AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 1996.
REGISTRATION NO. 33-82654
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------
POST-EFFECTIVE
AMENDMENT NO. 2
TO
FORM S-1*
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------------------------------
FIRST NATIONWIDE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Delaware 6035 (Primary Standard 13-3778552 (I.R.S.
(State or other jurisdiction of Industrial Classification Code Employer Identification
incorporation or organization) Number) Number)
</TABLE>
-----------------------------------------
38 EAST 63RD STREET
NEW YORK, NEW YORK 10021
(212) 572-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------------------------------------
GLENN P. DICKES, ESQ.
FIRST NATIONWIDE HOLDINGS INC.
38 EAST 63RD STREET
NEW YORK, NEW YORK 10021
(212) 572-8500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF AGENT FOR SERVICE)
-----------------------------------------
Copies to:
Stacy J. Kanter, Esq. Christie S. Flanagan, Esq.
Skadden, Arps, Slate, Meagher & Flom First Nationwide Holdings Inc.
919 Third Avenue 200 Crescent Court, Suite 1350
New York, New York 10022 Dallas, Texas 75201
(212) 735-3000 (214) 871-5131
-----------------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Post-Effective Amendment No.
2 to this Registration Statement.
-----------------------------------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
- -----------------------------------------------------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
POST-EFFECTIVE AMENDMENT NO. 2 TO THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR
UNTIL THIS POST-EFFECTIVE AMENDMENT NO. 2 TO THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(A), MAY DETERMINE. ------------
* Except for this cover page, the Prospectus included in this Post-Effective
Amendment No. 2 complies with the requirements of Form S-3.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
SUBJECT TO COMPLETION DATED MAY 24, 1996
PROSPECTUS
$5,500,000
FIRST NATIONWIDE HOLDINGS INC.
12 1/4 % SENIOR EXCHANGE NOTES DUE 2001
-----------------------------------------
Interest payable May 15 and November 15 Due May 15, 2001
This Prospectus relates to the offering (the "Offering") by Gerald J. Ford
and/or Carl B. Webb (the "Selling Securityholders") of up to $5,500,000
aggregate principal amount of the 12-1/4% Senior Exchange Notes Due 2001 (the
"Notes") of First Nationwide Holdings Inc. (the "Issuer"). The Issuer will
not receive any proceeds from the sale of the Notes by the Selling
Securityholders.
The Notes will be redeemable at the option of the Issuer, in whole or in
part, during the 12-month period beginning May 15, 1999, at a redemption
price of 106.125% of the principal amount thereof, plus accrued and unpaid
interest to the date of redemption, and thereafter at 100% of the principal
amount thereof, plus accrued and unpaid interest to the date of redemption.
Upon a Change of Control Call Event (as defined herein) prior to May 15,
1999, the Issuer will have the option to redeem the Notes, in whole but not
in part, at a redemption price of 100% of the amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption, plus the Applicable
Premium (as defined herein). Upon a Change of Control Put Event (as defined
herein), each holder of the Notes will have the right to require the Issuer
to repurchase all or a portion of such holder's Notes at 101% of the
principal amount thereof plus accrued and unpaid interest to the date of
repurchase. See "Description of the Notes."
The Notes are senior unsecured obligations of the Issuer and will rank
pari passu in right of payment with all future senior debt of the Issuer, if
any is issued, and senior to all existing and future subordinated debt of the
Issuer. As of March 31, 1996, on an unconsolidated basis the Issuer had
outstanding $340 million of indebtedness, consisting of $200 million
principal amount of the Notes and $140 million principal amount of the
Issuer's 9 1/8 % Senior Subordinated Notes Due 2003 (the "Senior Subordinated
Notes"). The Notes are effectively subordinated to (i) all existing and
future liabilities, including deposits, indebtedness and trade payables, of
the Issuer's subsidiaries, including First Nationwide Bank, A Federal Savings
Bank ("First Nationwide" or the "Bank"), and (ii) all preferred stock issued
by the Bank, including the 11 1/2 % Noncumulative Perpetual Preferred Stock
of the Bank (the "Bank Preferred Stock"). As of March 31, 1996, the
outstanding interest-bearing liabilities, including deposits, of such
subsidiaries were approximately $16.0 billion, the other liabilities of such
subsidiaries, including trade payables and accrued expenses, were
approximately $455 million, and there was $309 million aggregate liquidation
value of the Bank Preferred Stock outstanding.
The Issuer does not currently intend to list the Notes on any securities
exchange or seek approval for quotation through any automated quotation
system. There can be no assurance as to the liquidity or development of any
market for the Notes.
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN
CONNECTION WITH AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS" BEGINNING ON
PAGE 8.
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.
The Notes to be sold by the Selling Securityholders will be sold directly,
or through agents designated from time to time, or through underwriters or
dealers, which may be a group of underwriters represented by one or more
firms on terms to be determined at the time of sale. If required, the
specific amount of securities to be sold, the names of the Selling
Securityholders, the name or names of any underwriter, dealer or agent, the
purchase price and public offering price, the names of any such agent, dealer
or underwriter, and any applicable commission or discount with respect to a
particular offer will be set forth in a prospectus supplement.
The Issuer will pay all the expenses incident to the Offering. The Issuer
will indemnify the Selling Securityholders against certain liabilities,
including liabilities under the Securities Act of 1933, as amended (the
"Securities Act"). See "Plan of Distribution."
The Selling Securityholders and any broker-dealers, agents or underwriters
that participate with the Selling Securityholders in the distribution of the
Notes may be deemed to be "underwriters" within the meaning of the Securities
Act, and any commissions received by them and any profit on the resale of the
securities purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act.
The date of this Prospectus is , 1996.
<PAGE>
ADDITIONAL INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"SEC") a Registration Statement (the "Registration Statement") under the
Securities Act with respect to the Notes being offered by this Prospectus.
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits thereto, to which reference is hereby
made. Any statements made in this Prospectus concerning the provisions of
certain documents are not necessarily complete and, in each instance,
reference is made to the copy of such document filed as an exhibit to the
Registration Statement.
The Registration Statement and the exhibits thereto may be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and will also
be available for inspection and copying at the regional offices of the SEC
located at 7 World Trade Center, New York, New York 10048 and at Citicorp
Center, 500 West Madison Street (Suite 1400), Chicago, Illinois 60661. Copies
of such material may also be obtained from the Public Reference Section of
the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Issuer is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith is required to file periodic reports and other
information with the SEC. In the event the Issuer is not required to be
subject to the reporting requirements of the Exchange Act in the future the
Issuer will be required under the Indenture, between the Issuer and State
Street Bank and Trust Company, as successor to The First National Bank of
Boston, as trustee (the "Trustee"), pursuant to which the Notes have been
issued (the "Indenture"), to continue to file with the SEC, and to furnish
holders of the Notes with, the information, documents and other reports
specified in Sections 13 and 15(d) of the Exchange Act, including reports on
Forms 10-K, 10-Q and 8-K, for so long as any Notes are outstanding.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Issuer with the Commission (File No.
33-82654) pursuant to the Exchange Act, are incorporated herein by reference
and made a part hereof:
(a) The Issuer's Annual Report on Form 10-K for the year ended December
31, 1995.
(b) The Issuer's Amended and Restated Annual Report on Form 10-K for the
year ended December 31, 1995.
(c) The Issuer's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996.
All documents filed by the Issuer with the Commission pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof
and prior to the termination of the offering of the Notes shall hereby be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing of such documents.
The Issuer will provide without charge to each person to whom a copy of
this Prospectus is delivered, on the written or oral request of any such
person, a copy of any and all of the documents incorporated herein by
reference (other than exhibits not specifically incorporated herein by
reference). Requests for such copies should be directed to the Secretary of
the Issuer at 38 East 63rd Street, New York, New York 10021 (telephone number
(212) 572-5800).
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or
is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modifiedor superseded, to constitute a part of this Prospectus.
2
<PAGE>
THE ISSUER
The Issuer
The Issuer is a holding company whose only significant asset is all of the
common stock of the Bank. As such, the Issuer's principal business operations
are conducted by the Bank and its subsidiaries.
First Nationwide
First Nationwide'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 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
March 31, 1996, the Bank had approximately $17.7 billion in assets and
approximately $9.3 billion in deposits.
The Bank is chartered as a federal stock savings bank under the Home
Owner's Loan Act ("HOLA") and regulated by the Office of Thrift Supervision
("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), which,
through the Savings Association Insurance Fund ("SAIF"), insures the deposit
accounts of First Nationwide, up to applicable limits. The Bank is also a
member of the Federal Home Loan Bank System.
Business Strategy
The Bank's business strategy is to augment its position as a leading
thrift in California, principally through a combination of selective
acquisitions of high quality assets and deposits, expansion of its mortgage
banking and servicing operations and continued increases in its operating
efficiency. The key elements of this business strategy include:
o Expanding First Nationwide's retail branch network in California
through acquisitions of additional branches and other operations.
Management believes that the West Coast region, and California in
particular, offers attractive opportunities to build franchise
value.
o Expanding and improving the efficiency of First Nationwide's
mortgage banking operations while increasing origination of
residential loans, continuing to retain servicing on loans that it
sells and evaluating opportunities to augment its servicing
portfolio through purchases.
o Protecting the credit quality of the assets of First Nationwide
through, among other things, continuing to originate single-family
loans and consumer loans in accordance with stringent underwriting
standards and actively managing its existing portfolio of
commercial real estate loans.
o Increasing First Nationwide'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 First Nationwide is located.
Since October 1994, the Bank has been active in implementing this strategy
and, in connection therewith, has consummated or entered into agreements to
consummate the transactions described below.
o On February 1, 1996, First Nationwide acquired SFFed Corp.
("SFFed") and its wholly owned subsidiary, San Francisco Federal
Savings and Loan Association, which, as of December 31, 1995, had
approximately $4.0 billion in assets and approximately $2.7 billion
in deposits (the "SFFed Acquisition"). In connection with the SFFed
Acquisition on January 31, 1996, the Issuer issued $140 million
aggregate principal amount of the Senior Subordinated Notes (the
"Senior
3
<PAGE>
Subordinated Notes Offering"). The Senior Subordinated Notes were
sold pursuant to exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and
applicable state securities laws. The Issuer contributed the net
proceeds from the Senior Subordinated Notes Offering to the Bank as
additional paid-in capital, which augmented the Bank's regulatory
capital to maintain its "well capitalized" status after the SFFed
Acquisition.
o On December 19, 1995, the Bank entered into a merger agreement with
Home Federal Financial Corporation to acquire Home Federal
Financial Corporation and its wholly owned federally chartered
savings association subsidiary, Home Federal Savings and Loan
Association of San Francisco ("Home Federal"), which, as of March
31, 1996, had approximately $717 million in assets and $626 million
in deposits and operated 15 branches in Northern California (the
"Home Federal Acquisition").
o In April 1995, the Bank acquired approximately $13 million in
deposits located in Tiburon, California from East-West Federal
Bank, a federal savings bank. 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. On December 8, 1995, the Bank consummated the
purchase of four retail branches located in Sonoma County,
California with associated deposit accounts of approximately $143.5
million from Citizens Federal Bank, a Federal Savings Bank
(collectively, the "Branch Purchases").
o From September through December of 1995, First Nationwide entered
into contracts for 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, together with
the Ohio Branch Sale and the Northeast Branch Sales, the "Branch
Sales") at prices which represent an average premium of 7.82% of
the deposits sold.
o 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").
o On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc.
("LMUSA") a loan servicing portfolio of approximately $11.1 billion
(including $3.1 billion of mortgage servicing rights ("MSRs"),
which are rights to service mortgages held by others, which MSRs
are owned by third parties who have subcontracted to FNMC the
servicing function (a "sub-servicing portfolio")), $2.9 billion of
MSRs that 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 $14.1 billion loan servicing portfolio (including
a sub-servicing portfolio of $2.4 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").
Management believes that these transactions have significantly increased
the Bank's presence on the West Coast, providing additional economies of
scale and diversity of operations within its target California markets. As a
result of these transactions, 70% of the Bank's total deposits will be
located in California.
Management anticipates that the SFFed Acquisition, the Branch Sales and
the Home Federal Acquisition will enable the Bank to enhance the value of its
franchise and improve its operating efficiency through the consolidation or
elimination of duplicative bank 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 51.6% on an annualized
basis, excluding non-recurring gains and charges and certain incentive plan
accruals, during the first quarter of 1996.
4
APITAL PRINTING SYSTEMS]
<PAGE>
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. The Bank'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.
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. Since October 1994, the Bank
has 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
The Bank 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 the Bank, FSLIC Resolution
Fund (as successor to the Federal Savings and Loan Insurance Corporation),
First Gibraltar Holdings Inc. (one of the Issuer's parent companies) 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 $829 million in loans and 130 branches with
approximately $6.9 billion in deposits (the "First Gibraltar Texas Sale"),
and the Bank 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 and the performance of its obligations under the
Assistance Agreement.
On April 14, 1994, the Bank 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, the Bank 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, the Bank
changed its name from "First Madison Bank, FSB" to "First Nationwide Bank, A
Federal Savings Bank."
In connection with the FN Acquisition, the Bank 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 the Bank has 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, the Bank
has not required Granite to purchase $500 million of non-performing assets,
it may require Granite to purchase any qualifying assets of the Bank, other
than assets which previously were eligible to be put to Granite and which the
Bank did not require Granite to purchase, up to such $500 million maximum. At
March 31, 1996, the remaining available balance under the Put Agreement was
approximately $95.7 million. Of the approximately $302 million in non-
performing assets at March 31, 1996, approximately $30.1 million were
eligible to be sold to Granite under the Put Agreement. The Issuer expects
that the Bank will use the full capacity available under the Put Agreement
for such non-performing and other qualifying assets.
5
<PAGE>
The Bank financed the FN Acquisition with: (i) a capital contribution by
the Issuer funded with the net proceeds of (a) the issuance of the Issuer's
12-1/4% Senior Notes Due 2001 (the "Old Notes") and (b) the issuance of the
Issuer's class C common stock to First Nationwide (Parent) Holdings Inc.
("Holdings"), an indirect subsidiary of MacAndrews Holdings, (ii) the net
proceeds from the issuance of the Bank Preferred Stock and (iii) existing
cash and proceeds from securities sold under agreements to repurchase. The
Issuer exchanged the Old Notes for the Notes, which have substantially the
same terms as the Old Notes.
Ownership
The Issuer 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% 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. The Issuer's principal
executive offices are located at 38 East 63rd Street, New York, New York
10021, and its telephone number is (212) 572-5800. The Issuer was
incorporated in 1994 under the laws of the State of Delaware.
6
<PAGE>
The following chart sets forth in simplified form the ownership structure
of the Issuer and the Bank.
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 Holdings Inc.
("First Gibraltar Holdings")
100%
First Nationwide (Parent) Holdings Inc.
("Holdings")
80%*
Hunter's Glen/
Ford, Ltd.
("Hunter's Glen")
20%*
FIRST NATIONWIDE HOLDINGS INC.
(THE "ISSUER")
100%
First Nationwide Bank, A Federal Savings Bank
("First Nationwide" or the "Bank")
Holders of the
Bank Preferred Stock
100% of preferred 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, owns 100% of the class B common stock of the Issuer, representing
20% of its voting common stock (representing approximately 15% of the
voting power of its common stock), and Holdings owns 100% of the class A
common stock of the Issuer, representing 80% of its voting common stock
(representing approximately 85% of the voting power of its common
stock), and 100% of the class C common stock of the Issuer.
7
<PAGE>
RISK FACTORS
Prior to making an investment decision, prospective investors should
consider the specific factors set forth below as well as the other
information contained in this Prospectus.
HOLDING COMPANY STRUCTURE; RESTRICTIONS ON ABILITY OF SUBSIDIARIES TO PAY
DIVIDENDS
The Issuer is a holding company with no significant business operations of
its own. The Issuer's only significant asset is all of the common stock of
the Bank. The Issuer's only source of cash to pay interest on and principal
of the Notes is expected to be distributions from the Bank. As of March 31,
1996, on an unconsolidated basis the Issuer's total indebtedness was $340
million. The annual interest payable on the Notes is $24.5 million and the
annual interest payable on the Senior Subordinated Notes is $12.8 million.
Although the Issuer expects that distributions from the Bank will be
sufficient to pay interest when due and the principal amount of the Notes at
maturity, distributions from the Bank may not be sufficient to pay the
principal amount of the Notes prior to maturity upon the occurrence of an
Event of Default (as defined herein) or to redeem or repurchase the Notes
upon a Change of Control Put Event. In addition, the Issuer may use such
distributions to make dividends, distributions or other Restricted Payments
subject to the limitations set forth in the Indenture. See "Description of
the Notes--Certain Covenants-- Limitation on Restricted Payments." In
addition, there can be no assurance that earnings from the Bank will be
sufficient to make distributions to the Issuer to enable it to pay interest
on the Notes when due or principal of the Notes at maturity or that such
distributions will be permitted by the terms of any debt instruments of the
Issuer's subsidiaries then in effect, by the terms of any class of preferred
stock issued by the Bank, including the Bank Preferred Stock, or under
applicable federal thrift laws or regulations.
The terms of the Bank 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 Bank Preferred Stock (collectively, "Junior Stock"))
with respect to any Junior Stock or repurchase, redeem or otherwise acquire,
or set apart funds for the repurchase, redemption or other acquisition of any
Junior Stock (including the common stock held by the Issuer) through a
sinking fund or otherwise, unless and until: (i) the Bank has paid full
dividends on the Bank 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 Bank 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.
The federal thrift laws, including the regulation of the OTS, limit the
Bank's ability to pay dividends to the Issuer. 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 fully phased-in 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 March 31, 1996, the Bank met the capital requirements of a "well
capitalized" institution under the FDICIA prompt corrective action standards.
Although management of the Issuer 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 or will remain "well
capitalized" thereafter. If the Bank were only "adequately capitalized," it
would not be able to accept brokered deposits unless it received a waiver
from the FDIC.
8
<PAGE>
INDEBTEDNESS AND ABILITY TO PAY PRINCIPAL OF THE NOTES
At March 31, 1996, on an unconsolidated basis the Issuer had outstanding
$340 million of indebtedness, consisting of the Notes and the Senior
Subordinated Notes. In addition, subject to the restrictions imposed by the
Indenture and the indenture governing the Senior Subordinated Notes (the
"Senior Subordinated Notes Indenture"), the Issuer may incur from time to
time additional indebtedness that is subordinate in right of payment to, the
Notes. See "Description of the Notes--Certain Covenants."
The Issuer currently anticipates that, in order to pay the principal
amount of the Notes upon the occurrence of an Event of Default or to redeem
or repurchase the Notes upon a Change of Control Put Event or, in the event
that earnings from the Bank are not sufficient to make distributions to the
Issuer to enable it to pay the principal amount of the Notes at maturity, the
Issuer may be required to adopt one or more alternatives, such as borrowing
funds, selling its equity securities, or the equity securities or assets of
the Bank, or seeking capital contributions or loans from its affiliates. None
of the affiliates of the Issuer are required to make any capital
contributions or other payments to the Issuer with respect to the Issuer's
obligations on the Notes. There can be no assurance that any of the foregoing
actions could be effected on satisfactory terms, that any of the foregoing
actions would enable the Issuer to pay the principal amount of the Notes or
that any of such actions would be permitted by the terms of the Indenture,
the Senior Subordinated Notes Indenture or any other debt instruments of the
Issuer or the Issuer's subsidiaries then in effect, by the terms of the Bank
Preferred Stock or under applicable federal thrift laws or regulations.
The terms of the Indenture and the Senior Subordinated Notes Indenture
generally permit the Issuer to make distributions (and other Restricted
Payments (as defined herein)) of up to 75% of the consolidated net income of
the Issuer if, after giving effect to such distribution or payment (i) the
Bank is "well capitalized" under applicable OTS regulations and (ii) the
Consolidated Common Shareholders' Equity (as defined herein) of the Bank is
at least equal to the Minimum Common Equity Amount (as defined herein). The
Issuer is able to loan funds to its affiliates pursuant to the Indenture and
the Senior Subordinated Notes Indenture provided that the Consolidated Common
Shareholders' Equity of the Bank is at least the Minimum Common Equity
Amount, and the terms of any such loan are in writing and on terms that would
be obtainable in arm's length dealings, and, in certain cases, to the
additional requirement that the loan be approved by a majority of
disinterested directors. Subject to such restrictions, such loans may consist
of any and all funds available to the Issuer, whether or not such funds may
be distributed (or otherwise paid as a Restricted Payment) pursuant to the
terms of the Indenture or the Senior Subordinated Notes Indenture. See
"Description of the Notes--Certain Covenants." Accordingly, there can be no
assurance that, notwithstanding the receipt by the Issuer of sufficient funds
to enable it to pay the principal amount of the Notes at maturity, the Issuer
will have funds available to pay the principal amount of the Notes at
maturity or prior to maturity upon the occurrence of an Event of Default or
to redeem or repurchase the Notes upon a Change of Control Put Event.
SUBORDINATION TO SUBSIDIARY LIABILITIES AND PREFERRED STOCK
Any right of the Issuer and its creditors, including holders of the Notes,
to participate in the assets of any of the Issuer's subsidiaries, including
the Bank, upon any liquidation or reorganization of any such subsidiary will
be subject to the prior claims of that subsidiary's creditors, including the
Bank's depositors and trade creditors (except to the extent that the Issuer
may itself be a creditor of such subsidiary). Accordingly, the Notes will be
effectively subordinated to (i) all existing and future liabilities,
including deposits, indebtedness and trade payables, of the Issuer's
subsidiaries, including the Bank, and (ii) all preferred stock issued by the
Bank, including the Bank Preferred Stock. At March 31, 1996, the outstanding
interest-bearing liabilities, including deposits, of such subsidiaries were
approximately $16.0 billion, the other liabilities of such subsidiaries,
including trade payables and accrued expenses, were approximately $455
million, and there was approximately $309 million aggregate liquidation value
of the Bank Preferred Stock outstanding. In the event of the liquidation or
dissolution of the Bank, the holders of the Bank Preferred Stock will have
preference over the Issuer, as the holder of all of the common stock of the
Bank, with respect to the assets of the Bank.
