.1) (266.3)
--------------- --------------
Total Stockholders' Equity ............................... 804.1 887.5
--------------- --------------
Total Liabilities and Stockholders' Equity ............... $14,126.7 $14,320.6
=============== ==============
</TABLE>
- ------------
* Common stock value at par is $100.
See accompanying notes to consolidated financial statements.
OC-F-182
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
UNAUDITED 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 ................................................ 326.3 322.8
Borrowings .............................................. 175.3 195.7
-------- --------
Total interest expense ............................... 501.6 518.5
-------- --------
Net interest income .................................. 260.0 229.1
Provision for loan losses ................................ 30.8 24.5
-------- --------
Net interest income after provision for loan losses . 229.2 204.6
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 ........................ 56.0 57.5
Federal deposit insurance premiums ...................... 17.7 19.4
-------- --------
Total general and administrative expenses ........... 173.9 179.2
Savings Association Insurance Fund special assessment .. 58.1 --
Operations of real estate held for sale ................. 8.0 7.3
-------- --------
Total other expenses ................................. 240.0 186.5
-------- --------
Earnings before income tax expenses ...................... 51.1 68.4
Income tax expense ....................................... 0.1 0.1
-------- --------
Earnings before dividends on preferred stock of
subsidiary .......................................... 51.0 68.3
Dividends on preferred stock of subsidiary ............... 18.9 19.2
-------- --------
Net earnings available for common stockholders .......... $ 32.1 $ 49.1
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
OC-F-183
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
UNAUDITED 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 ........... $ 51.0 $ 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 estate 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 ............................. 49.9 (13.1)
Other items .......................................................... (37.1) 0.7
----------- -----------
Net cash provided by operating activities ......................... 218.2 155.1
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 ...................................... (713.1) 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 ........................................ (93.5) --
Payment of dividends on preferred stock of subsidiary ................ (18.9) (19.2)
----------- -----------
Net cash used by financial activities ............................. (330.9) (48.5)
----------- -----------
Net decrease increase 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.
OC-F-184
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(1) PRESENTATION OF FINANCIAL INFORMATION
In the opinion of California Federal Bank, F.S.B. and its subsidiaries
(the "Bank"), the accompanying unaudited consolidated financial statements,
prepared from the Bank's books and records, contain all adjustments
(consisting of only normal recurring accruals) necessary for a fair
presentation of the Bank'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 Bank
has made certain estimates relating to various legal proceedings in which the
Bank 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 Bank may realize a material adverse
impact on its financial condition and results of operations.
During the 1995 fourth quarter, 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 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 Cal Fed Bancorp Inc. 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.
OC-F-185
<PAGE>
CALIFORNIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
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 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 Bank
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 During the Period for:
Interest expense ........................................ $507.6 $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 .................................... 41.7 78.5
</TABLE>
OC-F-186
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data gives effect to the
Acquisitions, the Branch Sales, the issuance of the Series A Preferred Shares
and the Capital Contribution. 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 First Nationwide giving effect to the Cal Fed
Acquisition, the issuance of the Series A Preferred Shares and the Capital
Contribution as if such transactions occurred on September 30, 1996, and (ii)
the historical consolidated statement of operations of First Nationwide 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, the issuance of the Series A Preferred Shares and the Capital
Contribution 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 First
Nationwide for the year ended December 31, 1995 giving effect to the
Acquisitions, the Branch Sales, the issuance of the Series A Preferred Shares
and the Capital Contribution 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
First Nationwide that actually would have resulted had the Acquisitions, the
Branch Sales, the issuance of the Series A Preferred Shares and the Capital
Contribution occurred at the dates indicated, or project the results of
operations or financial position of First Nationwide for any future date or
period.
The following unaudited pro forma financial data should be read in
conjunction with the Consolidated Financial Statements of First Nationwide
and the notes thereto, the Consolidated Financial Statements of SFFed and the
notes thereto and the Consolidated Financial Statements of California Federal
and the notes thereto, contained elsewhere in this Offering Circular.
Capitalized terms used and not defined herein have the meanings set forth in
the Offering Circular.