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<PAGE>
RESTRICTIONS IMPOSED BY TERMS OF THE ISSUER'S INDEBTEDNESS; CONSEQUENCES OF
FAILURE TO COMPLY
The terms and conditions of the Indenture and the Senior Subordinated
Notes Indenture impose restrictions that affect, among other things, the
ability of the Issuer to incur debt, pay dividends or make distributions,
engage in a business other than holding the common stock of the Bank and
similar banking institutions, make acquisitions, create liens, sell assets
and make certain investments. The ability of the Issuer to comply with the
foregoing provisions can be affected by events beyond the Issuer's control.
The breach of any of these covenants could result in a default under one or
more of the debt instruments of the Issuer. In the event of a default under
any indebtedness of the Issuer or the Issuer's subsidiaries, the holders of
such indebtedness could elect to declare all amounts outstanding under their
respective debt instruments to be due and payable. Any such declaration under
a debt instrument of the Issuer or the Issuer's subsidiaries is likely to
result in an event of default under one or more of the other debt instruments
of the Issuer or the Issuer's subsidiaries. If indebtedness of the Issuer or
the Issuer's subsidiaries were to be accelerated, there could be no assurance
that the assets of the Issuer or the Issuer's subsidiaries as the case may
be, would be sufficient to repay in full borrowings under all of such debt
instruments, including the Notes. See "--Indebtedness and Ability to Pay
Principal of the Notes" and "Description of the Notes."
STRATEGY
Management intends to continue the implementation of its various
strategies in order to capitalize on the strengths of the Bank. 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.
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 residential 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-earning 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 March 31, 1996, the Bank had $13.1 billion in assets indexed to changes in
market rates and $13.4 billion in liabilities maturing or repricing within
one year. In addition, the lag in implementing 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 principal of their 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.
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<PAGE>
Securities owned by the Bank are accounted for in accordance with
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities. "On November 15, 1995, the
Financial Accounting Standards Board 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,
the Issuer 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.
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 the Bank
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 are primarily non-performing, through
November 30, 1996, less $89 million, the amount of sales of certain
non-performing assets by Old FNB to Granite during the period from January 1,
1994 through the consummation of the FN Acquisition. At March 31, 1996, the
remaining available balance under the Put Agreement was approximately $95.7
million. Of the approximately $302 million in non-performing assets at March
31, 1996, approximately $30.1 million were eligible to be sold to Granite
under the Put Agreement.
In the event that, as of November 30, 1996, the Bank has not required
Granite to purchase $500 million of non-performing assets, it may require
Granite to purchase any qualifying Putable Assets of the Bank, other than
assets which previously became Putable Assets and which the Bank did not
require Granite to purchase, up to such $500 million maximum.
The Put Agreement will 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
the Bank prior to the FN Acquisition, (iii) on the Putable Assets which
become non-performing and which the Bank does 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 Granite under the Put
Agreement and Old FNB under the Asset Purchase Agreement are enforceable
against Granite and Old FNB, respectively, and that Granite and Old FNB will
have the ability to satisfy their respective obligations under such
provisions, there can be no assurance that a court will enforce such
provisions or that Granite or Old FNB will have the ability to satisfy their
respective obligations. Ford Motor has guaranteed the obligations of Granite
under the Put Agreement and the obligations of Old FNB under the Asset
Purchase Agreement.
MORTGAGE PORTFOLIO AND MSRS
At March 31, 1996, the Bank held a 1-4 unit residential mortgage loan
portfolio of approximately $7.3 billion, and MSRs on a loan portfolio
totalling approximately $43.2 billion. The Bank's MSRs had a book
11
<PAGE>
value of $372.1 million at March 31, 1996. 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 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; SPECIAL ASSESSMENT AND OTHER LEGISLATIVE PROPOSALS REGARDING SAIF
The financial institutions industry is subject to extensive regulation,
which materially affects the business of the Issuer and the Bank. Regulations
to which the Bank, the Issuer and its parent companies are subject may be
changed at any time, and the interpretation of these regulations is also
subject to change. There can be no assurance that future changes in such
regulations or in their interpretation will not adversely affect the business
of the Issuer or the Bank.
Congress is currently considering legislation that would, among other
things, capitalize the SAIF, which is currently undercapitalized, by imposing
a special assessment on SAIF-insured institutions, such as the Bank. Based
upon preliminary FDIC estimates of the potential assessment rate, the effect
on the Bank of the assessment, as proposed by Congress, after giving effect
to the Home Federal Acquisition would be a pre-tax charge in the range of $75
to $80 million ($68 to $72 million on an after-tax basis). Such an assessment
would not be expected to cause the Bank to fail to meet the capital
requirements of a "well capitalized" institution based upon the Bank's
regulatory capital and asset levels as of March 31, 1996. Other legislative
proposals would combine the two deposit insurance funds of the FDIC and merge
the charters for federal savings associations and commercial banks. Such
legislation, if enacted, could have a material adverse effect on the
operations of the Bank and the Issuer. The Issuer is unable to predict
whether, or in what form, such legislation would be enacted.
TAX SHARING AGREEMENT; AVAILABILITY OF NET OPERATING LOSS CARRYOVERS
The Bank, the Issuer 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 the Issuer amounts equal to the
taxes that the Bank would be required to pay if it were to file a return
separately
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from the affiliated group of which Mafco Holdings is the common parent (the
"Mafco Group"), and (ii) the Issuer will pay to Mafco Holdings amounts equal
to the taxes that the Issuer 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 the Issuer, 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 the Bank. The Tax Sharing Agreement also
allows the Issuer 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 the Bank. Accordingly, pursuant to
the Tax Sharing Agreement, the benefits of any net operating losses generated
by the Bank since its formation are retained by the Bank and the Issuer.
The Bank has generated significant federal income tax net operating losses
since it was organized in December 1988. This is due, in part, to the fact
that under applicable federal income tax law, the financial assistance
received by the Bank pursuant to the Assistance Agreement was excluded from
the taxable income of the Bank. In addition to such tax-free financial
assistance, the Bank has been entitled to its normal operating deductions,
including interest expense and certain losses relating to its loan portfolio.
As a result, the Bank 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"), the Bank succeeded to certain net operating loss
carryovers of the Texas Closed Banks.
At December 31, 1995 if the Issuer had filed a consolidated tax return on
behalf of itself (as common parent) and the Bank for each year since the
formation of the Bank, it would have had approximately $2.6 billion of
regular net operating losses and approximately $992 million of federal
alternative minimum tax net operating losses, both of which the Issuer would
have been entitled to utilize. A portion of such losses, to the extent not
previously used to offset income, would expire in the year 2002 and in each
year thereafter and would fully expire in 2007. It is expected that under the
Tax Sharing Agreement, the Bank and the Issuer will be able to eliminate a
significant portion of the amounts that they otherwise would be required to
pay to the Issuer 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 the Issuer will record significant amounts of
federal income tax expense as members of the Mafco Group. Payments made by
the Issuer under the Tax Sharing Agreement with the Mafco Group during the
year ended December 31, 1995 totalled $3.1 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.
If for any reason the Bank and the Issuer were to deconsolidate from the
Mafco Group, only the amount of the net operating loss carryovers of the Bank
and the Issuer not already utilized by the Mafco Group would be available to
offset the taxable income of the Bank and the Issuer. If for any reason the
Bank were to deconsolidate from the Issuer with the Issuer 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
subsequently recognized by the Bank, but would no longer be available to
offset the taxable income of the Issuer. At December 31, 1995, approximately
58% of such net operating loss carryovers had been so utilized by the members
of the Mafco Group. The net operating loss carryovers are subject to review
and potential disallowance, in whole or in part, by the Internal Revenue
Service. Any disallowance of the Bank's net operating loss carryovers may
increase the amounts that the Bank would be required to pay to the Issuer
under the Tax Sharing Agreement and that the Issuer would be required to pay
to Mafco Holdings and would therefore decrease the earnings of the Bank
available for distribution to the Issuer.
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to the Issuer, as the sole owner of the Bank's
common stock, and to holders of the Bank 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 the Issuer under
the Tax Sharing Agreement. As a result, the Issuer may be required
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<PAGE>
to make payments to Mafco Holdings under the Tax Sharing Agreement if the
Issuer has insufficient expenses and losses to offset such income. 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 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
Under current law, the Bank qualifies as a domestic building and loan
association for federal income tax purposes. Accordingly, the Bank is
entitled to take its bad debts into account using the reserve method of
accounting under Section 593 of the Code. The Bank determines the amount of
the appropriate addition to its bad debt reserves based on the experience
method of accounting of Section 593(b)(3), which is described in Section
585(b)(2) of the Code, rather than on the percentage of taxable income method
described in Section 593(b)(2) of the Code.
Each of the Senate and House of Representatives has passed a bill which
includes a provision that, if enacted, would repeal Section 593 of the Code.
In addition, the President has proposed tax legislation that also includes a
provision repealing Section 593 of the Code which is substantially similar to
the provision passed by Congress. If tax legislation is ultimately enacted
that includes the repeal of Section 593 of the Code, the reserve method of
accounting for bad debts would no longer be available to the Bank. Rather,
the Bank generally would be required to take its bad debts into account using
the specific charge-off method. Pursuant to the specific charge-off method,
the Bank would be entitled to take its bad debts into account in the taxable
year during which such debts become wholly or partially worthless. The repeal
of Section 593 of the Code also may require a domestic building and loan
association, such as the Bank, to recapture a certain portion of its bad debt
reserve into income under certain circumstances, and, accordingly, could
cause the Bank to make payments to the Issuer under the Tax Sharing
Agreement. As a result, the Issuer may be required to make additional
payments to Mafco Holdings under the Tax Sharing Agreement if the Issuer has
insufficient expenses and losses to offset such income. At December 31, 1995,
the Bank had tax bad debt reserves totalling $187 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 reserve method of accounting
for bad debts, if enacted, would not be expected to have a material adverse
effect on the Bank.
LACK OF A PUBLIC MARKET FOR THE NOTES
The Issuer does not currently intend to list the Notes on any securities
exchange or seek approval for quotation through any automated quotation
system. There can be no assurance as to the development of liquidity of any
market for the Notes.
CONTROL BY MACANDREWS & FORBES
The Issuer is 80% indirectly owned through MacAndrews & Forbes by Ronald
O. Perelman and 20% 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. Holdings owns 100% of the class A common stock of the
Issuer, representing 80% of its voting common stock (representing
approximately 85% of the voting power of its voting common stock) and 100% of
the class C common stock of the Issuer, and Hunter's Glen owns 100% of the
class B common stock, representing 20% of its voting common stock
(representing approximately 15% of the voting power of its common stock). See
"Selling Securityholders." As a result, MacAndrews & Forbes will be able to
direct and control the policies of the Issuer and its subsidiaries, including
mergers, sales of assets and similar transactions.
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USE OF PROCEEDS
The Notes are being offered by the Selling Securityholders and not by the
Issuer. Accordingly, the Issuer will not receive any proceeds from the sale
of the Notes.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
MINORITY INTEREST - BANK PREFERRED STOCK DIVIDENDS
The following table sets forth the historical ratio of earnings to
combined fixed charges and minority interest of Bank Preferred Stock for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH YEAR ENDED DECEMBER 31,
31, 1996 ------------------------------------------
------------ 1995 1994(1) 1993(2) 1992(3) 1991(4)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Excluding interest on
deposits .................... 4.24x 1.27x 1.32x 9.59x 10.74x --
Including interest on ----- ----- ----- ----- ------ ----
deposits .................... 2.50 1.11 1.16 3.02 1.46 --
----- ----- ----- ----- ------ ----
</TABLE>
- ------------
(1) On October 3, 1994, effective immediately following the close of
business on September 30, 1994, the Bank 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.
(2) During the first quarter of 1993, the Issuer 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.
(3) During the last quarter of 1992, the Issuer 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.
(4) Earnings were insufficient to cover fixed charges in 1991 by $26.4
million excluding interest on deposits, and $26.4 million including
interest on deposits.
Earnings used in the computations consist of income before taxes,
extraordinary item and minority interest. Fixed charges consist of interest
expense on borrowings, the interest component of lease expense and, where
indicated, interest expenseon deposits.
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DESCRIPTION OF THE NOTES
The Notes offered hereby were issued under the Indenture between the
Issuer and State Street Bank and Trust Company, as successor to The First
National Bank of Boston, as Trustee, a copy of which is filed as an exhibit
to the Registration Statement of which this Prospectus constitutes a part.
The following summary, which describes certain provisions of the Indenture
and the Notes, does not purport to be complete and is subject to, and is
qualified in its entirety by reference to the TIA and all the provisions of
the Indenture and the Notes, including the definitions therein of terms not
defined in this Prospectus. Certain terms used herein are defined below under
"--Certain Definitions."
GENERAL
The Notes will mature on May 15, 2001. The Notes will bear interest at
12-1/4% per annum, payable semiannually in arrears on May 15 and November 15
of each year, commencing November 15, 1994, to the persons who are registered
holders thereof at the close of business on the May 1 or November 1 next
preceding such interest payment date.
Interest on the Notes is computed on the basis of a 360-day year of twelve
30-day months. Principal and interest is currently payable at the office of
the Trustee, but, at the option of the Issuer, interest may be paid by check
mailed to the registered holders of the Notes at their registered addresses.
The Notes are transferable and exchangeable initially at the office of the
Trustee and will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple thereof.
OPTIONAL REDEMPTION
Except as set forth in the next paragraph, the Notes may not be redeemed
prior to May 15, 1999. On and after such date, the Notes may be redeemed at
the option of the Issuer, as a whole, or from time to time in part, at the
following redemption prices (expressed as percentages of principal amount),
plus accrued and unpaid interest (if any) to the date of redemption (subject
to the right of holders of record on the relevant record date to receive
interest due on the relevant interest payment date): if redeemed during the
12-month period beginning May 15, 1999, 106.125%, and thereafter at 100%.
In addition, the Notes may be redeemed at the option of the Issuer in
connection with the occurrence of a Change of Control Call Event at any time
as a whole, prior to May 15, 1999, at an aggregate redemption price equal to
the sum of: (i) the then outstanding principal amount of the Notes, plus (ii)
accrued and unpaid interest (if any) to the date of redemption, plus (iii)
the Applicable Premium.
A "Change of Control Call Event" means the occurrence of either 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 Issuer, whether as a result of issuance
of securities of the Issuer, any merger, consolidation, liquidation or
dissolution of the Issuer, any direct or indirect transfer of securities
by a Permitted Holder or otherwise; or
(ii) a sale, transfer, conveyance or other disposition (other than to
the Issuer or any Affiliate of the Issuer) in a single transaction or in a
series of related transactions, 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 transaction in any such
related series of transactions); provided, however, that for purposes of
this clause (ii) if the Issuer at any time holds any assets other than (a)
the Capital Stock of the Bank, (b) Temporary Cash Investments, (c) assets
related to Permitted Business Activities and (d) Permitted Investments
described in clause (iv) of the definition thereof, such other assets
shall be deemed to be assets of the Bank and to have been reflected on
such consolidated balance sheet.
"Applicable Premium" means, with respect to a Note at any time of
determination, the greater of: (i) the product of (x) 6.125% and (y) the
outstanding principal amount of such Note on such date of
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determination, and (ii) the excess of (a) the present value at such time of
determination of the required interest and principal payments payable to and
including the first date on which the Note may be redeemed at the option of
the Issuer including the premium on the Note payable on the first date on
which such Note may be redeemed at the option of the Issuer, computed using a
discount rate equal to the Treasury Rate plus 75 basis points, over (b) the
then outstanding principal amount of the Note.
"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 repayment (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the then remaining Average Life to the first date on which Notes are
subject to optional redemption by the Issuer; provided, however, that, if the
Average Life of the Notes to the first date on which Notes are subject to
optional redemption by the Issuer 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
the Average Life of the Notes to the first date on which Notes are subject to
optional redemption by the Issuer 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.
Notice of redemption will be mailed at least 30 days but not more than 60
days before any redemption date to each holder of Notes to be redeemed at its
registered address. Notes in denominations larger than $1,000 may be redeemed
in part but only in integral multiples thereof. If money sufficient to pay
the redemption price of all Notes (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent (or, if the Issuer or a
Subsidiary acts as the Paying Agent, it segregates the money held by it as
Paying Agent and holds it as a separate trust fund) on or before the
redemption date, then on and after such date interest ceases to accrue on
such Notes (or such portions thereof) called for redemption.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
CHANGE OF CONTROL PUT EVENT
Upon the occurrence of any of the following events (each a "Change of
Control Put Event"), each holder of Notes will have the right to require the
Issuer to repurchase all or any part of such holder's Notes at a repurchase
price equal to 101% of the principal amount thereof plus accrued and unpaid
interest (if any) to the date of repurchase (subject to the right of holders
of record on the relevant record date to receive interest due on the relevant
interest payment date):
(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 Issuer, whether as a result of issuance
of securities of the Issuer, any merger, consolidation, liquidation or
dissolution of the Issuer, any direct or indirect transfer of securities
by a Permitted Holder or otherwise;
(ii) a sale, transfer, conveyance or other disposition (other than to
the Issuer or any of its Subsidiaries) in a single transaction or in a
series of related transactions, 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 transaction in any such
related series of transactions); provided, however, that for purposes of
this clause (ii) if the Issuer at any time holds any assets other than (a)
the Capital Stock of the Bank, (b) Temporary Cash Investments, (c) assets
related to Permitted Business Activities and (d) Permitted Investments
described in clause (iv) of the definition thereof, such other assets
shall be deemed to be assets of the Bank and to have been reflected on
such consolidated balance sheet; or
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(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 the Issuer or its
Wholly Owned Subsidiaries.
Within 45 days following any Change of Control Put Event, the Issuer will
mail a notice to each holder stating: (i) that a Change of Control Put Event
has occurred and that such holder has the right to require the Issuer to
repurchase all or any part of such holder's Notes at a purchase price in cash
equal to 101% of the principal amount thereof plus accrued and unpaid
interest (if any) to the date of repurchase (subject to the right of holders
of record on the relevant record date to receive interest due on the relevant
interest payment date), (ii) the circumstances and relevant facts regarding
such Change of Control Put Event, (iii) the repurchase date (which will be no
earlier than 30 days nor later than 60 days from the date such notice is
mailed), and (iv) the instructions, determined by the Issuer consistent with
the Indenture, that a holder must follow in order to have its Notes
repurchased.
The Issuer's ability to pay cash to holders of Notes upon a repurchase may
be limited by the Issuer's then existing financial resources. See "Risk
Factors--Indebtedness and Ability to Pay Principal on the Notes."
The Issuer will comply with any tender offer rules under the Exchange Act
which may then be applicable, including Rule 14e-1, in connection with any
offer required to be made by the Issuer to repurchase the Notes as a result
of a Change of Control Put Event. To the extent that the provisions of any
securities laws or regulations conflict with provisions of this covenant, the
Issuer will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligation under this covenant by
virtue thereof.
Certain provisions relating to the Issuer's obligation to make an offer to
repurchase the Notes as a result of a Change of Control Put Event may not be
waived or modified without the written consent of the holders of all the
Notes.
CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Debt. The Issuer will not issue any Debt and the Issuer will
not permit any Subsidiary to issue any Debt; provided, however, that the
foregoing shall not prohibit the issuance of the following Debt:
(a) the Notes and Debt of the Issuer issued in exchange for, or the
proceeds of which are used to Refinance, any Debt permitted by this clause
(a); provided, however, that in the case of any Debt (other than any
Notes) issued in connection with a Refinancing, (x) the principal amount
or, in the case of Debt issued at a discount, the accreted value of the
Debt so issued shall, as of the date of the Stated Maturity of the Notes,
not exceed the principal amount or, if the Debt being Refinanced was
issued at a discount, the accreted value of the Debt being Refinanced as
of the date of the Stated Maturity of the Notes and (y) the Debt so issued
shall not provide for the payment of principal in cash prior to the Stated
Maturity of the Notes;
(b) Subordinated Obligations of the Issuer if, immediately after
giving effect to any such issuance (including the Refinancing of any Debt
from the proceeds of such Subordinated Obligations), the aggregate
principal amount of such Subordinated Obligations and Debt outstanding
pursuant to clause (a) above would not exceed an amount equal to the
Consolidated Net Worth of the Issuer as of the end of the most recent
fiscal quarter ending at least 45 days prior to such issuance; provided,
however, that the Subordinated Obligations so issued (A) shall not mature
prior to the Stated Maturity of the Notes and (B) shall have an Average
Life to their Stated Maturity equal to or greater than the remaining
Average Life to the Stated Maturity of the Notes;
(c) any Debt of any Subsidiary that is a Depository Institution or a
Subsidiary of such Depository Institution; or
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(d) if the Mortgage Bank is not a Subsidiary of a Depository
Institution, any Debt issued by the Mortgage Bank in the ordinary course
of funding the origination or carrying of mortgage loans or hedging such
Subsidiary's loan portfolio.
Limitation on Restricted Payments. (a) The Issuer will not, and will not
permit, any of its Subsidiaries directly or indirectly, to, make any
Restricted Payment if, at the time of the making of such Restricted Payment,
and after giving effect thereto:
(1) a Default has occurred or is continuing (or would result
therefrom); or
(2) any Subsidiary that is a Depository Institution does not qualify
as "well capitalized" under Section 28 of the Federal Deposit Insurance
Act (or any successor provision) and the regulations of the OTS
thereunder;
(3) the Consolidated Common Shareholders' Equity of the Bank as of the
end of the most recent fiscal quarter ending at least 45 days prior to the
date of such Restricted Payment would have been less than the Minimum
Common Equity Amount as of the end of such fiscal quarter; or
(4) the aggregate amount of such Restricted Payment and all other
Restricted Payments since the date of the Indenture would exceed the sum
of:
(i) 75% of the aggregate Consolidated Net Income (or, if such
aggregate Consolidated Net Income is a deficit, minus 100% of such
deficit) since the date on which the FN Acquisition is consummated to
the end of the most recent fiscal quarter ending at least 45 days
prior to the date of such Restricted Payment;
(ii) the aggregate Net Cash Proceeds from sales of Capital Stock of
the Issuer (other than Redeemable Stock or Exchangeable Stock) or cash
capital contributions made to the Issuer and any earnings or proceeds
thereof to the extent invested in Temporary Cash Investments, to the
extent received, made or realized on or after the date of original
issuance of the Notes (other than an issuance or sale to a
Subsidiary); and
(iii) the amount by which Debt of the Issuer is reduced on the
Issuer's balance sheet on or after the date of the Indenture upon the
conversion or exchange (other than by a Subsidiary) of Debt of the
Issuer into Capital Stock (other than Redeemable Stock or Exchangeable
Stock) of the Issuer (less the amount of any cash or other property
distributed by the Issuer or any Subsidiary upon such conversion or
exchange).
(b) The preceding paragraph will not prohibit the following (none of
which will be included in the calculation of the amount of Restricted
Payments, except to the extent expressly provided in clause (i) below):
(i) dividends paid within 60 days after the date of declaration
thereof, or Restricted Payments made within 60 days after the making of a
binding commitment in respect thereof, if at such date of declaration or
commitment such dividend or other Restricted Payment would have complied
with this covenant; provided, however, that, at the time of payment of
such dividend or the making of such Restricted Payment, no other Default
shall have occurred and be continuing (or result therefrom); provided
further, however, that such dividend or other Restricted Payment shall be
included in the calculation of the amount of Restricted Payments;
(ii) dividends on the Bank Preferred Stock;
(iii) any purchase or redemption of Capital Stock or Subordinated
Obligations by exchange for or out of the proceeds from the substantially
concurrent sale of Capital Stock; provided, however, that the Net Cash
Proceeds from such sale, to the extent they are used to purchase or redeem
Capital Stock or Subordinated Obligations, shall be excluded from clause
(a)(4)(ii) above;
(iv) any purchase or redemption of Subordinated Obligations by
exchange for or out of the proceeds from the substantially concurrent sale
of Subordinated Obligations; provided, however, that such Subordinated
Obligations (A) shall be subordinated to the Notes to at least the same
extent as
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the Subordinated Obligations so exchanged, purchased or redeemed, (B)
shall have a Stated Maturity later than the Stated Maturity of the Notes
and (C) shall have an Average Life to their Stated Maturity greater than
the remaining Average Life to the Stated Maturity of the Notes;
(v) Dividends or other Restricted Payments consisting solely of funds
released from the Escrow Accounts to the extent not required to be used to
consummate the FN Acquisition or to pay dividends on the Bank Preferred
Stock; and
(vi) Dividends or other Restricted Payments in an amount equal to the
amount of funds released from the Escrow Account that are used to pay
dividends on the Bank Preferred Stock, but not to exceed in the aggregate
the amount of cash capital contributions to the Issuer on or prior to the
date of original issuance of the Notes.
(c) The Issuer or any Subsidiary may take actions to make a Restricted
Payment in anticipation of the occurrence of any of the events described in
paragraph (b) of this covenant; provided, however, that the making of such
Restricted Payment shall be conditioned upon the occurrence of such event.
Limitation on Transactions with Affiliates. (a) The Issuer will not, and
will not permit any of its Subsidiaries to, conduct any business or enter
into any transaction or series of similar transactions (including the
purchase, sale, lease or exchange of any property or the rendering of any
service) with any Affiliate of the Issuer or any legal or beneficial owner of
10% or more of the Voting Stock of the Issuer or with an Affiliate of any
such owner unless:
(i) the terms of such business, transaction or series of transactions
are (A) set forth in writing and (B) at least as favorable to the Issuer
or such Subsidiary as terms that would be obtainable at the time for a
comparable transaction or series of similar transactions in arm's-length
dealings with an unrelated third Person; and
(ii) to the extent that such business, transaction or series of
transactions is known by the Board of Directors of the Issuer or such
Subsidiary to involve an Affiliate of the Issuer or a legal or beneficial
owner of 10% or more of the Voting Stock of the Issuer or an Affiliate of
such owner, then:
(A) with respect to a transaction or series of related transactions
involving aggregate payments or other consideration in excess of
$500,000, such transaction or series of related transactions has been
determined to satisfy the requirements of clause (i)(B) above (and the
value of any non-cash consideration has been determined) by a majority
of those members of the Board of Directors of the Issuer or such
Subsidiary having no personal stake in such business, transaction or
series of transactions; and
(B) with respect to a transaction or series of related transactions
involving aggregate payments or other consideration in excess of
$10,000,000 (with the value of any non-cash consideration being
determined by a majority of those members of the Board of Directors of
the Issuer or such Subsidiary having no personal stake in such
business, transaction or series of transactions), such transaction or
series of related transactions has been determined, in the written
opinion of a nationally recognized investment banking firm to be fair,
from a financial point of view, to the Issuer or such Subsidiary and
the Issuer has delivered such opinion to the Trustee.
(b) The provisions of the preceding paragraph (a) above will not prohibit:
(i) any Restricted Payment permitted to be paid as described under
"Limitation on Restricted Payments" above, (ii) any transaction between the
Issuer and any of its Subsidiaries or between Subsidiaries of the Issuer and
any transaction with an Unrestricted Affiliate; provided, however, that no
portion of any minority interest in any such Subsidiary and no equity
interest in any such Unrestricted Affiliate is owned by (x) any Affiliate of
the Issuer (other than the Bank, a Wholly Owned Subsidiary of the Issuer, an
Unrestricted Affiliate or a Permitted Affiliate) or (y) any legal or
beneficial owner of 10% or more of the Voting Stock of the Issuer or any
Affiliate of such owner (other than the Issuer, the Bank, any Wholly Owned
Subsidiary of the Issuer or an Unrestricted Affiliate), (iii) transactions
pursuant to which Mafco Holdings will provide the Issuer and its Subsidiaries
at the request of the Issuer with certain allocated services to be purchased
from
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third party providers, such as legal and accounting services, insurance
coverage and other services, (iv) any transaction with an executive officer
or director of any Subsidiary of the Issuer entered into in the ordinary
course of business (including compensation or employee benefit arrangements
with any such executive officer or director); provided, however, that such
executive officer or director holds, directly or indirectly, no more than 10%
of the outstanding Capital Stock of the Issuer, (v) any transactions pursuant
to the Tax Sharing Agreement, and (vi) the issuance of Capital Stock of the
Issuer to Gerald J. Ford and transactions related thereto, all as
contemplated by the Exchange Agreement as in effect on the date of the
original issuance of the Notes.
Limitation on Other Business Activities. The Issuer will not engage in any
trade or business other than: (i) the ownership of the Capital Stock of the
Bank, (ii) the ownership of the Capital Stock of one or more other
Subsidiaries engaged in activities permissible for subsidiaries of a multiple
savings and loan holding company under Section 10 of the HOLA (or any
successor provision), (iii) the holding of Permitted Investments, and (iv)
Permitted Business Activities.
Limitations on Restrictions on Distributions by Subsidiaries. The Issuer
shall not, and shall not permit any Subsidiary of the Issuer to, suffer to
exist any consensual encumbrance or restriction on the ability of any
Subsidiary of the Issuer: (i) to pay, directly or indirectly, dividends or
make any other distributions in respect of its Capital Stock or to pay any
Debt or other obligation owed to the Issuer, (ii) to make loans or advances
to the Issuer, or (iii) to transfer any of its property or assets to the
Issuer, except, in any such case, any encumbrance or restrictions:
(a) pursuant to any agreement in effect or entered into on the date of
the Indenture (including the Bank Preferred Stock);
(b) pursuant to an agreement in effect or entered into by such
Subsidiary prior to the date on which such Subsidiary was acquired by the
Issuer (other than Debt issued as consideration in, or to provide all or
any portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Subsidiary became a Subsidiary or was acquired by the Issuer and other
than any agreement entered into in anticipation of the acquisition of such
Subsidiary by the Issuer) and outstanding on such date;
(c) pursuant to an agreement effecting a renewal, extension,
Refinancing or refunding of Debt or Preferred Stock issued pursuant to an
agreement referred to in clause (a) or (b) above or this clause (c) or
contained in any amendment to an agreement referred to in clauses (a) and
(b) or this clause (c); provided, however, that the provisions contained
in such renewal, extension, Refinancing or refunding agreement or in such
amendment relating to such encumbrance or restriction are no more
restrictive than the provisions contained in the agreement the subject
thereof, as determined in good faith by the Board of Directors of the
Issuer and evidenced by a resolution adopted by such Board;
(d) any encumbrance or restriction (A) that restricts in a customary
manner the subletting, assignment or transfer of any property or asset
that is a lease, license, conveyance or contract or similar property or
asset, (B) by virtue of any transfer of, agreement to transfer, option or
right with respect to, or Lien on, any property or assets of the Issuer or
any Subsidiary not otherwise prohibited by the Indenture or (C) arising or
agreed to in the ordinary course of business and that does not,
individually or in the aggregate, detract from the value of property or
assets of the Issuer or any Subsidiary in any manner material to the
Issuer or such Subsidiary;
(e) in the case of clause (iii) above, restrictions contained in
security agreements securing Debt of a Subsidiary to the extent such
restrictions restrict the transfer of the property subject to such
security agreements;
(f) any encumbrance or restriction relating to a mortgage banking
Subsidiary contained in an agreement providing for "warehouse" or other
financing for such Subsidiary for originating or carrying mortgage loans
or hedging such Subsidiary's loan portfolio; and
(g) any encumbrance or restriction imposed by, or otherwise agreed to
with, any governmental agency having regulatory supervision over the Bank
or any other Subsidiary of the Issuer.
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Limitation on Liens. The Issuer will not create or permit to exist any
Lien (other than a Lien in favor of the Trustee to secure certain of the
Issuer's obligations to the Trustee under the Indenture) on any of its
property or assets (including Capital Stock) whether owned on the date of the
Indenture or thereafter acquired, securing any obligation of the Issuer.
Amendment of Tax Sharing Agreement. (a) The Issuer will not terminate,
amend, modify or waive any provisions of the Tax Sharing Agreement; provided,
however, that anything to the contrary in this sentence notwithstanding, any
provision of the Tax Sharing Agreement may be amended to the extent required
by or otherwise agreed to with, any governmental agency having regulatory
supervision over the Bank or any other Subsidiary of the Issuer.
Notwithstanding the foregoing, no such terminations, amendments,
modifications or waivers shall be permitted by this covenant if such
terminations, amendments, modifications or waivers shall adversely affect the
Issuer or its rights or obligations under the Tax Sharing Agreement.
(b) Nothing in this covenant will prohibit the replacement of Mafco
Holdings as "Parent" under the Tax Sharing Agreement with any other
corporation that becomes the "common parent" (within the meaning of Section
1504 of the Code) of the affiliated group of corporations with respect to
which a consolidated Federal income tax return is filed that includes the
Issuer and the Bank and the amendment of the Tax Sharing Agreement to reflect
such replacement.
Maintenance of Status of Subsidiaries as Insured Depository Institutions;
Capital Maintenance. (a) The Issuer will do or cause to be done all things
necessary to preserve and keep in full force and effect the status of each of
its Subsidiaries that is a Depository Institution as an insured depository
institution and do all things necessary to ensure that savings accounts of
each such Subsidiary are insured by the FDIC or any successor organization up
to the maximum amount permitted by 12 U.S.C. Section 1811 et seq. and the
regulations thereunder or any succeeding federal law, except as to individual
accounts or interests in employee benefit plans that are not entitled to
"pass-through" insurance under 12 U.S.C. Section 1821(a)(1)(D).
(b) The Issuer shall cause the Bank to maintain or exceed the status of
an "adequately capitalized" institution as defined in the Federal Deposit
Insurance Act and OTS regulations.
SEC Reports. Notwithstanding that the Issuer may not be required to be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Issuer will file or cause to be filed with the SEC and provide the
Trustee and holders of the Notes with the information, documents and other
reports (or copies of such portions of any of the foregoing as the SEC may by
rules and regulations prescribe) specified in Sections 13 and 15(d) of the
Exchange Act. The Issuer also will comply with the other provisions of TIA
Section 314(a).
SUCCESSOR ISSUER
The Issuer may not consolidate with or merge with or into, or convey,
transfer or lease all or substantially all its assets to, any person, unless:
(i) the resulting, surviving or transferee person (if not the Issuer) is
organized and existing under the laws of the United States of America, any
State thereof or the District of Columbia and such person expressly assumes
by a supplemental indenture, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Issuer under the
Indenture and the Notes, (ii) immediately after giving effect to such
transaction (and treating any Debt which becomes an obligation of the
resulting, surviving or transferee person or any of its Subsidiaries as a
result of such transaction as having been issued by such person or such
Subsidiary at the time of such transaction), no Default has occurred and is
continuing, (iii) immediately after giving effect to such transaction, the
resulting, surviving or transferee person has a Consolidated Net Worth in an
amount which is not less than the Consolidated Net Worth of the Issuer
immediately prior to such transaction, and (iv) the Issuer delivers to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer complies with the Indenture and such
supplemental indenture (if any) complies with the Indenture and the TIA. The
resulting, surviving or transferee person will be the successor issuer and
thereafter, except in the case of a lease, the Issuer will be discharged from
all obligations and covenants under the Indenture and the Notes.
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DEFAULTS
An Event of Default is defined in the Indenture as: (i) (1) a default in
the payment of principal of any Note when due at its Stated Maturity, upon
redemption, upon required purchase, upon declaration or otherwise, or (2) a
default in the payment of interest on any Note when due and payable and the
continuance of such default for a period of 30 days, or (3) a failure to
redeem or purchase Notes when required pursuant to the Indenture or the
Notes, (ii) the failure by the Issuer to comply with its obligations
described under "Successor Issuer" above, (iii) the failure by the Issuer to
comply for 30 days after notice with any of its obligations under the
provisions described under "Change of Control Put Event" (other than a
failure to purchase Notes), or under the covenants described under
"Limitation on Debt," "Limitation on Restricted Payments," "Limitation on
Transactions with Affiliates," "Limitation on Other Business Activities,"
"Limitations on Restrictions on Distributions by Subsidiaries," "Limitations
on Liens," "Amendment of Tax Sharing Agreement," "Maintenance of Status of
Subsidiaries as Insured Depository Institutions; Capital Maintenance" or "SEC
Reports" above, (iv) the failure by the Issuer to comply for 60 days after
notice with its other agreements contained in the Indenture or the Notes
(other than those referred to in clauses (i), (ii) and (iii) of this
paragraph), (v) Debt of the Issuer or any Significant Subsidiary is not paid
within any applicable grace period after final maturity or is accelerated by
the holders thereof because of a default and the total principal amount of
the portion of such Debt that is unpaid or accelerated exceeds $25 million or
its foreign currency equivalent and such default continues for 5 days after
notice (the "cross acceleration provision"), (vi) certain events of
bankruptcy, insolvency or reorganization of the Issuer or a Significant
Subsidiary (the "bankruptcy provisions"), or (vii) any judgment or decree for
the payment of money in excess of $25 million is entered against the Issuer
or a Significant Subsidiary and is not discharged and either (A) an
enforcement proceeding has been commenced by any creditor upon such judgment
or decree or (B) there is a period of 60 days following the entry of such
judgment or decree during which such judgment or decree is not discharged,
waived or the execution thereof stayed and, in the case of (B), such default
continues for 10 days after the notice specified in the next sentence (the
"judgment default provision"). However, a default under clauses (iii), (iv),
(v) and (vii)(B) will not constitute an Event of Default until the Trustee or
the holders of 25% in principal amount of the outstanding Notes notify the
Issuer of the default and the Issuer does not cure such default within the
time specified after receipt of such notice.
If an Event of Default (other than an Event of Default specified in clause
(vi) in the above paragraph with respect to the Issuer) occurs and is
continuing, the Trustee or the holders of at least 25% in principal amount of
the outstanding Notes may declare the principal amount of and accrued
interest on all the Notes as of the date of such declaration to be
immediately due and payable (collectively, the "Default Amount"). If an Event
of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Issuer occurs, the Default Amount on all the Notes as
of the date of such Event of Default will ipso facto become and be
immediately due and payable without any declaration or other act on the part
of the Trustee or any holders of the Notes. Under certain circumstances, the
holders of a majority in principal amount of the outstanding Notes may
rescind any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes
unless such holders have offered to the Trustee reasonable indemnity or
security against any loss, liability or expense. Except to enforce the right
to receive payment of principal or interest when due, no holder of a Note may
pursue any remedy with respect to the Indenture or the Notes unless: (i) such
holder has previously given the Trustee written notice that an Event of
Default is continuing, (ii) holders of at least 25% in principal amount of
the outstanding Notes have requested the Trustee to pursue the remedy, (iii)
such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense, (iv) the Trustee has not complied
with such request within 60 days after the receipt thereof and the offer of
security or indemnity, and (v) the holders of a majority in principal amount
of the outstanding Notes have not given the Trustee a direction inconsistent
with such request within such 60-day period. Subject to certain restrictions,
the holders of a majority in principal amount of the outstanding Notes are
given the right to
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direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or of exercising any trust or power conferred on the
Trustee. The Trustee, however, may refuse to follow any direction that
conflicts with law or the Indenture or that the Trustee determines is unduly
prejudicial to the rights of any other holder of a Note or that would involve
the Trustee in personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes
notice of the Default within 90 days after it occurs. Except in the case of a
Default in the payment of principal of or interest on any Note, the Trustee
may withhold notice if and so long as a committee of its Trust Officers in
good faith determines that withholding notice is in the interest of the
holders of the Notes. In addition, the Issuer is required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred
during the previous year. The Issuer also is required to deliver to the
Trustee, within 30 days after the occurrence thereof, written notice of any
event which would constitute certain Defaults, their status and what action
the Issuer is taking or proposes to take in respect thereof.
AMENDMENT
Subject to certain exceptions, the Indenture may be amended with the
written consent of the holders of a majority in principal amount of the Notes
then outstanding and any past default or noncompliance with any provisions
may be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected, no amendment may, among other things:
(i) reduce the principal amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest
on any Note, (iii) reduce the principal of or extend the Stated Maturity of
any Note or reduce the Default Amount of any Note, (iv) reduce the price
payable upon the redemption of any Note or change the time at which any Note
may be redeemed as described under "Optional Redemption" above, (v) make any
Note payable in money other than that stated in the Note, (vi) make any
change in the definition of Change of Control or in the dates by which the
Issuer must purchase, or in the obligation of the Issuer to purchase,
tendered Notes upon a Change of Control, or (vii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions.
Without the consent of or notice to any holder of the Notes, the Issuer
and the Trustee may amend the Indenture to cure any ambiguity, omission,
defect or inconsistency, to provide for the assumption by a successor
corporation of the obligations of the Issuer under the Indenture if in
compliance with the provisions described under "Successor Issuer" above, to
provide for uncertificated Notes in addition to or in place of certificated
Notes (provided that the uncertificated Notes are issued in registered form
for purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to
add guarantees with respect to the Notes or to secure (or provide additional
security for) the Notes, to add to the covenants of the Issuer for the
benefit of the holders of the Notes or to surrender any right or power
conferred upon the Issuer, to make any change that does not adversely affect
the rights of any holder of the Notes or to comply with any requirement of
the SEC in connection with the qualification of the Indenture under the TIA.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Issuer is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
A consent to any amendment or waiver under the Indenture by any holder of
Notes given in connection with a tender of such holder's Notes will not be
rendered invalid by such tender.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of
transfer. The Issuer may require payment of a sum sufficient to cover any
tax, assessment or other governmental charge payable in connection with
certain transfers and exchanges.
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DEFEASANCE
The Issuer at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust (as herein defined) and
obligations to register the transfer or exchange of the Notes, to replace
mutilated, destroyed, lost or stolen Notes and to maintain a registrar and
paying agent in respect of the Notes. The Issuer at any time may terminate
its obligations under the covenants described under "Certain Covenants" and
"Change of Control Put Event" above, the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries
and the judgment default provision and the limitation contained in clause
(iii) described under "Successor Issuer" above ("covenant defeasance").
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Issuer exercises its
covenant defeasance option, payment of the Notes may not be accelerated
because of an Event of Default specified in clause (iii), (v), (vi) (with
respect only to Significant Subsidiaries) or (vii) under "Defaults" above, or
because of the failure of the Issuer to comply with clause (iii) described
under "Successor Company" above.
In order to exercise either defeasance option, the Issuer must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal on the Notes and interest
thereon to maturity or redemption, as the case may be, and must comply with
certain other conditions, including, but not limited to (unless the Notes
will mature or be redeemed within 30 days), delivering to the Trustee an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and defeasance and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been in the
case if such deposit and defeasance had not occurred (and, in the case of
legal defeasance only, such Opinion of Counsel must be based on a ruling of
the Internal Revenue Service or a change in applicable federal income tax
law).
CONCERNING THE TRUSTEE
State Street Bank and Trust Company, as successor to The First National
Bank of Boston, is the Trustee under the Indenture and has been appointed by
the Issuer as Registrar and Paying Agent with regard to the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
The following are certain definitions used in the Indenture and applicable
to the description of the Indenture set forth herein.
"Acquisition" means the consummation of the transactions contemplated by
the Asset Purchase Agreement dated April 14, 1994, between the Bank and Old
FNB (including any amendments, supplements or modifications thereto, the
"Asset Purchase Agreement"), provided that the terms of the transactions and
the business being acquired conform in all material respects to the
descriptions thereof contained in this Prospectus, subject only to any
changes provided for or contemplated herein.
"Affiliate" of any specified Person means: (i) any other Person which,
directly or indirectly, is in control of, is controlled by or is under common
control with such specified Person or (ii) any other Person who is a director
or executive officer (A) of such specified Person, (B) of any Subsidiary of
such specified Person or (C) of any Person described in clause (i) above. For
purposes of this definition, control of a
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Person means the power, direct or indirect, to direct or cause the direction
of the management and policies of such Person whether by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Average Life" means, with respect to any Debt, the quotient obtained by
dividing: (i) the sum of the products of (a) the number of years from the
date of the transaction or event giving rise to the need to calculate the
Average Life of such Debt to the date, or dates, of each successive scheduled
principal payment of such Debt multiplied by (b) the amount of each such
principal payment by (ii) the sum of all such principal payments.
"Bank" means First Nationwide Bank, A Federal Savings Bank.