OC-P-1
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAL FED ACQUISITION (A)
-------------------------------------------------------------
FIRST CALIFORNIA VALUATION PRO FORMA CAL FED
NATIONWIDE FEDERAL ADJUSTMENTS ADJUSTMENTS ACQUISITION
HISTORICAL HISTORICAL (I) (II) (III) PRO FORMA
------------- -------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash
equivalents .......... $ 144,345 $ 197,900 $ -- $(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, net ............ 11,288,403 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
Intangible assets .... 144,782 14,580 (14,580)(1) 554,094 (1) 554,094
Other assets .......... 800,437 305,054 185,720 (1) -- 490,774
------------- -------------- ------------- --------------- -------------
Total assets ......... $16,809,461 $14,126,700 $114,241 $(738,745) $13,502,196
============= ============== ============= =============== =============
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits .............. $ 8,799,990 $ 8,763,600 $ 3,839 (1) $ -- $ 8,767,439
Borrowings ............ 6,155,990 4,304,100 (2,043)(1) -- 4,302,057
Other liabilities .... 391,900 254,900 5,300 (1) -- 260,200
------------- -------------- ------------- --------------- -------------
Total liabilities ... 15,347,880 13,322,600 7,096 -- 13,329,696
------------- -------------- ------------- --------------- -------------
Minority interest .... -- -- -- -- --
Preferred stock ....... 300,730 172,500 -- -- 172,500
Common stock .......... 1 -- -- -- --
Additional paid-in
capital .............. 632,805 865,700 -- (865,700)(3) --
Net unrealized holding
gain on securities .. 35,087 -- -- -- --
Retained earnings
(deficit) ............ 492,958 (234,100) 107,145 (1) 126,955 (3) --
------------- -------------- ------------- --------------- -------------
Stockholders' equity 1,461,581 804,100 107,145 (738,745) 172,500
------------- -------------- ------------- --------------- -------------
Total liabilities,
minority interest
and stockholders'
equity .............. $16,809,461 $14,126,700 $114,241 $(738,745) $13,502,196
============= ============== ============= =============== =============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAPITALIZATION PRO FORMA
(B) COMBINED
-------------- -------------
<S> <C> <C>
ASSETS
Cash and cash
equivalents .......... $ 555,000 (1) $ 49,406
145,000 (1)
Securities ............ -- 1,715,869
Mortgage-backed
securities ........... -- 5,406,095
Loans, net ............ -- 21,311,818
Office premises and
equipment, net ....... -- 99,455
Mortgage servicing
rights, net .......... -- 438,927
Intangible assets .... -- 698,876
Other assets .......... -- 1,291,211
-------------- -------------
Total assets ......... $ 700,000 $31,011,657
============== =============
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits .............. $ -- $17,567,429
Borrowings ............ (434,225)(2) 10,023,822
Other liabilities .... -- 652,100
-------------- -------------
Total liabilities ... (434,225) 28,243,351
-------------- -------------
Minority interest .... 450,000 (2) 450,000
Preferred stock ....... -- 473,230
Common stock .......... -- 1
Additional paid-in
capital .............. 700,000 (1) 1,317,030
(15,775)(2)
Net unrealized holding
gain on securities .. -- 35,087
Retained earnings
(deficit) ............ -- 492,958
-------------- -------------
Stockholders' equity 684,225 2,318,306
-------------- -------------
Total liabilities,
minority interest
and stockholders'
equity .............. $ 700,000 $31,011,657
============== =============
</TABLE>
- ------------
(A) See note (A) on page OC-P-3.
(B) See note (B) on page OC-P-7.
(i) Represents historical amounts obtained from California Federal's
unaudited financial statements.
(ii) Represents adjustments to (i) record California Federal's assets and
liabilities at preliminary estimates of their respective fair values
and (ii) the elimination of California Federal's historical
intangible assets.
(iii) Represents adjustments to record (i) the purchase price of the Cal
Fed Acquisition and (ii) the elimination of the common equity of
California Federal.
OC-P-2
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
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
California Federal 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 California
Federal to the fair value of the net assets to be acquired by First
Nationwide:
<TABLE>
<CAPTION>
<S> <C> <C>
Common equity of California Federal at September 30,
1996 ................................................... $ 631,600
Fair value adjustments (c):
Securities ............................................. $ (741)
Mortgage-backed securities ............................. 4,768
Loans, net ............................................. (31,685)
Mortgage servicing rights .............................. 27,392
Office premises and equipment (d) ...................... (56,633)
Litigation asset, 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 ...................... 738,745
Purchase cost .......................................... 1,292,839
-----------
Excess of purchase cost over net assets acquired
("goodwill") .......................................... $ 554,094
===========
</TABLE>
(a)Represents cash to be received by California Federal 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).
OC-P-3
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(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 First
Nationwide under California Federal's compensation agreements with eleven of
its executive officers; (ii) transaction bonuses paid to six California
Federal executive officers; (iii) severance benefits paid or payable pursuant
to a letter agreement between California Federal and First Nationwide for
approximately 850 employees who are parties to separate employment
agreements; and (iv) relocation benefits for employees who have been offered
employment opportunities in northern California. The obligations of the Bank
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. First
Nationwide's termination plan has been developed, and employees to be
terminated have been so notified. Termination dates generally fall within six
months of the consummation of the Cal Fed Acquisition.
Pension termination costs represent lump sum distributions which are
required under California Federal'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 California Federal until the
Cal Fed Acquisition was consummated.