"Bank Preferred Stock" means the 11-1/2% Noncumulative Preferred Stock
issued by the Bank on July 27, 1994 or other Preferred Stock of the Bank
issued to Refinance such stock in an aggregate liquidation value at no time
exceeding the sum of the liquidation value of the Bank Preferred Stock on the
date of original issue of the Notes plus reasonable fees and expenses
incurred in connection with such Refinancing and accrued dividends and
premium, if any.
"Board of Directors" means, with respect to any Person, the Board of
Directors of such Person or any committee thereof duly authorized to act on
behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" of a Person means any obligation which is
required to be classified and accounted for as a capital lease on the face of
a balance sheet of such Person prepared in accordance with GAAP; the amount
of such obligation shall be the capitalized amount thereof, determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease prior to
the first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests
(including partnership interests), rights to purchase, warrants, options,
participations or other equivalents of or interests in (however designated)
equity of such Person, including any Preferred Stock, but excluding any debt
securities convertible into or exchangeable for such equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Common Shareholders' Equity" of the Bank means, at any date,
all amounts which would, in conformity with GAAP, be included under
shareholders' equity on a consolidated balance sheet of the Bank as at such
date, less any amounts included therein attributable to, without duplication,
(x) Redeemable Stock, (y) Exchangeable Stock and (z) Preferred Stock.
"Consolidated Net Income" of the Issuer means for any period the
consolidated net income (or loss) of the Issuer and its consolidated
Subsidiaries for such period determined in accordance with GAAP, less,
without duplication: (i) the amount of dividends declared in respect of the
Bank Preferred Stock during such period (to the extent not deducted from
Consolidated Net Income in accordance with GAAP) (other than any such
dividends that are paid from funds that are released from the Preferred Stock
Escrow Account), and (ii) the amount of dividends, distributions or other
Restricted Payments paid pursuant to clause (b) (vi) of the covenant
described under "Limitation on Restricted Payments"; provided, however, that
there shall be excluded therefrom:
(a) any net income (or loss) of any Person if such Person is not a
Subsidiary, except that (A) the Issuer's equity in the net income of any
such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Issuer or a Subsidiary as a dividend or
other distribution (subject, in the case of a dividend or other
distribution to a Subsidiary, to the limitations contained in clause (c)
below) and (B) the Issuer's equity in a net loss of any such Person for
such period shall be included in determining such Consolidated Net Income;
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(b) any net income (but not loss) of any Person acquired by the Issuer
or a Subsidiary in a pooling of interests transaction for any period prior
to the date of such acquisition;
(c) any net income (or loss) of any Subsidiary (other than the Bank or
any of its Subsidiaries) if such Subsidiary is subject to restrictions,
directly or indirectly, on the payment of dividends or the making of
distributions by such Subsidiary, directly or indirectly, to the Issuer,
except that (A) the Issuer's equity in the net income of any such
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Subsidiary during such period to the Issuer or another Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or
other distribution to another Subsidiary, to the limitation contained in
this clause) and (B) the Issuer's equity in a net loss of any such
Subsidiary for such period shall be included in determining such
Consolidated Net Income;
(d) any gain (but not loss) realized upon the sale or other
disposition of any property, plant or equipment of the Issuer or its
consolidated Subsidiaries (other than in connection with the sale of
insured deposits) (including pursuant to any sale-and-leaseback
arrangement) and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(e) the cumulative effect of a change in accounting principles; and
(f) the gain (but not the loss) from the sale, transfer, conveyance or
other disposition (other than to the Issuer or any of its Subsidiaries) in
a single transaction or in a series of related transactions, in either
case occurring outside the ordinary course of business, of more than 75%
of the assets of the Mortgage Bank shown on a balance sheet of the
Mortgage Bank as of the end of the most recent fiscal quarter ending at
least 45 days prior to such transaction (or the first transaction in such
related series of transactions).
"Consolidated Net Worth" of any Person means, at any date, all amounts
which would, in conformity with GAAP, be included under shareholders' equity
on a consolidated balance sheet of such Person as at such date, less any
amounts included therein attributable to (x) Redeemable Stock and (y)
Exchangeable Stock.
"Debt" of any Person means, without duplication,
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for the
payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person;
(iii) all obligations of such Person issued as the deferred purchase
price of property, all conditional sale obligations of such Person and all
obligations of such Person under any title retention agreement (but
excluding trade accounts payable and other accrued current liabilities
arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit
securing obligations (other than obligations described in (i) through
(iii) above) entered into in the ordinary course of business of such
Person to the extent such letters of credit are not drawn upon or, if and
to the extent drawn upon, such drawing is reimbursed no later than the
third Business Day following receipt by such Person of a demand for
reimbursement following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect to the
redemption, repayment or other repurchase of any Redeemable Stock (but
excluding in each case any accrued dividends);
(vi) all obligations of the type referred to in clauses (i) through
(v) of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including Guarantees of
such obligations and dividends; and
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(vii) all obligations of the type referred to in clauses (i) through
(vi) of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Depository Institution" shall have the meaning attributed thereto in
Section 3(c)(i) of the Federal Deposit Insurance Act, 12 U.S.C. Section
1813(c)(1), or a similar definition under any successor statute.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchangeable Stock" means any Capital Stock of a Person which is
exchangeable or convertible into another security (other than Capital Stock
of such Person which is neither Exchangeable Stock nor Redeemable Stock).
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, as in effect from time
to time, except that, for purposes of calculating Consolidated Net Income,
Consolidated Net Worth and Consolidated Common Shareholders' Equity, it shall
mean generally accepted accounting principles in the United States as in
effect on the date of the Indenture.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Debt or other obligation of any
Person and any obligation, direct or indirect, contingent or otherwise, of
such Person: (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or other obligation of such Person (whether
arising by virtue of partnership arrangements, or by agreement to keep well,
to purchase assets, goods, securities or services, to take-or-pay, or to
maintain financial statement conditions or otherwise) or (ii) entered into
for purposes of assuring in any other manner the obligee of such Debt or
other obligation of the payment thereof or to protect such obligee against
loss in respect thereof (in whole or in part); provided, however, that the
term "Guarantee" shall not include endorsements for collection or deposit in
the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Investment" in any Person means any loan or advance to, any net payment
on a Guarantee of, any acquisition of Capital Stock, equity interest,
obligation or other security of, or capital contribution or other investment
in, such Person. Investments shall exclude loans or advances to customers and
suppliers in the ordinary course of business. The term "Invest" has a
corresponding meaning.
"issue" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Debt or Capital Stock of a Person existing
at the time such Person becomes a Subsidiary of another Person (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be issued
by such Subsidiary at the time it becomes a Subsidiary of such other Person.
"Lien" means any mortgage, pledge, security interest, conditional sale or
other title retention agreement or other similar lien.
"Mafco Holdings" means Mafco Holdings Inc., a Delaware corporation, and
its successors.
"Minimum Common Equity Amount" means, as of the end of any fiscal quarter,
an amount equal to the sum of: (i) $400 million and (ii) the excess, if any,
of amounts attributable to goodwill and core deposit intangible on the
consolidated balance sheet of the Bank as at the end of such fiscal quarter,
over $100 million.
"Mortgage Bank" means any Subsidiary of the Issuer, other than the Bank,
that is engaged in the mortgage banking business, including the business of
originating or carrying mortgage loans.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys'
fees, accountants' fees, underwriters' or placement agents' fees, discounts
or commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or estimated in
good faith to be payable as a result thereof.
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"Non-Convertible Capital Stock" means, with respect to any corporation,
any non-convertible Capital Stock of such corporation and any Capital Stock
of such corporation convertible solely into non-convertible common stock of
such corporation; provided, however, that Non-Convertible Capital Stock shall
not include any Redeemable Stock or Exchangeable Stock.
"Officer" means the Chairman of the Board, the Vice Chairman, the
President, any Vice President, the Treasurer, an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Issuer.
"Officers' Certificate" means a certificate signed by the Chairman of the
Board, the Vice Chairman, the President or a Vice President (regardless of
Vice Presidential designation), and by the Treasurer, an Assistant Treasurer,
Secretary or an Assistant Secretary, of the Issuer, and delivered to the
Trustee. One of the Officers signing an Officers' Certificate given pursuant
to the requirement for a compliance certificate as described in the last
paragraph under "Defaults" above shall be the principal executive, financial
or accounting officer of the Issuer.
"Opinion of Counsel" means a written opinion from legal counsel who is
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Issuer (or Mafco Holdings or one of its Subsidiaries) or the
Trustee.
"Optional Redemption Amount" means at any time the price at which the
Notes are then redeemable pursuant to an optional redemption by the Issuer.
"Permitted Affiliate" means any individual who is a director or executive
officer of the Issuer, of a Subsidiary of the Issuer or of an Unrestricted
Affiliate; provided, however, that such individual is not also a director or
executive officer of Mafco Holdings, any Person that controls Mafco Holdings
or any successor to any of the foregoing.
"Permitted Business Activities" means, with respect to any Person: (i) the
annuities and mutual funds sales business, (ii) the asset and real estate
management business, and (iii) any other business activity permissible for
Subsidiaries of a multiple savings and loan holding company under Section 10
of the HOLA (or any successor provision); provided, however, that in
connection with such business activities such Person may not have total
liabilities of more than $1,000,000.
"Permitted Holders" 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.
"Permitted Investments" means: (i) Temporary Cash Investments, (ii)
investments by the Bank consisting of loans to directors and executive
officers (other than any such director or executive officer that is the
beneficial owner of 10% or more of the Voting Stock of the Issuer) of any
Subsidiary of the Issuer made in the ordinary course of its business and in
compliance with all regulatory restrictions on such loans, (iii) Investments
by any Subsidiary of the Issuer (to the extent that and for so long as such
Subsidiary, if it were the Bank or a Subsidiary of the Bank, would be
permitted, under applicable laws and regulations, to make such Investment) in
any Person other than an Affiliate of the Issuer (other than an Unrestricted
Affiliate, a Subsidiary of the Issuer or a Person that would become an
Unrestricted Affiliate or a Subsidiary as a result of such Investment), (iv)
Investments by the Issuer consisting of loans to Affiliates of the Issuer so
long as (in the case of this clause (iv) only) the Consolidated Common
Shareholders' Equity of the Bank as of the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Investment was at
least equal to the Minimum Common Equity Amount as of the end of such fiscal
quarter, and (v) Investments by the Issuer in any Subsidiary of the Issuer or
any Person that would become a Subsidiary of the Issuer as a result of such
Investment.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other
entity.
"Preferred Stock" as applied to the Capital Stock of any corporation means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such corporation, over
shares of Capital Stock of any other class of such corporation.
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"principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Redeemable Stock" means, with respect to any Person, Capital Stock of
such Person that by its terms or otherwise is required to be redeemed on or
prior to the first anniversary of the Stated Maturity of the Notes or is
redeemable at the option of the holder thereof at any time on or prior to the
first anniversary of the Stated Maturity of the Notes.
"Refinance" means, in respect of any Debt, to refinance, extend, renew,
refund, repay, prepay, redeem, defease or retire, or to issue Debt in
exchange or replacement for, such Debt. "Refinanced" and "Refinancing" shall
have correlative meanings.
"Restricted Payment" means, as to any Person making a Restricted Payment:
(i) the declaration or payment of any dividend or any distribution on or in
respect of the Capital Stock of such Person (including any payment in
connection with any merger or consolidation involving such Person) or to the
holders of the Capital Stock of such Person (except dividends or
distributions payable solely in the Non-Convertible Capital Stock of such
Person or in options, warrants or other rights to purchase the
Non-Convertible Capital Stock of such Person and except dividends or
distributions on common stock payable to the Issuer or a Subsidiary and to
minority shareholders who are not Affiliates of the Issuer (other than an
Unrestricted Affiliate, a Permitted Affiliate or a Subsidiary of the
Issuer)), (ii) any purchase, redemption or other acquisition or retirement
for value of any Capital Stock (including the Bank Preferred Stock) of the
Issuer or any Subsidiary, (iii) any purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment, of any
Subordinated Obligation (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of
satisfying a sinking fund obligation, principal installment or final
maturity, in each case due within one year of the date of acquisition), and
(iv) any Investment in any Person other than a Permitted Investment.
"Significant Subsidiary" means: (i) any Subsidiary of the Issuer which at
the time of determination either (A) had assets which, as of the date of the
Issuer's most recent quarterly consolidated balance sheet, constituted at
least 5% of the Issuer's total assets on a consolidated basis as of such
date, in each case determined in accordance with GAAP, or (B) had revenues
for the 12-month period ending on the date of the Issuer's most recent
quarterly consolidated statement of income which constituted at least 5% of
the Issuer's total revenues on a consolidated basis for such period or (ii)
any Subsidiary of the Issuer which, if merged with all Defaulting
Subsidiaries (as defined below) of the Issuer, would at the time of
determination either (A) have had assets which, as of the date of the
Issuer's most recent quarterly consolidated balance sheet, would have
constituted at least 10% of the Issuer's total assets on a consolidated basis
as of such date or (B) have had revenues for the 12-month period ending on
the date of the Issuer's most recent quarterly consolidated statement of
income which would have constituted at least 10% of the Issuer's total
revenues on a consolidated basis for such period (each such determination
being made in accordance with GAAP). "Defaulting Subsidiary" means any
Subsidiary of the Issuer with respect to which an event described under
clause (v), (vi) or (vii) of "Defaults" above has occurred and is continuing.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency).
"Subordinated Obligation" means any Debt of the Issuer (whether
outstanding on the date hereof or hereafter issued) which is subordinate or
junior in right of payment to the Notes.
"Subsidiary" means as to any Person any corporation, association,
partnership or other business entity of which more than 50% of the total
voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned, directly or indirectly, by: (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
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"Tax Sharing Agreement" means: (i) that certain agreement effective as of
January 1, 1994 by and among the Issuer, certain of its Subsidiaries and
Mafco Holdings, and (ii) any other tax allocation agreement between the
Issuer or any of its Subsidiaries with the Issuer or any direct or indirect
shareholder of the Issuer with respect to consolidated or combined tax
returns including the Issuer or any of its Subsidiaries but only to the
extent that amounts payable from time to time by the Issuer or any such
Subsidiary under any such agreement do not exceed the corresponding tax
payments that the Issuer or such Subsidiary would have been required to make
to any relevant taxing authority had the Issuer or such Subsidiary not joined
in such consolidated or combined returns, but instead had filed returns
including only the Issuer or its Subsidiaries, provided that any such
agreement may provide that, if the Issuer or any such Subsidiary ceases to be
a member of the affiliated group of corporations of which Mafco Holdings is
the common parent for purposes of filing a consolidated Federal income tax
return (such cessation, a "Deconsolidation Event"), then the Issuer or such
Subsidiary shall indemnify such direct or indirect shareholder with respect
to any Federal, state or local income, franchise or other tax liability
(including any related interest, additions or penalties) imposed on such
shareholder as the result of an audit or other adjustment with respect to any
period prior to such Deconsolidation Event that is attributable to the
Issuer, such Subsidiary or any predecessor business thereof (computed as if
the Issuer, such Subsidiary or such predecessor business, as the case may be,
were a stand-alone entity that filed separate tax returns as an independent
corporation), but only to the extent that any such tax liability exceeds any
liability for taxes recorded on the books of the Issuer or such Subsidiary
with respect to any such period.
"Temporary Cash Investments" means any of the following: (i) any
investment in direct obligations of the United States of America or any
agency thereof or obligations Guaranteed by the United States of America or
any agency thereof, in each case, maturing within 360 days of the date of
acquisition thereof, (ii) investments in time deposit accounts, certificates
of deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company (including the Trustee)
which is organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States having
capital, surplus and undivided profits aggregating in excess of $250,000,000
and whose debt is rated "A" (or such similar equivalent rating) or higher by
at least one nationally recognized statistical rating organization (as
defined for purposes of Rule 436 under the Securities Act) or any
money-market fund sponsored by any registered broker dealer or mutual fund
distributor, (iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i) above
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate or Subsidiary of the Issuer) organized and in existence under the
laws of the United States of America or any foreign country recognized by the
United States of America with a rating at the time as of which any investment
therein is made of "P-2" (or higher) according to Moody's Investors Service,
Inc. or "A-2" (or higher) according to Standard and Poor's Corporation and
(v) securities with maturities of six months or less from the date of
acquisition backed by standby or direct pay letters of credit issued by any
bank satisfying the requirements of clause (ii) above.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb) as in effect on the date of the Indenture.
"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 repayment (or, if such Statistical Release is no longer
published, any publicly available source of similar market data)) most nearly
equal to the then remaining Average Life to the first date on which Notes are
subject to optional redemption by the Issuer; provided, however, that, if the
Average Life of the Notes to the first date on which Notes are subject to
optional redemption by the Issuer 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,
31
<PAGE>
except that, if the Average Life of the Securities to the first date on which
Notes are subject to optional redemption by the Issuer 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.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means any officer or assistant officer of the Trustee
assigned by the Trustee to administer its corporate trust matters.
"Unrestricted Affiliate" means a Person (other than a Subsidiary of the
Issuer) controlled (as defined in the definition of "Affiliate") by the
Issuer, in which no Affiliate of the Issuer (other than (w) the Issuer, (x) a
Wholly Owned Subsidiary of the Issuer, (y) a Permitted Affiliate and (z)
another Unrestricted Affiliate) has an Investment.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States
of America (including any agency or instrumentality thereof) for the payment
of which the full faith and credit of the United States of America is pledged
and which are not callable at the Issuer's option.
"Voting Stock" of a corporation means all classes of Capital Stock of such
corporation then outstanding and normally entitled to vote in the election of
directors.
"Wholly Owned Subsidiary" means the Bank and any Subsidiary of the Issuer
all the Capital Stock of which (other than directors' qualifying shares) is
owned by the Issuer, the Bank or another Wholly Owned Subsidiary.
REGISTRATION RIGHTS
The Issuer has agreed with the Selling Securityholders to file and has
filed this shelf registration statement with respect to the $5.5 million
aggregate principal amount of Notes held by such persons. This Prospectus has
been prepared in connection with such shelf registration statement. Gerald J.
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 Notes. The terms of
the loan provide that, in the event of default by Mr. Ford under such loan,
NationsBank or any successor or assignee thereof will have the right to
foreclose on the pledged Notes and sell, or direct Mr. Ford to sell, such
Notes to certain "qualified institutional buyers" pursuant to Rule 144A under
the Securities Act, pursuant to Regulation S under the Securities Act, to the
Issuer or pursuant to this shelf registrationstatement and the prospectus
contained herein.
32
<PAGE>
DESCRIPTION OF OTHER INDEBTEDNESS OF THE ISSUER
The following summary of terms of the Senior Subordinated Notes and the
Senior Subordinated Notes Indenture is subject to and qualified in its
entirety by reference to the detailed provisions of the Senior Subordinated
Notes Indenture and the form of Note included therein, copies of which are
filed as an exhibit to the Registration Statement of which this Prospectus
constitutes a part. Capitalized terms used below and not defined have the
meanings set forth in the Senior Subordinated Notes Indenture.
On January 31, 1996, the Issuer issued and sold $140.0 million principal
amount of 9 1/8 % Senior Subordinated Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. On or about May 15,
1996, the Issuer commenced an exchange offer to exchange 9 1/8 % Senior
Subordinated Exchange Notes, which have been registered under the Securities
Act and are identical in all material respects to the Senior Subordinated
Notes, for its Senior Subordinated Notes. If the exchange offer is not
consummated by July 1, 1996, the Senior Subordinated Notes will bear interest
at 9 5/8 % per annum from and including July 1, 1996 until but excluding the
date of consummation of the exchange offer, at which time the interest on the
Senior Subordinated Notes will permanently decrease to 9 1/8 % per annum.
Interest is payable semiannually on each January 15 and July 15 and the
Senior Subordinated Notes mature on January 15, 2003. The Senior Subordinated
Notes are unsecured obligations of the Issuer and are subordinated to all
existing and future Senior Indebtedness (as defined in the Senior
Subordinated Notes Indenture) of the Issuer, including the Notes.
The Senior Subordinated Notes may be redeemed at the option of the Issuer
in whole or in part any time during the twelve month period beginning January
1, 2001 at a redemption price of 104.5625% plus accrued and unpaid interest,
if any, to the date of redemption, and thereafter at a redemption price of
100% plus accrued and unpaid interest, if any, to the date of redemption.
Upon a Change of Control Call Event (as defined in the Senior Subordinated
Notes Indenture) prior to January 1, 2001, the Issuer will have the option to
redeem the Senior Subordinated Notes in whole at a redemption price equal to
the principal amount thereof plus the Applicable Premium (as defined in the
Senior Subordinated Notes Indenture), plus accrued and unpaid interest, if
any, to the date of redemption, and, subject to certain conditions, upon a
Change of Control Put Event (as defined in the Senior Subordinated Notes
Indenture) each holder of Senior Subordinated Notes will have the right to
require the Issuer to repurchase all or a portion of such holder's Senior
Subordinated Notes at 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase.
The Senior Subordinated Notes Indenture contains various restrictive
covenants that, among other things, limit (i) the issuance of additional
indebtedness by the Issuer and certain subsidiaries, (ii) the payment of
dividends on capital stock of the Issuer and its subsidiaries, and the
redemption or repurchase of the capital stock of the Issuer and its
subsidiaries, including a requirement that no such payments, redemptions or
repurchases may be made if at the time the Consolidated Common Shareholders'
Equity (as defined in the Senior Subordinated Notes Indenture) of the Issuer
is less than the Minimum Common Equity Amount (as defined in the Senior
Subordinated Notes Indenture), (iii) the making of certain investments, (iv)
transactions with affiliates, (v) the incurrence of liens on the assets of
the Issuer to secure pari passu or subordinated obligations which do not
equally and ratably secure the Senior Subordinated Notes, (vi) the
termination or amendment of the Tax Sharing Agreement, (vii) the ability of
the Issuer to restrict dividends or distributions from subsidiaries, (viii)
consolidations, mergers and transfers of all or substantially all of the
Issuer's assets and (ix) other business activities of the Issuer. All of
these limitations and prohibitions, however, are subject to a number of
important qualifications.