The majority of conversion and contract costs of $33.3 million represents
costs and penalities expected to be incurred by First Nationwide 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
ITEM METHOD OF AMORTIZATION (ACCRETION) AMORTIZATION (ACCRETION)
- ------------------------------ ------------------------------------------- --------------------------
<S> <C> <C>
Mortgage-backed securities Level yield method over effective terms of 6 to 9 years
such assets, considering estimated
prepayments
Loans, net Level yield method over effective terms of 2 to 12 years
such assets, considering estimated
prepayments
Mortgage servicing rights Level yield method over effective terms of 2 to 7 years
such assets, considering estimated
prepayments
OC-P-4
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION
(Continued)
Goodwill Straight-line method 15 years
Deposit accounts Level yield method over stated terms of 1 to 6 years
such liabilities
Borrowings Level yield method over stated terms of 1 to 9 years
such liabilities
</TABLE>
With respect to goodwill, representing the excess of the purchase price
over the fair value of tangible assets acquired and liabilities assumed (the
"Excess"), First Nationwide 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. First Nationwide 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 the Bank's financial statements.
(d) Includes (i) $45.7 million in fair value adjustments to reflect
obligations assumed under master lease arrangements on California
Federal'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 the
Bank 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) A subjective discount of approximately 15% was applied in
consideration of the variability of the
OC-P-5
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION (Continued)
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.
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
First Nationwide Initial Distribution ...... 125,000
-----------
Remainder for Secondary Distribution ....... $ 19,301
===========
First Nationwide--40% Distribution .......... $ 7,720
Class B Certificate Holders--60%
Distribution ............................... 11,581
-----------
Total Secondary Distribution ............... $ 19,301
===========
First Nationwide Distribution:
Initial Distribution ....................... $ 125,000
40% Secondary Distribution ................. 7,720
-----------
Total First Nationwide Distribution ...... $ 132,720
===========
</TABLE>
OC-P-6
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION (Continued)
Once the allocation of purchase price has been made, the Bank 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 California Federal'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
California Federal of $738,745.
(B) CAPITALIZATION
(1) Represents the Capital Contribution to be made by Holdings to First
Nationwide prior to or concurrent with the Cal Fed Acquisition:
<TABLE>
<CAPTION>
<S> <C> <C>
Proceeds from the issuance of debt securities by
Holdings ............................................... $575,000
Less:deferred issuance costs ............................ (20,000)
----------
Net proceeds ....................................... $555,000
Proceeds from the issuance of Holdings Preferred Stock . 150,000
Less:issuance costs ..................................... (5,000)
----------
Net proceeds ....................................... 145,000
----------
$700,000
==========
</TABLE>
(2) Represents the proceeds from the issuance of the Series A Preferred
Shares:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Series A Preferred
Shares ............................................. $450,000
Less:issuance costs (additional paid-in capital) ... (15,775)
----------
Net proceeds ................................... $434,225
==========
</TABLE>
Net proceeds will be utilized to reduce borrowings of the Bank. It is
expected that the issuance of the Series A Preferred Shares, by
increasing core capital, will enable the Bank to retain a higher base
of interest-earning assets, resulting in incrementally higher related
earnings.
OC-P-7
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSADS)
<TABLE>
<CAPTION>
SFFED LMUSA 1996
FIRST ACQUISITION PURCHASE
NATIONWIDE PRO FORMA PRO FORMA
HISTORICAL TOTALS (A) TOTALS (B)
------------ ------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ....................................... $714,883 $21,821 $ --
Securities .................................. 24,680 1,017 --
Mortgage-backed securities .................. 191,602 3,174 --
Other interest income ....................... 1,413 -- --
------------ ------------- ------------
Total interest income ...................... 932,578 26,012 --
------------ ------------- ------------
INTEREST EXPENSE:
Deposits .................................... 323,246 12,401 --
Borrowings .................................. 263,112 6,114 (848)
------------ ------------- ------------
Total interest expense ..................... 586,358 18,515 (848)
------------ ------------- ------------
Net interest income ......................... 346,220 7,497 848
Provision for loan losses ................... 29,700 500 --
------------ ------------- ------------
Net interest income after provision for loan
losses ..................................... 316,520 6,997 848
NONINTEREST INCOME:
Customer banking fees ....................... 34,356 199 --
Mortgage banking operations ................. 92,150 191 3,484
Net gain (loss) on sales of assets .......... 414,413 (1,140) --
Other ....................................... 54,542 239 51
------------ ------------- ------------
Total noninterest income ................... 595,461 (511) 3,535
NONINTEREST EXPENSE:
Compensation and benefits ................... 155,976 1,257 2,070
Other ....................................... 214,168 2,616 1,099
------------ ------------- ------------
Total noninterest expense .................. 370,144 3,873 3,169
------------ ------------- ------------
Income (loss) before income taxes and
minority interest .......................... 541,837 2,613 1,214
Income tax (benefit) expense ................ (77,523) 369 120
------------ ------------- ------------
Income (loss) before minority interest ..... 619,360 2,244 1,094
Minority interest--Series A Preferred Stock
dividends, net ............................. -- -- --
------------ ------------- ------------
Net income (loss) ........................... 619,360 2,244 1,094
Existing Preferred Stock dividends .......... 25,938 -- --
------------ ------------- ------------
Net income (loss) available to common
stockholder ................................ $593,422 $ 2,244 $1,094
============ ============= ============
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAL FED
BRANCH SALES ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTALS (C) TOTALS (D) ADJUSTMENTS (E) COMBINED
-------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans ....................................... $ (110) $579,125 $ -- $1,315,719
Securities .................................. -- 80,200 -- 105,897
Mortgage-backed securities .................. -- 127,000 -- 321,776
Other interest income ....................... -- (21,792) -- (20,379)
-------------- ------------- --------------- ------------
Total interest income ...................... (110) 764,533 -- 1,723,013
-------------- ------------- --------------- ------------
INTEREST EXPENSE:
Deposits .................................... (40,742) 318,800 -- 613,705
Borrowings .................................. 44,835 174,325 (17,775)(1) 469,763
-------------- ------------- --------------- ------------
Total interest expense ..................... 4,093 493,125 (17,775) 1,083,468
-------------- ------------- --------------- ------------
Net interest income ......................... (4,203) 271,408 17,775 639,545
Provision for loan losses ................... -- 30,800 -- 61,000
-------------- ------------- --------------- ------------
Net interest income after provision for loan
losses ..................................... (4,203) 240,608 17,775 578,545
NONINTEREST INCOME:
Customer banking fees ....................... (3,965) 36,300 -- 66,890
Mortgage banking operations ................. -- 3,500 -- 99,325
Net gain (loss) on sales of assets .......... 10 1,800 -- 415,083
Other ....................................... (163) 15,500 -- 70,169
-------------- ------------- --------------- ------------
Total noninterest income ................... (4,118) 57,100 -- 651,467
NONINTEREST EXPENSE:
Compensation and benefits ................... (4,337) 50,994 -- 205,960
Other ....................................... (3,387) 173,224 -- 387,720
-------------- ------------- --------------- ------------
Total noninterest expense .................. (7,724) 224,218 -- 593,680
-------------- ------------- --------------- ------------
Income (loss) before income taxes and
minority interest .......................... (597) 73,490 17,775 636,332
Income tax (benefit) expense ................ (59) 11,606 1,749 (2) (63,738)
-------------- ------------- --------------- ------------
Income (loss) before minority interest ..... (538) 61,884 16,026 700,070(4)
Minority interest--Series A Preferred Stock
dividends, net ............................. -- -- 27,717 (3) 27,717
-------------- ------------- --------------- ------------
Net income (loss) ........................... (538) 61,884 (11,691) 672,353
Existing Preferred Stock dividends .......... -- 18,900 -- 44,838
-------------- ------------- --------------- ------------
Net income (loss) available to common
stockholder ................................ $ (538) $ 42,984 $(11,691) $ 627,515
============== ============= =============== ============
</TABLE>
(A) See note (A) on page OC-P-9.
(B) See note (B) on page OC-P-12.
(C) See note (C) on page OC-P-14.
(D) See note (D) on page OC-P-16.
(E) See note (E) on page OC-P-19.
OC-P-8
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ONE MONTH ENDED JANUARY 31, 1996 (A)
-------------------------------------------------------------
SFFED
ACQUISITION
VALUATION PRO FORMA PRO FORMA
(A) SFFED ACQUISITION 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 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 ........... (4,038) (908) 7,559 2,613
Income tax (benefit) expense ................ (4,993) -- 5,362 369 (5)
------------ --------------- --------------- -------------
Net income (loss) ........................... 955 (908) 2,197 2,244
Preferred stock dividends ................... -- -- -- --
------------ --------------- --------------- -------------
Net income (loss) available to common
stockholder ................................ $ 955 $ (908) $ 2,197 $ 2,244
============ =============== =============== =============
</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, (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.
OC-P-9
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES
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)
(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 the Bank:
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 the Bank:
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>
OC-P-10
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
(4) Represents adjustments to other noninterest expense relating to the
consolidation of SFFed's operations into those of the Bank. Substantially
all of SFFed's operations have been consolidated into the existing
operations of the Bank, 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
===========
</TABLE>
(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:
<TABLE>
<CAPTION>
<S> <C>
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
========
</TABLE>
OC-P-11
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ONE MONTH ENDED JANUARY 31, 1996 (A)
----------------------------------------------------------------------------
LMUSA
PRO FORMA 1996 PURCHASE
(B) LMUSA 1996 PURCHASE HISTORICAL (A) ADJUSTMENTS (B) ADJUSTMENTS (C) PRO 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 .......... 1,404 (1,879) 1,689 1,214
Income tax (benefit) expense ............... -- -- 120 (4) 120
---------------- ----------------- ----------------- --------------------
Net income (loss) .......................... 1,404 (1,879) 1,569 1,094
Preferred stock dividends .................. -- -- -- --
---------------- ----------------- ----------------- --------------------
Net income (loss) available to common
stockholder ............................... $1,404 $(1,879) $1,569 $1,094
================ ================= ================= ====================
</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.