Events of Default under the Senior Subordinated Notes Indenture include,
among other things, (i) a default continuing for 30 days in the payment of
interest when due, (ii) a default in the payment of any principal when due,
(iii) the failure to purchase the Senior Subordinated Notes when required
pursuant to the Senior Subordinated Notes Indenture, (iv) the failure to
comply with the covenants in the Senior Subordinated Notes Indenture, subject
in certain instances to grace periods, (v) failure to pay other indebtedness
of the Issuer or a Significant Subsidiary (as defined in the Senior
Subordinated Notes
33
<PAGE>
Indenture) in excess of $25 million upon final maturity or as a result of
such indebtedness becoming accelerated and such default continues for a
period of 5 days after notice thereof, (vi) certain events of bankruptcy,
insolvency or reorganization of the Issuer or a Significant Subsidiary and
(vii) the failure to pay any judgment in excess of $25 million.
SELLING SECURITYHOLDERS
The following table provides certain information with respect to the Notes
held by each Selling Securityholder as of May 1, 1996. The Notes registered
under the Registration Statement of which this Prospectus constitutes a part
may be offered from time to time by the Selling Securityholders named below.
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
SELLING AMOUNT OF NOTES AMOUNT OF NOTES COVERED AMOUNT OF NOTES OWNED
SECURITYHOLDER BENEFICIALLY OWNED BY THIS PROSPECTUS AFTER THIS OFFERING
- --------------------- ------------------- ----------------------- ---------------------
<S> <C> <C> <C>
Gerald J. Ford* ...... $5,000,000 $5,000,000 $0
Carl B. Webb ......... 500,000 500,000 0
</TABLE>
- ------------
* Gerald J. Ford has entered into a loan arrangement with NationsBank
whereby he has borrowed $5 million secured by his Notes. In the event Mr.
Ford defaults under such loan, NationsBank or any successor or assignee
thereof will have the right, among other things, to foreclose on the pledged
Notes and sell such Notes pursuant to the Registration Statement and this
Prospectus. See "Plan of Distribution."
PLAN OF DISTRIBUTION
The Issuer will not receive any proceeds from the sale of Notes by the
Selling Securityholders. The Selling Securityholders may offer the Notes in
any of the following methods: (i) through underwriters or dealers, (ii)
directly, (iii) through agents or (iv) through a combination of any such
methods of sale on terms to be determined at the time of such sale.
If underwriters are used in an offering of Notes by the Selling
Securityholders, such Notes will be acquired by the underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale. The Notes may be either
offered by the Selling Securityholders, to the public through underwriting
syndicates represented by one or more managing underwriters, or by
underwriters without a syndicate. Unless otherwise set forth in a prospectus
supplement, the obligations of the underwriters to purchase Notes will be
subject to certain conditions precedent and the underwriters will be
obligated to purchase all such Notes if any are purchased. Any initial public
offering price and any discounts or concessions allowed or unallowed or paid
to dealers may be changed from time to time.
Notes also may be sold directly by the Selling Securityholders or through
agents designated by the Selling Securityholders from time to time. Any agent
involved in the offer or sale of the Notes in respect of which this
Prospectus is delivered will be named, and the terms of any such agency
(including any commissions payable by the Selling Securityholders to such
agent) will be set forth, in the applicable prospectus supplement. Unless
otherwise indicated in such prospectus supplement, any such agent will be
acting on a best efforts basis for the period of its appointment. The Selling
Securityholders and any such underwriters, dealers or agents who participate
in the distribution of the Notes may be deemed to be underwriters, and any
profits on the sale of the Notes by them and any discounts, commissions or
concessions received by any such underwriters, dealers or agents might be
deemed to be underwriting discounts and commissions under the Securities Act.
If required, a prospectus supplement with respect to an offering of Notes by
the Selling Securityholders, will set forth the terms of such offering,
including the name or names of the Selling Securityholders, the name or names
of any underwriter, dealer or agent, the purchase price of the Notes and the
proceeds to the Selling Securityholders from such sale, any underwriting
discounts and other items constituting underwriters' compensation, any
initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers.
34
<PAGE>
If so indicated in a prospectus supplement, the Selling Securityholders
will authorize agents, underwriters or dealers to solicit offers by certain
institutional investors to purchase Notes of the series to which such
prospectus supplement relates providing for payment and delivery on a future
date specified in such prospectus supplement. There may be limitations on the
minimum amount which may be purchased by any such institutional investor or
on the portion of the aggregate principal amount of the particular Notes
which may be sold pursuant to such arrangements. Institutional investors to
which such offers may be made, when authorized, include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and such other institutions as may be
approved by the Selling Securityholders. The obligations of any such
purchasers pursuant to such delayed delivery and payment arrangements will
not be subject to any conditions except that: (i) the purchase by an
institution of the particular Notes shall not at the time of delivery be
prohibited under the laws of any jurisdiction in the United States to which
such institution is subject and (ii) if the particular Notes are being sold
to underwriters, the Selling Securityholder shall have sold to such
underwriters the total principal amount of such Notes less the principal
amount thereof covered by such arrangements. Underwriters will not have any
responsibility in respect of the validity of such arrangements or the
performance of the Selling Securityholders or such institutional investors
thereunder.
Pursuant to the Registration Agreement dated July 20, 1994, by and among
the Issuer and the other signatories thereto, agents and underwriters may be
entitled under agreements entered into with the Issuer to indemnification by
the Issuer against certain civil liabilities, including liabilities under the
Securities Act, or to contribution with respect to payments which the agents
or underwriters may be required to make in respect thereof. Agents and
underwriters may engage in transactions with, or perform services for, the
Issuer in the ordinary course of business.
The Notes may be sold from time to time in one or more transactions at a
fixed offering price, which may be changed, or at varying prices determined
at the time of sale or at negotiated prices. Such prices will be determined
by the Selling Securityholders or by agreement between the Selling
Securityholders and underwriters or dealers. The Issuer does not currently
intend to list the Notes on any securities exchange or seek approval for
quotation on any automated quotation system.
The Selling Securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation, Rules
10b-3, 10b-6 and 10b-7, which provisions may limit the timing of purchases
and sales of any of the Notes by the Selling Securityholders and any other
such person. Furthermore, under Rule 10b-6 under the Exchange Act but subject
to the limitations set forth therein, any person engaged in a distribution of
the Notes may not simultaneously engage in market-making activities with
respect to the particular Notes being distributed for a period of nine
business days prior to the commencement of such distribution. All of the
foregoing may affect the marketability of the Notes and the ability of any
person or entity to engage in market-making activities with respect to the
Notes.
Gerald J. Ford has entered into a loan agreement with 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 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 Notes pledged as collateral,
NationsBank or any successor or assignee thereof will have the right to
foreclose on the pledged Notes and sell, or direct Mr. Ford to sell, such
Notes to certain "qualified institutional buyers" pursuant to Rule 144A under
the Securities Act, pursuant to Regulation S under the Securities Act, to the
Issuer or pursuant to the Registration Statement and this Prospectus. Any
sale made by or on behalf of the lender or its successor or assignee will be
made on the same terms and conditions as set forth herein.
In order to comply with certain states' securities laws, if applicable,
the Notes will be sold in such jurisdictions only through registered or
licensed brokers or dealers. In certain states the Notes may not be sold
unless the Notes have been registered or qualified for sale in such state, or
unless an exemption from registration or qualification is available and is
obtained.
35
<PAGE>
The Notes offered hereby contain legends as to their restricted
transferability. Upon the effectiveness of the Registration Statement of
which this Prospectus constitutes a part and the transfer of the Notes
pursuant thereto, these legends will no longer be necessary, and accordingly,
the Notes will be issued to the transferee without any such legends unless
otherwise required by law.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
Notes were passed upon for the Issuer by Paul, Weiss, Rifkind, Wharton &
Garrison, New York, New York. Skadden, Arps, Slate, Meagher & Flom has acted
as counsel for the Issuer in connection with the offering of the Old Notes.
Skadden, Arps, Slate, Meagher & Flom and Paul, Weiss, Rifkind, Wharton &
Garrison have from time to time represented, and may continue to represent,
MacAndrews & Forbes and certain of its affiliates (including the Issuer and
the Bank) in connection with certain legal matters. Joseph H. Flom, a partner
in the firm of Skadden, Arps, Slate, Meagher & Flom, is a director of Revlon
Group Incorporated, a wholly owned subsidiary of MacAndrews & Forbes.
EXPERTS
The Consolidated Financial Statements of the Issuer 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 and incorporated by reference herein
and in the Registration Statement in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
and incorporated by reference 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 in this Registration Statement in
reliance upon the report of Coopers & Lybrand LLP, independent 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 Prospectus, which is part of this Registration Statement,
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 relating 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.
36
<PAGE>
INDEX OF DEFINED TERMS*
<TABLE>
<CAPTION>
PAGE
TERM NUMBER
- ---- --------
<S> <C>
Applicable Premium ..................... 16
Asset Purchase Agreement ............... 5
Assistance Agreement ................... 5
Bank ................................... 1
Bank Preferred Stock ................... 1
bankruptcy provisions .................. 23
Branch Purchases ....................... 4
Branch Sales ........................... 4
Change of Control Call Event ........... 16
Change of Control Put Event ............ 17
Code ................................... 13
Consolidated Common Shareholders'
Equity ................................ 26
cross acceleration provision ........... 23
covenant defeasance .................... 25
Default Amount ......................... 23
defeasance trust ....................... 25
Event of Default ....................... 23
Exchange Act ........................... 2
FDIC ................................... 3
FDICIA ................................. 8
First Gibraltar ........................ 5
First Gibraltar Oklahoma Sale .......... 5
First Gibraltar Texas Sale ............. 5
First Madison .......................... 5
First Nationwide ....................... 1
FNB Acquired Business .................. 5
FN Acquisition ......................... 5
FNMC ................................... 4
Ford Motor ............................. 5
Granite ................................ 5
HOLA ................................... 3
Holdings ............................... 6
Home Federal ........................... 4
Home Federal Acquisition ............... 4
Hunters Glen ........................... 6
Indenture .............................. 2
Issuer ................................. 1
judgment default provisions ............ 23
Junior Stock ........................... 8
legal defeasance ....................... 25
LMUSA .................................. 4
LMUSA 1995 Purchase .................... 4
LMUSA 1996 Purchase .................... 4
LMUSA Purchases ........................ 4
MacAndrews & Forbes .................... 6
MacAndrews Holdings .................... 5
Mafco Group ............................ 13
Mafco Holdings ......................... 6
Maryland Acquisition ................... 4
master servicing portfolio ............. 4
Michigan Branch Sale ................... 4
Minimum Common Equity Amount ........... 28
MSRs ................................... 4
NationsBank ............................ 32
Northeast Branch Sales ................. 4
Notes .................................. 1
Offering ............................... 1
Ohio Branch Sale ....................... 4
Old FNB ................................ 5
Old Notes .............................. 6
OTS .................................... 3
Put Agreement .......................... 5
Putable Assets ......................... 11
Registration Statement ................. 2
Restricted Payment ..................... 30
SAIF ................................... 3
SEC .................................... 2
Securities Act ......................... 1
Selling Securityholders ................ 1
Senior Subordinated Notes .............. 1
Senior Subordinated Notes Indenture ... 9
Senior Subordinated Notes Offering .... 3
SFFed .................................. 3
SFFed Acquisition ...................... 3
Special Report ......................... 11
sub-servicing portfolio ................ 4
Tax Sharing Agreement .................. 12
Texas Closed Banks ..................... 5
Trustee ................................ 2
</TABLE>
* Does not include terms defined under "Description of the Notes--Certain
Definitions."
37
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
First Nationwide Holdings Inc. 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
The FNB Acquired Business
At December 31, 1993 and for the years ended December 31, 1993 and 1992:
Report of Independent Accountants ........................................ F-49
Consolidated Statements of Financial Condition ........................... F-50
Consolidated Statements of Operations .................................... F-51
Consolidated Statements of Equity ........................................ F-52
Consolidated Statements of Cash Flows .................................... F-53
Notes to Consolidated Financial Statements ............................... F-55
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-82
Consolidated Statements of Financial Condition ........................... F-83
Consolidated Statements of Operations .................................... F-84
Consolidated Statements of Stockholders' Equity .......................... F-85
Consolidated Statements of Cash Flows .................................... F-86
Notes to Consolidated Financial Statements ............................... F-88
Unaudited Pro Forma Financial Data of the Issuer
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1995 ........................................................ P-2
Notes to Pro Forma Condensed Combined Statement of Operations .......... P-3
SFFed Acquisition and notes thereto ..................................... P-4
LMUSA Purchases and notes thereto ....................................... P-8
Branch Sales and notes thereto .......................................... P-10
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
First Nationwide Holdings Inc.:
We have audited the accompanying consolidated statements of financial
condition of First Nationwide Holdings Inc. and subsidiaries (the "Company")
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 Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 Holdings Inc. and subsidiaries as of December 31, 1995 and 1994,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1995, in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, the Company
adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage
Servicing Rights," in 1995, and 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
F-2
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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 $ 149,564
Interest-bearing deposits in other banks ....................... 32,778 39,219
Short-term investment securities ............................... 125,035 --
-------------- -------------
Cash and cash equivalents ..................................... 312,571 188,783
Securities available for sale .................................. 1,826,075 45,000
Securities to be held to maturity (fair value $1,455 in 1995
and $409,398 in 1994) ......................................... 1,455 411,859
Mortgage-backed securities to be 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 ("FHLB") .......... 109,943 128,557
Office premises and equipment, net ............................. 93,509 76,523
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 ................................................... 295,325 150,050
-------------- -------------
Total assets ................................................. $14,646,245 $14,683,559
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ....................................................... $10,241,628 $ 9,196,656
Securities sold under agreements to repurchase ................. 969,510 1,883,490
Borrowings ..................................................... 2,392,862 2,808,979
Other liabilities .............................................. 279,099 140,832
-------------- -------------
Total liabilities ............................................ 13,883,099 14,029,957
-------------- -------------
Minority interest--preferred stock of First Nationwide Bank ... 300,730 300,730
Stockholders' equity:
Class A common stock, $1.00 par value, 800 shares
authorized, 800 shares issued and outstanding ................ 1 1
Class B common stock, $1.00 par value, 200 shares
authorized, 200 shares issued and outstanding ................ -- --
Class C common stock, $1.00 par value, 250 shares
authorized, 169.5 and 230.3 shares issued and outstanding at
December 31, 1995 and 1994, respectively ..................... -- --
Additional paid-in capital .................................... 223,000 283,801
Net unrealized holding gain on securities available for sale . 63,512 11,000
Retained earnings (substantially restricted) .................. 175,903 58,070
-------------- -------------
Total stockholders' equity ................................... 462,416 352,872
-------------- -------------
Total liabilities and stockholders' equity ................... $14,646,245 $14,683,559
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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 . 28,396 6,997 24,342
----------- ---------- ----------
Total interest income ................................... 1,075,845 293,139 95,264
----------- ---------- ----------
Interest expense:
Deposits ................................................. 447,359 100,957 55,410
Securities sold under agreements to repurchase .......... 104,957 18,863 805
Borrowings ............................................... 182,499 80,025 18,513
----------- ---------- ----------
Total interest expense .................................. 734,815 199,845 74,728
----------- ---------- ----------
Net interest income ..................................... 341,030 93,294 20,536
Provision for loan losses ................................. 37,000 6,226 1,402
----------- ---------- ----------
Net interest income after provision for loan losses .... 304,030 87,068 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
Data processing .......................................... 9,787 2,888 3,739
Savings Association Insurance Fund deposit insurance
premium ................................................. 22,262 6,813 3,259
Marketing ................................................ 10,810 3,385 166
Loan expense ............................................. 12,431 1,132 388
Foreclosed real estate operations, net ................... (927) (528) (726)
Amortization of core deposit and other intangible assets 1,474 222 468
Other .................................................... 72,531 21,293 25,804
----------- ---------- ----------
Total noninterest expense ............................... 332,553 96,298 63,392
----------- ---------- ----------
Income before income taxes, extraordinary item and
minority interest ........................................ 122,450 31,928 146,618
Income taxes .............................................. (57,185) 2,558 2,500
----------- ---------- ----------
Income before extraordinary item and minority interest ... 179,635 29,370 144,118
Extraordinary item--gain on early extinguishment of FHLB
advances, net ............................................ 1,967 1,376 --
----------- ---------- ----------
Income before minority interest ........................... 181,602 30,746 144,118
Minority interest--First Nationwide Bank preferred stock
dividends ................................................ 34,584 -- --
----------- ---------- ----------
Net income .............................................. $ 147,018 $ 30,746 $144,118
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------
CLASS A CLASS B CLASS C
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1, 1993 ... $1 -- --
Net income .................... -- -- --
Redemption of preferred stock -- -- --
Dividends and distributions to
stockholders ................. -- -- --
--------- --------- ---------
Balance at December 31, 1993 . 1 -- --
Net income .................... -- -- --
Issuance of class C common
stock ........................ -- -- --
Issuance of the Bank's
preferred stock .............. -- -- --
Change in net unrealized
holding gain on securities
available for sale ........... -- -- --
--------- --------- ---------
Balance at December 31, 1994 . 1 -- --
Net income .................... -- -- --
Redemption of class C common
stock ........................ -- -- --
Dividends on class C common
stock ........................ -- -- --
Change in net unrealized
holding gain on securities
available for sale ........... -- -- --
--------- --------- ---------
Balance at December 31, 1995 . $1 -- --
========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET UNREALIZED
ADDITIONAL HOLDING GAIN ON TOTAL
PAID-IN SECURITIES AVAILABLE RETAINED STOCKHOLDERS'
CAPITAL FOR SALE EARNINGS EQUITY
------------ -------------------- ----------- ---------------
<S> <C> <C> <C> <C>
Balance at January 1, 1993 ... $ 401,569 -- $ 71,206 $ 472,776
Net income .................... -- -- 144,118 144,118
Redemption of preferred stock (124,500) -- -- (124,500)
Dividends and distributions to
stockholders ................. (191,500) -- (188,000) (379,500)
------------ -------------------- ----------- ---------------
Balance at December 31, 1993 . 85,569 -- 27,324 112,894
Net income .................... -- -- 30,746 30,746
Issuance of class C common
stock ........................ 210,376 -- -- 210,376
Issuance of the Bank's
preferred stock .............. (12,144) -- -- (12,144)
Change in net unrealized
holding gain on securities
available for sale ........... -- $11,000 -- 11,000
------------ -------------------- ----------- ---------------
Balance at December 31, 1994 . 283,801 11,000 58,070 352,872
Net income .................... -- -- 147,018 147,018
Redemption of class C common
stock ........................ (60,801) -- -- (60,801)
Dividends on class C common
stock ........................ -- -- (29,185) (29,185)
Change in net unrealized
holding gain on securities
available for sale ........... -- 52,512 -- 52,512
------------ -------------------- ----------- ---------------
Balance at December 31, 1995 . $ 223,000 $63,512 $ 175,903 $ 462,416
============ ==================== =========== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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 .......................................... $ 147,018 $ 30,746 $ 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 ...................... 9,650 2,725 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 ........................... (75,273) (64,217) (65,242)
(Increase) decrease in accrued interest receivable (9,743) 759 752
Increase (decrease) in other liabilities .......... 12,619 (22,224) 38,640
------------- ------------- -------------
Total adjustments ................................. (577,331) (67,940) (186,605)
------------- ------------- -------------
Net cash flows used in operating activities ...... (430,313) (37,194) (42,487)
------------- ------------- -------------
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)
F-6
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Years Ended December 31, 1995, 1994 and 1993
(in thousands)
1995 1994 1993
------------- ------------- -------------
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 ......... (15,331) (2,555) (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 (used in) provided by investing
activities ........................................ 1,723,807 (1,048) (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 1,472,160 112,100
Principal payments on borrowings .................... (6,860,569) (2,239,248) (138,874)
Net (decrease) increase in securities sold under
agreements to repurchase ........................... (913,103) 534,998 119,144
Issuance of class C common stock .................... -- 210,376 --
Redemption of class C common stock .................. (60,801) -- --
Dividends on class C common stock ................... (29,185) -- --
Minority interest--issuance of First Nationwide
preferred stock .................................... -- 288,586 --
Redemption of preferred stock ....................... -- -- (124,500)
------------- ------------ -------------
Dividends ........................................... -- -- (136,210)
Net cash transferred through dividend of First
Gibraltar Mortgage Holdings ........................ -- -- (4,295)
Net cash flows provided by (used in) financing
activities ........................................ (1,169,706) 183,021 (605,099)
------------- ------------ -------------
Net change in cash and cash equivalents .............. 123,788 144,779 (4,297,193)
Cash and cash equivalents at beginning of year ...... 188,783 44,004 4,341,197
------------- ------------ -------------
Cash and cash equivalents at end of year ............. $ 312,571 $ 188,783 $ 44,004
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION
First Nationwide Holdings Inc. (the "Company" or "FN Holdings") is a
holding company whose only significant asset is all of the outstanding shares
of common stock of First Nationwide Bank, A Federal Savings Bank, formerly
First Madison Bank, FSB ("First Madison") ("First Nationwide" or "Bank"). The
Company is a subsidiary of First Nationwide (Parent) Holdings Inc. ("Parent
Holdings"), which is a subsidiary of First Gibraltar Holdings Inc. ("First
Gibraltar Holdings"), an indirect subsidiary of MacAndrews & Forbes Holdings
Inc. ("M&F Holdings").
First Nationwide 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 and 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, First Nationwide'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 acquisitions 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").
F-8
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 34.
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>
ESTIMATED
REMAINING
OLD FN FAIR VALUE FIRST NATIONWIDE LIVES (IN
CARRYING VALUE ADJUSTMENTS CARRYING VALUE YEARS)
-------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Securities .................................... $ 355,760 $ (3,989) $ 351,771 1 to 5
Mortgage-backed securities .................... 1,615,183 (30,516) 1,584,667 6 to 9
Loans held for sale ........................... 33,527 (72) 33,455 --
Loans receivable, net ......................... 11,395,622 6,651 11,402,273 2 to 18
Investment in FHLB ............................ 111,654 -- 111,654 --
Offices premises and equipment ................ 98,075 (13,166) 84,909 3 to 10
Foreclosed real estate, net ................... 48,188 (4,032) 44,156 --
Accrued interest receivable ................... 86,361 -- 86,361 2 to 7
Cost of mortgage servicing rights, net ....... 50,718 39,282 90,000 2 to 4
Other assets .................................. 82,186 67,304 149,490 2 to 5
Deposits ...................................... (10,047,911) (25,607) (10,073,518) 1 to 5
Securities sold under agreement to repurchase (1,229,296) (416) (1,229,712) --
Borrowings .................................... (2,012,574) 33,765 (1,978,809) 1 to 17
Other liabilities ............................. (106,073) (36,250) (142,323) 1 to 5
-------------- ------------- ----------------
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>
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 FN Holdings, funded with the net proceeds
of (a) the issuance by FN Holdings of its 12 1/4 % Senior Notes due 2001
("Senior Notes"), and (b) the issuance of FN Holdings' class C common stock
to Parent Holdings, (ii) the net proceeds from the issuance of 3,007,300
shares of the Bank's 11 1/2 % Noncumulative Perpetual Preferred Stock
("Preferred Stock"), and (iii) existing cash and proceeds from securities
sold under agreements to repurchase.