OC-P-12
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
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
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
LMUSA ESTIMATED IN 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 the
Bank's 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>
OC-P-13
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BRANCH SALES
OHIO SALE MICHIGAN SALE NORTHEAST SALE PRO FORMA
(C) BRANCH SALES 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 ........... 374 (1,197) 226 (597)
Income tax (benefit) expense ................ 37 (118) 22 (59)(2)
------------ --------------- -------------- --------------
Net income (loss) ........................... 337 (1,079) 204 (538)
Preferred stock dividends ................... -- -- -- --
------------ --------------- -------------- --------------
Net income (loss) available to common
stockholder ................................ $ 337 $ (1,079) $ 204 $ (538)
============ =============== ============== ==============
</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. Amounts represent
historical information from January 1, 1996 through the date of sale. The
sales were consummated in the first six months of 1996.
OC-P-14
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(C) BRANCH SALES (CONTINUED)
(1) Represents increase in interest expense on borrowings to fund the
Branch Sales, as follows:
<TABLE>
<CAPTION>
SALE DEPOSITS
DATE LOCATION SOLD ASSETS
- --------- ------------ ------------ ---------
<S> <C> <C> <C>
1/19/96 Ohio $1,392,561 $20,480
1/12/96 New York 416,476 5,997
2/23/96 New York 270,046 1,838
3/15/96 New York 615,572 8,083
3/22/96 New Jersey 501,262 6,396
3/22/96 New York 637,045 9,465
Total Northeast
6/28/96 Michigan 799,226 15,060
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SALE PRE-TAX AMOUNT PRO FORMA
DATE GAIN BORROWED RATE DAYS INTEREST EXPENSE
- --------- ---------- ------------ ---------- ------ ----------------
<S> <C> <C> <C> <C> <C>
1/19/96 $130,660 $1,241,417 5.45%(i) 19 $ 3,522
=======
1/12/96 32,991 377,512 5.45%(i) 12 $ 676
2/23/96 17,027 251,154 5.45%(i) 54 2,025
3/15/96 48,933 558,514 5.45%(i) 75 6,255
3/22/96 35,938 458,932 5.45%(i) 82 5,619
3/22/96 41,286 586,269 5.45%(i) 82 7,178
-------
$21,753
=======
6/28/96 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.
(2) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the six months ended June
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>
OC-P-15
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(D) CAL FED ACQUISITION
<TABLE>
<CAPTION>
CAL FED
CALIFORNIA ACQUISITION
FEDERAL 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 ............................... 326,300 (7,500)(1) -- 318,800
Borrowings ............................. 175,300 (975)(1) -- 174,325
------------ -------------- -------------- -------------
Total interest expense ................ 501,600 (8,475) -- 493,125
------------ -------------- -------------- -------------
Net interest income .................... 260,000 36,900 (25,492) 271,408
Provision for loan losses .............. 30,800 -- -- 30,800
------------ -------------- -------------- -------------
Net interest income after provision for
loan losses ........................... 229,200 36,900 (25,492) 240,608
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 .................................. 167,700 41,909 (2) (36,385)(4) 173,224
------------ -------------- -------------- -------------
Total noninterest expense ............. 240,000 41,909 (57,691) 224,218
------------ -------------- -------------- -------------
Income (loss) before income taxes ..... 51,100 (9,809) 32,199 73,490
Federal and state income taxes ......... 100 -- 11,506 (5) 11,606
------------ -------------- -------------- -------------
Net income (loss) ...................... 51,000 (9,809) 20,693 61,884
------------ -------------- -------------- -------------
Existing Preferred Stock dividends .... 18,900 -- -- 18,900
------------ -------------- -------------- -------------
Net income (loss) available to common
stockholder ........................... $ 32,100 $ (9,809) $ 20,693 $ 42,984
============ ============== ============== =============
</TABLE>
- ------------
(a) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization of
California Federal'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 California Federal's
operations with the Bank's and (iii) income taxes relative to the Cal
Fed Acquisition. See further discussion at Notes (3) and (4).
OC-P-16
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(D) CAL FED ACQUISITION (CONTINUED)
(1) Represents amortization or accretion of fair value adjustments as
follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM
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 EXTRAORDINARY ITEM
INCREASE/(DECREASE)
----------------------
<S> <C>
Amortization of fair adjustments:
Amortization of goodwill ......................... $(44,465)
Elimination of amortization of California Federal'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 established 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 California Federal's operations into those
of First Nationwide. A substantial portion of California
Federal's operations will be consolidated into the existing
operations of First Nationwide, 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:
OC-P-17
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(D) CAL FED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
CALIFORNIA FEDERAL 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
Occupancy & Other Expense:
Retail Banking ............... 45,797 20,355 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)
------------------ ------------ -------------
89,347 52,962 36,385
SAIF Deposit Insurance Premium 75,778 75,778 --
------------------ ------------ -------------
Total Noninterest Expense ... $237,444(i) $179,753 $ 57,691
================== ============ =============
</TABLE>
(i) Balance represents total historical noninterest expense of
$240,000 less historical amortization of intangible assets
already adjusted in note 2 on page OC-P-17.
(5) 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 Cal Fed
Acquisition was computed as follows:
OC-P-18
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(D) CAL FED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
<S> <C>
Income before income taxes ....................... $ 73,490
Add back: permanent differences--amortization of
goodwill ........................................ 44,465
----------
Taxable income ................................... $117,955
==========
Federal AMT, reduced to the extent of 90%, by net
operating loss carryovers ....................... $ 2,170
State, at an assumed rate of 8% .................. 9,436
----------
$ 11,606
==========
</TABLE>
(6) Includes $12,000 gain on sale of California Federal's branches in
San Diego County.
(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 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 reduction in
interest expense was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced to the extent of
90%, by net operating loss carryover ... $ 327
State, at an assumed rate of 8% ......... 1,422
------
$1,749
======
</TABLE>
(3) Represents dividends on the $450,000 Series A Preferred Shares,
net of tax benefit, at an assumed rate of 9 1/8% 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, for the nine months ended September 30, 1996 by
$759. If the underwriters' $50 million over-allotment option is
exercised in full, dividends on the Series A Preferred Shares,
net of tax benefit, for the period would increase by $3,080. It
is expected that the issuance of the Series A Preferred Shares,
by increasing core capital, will enable the Bank to retain a
higher base of interest-earning assets, resulting in
incrementally higher related earnings.
OC-P-19
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(E) PRO FORMA ADJUSTMENTS (Continued)
(4) 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.
OC-P-20
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA
FIRST ACQUISITION PURCHASES
NATIONWIDE PRO FORMA PRO FORMA
HISTORICAL TOTALS (A) TOTALS (B)
------------ ------------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans ............................... $ 823,864 $230,713 $22,477
Securities .......................... 28,055 10,685 --
Mortgage-backed securities .......... 212,880 62,403 --
Other interest income ............... 10,705 -- --
------------ ------------- -----------
Total interest income ............. 1,075,504 303,801 22,477
------------ ------------- -----------
INTEREST EXPENSE:
Deposits ............................ 447,359 143,797 --
Borrowings .......................... 261,917 74,587 2,018
------------ ------------- -----------
Total interest expense ............ 709,276 218,384 2,018
Net interest income ................. 366,228 85,417 20,459
Provision for loan losses ........... 37,000 11,094 --
------------ ------------- -----------
Net interest income after provision
for loan losses .................... 329,228 74,323 20,459
NONINTEREST INCOME:
Customer banking fees ............... 47,493 5,291 --
Mortgage banking operations ......... 70,265 860 76,445
Net gain (loss) on sales of assets . 147 -- (1,851)
Other ............................... 33,068 1,677 2,690
------------ ------------- -----------
Total noninterest income .......... 150,973 7,828 77,284
NONINTEREST EXPENSE:
Compensation and benefits ........... 154,288 11,141 19,500
Other ............................... 172,446 34,896 38,081
------------ ------------- -----------
Total noninterest expense ......... 326,734 46,037 57,581
------------ ------------- -----------
Income (loss) before income taxes
and minority interest .............. 153,467 36,114 40,162
Federal and state income tax
(benefit) expense .................. (55,826) 4,890 3,952
------------ ------------- -----------
Income (loss) before minority
interest ........................... 209,293 31,224 36,210
Minority interest-Series A Preferred
Stock dividends, net ............... -- -- --
------------ ------------- -----------
Net income (loss) ................... 209,293 31,224 36,210
Existing Preferred Stock dividends . 34,584 -- --
------------ ------------- -----------
Net income (loss) available to
common stockholder ................. $ 174,709 $ 31,224 $36,210
============ ============= ===========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAL FED
BRANCH SALES ACQUISITION
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTAL (C) TOTALS (D) ADJUSTMENTS (E) COMBINED
-------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans ............................... $ (623) $ 722,000 $ -- $1,798,431
Securities .......................... -- 119,000 -- 157,740
Mortgage-backed securities .......... -- 197,800 -- 473,083
Other interest income ............... -- (21,089) -- (10,384)
-------------- ------------- --------------- ------------
Total interest income ............. (623) 1,017,711 -- 2,418,870
-------------- ------------- --------------- ------------
INTEREST EXPENSE:
Deposits ............................ (211,530) 396,200 -- 775,826
Borrowings .......................... 280,671 245,400 (26,088)(1) 838,505
-------------- ------------- --------------- ------------
Total interest expense ............ 69,141 641,600 (26,088) 1,614,331
Net interest income ................. (69,764) 376,111 26,088 804,539
Provision for loan losses ........... -- 31,800 -- 79,894
-------------- ------------- --------------- ------------
Net interest income after provision
for loan losses .................... (69,764) 344,311 26,088 724,645
NONINTEREST INCOME:
Customer banking fees ............... (22,228) 42,100 -- 72,656
Mortgage banking operations ......... -- 3,600 -- 151,170
Net gain (loss) on sales of assets . -- 6,600 -- 4,896
Other ............................... (789) 2,400 -- 39,046
-------------- ------------- --------------- ------------
Total noninterest income .......... (23,017) 54,700 -- 267,768
NONINTEREST EXPENSE:
Compensation and benefits ........... (19,476) 69,408 -- 234,861
Other ............................... (25,823) 158,283 -- 377,883
-------------- ------------- --------------- ------------
Total noninterest expense ......... (45,299) 227,691 -- 612,744
-------------- ------------- --------------- ------------
Income (loss) before income taxes
and minority interest .............. (47,482) 171,320 26,088 379,669
Federal and state income tax
(benefit) expense .................. (4,671) 22,692 2,567 (2) (26,396)
-------------- ------------- --------------- ------------
Income (loss) before minority
interest ........................... (42,811) 148,628 23,521 406,065
Minority interest-Series A Preferred
Stock dividends, net ............... -- -- 36,956 (3) 36,956
-------------- ------------- --------------- ------------
Net income (loss) ................... (42,811) 148,628 (13,435) 369,109
Existing Preferred Stock dividends . -- 25,600 -- 60,184
-------------- ------------- --------------- ------------
Net income (loss) available to
common stockholder ................. $(42,811) $123,028 $(13,435) $308,925
============== ============= =============== ============
</TABLE>
- ------------
(A) See note (A) on page OC-P-22.
(B) See note (B) on page OC-P-26.
(C) See note (C) on page OC-P-28.
(D) See note (D) on page OC-P-30.
(E) See note (E) on page OC-P-33.
OC-P-21
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
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 gain (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 ..... 1,368 (10,897) 45,643 36,114
Income tax (benefit) expense ........... 1,568 -- 3,322 4,890(5)
------------ -------------- -------------- -------------
Net income (loss) ...................... (200) (10,897) 42,321 31,224
Preferred stock dividends .............. -- -- -- --
------------ -------------- -------------- -------------
Net income (loss) available to common
stockholder ........................... $ (200) $(10,897) $ 42,321 $ 31,224
============ ============== ============== =============
</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 the
Bank, (ii) the elimination of certain historical noninterest expense
recorded by SFFed as a result of the acquisition by the Bank and (iii)
income taxes relative to the SFFed Acquisition.
OC-P-22
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
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
AND EXTRAORDINARY ITEM
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
AND EXTRAORDINARY ITEM
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 the Bank 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 the Bank:
Payments under employment contracts ......................................... 2,080
Accruals for benefit plans frozen by the Bank ............................... 3,260
---------
$24,377
=========
</TABLE>
(4) Represents adjustments to other noninterest expense relating to the
consolidation of SFFed's operations into those of the Bank and the
elimination of nonrecurring historical expenses of SFFed. Substantially
all of SFFed's operations have been consolidated into the existing
operations of the Bank, 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.
OC-P-23
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
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 the Bank ..... 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
the Bank:
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-23.
OC-P-24
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
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>
OC-P-25
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
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 ........... (275,672) (1,442) 317,276 40,162
Income tax (benefit) expense ................ -- -- 3,952 (5) 3,952
------------- -------------- -------------- ----------------
Net income (loss) ........................... (275,672) (1,442) 313,324 36,210
Preferred stock dividends ................... -- -- -- --
------------- -------------- -------------- ----------------
Net income (loss) available to common
stockholder ................................ $(275,672) $(1,442) $ 313,324 $36,210
============= ============== ============== ================
</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 the Bank,
(ii) decreases in compensation and benefits expense due to reduction in
staffing, (iii) elimination of certain other noninterest expense due to
consolidation with the Bank's existing mortgage banking operations, and
(iv) income taxes relative to the LMUSA Purchases.
OC-P-26
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
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 AND EXTRAORDINARY
ITEM
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 the Bank 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
LMUSA ESTIMATED IN OTHER
HISTORICAL FUTURE NONINTEREST
COSTS 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 the Bank's 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>
OC-P-27
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(C) BRANCH SALES
<TABLE>
<CAPTION>
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 ....................... $ (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 45,869 148,237 280,671 (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 gain (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 ..... (14,205) (10,566) (22,711) (47,482)
Income tax (benefit) expense ........... (1,397) (1,039) (2,235) (4,671)(2)
------------- --------------- -------------- --------------
Net income (loss) ...................... (12,808) (9,527) (20,476) (42,811)
Preferred stock dividends .............. -- -- -- --
------------- --------------- -------------- --------------
Net income (loss) available to common
stockholder ........................... $ (12,808) $ (9,527) $ (20,476) $ (42,811)
============= =============== ============== ==============
</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.