F-9
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On October 7, 1994, First Nationwide 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 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 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 Company and the Acquired Business as if the FN Acquisition and
the Branch 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 Branch 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 $385,313 $489,204
Net income ......... 77,397 150,946
========== ==========
</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 totalling $35
million from existing cash. At December 31, 1995, approximately $64.7 million
F-10
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
Pro froma 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, extraordinary item and minority interest 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 FN Holdings 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 FN Holdings, the Bank and the Bank's wholly owned subsidiaries
not subject to the Assistance Agreement. Earnings per share data is not
presented due to the limited ownership of the Company (see note 23). 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 securities purchased under agreements to
resell with original maturities of three months or less. Savings and loans
are required by the Federal Reserve Bank to maintain noninterest-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
The Company's investment in securities consists primarily of U.S.
Government and agency securities and mortgage-backed securities. FN
Holdings adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"), which specifies the accounting and reporting for all investments in
debt securities and for
F-11
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
investments in equity securities that have readily determinable fair
values, effective January 1, 1994. There was no material impact on the
consolidated financial statements as a result of the adoption of SFAS 115
at January 1, 1994. SFAS 115 requires classification of debt and equity
securities, including mortgage-backed securities, into one of three
categories: to be 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 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 available for sale securities 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 Company 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 30
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
F-12
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Bank's past loan loss experience, delinquency trends, known and
inherent risks in 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 judgments 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 returns, the loan is returned to
accrual status.
(f) Impaired Loans
Effective January 1, 1995, the Company 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 FN
Holdings, 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 Company's consolidated financial statements
as the Company's existing policy of measuring loan impairment was
consistent with methods prescribed in these standards.
The Company considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Company 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, FN Holdings considers
large nonhomogeneous 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 Company 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, of principal, if any, is recorded through a
charge-off to the allowance for loan losses.
F-13
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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 Company and its subsidiaries 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 foreclosures 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.
The Company 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 Company 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
F-14
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the 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 Company 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
Company 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 Company
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 Company 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 Company 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 Company 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
Company 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 cost over the current fair value, by risk stratification, by
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 Company'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 Company. 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
F-15
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(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, FN Holdings 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. FN
Holdings may also be included in certain state and local income tax
returns of Mafco or its subsidiaries. FN Holding's tax sharing agreement
with Mafco provides that income taxes will be based on the separate
results of FN Holdings. The agreement generally provides that FN Holdings
will pay to Mafco amounts equal to the taxes that FN Holdings would be
required to pay if it were to file a return separately from the affiliated
group. Furthermore, the agreement provides that FN Holdings 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 Mafco will pay FN
Holdings amounts equal to tax refunds FN Holdings 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 carryforwards. 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. FN Holdings 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, the Bank
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.
F-16
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 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 Company has not yet
adopted SFAS No. 121, management does not expect such adoption to have a
material impact on the Company'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 $702,254, $184,499 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. As discussed in note 2, the Bank
distributed the common stock of a subsidiary, 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 2, 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.
F-17
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES
------------ ------------ ------------
<S> <C> <C> <C>
Marketable equity securities .......... $ 34,000 $ 80,068 $ --
Mortgage-backed securities:
GNMA ................................. 14,018 906 --
FNMA ................................. 294,070 5,643 --
FHLMC ................................ 801,393 19,671 (1)
Collateralized mortgage obligations . 345,699 793 (4,678)
U.S. government and agency obligations 231,794 2,768 (69)
------------ ------------ ------------
Total ............................... $1,720,974 $109,849 $(4,748)
============ ============ ============
FDIC portion of unrealized gain on
marketable equity securities .........
Estimated tax effect ..................
Net unrealized holding gain in
stockholders' equity ...............
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED CARRYING
GAIN VALUE
------------ ------------
<S> <C> <C>
Marketable equity securities .......... $ 80,068 $ 114,068
Mortgage-backed securities:
GNMA ................................. 906 14,924
FNMA ................................. 5,643 299,713
FHLMC ................................ 19,670 821,063
Collateralized mortgage obligations . (3,885) 341,814
U.S. government and agency obligations 2,699 234,493
------------ ------------
Total ............................... 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
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES
------------ ------------ ------------
<S> <C> <C> <C>
Marketable equity securities $34,000 $11,000 $--
============ ============ ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NET
UNREALIZED CARRYING
GAIN VALUE
------------ -----------
<S> <C> <C>
Marketable equity securities $11,000 $45,000
============ ===========
</TABLE>
<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 "training"
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 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 qualifing mortgage loans from First Nationwide's
loan portfolio.
F-18
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 30.
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 Company, 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 TO BE HELD TO MATURITY
At December 31, 1995 and 1994, securities to be 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.
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
------------------------------------
WEIGHTED
AMORTIZED ESTIMATED AVERAGE
COST FAIR 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>
F-19
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) MORTGAGE-BACKED SECURITIES
At December 31, 1995 and 1994, mortgage-backed securities to be 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 interest rate 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 to be 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 to be held to maturity included $1.5 billion and $2.5 billion,
respectively, of variable-rate securities.
F-20
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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 mortgage .................. $5,423,411 $ 5,612,150
5+ unit residential mortgage ................... 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.
F-21
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table indicates the amount of loans which have been placed
on nonaccrual status 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>
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>
F-22
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
At December 31, 1995 and 1994, respectively, the Bank and its wholly
owned subisdiary, FGB Realty Advisors, Inc., managed principally
non-performing loan and asset portfolios totalling 41.3 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>
(9) IMPAIRED LOANS
The Company's adoption of SFAS No. 114, as amended by SFAS No. 118,
effective January 1, 1995, had no material impact on the Company's
consolidated financial statements as the Company'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 Company 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 Company, 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 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
F-23
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 rebate 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.
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.
F-24
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 DECEMBER 31,
1995 1994 1995
---------- --------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land ...................................... $ 17,952 $14,857 --
Buildings and leasehold improvements ..... 46,652 38,240 25
Furniture and equipment ................... 37,697 25,348 10
Capitalized equipment leases .............. -- 819 --
Construction in progress .................. 2,471 2,882 --
---------- --------- -----------------
104,772 82,146
Accumulated depreciation and amortization (11,263) (5,623)
---------- ---------
Total office premises and equipment, net $ 93,509 $76,523
========== =========
</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 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 34.
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 million 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 included
in the Branch Sale Agreements, as defined and further described in note 34.
F-25
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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>
(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 ........................ 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>
F-26
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 95,780 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>
F-27
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 34.
(18) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of information regarding securities sold under agreements to
repurchase as of December 31, 1995 and 1994 follows (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
------------------------ ----------------------
RECORDED INTEREST
VALUE (1) MARKET 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>
F-28
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
---------------------------------------------------
UNDERLYING COLLATERAL REPURCHASE LIABILITY
-------------------------- -----------------------
RECORDED INTEREST
VALUE (1) MARKET 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
interest rates of 6.48% and 6.51%, respectively. The underlying securities
were delivered to, and are being held by 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
Senior Notes ............................ 200,000 12.25 200,000 12.25
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 ...................... 2,390,666 7.19 2,813,839 7.85
Accrued interest payable ................ 11,555 -- 18,635 --
Purchase accounting adjustments ........ (9,359) -- (23,495) --
------------ --------- ------------ ---------
Total other borrowings ................ $2,392,862 7.19% $2,808,979 7.85%
============ ========= ============ =========
</TABLE>
F-29
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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, follow (dollars in thousands):
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
MATURITIES DURING THE YEARS BALANCES MATURING RATES
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
2001and thereafter ......... 2,395 294,914 7.71 11.51
------------ ---------- ------- -------
Total .................... $2,039,811 $350,855 6.60% 10.65%
============ ========== ======= =======
</TABLE>
Interest expense on borrowings for the years ended December 31, 1995, 1994
and 1993,are 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 --
Senior Notes ................... 24,500 6,150 --
Federal funds purchased ........ 2,268 438 --
Revolving warehouse line ...... -- - 1,924
Other .......................... 1,403 332 694
Purchase accounting adjustments 21,244 7,937 --
---------- --------- ---------
Total ........................ $182,499 $80,025 $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>
In connection with the FN Acquisition, the Company issued $200 million
principal amount of 12 1/4 % Senior Notes, including $5.5 million principal
amount of Senior Notes to certain directors and officers of the Bank. The
notes will mature on May 15, 2001 with interest payable semiannually on May
15 and November 15. Deferred issuance costs associated with the Senior Notes'
issuance totalling $9.6 million were recorded in other assets in the 1994
consolidated statement of financial condition and are being amortized over
the term of the Senior Notes.
The notes are redeemable at the option of the Company, in whole or in
part, during the 12-month period beginning May 15, 1999, at a redemption
price of 106.125% plus accrued interest to the date of redemption, and
thereafter at 100% plus accrued interest. The notes are subordinated to all
existing and future liabilities, including deposits and other borrowings of
the Bank, and to the Preferred Stock. The terms and conditions of the
Indenture impose restrictions that affect, among other things, the ability of
FN Holdings to incur debt, pay dividends, make acquisitions, create liens,
sell assets and make certain investments. The Company was in compliance with
these covenants at December 31, 1995.
F-30
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) INTEREST RATE SWAP AGREEMENTS
Interest rate swap agreements outstanding at December 31, 1995 are as
follows (dollars in thousands):
<TABLE>
<CAPTION>
NOTIONAL WEIGHTED AVERAGE ESTIMATED
PRINCIPAL RATE MATURITY IN VARIABLE RATE
MATURITY DATE AMOUNT PAY RECEIVE YEARS 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>
<TABLE>
<CAPTION>
NOTIONAL WEIGHTED AVERAGE ESTIMATED
PRINCIPAL RATE MATURITY IN VARIABLE RATE
MATURITY DATE AMOUNT PAY RECEIVE YEARS 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.
F-31
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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 would 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.
(22) MINORITY INTEREST--PREFERRED STOCK OF THE BANK
In connection with the FN Acquisition, the Bank issued 3,007,300 shares of
its Preferred Stock with a par value of $.01 per share, having a liquidation
preference of $300.7 million. This stock has a stated
F-32
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
(23) STOCKHOLDERS' EQUITY
(a) Common Stock
In connection with the FN Acquisition and the offering of the Senior
Notes, First Gibraltar Holdings incorporated Parent Holdings and FN Holdings
to hold 100% of the common stock of First Nationwide Bank. First Gibraltar
Holdings contributed all of its shares of capital stock of the Bank to Parent
Holdings, which contributed such shares to FN Holdings in exchange for 1,000
shares of common stock of FN Holdings.
In 1994, FN 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. Parent Holdings exchanged its 1,000 shares of
common stock of FN Holdings for 800 shares of class A common stock.
Pursuant to the terms of an exchange agreement between FN Holdings, the
Bank's Chairman and Parent Holdings (the "Exchange Agreement"), and in
connection with the consummation of the FN Acquisition, FN Holdings issued
100% of its class C common stock to Parent Holdings for approximately $210.3
million, and the Bank's Chairman acquired 100% of the class B common stock of
FN Holdings, in exchange for his 6.25% of the class A common stock of First
Gibraltar Holdings.
As a result of the consummation of the transactions contemplated by the
Exchange Agreement, the Bank's Chairman owned 100% of the class B common
stock of FN Holdings, representing 20% of its voting common stock
(representing approximately 15% of the voting power of its common stock), and
Parent Holdings owns (i) 100% of the class A common stock of FN Holdings,
representing 80% of its voting common stock (representing approximately 85%
of the voting power of its common stock) and (ii) 100% of the class C common
stock of FN Holdings. The class C common stock is redeemable out of
distributions from the Bank for $230.3 million plus accrued interest to the
date of redemption at a rate equal to the interest rate on the secured term
credit facility. On December 29, 1995, the Bank's Chairman transferred his
shares of class B common stock to a limited partnership controlled by the
Bank's Chairman.
No dividend will be payable on the class A common stock or the class B
common stock of the Company as long as any shares of the class C common stock
remain outstanding. Dividends on the Company's class C common stock during
1995 totalled $29.2 million. In addition, 60.8 shares of the Company's class
C common stock were redeemed during 1995, resulting in a capital distribution
totalling $60.8 million. There were no dividends or distributions on common
stock in 1994. Dividends and distributions on common stock in 1993 totalled
$379.5 million and included certain assets of the Bank, including the stock
of FGMH.
(b) Preferred Stock
Floating rate noncumulative preferred stock of the Bank ("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.
F-33
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(c) Payment of Dividends
The payment of dividends by the Company may be limited by the indenture
agreement for the Senior Notes and is also restricted pursuant to provisions
mandated by the Company's charter. The Federal thrift laws and regulations of
the OTS limit the Bank's ability to pay dividends on its preferred or common
stock. The Bank 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 the Bank meets its
fully phased-in regulatory capital requirements, other limitations will apply
to First Nationwide's payment of dividends. The payment of dividends by the
Bank will also be subject to the Bank's dividend policy, which reflects such
legal and regulatory restrictions.
(24) 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.
(25) 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>
F-34
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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>
(26) 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):
F-35
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<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 ................................ 30,876 9,375 14,438
--------- --------- --------
$72,531 $21,293 $25,804
========= ========= ========
</TABLE>
(27) INCOME TAXES
Total income tax expense 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, extraordinary item and
minority interest ................................ $(57,185) $2,558 $2,500
Extraordinary item ................................ 221 119 --
----------- -------- --------
Net unrealized holding gain on securities
available
for sale ......................................... 7,055 -- --
----------- -------- --------
$(49,909) $2,677 $2,500
=========== ======== ========
</TABLE>
Income tax expense (benefit) for the years ended December 31, 1995, 1994
and 1993, consists of (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- -------- --------
<S> <C> <C> <C>
Federal
Current ....... $ 285 $ -- $2,500
Deferred ...... (69,000) -- --
----------- -------- --------
(68,715) -- 2,500
----------- -------- --------
State and local
Current ....... 11,530 -- --
Deferred ...... -- 2,558 --
----------- -------- --------
11,530 2,558 --
----------- -------- --------
$(57,185) $2,558 $2,500
=========== ======== ========
</TABLE>
F-36
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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 ............. $ 42,858 $11,175 $ 51,316
Increase (decrease) in taxes resulting from:
State income taxes, net of Federal income tax
benefit ........................................ 7,495 1,740 --
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 ........... (1,675) -- --
Adjustment to deferred tax asset ................. 7,644 -- --
Unrealized holding gain on securities available
for sale recognized for tax purposes ........... 15,937 -- --
Other ............................................ (1,747) 306 390
Change in the beginning-of-the-year balance of the
valuation allowance for deferred tax assets
allocated to income tax expense ................ (125,061) (7,170) (61,039)
----------- --------- ----------
$ (57,185) $2,558 $ 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) .................. $ 56,061 $ 9,728 $ 61,039
Decrease in beginning-of-the-year balance of the
valuation allowance for deferred tax assets .... (125,061) (7,170) (61,039)
----------- --------- ----------
$ (69,000) $ 2,558 $ --
=========== ========= ==========
</TABLE>
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 ............... $920,300 $938,153
Foreclosed real estate ......................... -- 8,209
Loans receivable ............................... 6,868 62,833
Securities ..................................... -- 3,850
Miscellaneous reserves ......................... 11,842 5,538
F-37
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1995 1994
----------- -----------
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 ...................... 2,932 3,290
Other .......................................... 8,174 4,116
----------- -----------
Total gross deferred tax assets .......... 1,018,755 1,055,942
Less valuation allowance ................. (810,459) (936,242)
----------- -----------
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 $125.8 million, of which $125.1 million
is attributable to income before income taxes, extraordinary item and
minority interest and $.7 million is attributable to the extraordinary item.
The decrease of $125.1 million attributable to income before income taxes,
extraordinary item and minority interest consists of $69 million relating to
the favorable reassessment, in the fourth quarter of 1995, of future earnings
expectations and $56.1 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 $7.6 million.
As of December 31, 1994, FN Holdings recorded a valuation allowance for
100% of the Company'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 Company'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 FN Holdings will generate the necessary amount of
taxable income in future periods.
At December 31, 1995, if FN Holdings had filed a consolidated Federal
income tax return on behalf of itself (as common parent) with its
subsidiaries, it would have had regular and alternative minimum tax net
operating losses for Federal income tax purposes of approximately $2.6
billion and $992 million, respectively, which expire in 2002 through 2007.
(28) 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.
F-38
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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):
Accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Retirees ................................... $ -- $ --
Eligible active plan participants .......... 1,177 713
Ineligible active plan participants ....... 1,719 1,164
-------- -------
Accrued 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 year 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%, and 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 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.
(29) 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
F-39
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
other liabilities. During 1995, a liability of $2 million was recorded
relative to the Plan.
(30) 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' credit worthiness through ongoing credit reviews.
The following is a summary of outstanding firm commitments to originate
and sell loans at December 31, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
Commitments to originate 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 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, mortgage-backed securities available for sale with a
carrying value of $39.0 million were pledged to FNMA associated with sales of
certain securitized multi-family loans.
At December 31, 1994, 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
SAIF-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.
F-40
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The legislation provides that the assessment would be applied to SAIF
deposits held as of March 31, 1995. The SAIF-assessable deposits of the Bank
as of this date, adjusted for the deposit acquisitions and sales discussed in
notes 2 and 34, 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
34, 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 SAIF-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.
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.
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.
F-41
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(31) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company'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 CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents ...................... $ 312,571 $ 312,571 $ 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 ......................................... 2,409,166 2,464,431 2,853,369 2,828,250
Interest rate swap agreements (1) ............. (16,304) (32,000) (44,390) (27,000)
------------- ------------ ------------ ------------
Total borrowings ............................ $ 2,392,862 $ 2,432,431 $2,808,979 $2,801,250
============= ============ ============ ============
Off-balance-sheet net unrealized gains (losses):
Commitments to originate loans ................. $ 1,691 $ --
Forward commitments to sell loans .............. (2,757) 56
<FN>
- ------------
(1) Designated as a hedge against FHLB advances.
</TABLE>
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 Company'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 Company's financial
instruments, active markets do not exist. Therefore, considerable judgements
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, 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.
F-42
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 and the
Senior Notes, are 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.
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.