OC-P-28
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(C) 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>
OC-P-29
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(D) CAL FED ACQUISITION (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAL FED
CALIFORNIA ACQUISITION
FEDERAL 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 ............................. 119,000 -- -- 119,000
Mortgage-backed securities ............. 169,200 28,600 (1) -- 197,800
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 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 ..... 93,700 33,589 44,031 171,320
Federal and state income taxes ......... 100 -- 22,592 (5) 22,692
------------ --------------- --------------- -------------
Net income (loss) ...................... 93,600 $ 33,589 21,439 148,628
Existing Preferred Stock dividends .... 25,600 -- -- 25,600
------------ --------------- --------------- -------------
Net income (loss) available to common
stockholder ........................... $ 68,000 $ 33,589 $ 21,439 123,028
============ =============== =============== =============
</TABLE>
- ------------
(a) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization of
California Federal'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 California Federal's
operations with the Bank's and (iii) income taxes relative to the Cal
Fed Acquisition. See further discussion at Notes (3) and (4).
OC-P-30
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(D) CAL FED ACQUISITION (CONTINUED)
(1) Represents amortization or accretion of fair value adjustments as
follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM
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 AND
EXTRAORDINARY ITEM
INCREASE/(DECREASE)
-----------------------
<S> <C>
Amortization of fair value adjustment--amortization of
goodwill .................................................... $(59,287)
Elimination of amortization of California Federal'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 California Federal's operations into those of the
Bank. A substantial portion of California Federal's operations will be
consolidated into the existing operations of the Bank, 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 35%
reduction over historical levels based on management's current
transition plan:
OC-P-31
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(D) CAL FED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
CALIFORNIA
FEDERAL 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 27,554 (15,388)
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 ........... 48,781 23,800 24,981
------------- ------------ -------------
123,299 72,971 50,328
------------- ------------ -------------
SAIF Deposit Insurance Premium 25,996 25,996 --
------------- ------------ -------------
Total Noninterest Expense ... $246,424(i) $168,404 $ 78,020
============= ============ =============
</TABLE>
(i) Balance represents total historical noninterest expense of $249,900
less historical amortization of intangible assets already adjusted in
note 2 on page OC-P-31.
(5) 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 Cal Fed Acquisition was computed as
follows:
<TABLE>
<CAPTION>
<S> <C>
Income before income 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, at an assumed rate of 8% ................................. 18,449
----------
$ 22,692
==========
</TABLE>
OC-P-32
<PAGE>
FIRST NATIONWIDE BANK, A FEDERAL SAVINGS BANK
TO BE KNOWN AS CALIFORNIA FEDERAL BANK, A FEDERAL SAVINGS BANK
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 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 reduction in interest expense was
computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced to the extent of 90%, by net operating
loss carryovers ............................................... $ 480
State, at an assumed rate of 8% ................................ 2,087
-------
$2,567
=======
</TABLE>
(3) Represents dividends on the $450,000 Series A Preferred Shares, net of
tax benefit, at an assumed rate of 9 1/8% 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, for the year ended
December 31, 1995 by $1,013. If the underwriters' $50 million
over-allotment option is exercised in full, dividends on the Series A
Preferred Shares, net of tax benefit, for the period would increase by
$4,106. It is expected that the issuance of the Series A Preferred
Shares, by increasing core capital, will enable the Bank to retain a
higher base of interest-earning assets, resulting in incrementally
higher related earnings.
OC-P-33
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
TO WHICH IT RELATES OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS
DATE.
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Additional Information ...................... iv
Prospectus Summary .......................... 1
Risk Factors ................................ 14
The Company ................................. 22
Use of Proceeds ............................. 23
Capitalization .............................. 24
Business and Strategy ....................... 25
Certain Information Regarding the Bank ..... 40
Management .................................. 46
Certain Transactions Constituting The
Formation .................................. 49
Description of Series A Preferred Shares ... 50
Description of Capital Stock ................ 57
Federal Income Tax Considerations ........... 62
ERISA Considerations ........................ 70
Experts ..................................... 73
Ratings ..................................... 73
Certain Legal Matters ....................... 73
Glossary .................................... 74
Index to Financial Statement ................ F-1
Underwriting ................................ U-1
Annex I -- Offering Circular for Bank
Preferred Stock ............................ OC-1
</TABLE>
THROUGH AND INCLUDING FEBRUARY 19, 1997 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
18,000,000 SHARES
CALIFORNIA FEDERAL
PREFERRED
CAPITAL
CORPORATION
9 1/8% NONCUMULATIVE
EXCHANGEABLE
PREFERRED STOCK,
SERIES A
GOLDMAN, SACHS & CO.
SMITH BARNEY INC.