F-43
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(32) 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 ............... $ 277,679 $ 270,583 $ 268,127 $ 259,456 $1,075,845
Total interest expense .............. (185,619) (184,751) (185,237) (179,208) (734,815)
-------------- --------------- ----------- ----------- -------------
Net interest income ................ 92,060 85,832 82,890 80,248 341,030
Provision for loan losses ........... (19,000) (6,000) (5,799) (6,201) (37,000)
-------------- --------------- ----------- ----------- -------------
Net interest income after provision
for loan losses ................... 73,060 79,832 77,091 74,047 304,030
Total noninterest income ............ 45,717 35,636 38,595 31,025 150,973
Total noninterest expense ........... (82,725) (76,973) (92,520) (80,335) (332,553)
-------------- --------------- ----------- ----------- -------------
Income before income taxes,
extraordinary item and minority
interest ........................... 36,052 38,495 23,166 24,737 122,450
Income taxes (see Note 27) .......... 64,614 (4,005) (2,743) (681) 57,185
-------------- --------------- ----------- ----------- -------------
Income berfore extraordinary item
and minority interest ............. 100,666 34,490 20,423 24,056 179,635
Extraordinary item .................. -- -- -- 1,967 1,967
-------------- --------------- ----------- ----------- -------------
Income before minority interest ... 100,666 34,490 20,423 26,023 181,602
Minority interest ................... (8,646) (8,646) (8,646) (8,646) (34,584)
-------------- --------------- ----------- ----------- -------------
Net income ......................... $ 92,020 $ 25,844 $ 11,777 $ 17,377 $ 147,018
============== =============== =========== =========== =============
</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 ............... $ 252,220 $12,856 $ 13,307 $ 14,756 $ 293,139
Total interest expense .............. (169,434) (9,385) (10,325) (10,701) (199,845)
-------------- --------------- ---------- ----------- -----------
Net interest income ................ 82,786 3,471 2,982 4,055 93,294
Provision for loan losses ........... (6,226) -- -- -- (6,226)
-------------- --------------- ---------- ----------- -----------
Net interest income after provision
for loan losses ................... 76,560 3,471 2,982 4,055 87,068
Total noninterest income ............ 28,651 4,174 4,634 3,699 41,158
Total noninterest expense ........... (74,401) (7,059) (7,279) (7,559) (96,298)
-------------- --------------- ---------- ----------- -----------
Income before income taxes and
extraordinary item ................ 30,810 586 337 195 31,928
Income taxes ........................ (2,558) -- -- -- (2,558)
-------------- --------------- ---------- ----------- -----------
Income before extraordinary item .. 28,252 586 337 195 29,370
Extraordinary item .................. (119) -- 1,495 -- 1,376
-------------- --------------- ---------- ----------- -----------
Net income ......................... $ 28,133 $ 586 $ 1,832 $ 195 $ 30,746
============== =============== ========== =========== ===========
</TABLE>
F-44
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(33) CONDENSED PARENT COMPANY FINANCIAL INFORMATION
The following represents condensed statements of financial condition of
the Company (parent company only) at December 31, 1995 and 1994 (in
thousands):
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents .................. $ 6 $ 3,801
Investment in Bank ......................... 659,155 539,867
Receivable from Bank ....................... -- 3,156
Office premises and equipment, net ........ -- 414
Other assets and deferred charges .......... 8,794 10,191
---------- ----------
Total assets .............................. $667,955 $557,429
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior Notes ............................... $200,000 $200,000
Accrued interest payable ................... 3,131 3,131
Payables to affiliates ..................... 304 1,301
Other liabilities .......................... 2,104 125
---------- ----------
Total liabilities ......................... 205,539 204,557
---------- ----------
Total stockholders' equity ................ 462,416 352,872
---------- ----------
Total liabilities and stockholders' equity $667,995 $557,429
========== ==========
</TABLE>
The following represents parent company only condensed statements of
operations for the years ended December 31, 1995, 1994, and 1993 (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
---------- --------- ---------
<S> <C> <C> <C>
Interest income .......................................... $ 34 1 $ 155 $ --
Dividends received from the Bank ......................... 111,900 -- 136,210
---------- --------- ---------
112,241 155 136,210
Interest expense ......................................... 25,539 6,381 --
Non-interest expense ..................................... 5,819 987 --
---------- --------- ---------
31,358 7,368 --
Income (loss) before equity in undistributed net income
of the Bank ............................................. 80,883 (7,213) 136,210
Equity in undistributed net income of the Bank .......... 99,360 37,326 7,908
---------- --------- ---------
Income before taxes and minority interest ................ 180,243 30,113 144,118
Income tax expense (benefit) ............................. (1,359) (633) --
---------- --------- ---------
Income before minority interest .......................... 181,602 30,746 144,118
Minority interest in earnings of the Bank ................ 34,584 -- --
---------- --------- ---------
Net income .............................................. $147,018 $30,746 $144,118
========== ========= =========
</TABLE>
F-45
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following represents parent company only statements of cash flows for
the 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 ...................................... $ 147,018 $ 30,746 $144,118
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of deferred issuance costs ....... 764 232 --
Decrease (increase) in receivable from the Bank 3,156 (3,156) --
Decrease (increase) in other assets and
deferred
charges ....................................... 633 (863) --
Increase (decrease) in payable to affiliates .. (997) 1,301 --
Increase in accrued interest payable ........... -- 3,131
Increase in other liabilities .................. 1,979 125
Equity in undistributed net income of the Bank (99,360) (37,326) (7,908)
----------- ----------- -----------
Total adjustments ............................. (93,825) (36,556) (7,908)
----------- ----------- -----------
Net cash flows provided by (used in) operating
activities ................................... 53,193 (5,810) 136,210
----------- ----------- -----------
Cash flows from investing activities:
Purchases of furniture, fixtures and equipment . -- (414) --
Proceeds from disposal of furniture, fixture and
equipment ...................................... 414 -- --
Capital contributions to the Bank ............... (2,000) (390,791) --
----------- ----------- -----------
Net cash flows used in financing activities ... (1,586) (391,205) 0
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes ......... -- 190,440 --
Proceeds from other borrowings .................. -- 19,029 --
Repayment of other borrowings ................... -- (19,029) --
Issuance of class C common stock ................ -- 210,376 --
Redemption of class C common stock .............. (60,801) -- --
Dividends on class C common stock ............... (29,185) -- (136,210)
Dividends paid to minority shareholders
of the Bank .................................... 34,584 -- --
----------- ----------- -----------
Net cash flow (used in) provided by financial
activities .................................... (55,402) 400,816 (136,210)
Net change in cash and cash equivalents ......... (3,795) 3,801 0
Cash and cash equivalents at beginning of year .. 3,801 -- --
----------- ----------- -----------
Cash and cash equivalents at end of year ........ $ 6 $ 3,801 $ 0
=========== =========== ===========
</TABLE>
F-46
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(34) 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 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 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.
Issuance of Senior Subordinated Notes
On January 31, 1996, FN Holdings issued $140 million of its 9 1/8 % Senior
Subordinated Notes Due 2003. On February 1, 1996, FN Holdings contributed the
net proceeds of such offering totalling $133 million in cash as additional
paid in capital to the Bank to ensure that the Bank retains its
"well-capitalized" status upon consummation of the SFFed Acquisition and
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.
F-47
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. 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
DATE OF NUMBER OF GENERAL 31, 1995
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 New 485,975 5,594
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 ............................... $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.
Loans to Affiliate
On March 1, 1996, the Company extended a loan to an affiliate in the
amount of $46.8 million.
F-48
<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
F-49
<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.
F-50
<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.
F-51
<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.
F-52
<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
F-53
<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.
F-54
<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>
F-55
<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
F-56
<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
F-57
<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
F-58
<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
F-59
<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.
F-60
<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.
F-61
<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.
F-62
<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 averagze 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.
F-63
<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.
F-64
<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>
F-65
<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>
F-66
<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>
TOTAL
(DOLLARS IN COMMERCIAL REAL
MILLIONS) 1-4 UNIT RESIDENTIAL 5+ UNIT RESIDENTIAL AND OTHER CONSTRUCTION ESTATE
-------------------- ------------------- ------------------- VARIABLE LOANS(2) % OF TOTAL
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED ------------ -------- ----------
- ------------------- ---------- -------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California ......... $3,151 $ 439 $ 932 $159 $1,336 $298 $ 3 $ 6,318 55%
New York ........... 538 119 194 210 47 49 -- 1,157 10
Florida ............ 138 67 50 72 75 37 -- 439 4
Illinois ........... 125 105 55 16 51 30 -- 382 3
Hawaii ............. 311 41 -- -- 4 -- -- 356 3
Ohio ............... 145 125 29 12 31 10 -- 352 3
New Jersey ......... 170 47 58 28 16 11 -- 330 3
Colorado ........... 35 155 2 3 -- -- -- 195 2
Texas .............. 68 57 3 40 1 5 -- 174 2
Nevada ............. 14 4 79 26 37 1 -- 161 1
Other states (1) .. 565 260 243 186 163 110 15 1,542 14
---------- -------- ---------- ------- ---------- ------- -------------- --------- ------------
Total .............. $5,260 $1,419 $1,645 $752 $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>
F-67
<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>
F-68
<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
(DOLLARS IN THOUSANDS) TOTAL REAL ESTATE PROPERTY TOTAL
----------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
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.
F-69
<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>
F-70
<PAGE>
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.
F-71
<PAGE>
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 AND BALANCES AVERAGE
DECEMBER 31, $100,000 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.
F-72
<PAGE>
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>
(DOLLARS IN WEIGHTED AVERAGE
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
F-73
<PAGE>
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>
NOTIONAL
(DOLLARS IN THOUSANDS) PRINCIPAL YEAR END INTEREST RATE
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>
F-74
<PAGE>
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.
F-75
<PAGE>
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.
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
F-76
<PAGE>
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.
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
F-77
<PAGE>
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.
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%.
F-78
<PAGE>
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>
F-79
<PAGE>
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
F-80
<PAGE>
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>
F-81
<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 flow, 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
F-82
<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.
F-83
<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.
F-84
<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.
F-85
<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 .......................... 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.
F-86
<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.
F-87
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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' equity until realized. Gains
and losses from the sale of MBS available for sale are determined using the
F-88
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
F-89
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a 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 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
F-90
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).
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.
F-91
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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
F-92
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 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 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 amounted to $3,449,000, net of tax.
F-93
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
F-94
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MBS held for investment are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES PAR 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>
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
COST VALUE COST FAIR 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
----------- --------- ----------- ----------
$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 to repurchase (Note
10) .................................................... 791,665 371,679
FNMA servicing ......................................... 4,638 18,599
---------- ----------
$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 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
F-95
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transfer, in the amount of $3,055,000, is being amortized as a yield
adjustment over the remaining lives 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.
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
------------ ------------
2,669,897 2,967,658
Consumer loans ........................... 94,749 91,928
Loans secured by savings accounts ....... 7,528 6,689
------------ ------------
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 (Note 5) ..... (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.
F-96
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
---------- ----------
$465,466 $500,106
========== ==========
</TABLE>
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
------------ ------------
$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 economies 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.
F-97
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 REAL ESTATE
LOANS LOANS LOANS OWNED OTHER(1) TOTAL
------------- ---------- ---------- ------------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ..... $ 33,194 $ 717 $ 33,911 $ 6,645 $ 838 $ 41,394
Provision for losses (recoveries) 6,279 304 6,583 7,134 (90) 13,627
Charge-offs ...................... (3,290) (603) (3,893) (5,975) -- (9,868)
Recoveries ....................... 25 171 196 -- -- 196
------------- ---------- ---------- ------------- -------- ----------
Balance at December 31, 1993 ..... 36,208 589 36,797 7,804 748 45,349
Provision for losses ............. 16,828 377 17,205 8,336 188 25,729
Charge-offs ...................... (16,830) (605) (17,435) (4,980) (200) (22,615)
Recoveries ....................... 59 203 262 -- -- 262
------------- ---------- ---------- ------------- -------- ----------
Balance at December 31, 1994 ..... 36,265 564 36,829 11,160 736 48,725
Provision for losses ............. 10,169 925 11,094 3,832 1,042 15,968
Charge-offs ...................... (8,895) (945) (9,840) (1,902) (28) (11,770)
Recoveries ....................... 262 258 520 -- -- 520
------------- ---------- ---------- ------------- -------- ----------
Balance at December 31, 1995 ..... $ 37,801 $ 802 $ 38,603 $13,090 $1,750 $ 53,443
============= ========== ========== ============= ======== ==========
<FN>
- ------------
(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.
</TABLE>
F-98
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 -- --
---------- -------- ---------- --------
$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 (which are included in other assets in the accompanying
Consolidated Statements of Financial Condition) for the years ended December
31, are summarized as follows:
<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
---------------------- USEFUL LIVES
1995 1994
---------- ----------
(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 --
---------- ----------
52,102 52,207
Less accumulated depreciation and amortization (30,203) (29,261)
---------- ----------
$ 21,899 $ 22,946
========== ==========
</TABLE>
F-99
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
---------- ----------
$ 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.
F-100
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
------------ -------- ------------ -------
$1,840,528 100.0% $1,915,585 100.0%
============ ======== ============ =======
</TABLE>
Customer deposits include approximately $387,385,000 and $373,347,000 of
accounts 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.
F-101
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
F-102
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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
-------- ---------- ---------
(775) (740) 12,955
-------- ---------- ---------
Deferred:
Federal income tax ....... 873 (1,748) (3,453)
California franchise tax 1,470 (912) (1,597)
-------- ---------- ---------
2,343 (2,660) (5,050)
-------- ---------- ---------
Total:
Federal income tax ....... 113 (2,105) 5,885
California franchise tax 1,455 (1,295) 2,020
-------- ---------- ---------
$1,568 $(3,400) $ 7,905
======== ========== =========
</TABLE>
F-103
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The liability for taxes on income at December 31, 1995 and 1994 in the
accompanying Consolidated Statements of Financial Condition includes a
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>
F-104
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 specified 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.
F-105
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 TIER 1 TOTAL CORE, 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
============ ============ ============ ============
<FN>
- ------------
(1) For the Association, there are no differences in these regulatory
capital computations.
(2) Also deducted from total assets for regulatory test purposes.
</TABLE>
F-106
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<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, the Company contributed $5,000,000 from the senior note
proceeds to the Association as equity capital. During 1994, the Company
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 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.
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.
F-107
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
---------- ----------
$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
---------- ----------
$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>
F-108
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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)
Decrease (increase) in 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 ................. 19 391 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 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.
F-109
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 8.00 8.00 8.50
</TABLE>
F-110
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 -- ASSETS LESS THE ACCUMULATED
BENEFITS
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, was 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.
F-111
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 postretirement 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.
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.
F-112
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 PER
SARS (1) LSARS 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 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.
F-113
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
F-114
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
F-115
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
<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 SAIF-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.
F-116
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data gives effect to the SFFed
Acquisition and the LMUSA Purchases (collectively, the "Acquisitions"), the
Branch Sales and the Senior Subordinated Notes Offering. The Branch Purchases
consummated in 1995 and the proposed 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 pro forma condensed combined statement of operations for the year
ended December 31, 1995, is based on the historical consolidated statement of
operations for the year ended December 31, 1995 giving pro forma effect to
the Acquisitions, the Branch Sales and the Senior Subordinated Notes Offering
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 unaudited pro forma financial data do not necessarily
reflect the results of operations or the financial position of the Issuer
that actually would have resulted had the Acquisitions, the Branch Sales and
the Senior Subordinated Notes Offering occurred at the dates indicated, or
project the results of operations or financial position of the Issuer for any
future date or period.
The following unaudited pro forma financial data should be read in
conjunction with the Consolidated Financial Statements of the Issuer and the
notes thereto and the Consolidated Financial Statements of SFFed and the
notes thereto, contained elsewhere in this Prospectus. Capitalized terms used
and not defined herein have the meanings set forth in the Prospectus.
P-1
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA
ACQUISITION PURCHASES BRANCH SALES
ISSUER PRO FORMA PRO FORMA PRO FORMA PRO FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B) TOTALS(C) ADJUSTMENTS(D) COMBINED
----------- ----------- ----------- ----------- ----------- -----------
<S> .......................................... <C> <C> <C> <C> <C> <C>
INTEREST INCOME:
LOANS RECEIVABLE ............................. $ 823,864 $ 230,713 $ 22,477 $ (623) $ -- $ 1,076,431
SECURITIES ................................... 28,396 10,685 -- -- -- 39,081
MORTGAGE-BACKED SECURITIES ................... 212,880 62,403 -- -- -- 275,283
OTHER INTEREST INCOME ........................ 10,705 -- -- -- -- 10,705
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INTEREST INCOME ....................... 1,075,845 303,801 22,477 (623) -- 1,401,500
INTEREST EXPENSE:
DEPOSITS ..................................... 447,359 143,797 -- (211,530) -- 379,626
BORROWINGS ................................... 287,456 74,587 2,018 280,671 12,775 657,507
----------- ----------- ----------- ----------- ----------- -----------
TOTAL INTEREST EXPENSE ...................... 734,815 218,384 2,018 69,141 12,775 1,037,133
----------- ----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME .......................... 341,030 85,417 20,459 (69,764) (12,775) 364,367
PROVISION FOR LOAN LOSSES .................... 37,000 11,094 -- -- -- 48,094
----------- ----------- ----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES .............................. 304,030 74,323 20,459 (69,764) (12,775) 316,273
NONINTEREST INCOME:
CUSTOMER BANKING FEES ........................ 47,493 5,291 -- (22,228) -- 30,556
MORTGAGE BANKING OPERATIONS .................. 70,265 860 76,445 -- -- 147,570
NET GAIN (LOSS) ON SALES OF ASSETS ........... 147 -- (1,851) -- -- (1,704)
OTHER ........................................ 33,068 1,677 2,690 (789) -- 36,646
----------- ----------- ----------- ----------- ----------- -----------
TOTAL NONINTEREST INCOME .................... 150,973 7,828 77,284 (23,017) -- 213,068
NONINTEREST EXPENSE:
COMPENSATION AND BENEFITS .................... 154,288 11,141 19,500 (19,476) -- 165,453
OTHER ........................................ 178,265 34,896 38,081 (25,823) 1,000 226,419
----------- ----------- ----------- ----------- ----------- -----------
TOTAL NONINTEREST EXPENSE ................... 332,553 46,037 57,581 (45,299) 1,000 391,872
----------- ----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND MINORITY INTEREST .... 122,450 36,114 40,162 (47,482) (13,775) 137,469
FEDERAL AND STATE INCOME TAXES ............... (57,185) 3,554 3,952 (4,671) (1,355)(3) (55,705)
----------- ----------- ----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM AND MINORITY INTEREST .................. 179,635 32,560 36,210 (42,811) (12,420) 193,174
EXTRAORDINARY ITEM--GAIN ON EARLY
EXTINGUISHMENT OF FEDERAL HOME LOAN
BANK ("FHLB") ADVANCES, NET ................. 1,967 -- -- -- -- 1,967
----------- ----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE MINORITY INTEREST ... 181,602 32,560 36,210 (42,811) (12,420) 195,141
MINORITY INTEREST--FIRST NATIONWIDE BANK
PREFERRED STOCK DIVIDENDS ................... 34,584 -- -- -- -- 34,584
----------- ----------- ----------- ----------- ----------- -----------
NET INCOME (LOSS) ............................ $ 147,018 $ 32,560 $ 36,210 $ (42,811) $ (12,420) $ 160,557
=========== =========== =========== =========== =========== ===========
</TABLE>
- ------------
(a) Represents pro forma results of operations related to the SFFed
Acquisition. See details on P-4.
(b) Represents pro forma results of operations related to the LMUSA
Purchases. See details on P-8.
(c) Represents pro forma results of operations related to the Branch Sales.
See details on P-10.
(d) Represents adjustments to reflect (i) interest expense and amortization
of debt issuance costs associated with the Senior Subordinated Notes
and (ii) the impact on income taxes from (i).
P-2
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(1) Represents interest expense on the Senior Subordinated Notes at 9 1/8 %
per annum for the year ended December 31, 1995.
(2) Represents amortization of $7,000 in deferred debt issuance costs over
the seven year term of the Senior Subordinated Notes for the year ended
December 31, 1995.
(3) Represents amounts necessary to adjust historical tax expense to the
pro forma computation. Pro forma tax expense for the year ended
December 31, 1995 related to the issuance of the Senior Subordinated
Notes was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal alternative minimum tax ("AMT"), reduced, to the extent
of 90%, by net operating loss carryovers ....................... $ (253)
State, at an assumed rate of 8% ................................. (1,102)
---------
$(1,355)
=========
</TABLE>
P-3
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
SFFED ACQUISITION
<TABLE>
<CAPTION>
SFFED
ACQUISITION
VALUATION PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) TOTALS
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .......................... $215,147 $ 15,566 (1) $-- $230,713
Securities ................................ 10,685 -- -- 10,685
Mortgage-backed securities ................ 60,024 2,379 (1) -- 62,403
Other interest income ..................... -- -- -- --
------------ -------------- -------------- -------------
Total interest income .................... 285,856 17,945 -- 303,801
INTEREST EXPENSE:
Deposits .................................. 135,299 8,498 (1) -- 143,797
Borrowings ................................ 71,543 3,044 (1) -- 74,587
------------ -------------- -------------- -------------
Total interest expense ................... 206,842 11,542 -- 218,384
------------ -------------- -------------- -------------
Net interest income ....................... 79,014 6,403 -- 85,417
Provision for loan losses ................. 11,094 -- -- 11,094
------------ -------------- -------------- -------------
Net interest income after provision for
loan losses .............................. 67,920 6,403 -- 74,323
NONINTEREST INCOME:
Customer banking fees ..................... 5,291 -- -- 5,291
Mortgage banking operations ............... 5,255 (4,395)(1) -- 860
Net loss on sales of assets ............... -- -- -- --
Other ..................................... 1,677 -- -- 1,677
------------ -------------- -------------- -------------
Total noninterest income ................. 12,223 (4,395) -- 7,828
NONINTEREST EXPENSE:
Compensation and benefits ................. 35,518 -- (24,377)(3) 11,141
Other ..................................... 43,257 12,905 (2) ( 21,266)(3) 34,896
------------ -------------- -------------- -------------
Total noninterest expense ................ 78,775 12,905 (45,643) 46,037
------------ -------------- -------------- -------------
Income (loss) before income taxes,
extraordinary item and minority interest 1,368 (10,897) 45,643 36,114
Federal and state income taxes ............ 1,568 -- 1,986 (4) 3,554
------------ -------------- -------------- -------------
Income (loss) before extraordinary item
and minority interest .................... (200) (10,897) 43,657 32,560
Extraordinary item--gain on early
extinguishment of FHLB advances, net .... -- -- -- --
------------ -------------- -------------- -------------
Net income (loss) before minority interest (200) (10,897) 43,657 32,560
Minority interest ......................... -- -- -- --
------------ -------------- -------------- -------------
Net income (loss) ......................... $ (200) $(10,897) $43,657 $ 32,560
============ ============== ============== =============
</TABLE>
- ------------
(a) Represents adjustments to reflect (i) the amortization/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.
P-4
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
SFFED ACQUISITION
- -----------------
(1) Represents amortization/accretion of fair value adjustments as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES,
EXTRAORDINARY ITEM
AND MINORITY
INTEREST
INCREASE/(DECREASE)
--------------------
<S> <C>
Loans receivable, net .... $15,566
Mortgage-backed securities 2,379
Deposits .................. (8,498)
Borrowings ................ (3,044)
Mortgage servicing rights (4,395)
</TABLE>
(2) Represents adjustments consisting of the following:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES,
EXTRAORDINARY ITEM
AND MINORITY
INTEREST
INCREASE/(DECREASE)
--------------------
<S> <C>
Amortization of fair value adjustments:
Amortization of core deposit intangible assets ........ $ (3,368)
Amortization of goodwill ............................... (10,206)
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>
P-5
<PAGE>
(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 will be 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 will be closed.
<TABLE>
<CAPTION>
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 officers,
legal, human resources, information services,
accounting, and strategic planning areas:
Occupancy costs .................................. $ 1,316 $ 0 $ 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 0
------------ ------------ -------------
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
============ ============ =============
<FN>
- ------------
(i) Balance represents total historical noninterest expense of $43,257 less
historical amortization of goodwill already adjusted in note 2 on page
P-5.
P-6
<PAGE>
(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>
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $ 665
State, at an assumed rate of 8% ................................. 2,889
-------
$3,554
=======
</TABLE>
P-7
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
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 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 income .................... 338,517 -- (280,936) 57,581
------------- -------------- -------------- ----------------
Income (loss) before income taxes,
extraordinary item and minority interest .. (275,672) (1,442) 317,276 40,162
Federal and state income taxes .............. -- -- 3,952 (5) 3,952
------------- -------------- -------------- ----------------
Income (loss) before extraordinary item and
minority interest .......................... (275,672) (1,442) 313,324 36,210
Extraordinary item--gain on early
extinguishment of FHLB advances, net ...... -- -- -- --
------------- -------------- -------------- ----------------
Net income (loss) before minority interest . (275,672) (1,442) 313,324 36,210
Minority interest ........................... -- -- -- --
------------- -------------- -------------- ----------------
Net income (loss) ........................... $(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 the management of First Nationwide Bank.
(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 Bank, (ii) decreases in compensation and benefits expense
due to reduction in staffing, (iii) elimination of certain other
noninterest expenses due to consolidation with First Nationwide Bank's
existing mortgage banking operations, and (iv) income taxes relative to
the LMUSA Purchases.
P-8
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
LMUSA PURCHASES
(1) Represents the difference between the amortization of pro forma
recorded balance of mortgage servicing rights and the historical
amortization of mortgage servicing rights as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME BEFORE
INCOME TAXES, EXTRAORDINARY
ITEM AND MINORITY INTEREST
INCREASE (DECREASE)
---------------------------
<S> <C>
Pro forma amortization ... $(48,941)
Historical amortization(i) 47,499
---------------------------
$ (1,442)
===========================
</TABLE>
(i) Represents elimination of amortization of mortgage servicing
rights of $47,499 included in LMUSA's historical consolidated
statement of operations for the year ended December 31, 1995.
(2) Represents a decrease in interest expense resulting from a reduction in
funding costs due to the transfer of custodial accounts acquired to the
Bank.
(3) Represents the adjustment necessary to reduce compensation and benefits
expense to the level necessary for the incremental number
(approximately 650) of LMUSA employees retained by the Issuer as a
result of the LMUSA Purchases, with average annual compensation and
benefits per employee of $30,000.
(4) Represents the impact on other noninterest expense of (i) the
elimination of historical amounts related to LMUSA operations not
included in the LMUSA Purchases and (ii) the consolidation of the LMUSA
Purchases into the Bank's existing mortgage banking operations, as
follows:
<TABLE>
<CAPTION>
DECREASE IN
OTHER
HISTORICAL ESTIMATED NONINTEREST
COSTS FUTURE COSTS EXPENSE
------------ ------------- -------------
<S> <C> <C> <C>
COMPONENTS OF HISTORICAL NONINTEREST
EXPENSE:
Interest rate swap agreements ............... $ 6,615 $-- (ii) $ (6,615)
Facilities charge-offs ...................... 38,559 -- (ii) (38,559)
Facilities depreciation ..................... 1,797 -- (ii) (1,797)
Provision for losses on assets held for sale 180,255 -- (ii) (180,255)
Reorganization items ........................ 16,892 -- (ii) (16,892)
Data processing, document storage,
administrative services and management
fees ....................................... 20,896 3,004 (iii) (17,892)
Other miscellaneous costs ................... 35,077 35,077 --
------------ ------------- -------------
$300,091 $38,081 $(262,010)
============ ============= =============
</TABLE>
(ii) Represents historical amounts related to operations not
included in the LMUSA Purchases.
(iii) Represents amounts necessary to replace these services based
on the Issuer'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, at an assumed rate of 8% ............................ 3,213
-------
$3,952
=======
</TABLE>
P-9
<PAGE>
THE ISSUER
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
BRANCH SALES
<TABLE>
<CAPTION>
BRANCH SALES
OHIO SALE PRO MICHIGAN SALE NORTHEAST SALE PRO FORMA
FORMA PRO FORMA PRO FORMA TOTALS
------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ....................... $ (119)(a) $ (64)(a) $ (440)(a) $ (623)
Securities ............................. -- -- -- --
Mortgage-backed securities ............. -- -- -- --
Other interest income .................. -- -- -- --
------------- --------------- -------------- --------------
Total interest income ................. (119) (64) (440) (623)
INTEREST EXPENSE:
Deposits ............................... (65,588)(a) (32,677)(a) (113,265)(a) (211,530)
Borrowings ............................. 86,565 (1) 45,869 (1) 148,237 (1) 280,671
------------- --------------- -------------- --------------
Total interest expense ................ 20,977 13,192 34,972 69,141
------------- --------------- -------------- --------------
Net interest income .................... (21,096) (13,256) (35,412) (69,764)
Provision for loan losses .............. -- -- -- --
------------- --------------- -------------- --------------
Net interest income after provision for
loan losses ........................... (21,096) (13,256) (35,412) (69,764)
NONINTEREST INCOME:
Customer banking fees .................. (7,076)(a) (5,673)(a) (9,479)(a) (22,228)
Mortgage banking operations ............ -- -- -- --
Net loss on sales of assets ............ -- -- -- --
Other .................................. (240)(a) (139)(a) (410)(a) (789)
------------- --------------- -------------- --------------
Total noninterest income .............. (7,316) (5,812) (9,889) (23,017)
NONINTEREST EXPENSE:
Compensation and benefits .............. (6,771)(a) (4,154)(a) (8,551)(a) (19,476)
Other .................................. (7,436)(a) (4,348)(a) (14,039)(a) (25,823)
------------- --------------- -------------- --------------
Total noninterest expense ............. (14,207) (8,502) (22,590) (45,299)
------------- --------------- -------------- --------------
Income (loss) before income taxes,
extraordinary item and minority
interest .............................. (14,205) (10,566) (22,711) (47,482)
Federal and state income taxes ......... (1,397) (1,039) (2,235) (4,671)(2)
------------- --------------- -------------- --------------
Income (loss) before extraordinary item
and minority interest ................. (12,808) (9,527) (20,476) (42,811)
Extraordinary item-gain on early
extinguishment of FHLB advances, net . -- -- -- --
------------- --------------- -------------- --------------
Net income (loss) before minority
interest .............................. (12,808) (9,527) (20,476) (42,811)
Minority interest ...................... -- -- -- --
------------- --------------- -------------- --------------
Net income (loss) ...................... $(12,808) $ (9,527) $ (20,476) $ (42,811)
============= =============== ============== ==============
<FN>
- ------------
(a) Represents historical information related to the retail banking
facilities in Ohio, Michigan and the Northeast. Other noninterest
expense includes occupancy, SAIF insurance premiums, marketing, OTS
assessments, data processing and telecommunications directly
attributable to the Ohio, Michigan and Northeast retail branch
operations.
P-10
<PAGE>
THE ISSUER
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(Dollars in Thousands)
BRANCH SALES
(1) Represents increase in intrest expense on borrowing to fund the Branch
Sales as follows:
</TABLE>
<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 (iii)
============ ==============
</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 Issuer'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 (iv) ......................... 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) Branch sales consummated through March 31, 1996 have been funded with
a mix of FHLB advances and reverse repurchase agreements at a
weighted average rate of 5.45%, compared to 6.79% used in the pro
forma date which is based on blended borrowing rates during 1995, as
reflected in (i) and (ii) above. Applying the actual average rate to
the additional borrowings used to fund the Branch Sales has the
effect of decreasing the pro forma interest expense on borrowings by
$49,882 on an after tax basis.
(iv) 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% 7.86%
------------ ---------- ------------ ------------
Total pro forma premium ......... 130,300 53,835 172,990 357,125
Write-off of core deposit
intangible ..................... 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, at an assumed rate of 8% ................... (3,798)
---------
$(4,671)
=========
</TABLE>
P-11
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE ISSUER OR THE SELLING SECURITYHOLDERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION, TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE ISSUER SINCE SUCH DATE.
- -----------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Additional Information ..................... 2
Incorporation of Certain Information by
Reference ................................. 2
The Issuer ................................. 3
Risk Factors ............................... 8
Use of Proceeds ............................ 15
Ratio of Earnings to Combined Fixed Charges
and Minority Interest -- Bank Preferred
Stock ..................................... 15
Description of the Notes ................... 16
Description of Other Indebtedness
of the Issuer ............................. 33
Selling Securityholders .................... 34
Plan of Distribution ....................... 34
Legal Matters .............................. 36
Experts .................................... 36
Index of Defined Terms ..................... 37
Index to Consolidated Financial
Statements ................................ F-1
</TABLE>
FIRST NATIONWIDE
HOLDINGS INC.
$5,500,000
12 1/4 % SENIOR EXCHANGE
NOTES DUE 2001
PROSPECTUS
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is a table of the SEC registration fee and estimates of
all other expenses to be incurred in connection with the issuance and
distribution of the securities described in this Registration Statement:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fee ........... $ 1,897
Printing and engraving expenses 10,000
Legal fees and expenses ........ 20,000
Accounting fees and expenses .. 10,000
Miscellaneous .................. 8,103
---------
Total ........................ $50,000
=========
</TABLE>
All of the fees will be borne by the Registrant.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware (the
"Delaware Corporation Law") empowers a Delaware corporation to indemnify any
persons who are, or are threatened to be made, parties to any threatened,
pending or completed legal action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was
an officer, director, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided that such officer or director acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best
interests, and, for criminal proceedings, had no reasonable cause to believe
his conduct was unlawful. A Delaware corporation may indemnify officers and
directors against expenses (including attorneys' fees) in an action by or in
the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director actually and reasonably incurred.
Article VIII of the By-laws of the Registrant, a copy of which is filed by
incorporation by reference as Exhibit 3.2 to this Registration Statement,
allows the Registrant to maintain director and officer liability insurance on
behalf of any person who is or was a director or officer of the Registrant or
such person who serves or served as a director, officer, employee or agent,
of another corporation, partnership or other enterprise at the request of the
Registrant. Article VIII of the Registrant's By-Laws provides for
indemnification of the officers and directors of the Registrant to the
fullest extent permitted by applicable law.
Pursuant to Section 102(b)(7) of the Delaware Corporation Law, Article
Fifth of the Certificate of Incorporation of the Registrant , a copy of which
is filed by incorporation by reference as Exhibit 3.1 to this Registration
Statement, provides that no director of the Registrant shall be personally
liable to the Registrant or its shareholders for monetary damages for any
breach of his fiduciary duty as a director; provided, however, that such
clause shall not apply to any liability of a director (1) for any breach of
his duty of loyalty to the Registrant or its stockholders, (2) for acts or
omissions that are not in good faith or involve intentional misconduct or a
knowing violation of the law, (3) under Section 174 of the Delaware
Corporation Law, or (4) for any transaction from which the director derived
an improper personal benefit.
II-1
<PAGE>
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
<S> <C>
3.1 Fourth Restated Certificate of Incorporation of the Registrant (incorporated by reference to
Exhibit 3.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (File No.
333-00854)).
3.2 By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's filing on
Form 10-K for the year ended December 31, 1994).
*4.1 Indenture, dated as of July 15, 1994, between the Registrant and The First National Bank of
Boston, as trustee, relating to the 12 1/4 % Senior Exchange Notes Due 2001 (the "Notes").
4.2 Indenture, dated as of January 31, 1996, between the Registrant and The Bank of
New York, as trustee, Re: $140,000,000, 9 1/8 % Senior Subordinated Notes due 2003 (incorporated
by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No.
333-00854)).
*4.3 Indenture, dated as of October 1, 1986, between First Nationwide Bank, A Federal Savings Bank,
and Bank of America National Trust and Savings Association Re: $100,000,000 10% Subordinated
Debentures due 2006 (incorporated by reference to Exhibit 4.5 to the Registrant's filing on Form
10-K for the year ended December 31, 1994).
*4.4 First Supplemental Indenture, dated as of September 30, 1994, among First Madison Bank, FSB,
First Nationwide Bank, A Federal Savings Bank, and Bank of America National Trust and Savings
Association, supplementing the Indenture, dated as of October 1, 1986, between First Nationwide
Bank, A Federal Savings Bank, and Bank of America National Trust and Savings Association Re:
$100,000,000 10% Subordinated Debentures due 2006 (incorporated by reference to Exhibit 4.6 to
the Registrant's filing on Form 10-K for the year ended December 31, 1994).
4.5 Note Purchase Agreement, dated as of September 1, 1994, between SFFed Corp. and each of the
purchasers (incorporated by reference to Exhibit 4.5 to the Registrant's Registration Statement
on Form S-1 (File No. 333-00854)).
4.6 First Amendment and Waiver Agreement, dated as of December 11, 1995, between SFFed Corp. and each
of the purchasers, supplementing the Note Purchase Agreement, dated as of September 1, 1994,
between SFFed Corp. and each of the purchasers (incorporated by reference to Exhibit 4.6 to the
Registrant's Registration Statement on Form S-1 (File No. 333-00854)).
4.7 Registration Agreement, dated January 23, 1996, by and among the Registrant, Smith Barney Inc.
and Keefe, Bruyette & Woods, Inc. (incorporated by reference to Exhibit 4.7 to the Registrant's
Registration Statement on Form S-1 (File No. 333-00854)).
*5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Registrant, regarding the
legality of the Notes.
12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Coopers & Lybrand LLP, Independent Auditors.
*23.3 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
23.4 Consent of Deloitte & Touche LLP, Independent Auditors.
*24.1 Power of Attorney executed by Ronald O. Perelman.
*24.2 Power of Attorney executed by P. Richard Frieder (who resigned as a director of the Registrant
effective March 27, 1996).
*24.3 Power of Attorney executed by Howard Gittis.
*24.4 Power of Attorney executed by Irwin Engelman.
*24.5 Power of Attorney executed by Laurence Winoker.
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------
*25.1 Statement of Eligibility and Qualification on Form T-1 of The First National Bank of Boston, as
trustee under the Indenture relating to the Notes (bound separately).
</TABLE>
- ------------
* Previously filed.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more that
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934 (and, where applicable, each filing
of an employee benefit plan's annual report pursuant to Section 15(d) of
the Securities Exchange Act of 1934) that is incorporated by reference in
this Registration Statement shall be deemed to be a new registration
statement relating to the securities offered herein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such
issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on May 24, 1996.
FIRST NATIONWIDE HOLDINGS INC.
By/s/ Glenn P. Dickes
-----------------------------------
Glenn P. Dickes
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 2 to the Registration Statement has been signed
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------- ---------------------------------- ---------------
<S> <C> <C>
* Chairman of the Board, Chief May 24, 1996
---------------------- Executive Officer and Director
Ronald O. Perelman (Principal Executive Officer)
* Vice Chairman and Director May 24, 1996
----------------------
Howard Gittis
* Executive Vice President and Chief May 24, 1996
---------------------- Financial Officer (Principal
Irwin Engelman Financial Officer)
* Vice President and Controller May 24, 1996
---------------------- (Principal Accounting Officer)
Laurence Winoker
</TABLE>
*Joram C. Salig, by signing his name hereto, does hereby execute this
Post-Effective Amendment No. 2 to the Registration Statement on behalf of the
directors and officers of the Registrant indicated above by asterisks,
pursuant to powers of attorney duly executed by such directors and officers
and filed as exhibits to the Registration Statement.
By/s/ Joram C. Salig
-----------------------------------
Joram C. Salig
Attorney-in-Fact
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------------- ------------
<S> <C> <C>
3.1 Fourth Restated Certificate of Incorporation of the Registrant (incorporated by reference to
Exhibit 3.1 to Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (File No.
333-00854)).
3.2 By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's filing on
Form 10-K for the year ended December 31, 1994).
*4.1 Indenture, dated as of July 15, 1994, between the Registrant and The First National Bank of
Boston, as trustee, relating to the 12 1/4 % Senior Exchange Notes Due 2001 (the "Notes").
4.2 Indenture, dated as of January 31, 1996, between the Registrant and The Bank of
New York, as trustee, Re: $140,000,000, 9 1/8 % Senior Subordinated Notes due 2003 (incorporated
by reference to Exhibit 4.1 to the Registrant's Registration Statement on Form S-1 (File No.
333-00854)).
*4.3 Indenture, dated as of October 1, 1986, between First Nationwide Bank, A Federal Savings Bank,
and Bank of America National Trust and Savings Association Re: $100,000,000 10% Subordinated
Debentures due 2006 (incorporated by reference to Exhibit 4.5 to the Registrant's filing on Form
10-K for the year ended December 31, 1994).
*4.4 First Supplemental Indenture, dated as of September 30, 1994, among First Madison Bank, FSB,
First Nationwide Bank, A Federal Savings Bank, and Bank of America National Trust and Savings
Association, supplementing the Indenture, dated as of October 1, 1986, between First Nationwide
Bank, A Federal Savings Bank, and Bank of America National Trust and Savings Association Re:
$100,000,000 10% Subordinated Debentures due 2006 (incorporated by reference to Exhibit 4.6 to
the Registrant's filing on Form 10-K for the year ended December 31, 1994).
4.5 Note Purchase Agreement, dated as of September 1, 1994, between SFFed Corp. and each of the
purchasers (incorporated by reference to Exhibit 4.5 to the Registrant's Registration Statement
on Form S-1 (File No. 333-00854)).
4.6 First Amendment and Waiver Agreement, dated as of December 11, 1995, between SFFed Corp. and each
of the purchasers, supplementing the Note Purchase Agreement, dated as of September 1, 1994,
between SFFed Corp. and each of the purchasers (incorporated by reference to Exhibit 4.6 to the
Registrant's Registration Statement on Form S-1 (File No. 333-00854)).
4.7 Registration Agreement, dated January 23, 1996, by and among the Registrant, Smith Barney Inc.
and Keefe, Bruyette & Woods, Inc. (incorporated by reference to Exhibit 4.7 to the Registrant's
Registration Statement on Form S-1 (File No. 333-00854)).
*5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Registrant, regarding the
legality of the Notes.
12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors.
23.2 Consent of Coopers & Lybrand LLP, Independent Auditors.
*23.3 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
23.4 Consent of Deloitte & Touche LLP, Independent Auditors.
*24.1 Power of Attorney executed by Ronald O. Perelman.
<PAGE>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------------- ------------
*24.2 Power of Attorney executed by P. Richard Frieder (who resigned as a director of the Registrant
effective March 27, 1996).
*24.3 Power of Attorney executed by Howard Gittis.
*24.4 Power of Attorney executed by Irwin Engelman.
*24.5 Power of Attorney executed by Laurence Winoker.
*25.1 Statement of Eligibility and Qualification on Form T-1 of The First National Bank of Boston, as
trustee under the Indenture relating to the Notes (bound separately).
</TABLE>
- ------------
* Previously filed.
EXHIBIT 12.1
FIRST NATIONWIDE HOLDINGS INC.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND
PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
---------------
1996
---------------
<S> <C>
Fixed charges (excluding interest on
deposits):
Interest on borrowings ................. $ 82,608
Total fixed charges (excluding interest
on deposits) .......................... 82,608
Rent interest factor ................... 1,224
Income before income taxes,
extraordinary item and minority
interest .............................. 344,873
Earnings ............................... 428,705
Fixed charges (excluding interest on
deposits) ............................. 83,832
Preferred stock dividends .............. 17,292
Combined fixed charges (excluding
interest on deposits) and preferred
stock dividends ....................... 101,124
Ratio of earnings to combined fixed
charges (excluding interest on
deposits) and preferred stock
dividends (note 1) .................... 4.24x
Fixed charges (including interest on
deposits):
Interest on deposits ................... $117,513
Interest on borrowings ................. 82,608
Total fixed charges (including interest
on deposits) .......................... 200,121
Rent interest factor ................... 1,224
Income before income taxes,
extraordinary item and minority
interest .............................. 344,873
Earnings ............................... 546,218
Fixed charges (including interest on
deposits) ............................. 201,345
Preferred stock dividends .............. 17,292
Combined fixed charges (including
interest on deposits) and preferred
stock dividends ....................... 218,637
Ratio of earnings to combined fixed
charges (including interest on
deposits) and preferred stock
dividends (note 1) .................... 2.50x
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fixed charges (excluding interest on
deposits):
Interest on borrowings ................. $287,456 $ 98,888 $ 16,700 $ 11,137 $ 27,283
Total fixed charges (excluding interest
on deposits) .......................... 287,456 98,888 16,700 11,137 27,283
Rent interest factor ................... 6,628 1,385 361 2,595 3,757
Income before income taxes,
extraordinary item and minority
interest .............................. 122,450 31,928 146,618 215,555 (26,376)
Earnings ............................... 416,534 132,201 163,679 229,287 4,664
Fixed charges (excluding interest on
deposits) ............................. 294,084 100,273 17,061 13,732 31,040
Preferred stock dividends .............. 34,584 0 0 7,623 10,732
Combined fixed charges (excluding
interest on deposits) and preferred
stock dividends ....................... 328,668 100,273 17,061 21,355 41,772
Ratio of earnings to combined fixed
charges (excluding interest on
deposits) and preferred stock
dividends (note 1) .................... 1.27x 1.32x 9.59x 10.74x (26,376)
Fixed charges (including interest on
deposits):
Interest on deposits ................... $447,359 $100,957 $ 55,410 $430,933 $630,375
Interest on borrowings ................. 287,456 98,888 16,700 11,137 27,283
Total fixed charges (including interest
on deposits) .......................... 734,815 199,845 72,110 442,070 657,658
Rent interest factor ................... 6,628 1,385 361 2,595 3,757
Income before income taxes,
extraordinary item and minority
interest .............................. 122,450 31,928 146,618 215,555 (26,376)
Earnings ............................... 863,893 233,158 219,089 660,220 635,039
Fixed charges (including interest on
deposits) ............................. 741,443 201,230 72,471 444,665 661,415
Preferred stock dividends .............. 34,584 0 0 7,623 10,732
Combined fixed charges (including
interest on deposits) and preferred
stock dividends ....................... 776,027 201,230 72,471 452,288 672,147
Ratio of earnings to combined fixed
charges (including interest on
deposits) and preferred stock
dividends (note 1) .................... 1.11x 1.16x 3.02x 1.46x (26,376)
</TABLE>
Note (1)--Ratios with a less than one-to-one coverage are shown as dollar
amounts which represent the amount of coverage deficiency.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
First Nationwide Holdings Inc.:
We consent to the use of our report included herein and incorporated herein by
reference, and to the reference to our firm under the heading "Experts" in the
Prospectus. Our report 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.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Dallas, Texas
May 23, 1996
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement of First
Nationwide Holdings Inc. on Form S-1 related to the offer of Senior Exchange
Notes Due 2001 of our report, which includes an explanatory paragraph referring
to a change in method of accounting for income taxes and postretirement health
benefits in 1992, dated May 10, 1994, on our audits of the financial statements
of the Acquired Business. We also consent to the reference of our firm under the
caption "Experts."
/s/ Coopers & Lybrand
San Francisco, California
May 23, 1996
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to Registration
Statement No. 33-82654 of First Nationwide Holdings Inc. on Form S-1 of our
report dated April 15, 1996, (relating to the consolidated financial statements
of SFFed Corp. for the years ended December 31, 1995, 1994 and 1993 and which
expresses an unqualified opinion and includes an explanatory paragraph relating
to the acquisition of SFFed Corp.) appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ Deloitte & Touche LLP
May 23, 1996
