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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 3, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FIRST NATIONWIDE HOLDINGS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
DELAWARE 6035 13-3778552
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
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35 EAST 62ND STREET
NEW YORK, NEW YORK 10021
(212) 572-8600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
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GLENN P. DICKES, ESQ.
FIRST NATIONWIDE HOLDINGS INC.
35 EAST 62ND STREET
NEW YORK, NEW YORK 10021
(212) 572-8600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
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Copies to:
STACY J. KANTER, ESQ. CHRISTIE S. FLANAGAN, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP 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
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of 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. [ ]
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED AMOUNT OF
TITLE OF EACH CLASS AMOUNT TO BE MAXIMUM OFFERING MAXIMUM AGGREGATE REGISTRATION
OF SECURITIES TO BE REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE(1) FEE
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<S> <C> <C> <C> <C>
10 5/8% Senior Subordinated
Exchange Notes Due 2003 ..... $575,000,000 100% $575,000,000 $174,243
- -----------------------------------------------------------------------------------------------------
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(1) Estimated solely for the purpose of calculating the registration fee.
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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
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<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
PRELIMINARY PROSPECTUS DATED FEBRUARY 3, 1997
PROSPECTUS
OFFER FOR ALL OUTSTANDING 10 5/8% SENIOR SUBORDINATED NOTES DUE 2003
IN EXCHANGE FOR 10 5/8% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2003
OF
FIRST NATIONWIDE HOLDINGS INC.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON , 1997, UNLESS EXTENDED
First Nationwide Holdings Inc., a Delaware corporation ("Holdings" or the
"Issuer"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), to exchange an aggregate principal
amount of up to $575,000,000 of 10 5/8% Senior Subordinated Exchange Notes
Due 2003 (the "New Notes") of the Issuer, which have been registered under
the Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount of the issued and outstanding 10 5/8% Senior Subordinated
Notes Due 2003 (the "Old Notes" and, with the New Notes, the "Notes"), of the
Issuer from the holders thereof. The terms of the New Notes are identical in
all material respects to the Old Notes, except for certain transfer
restrictions and registration rights relating to the Old Notes and except
that, if the Exchange Offer is not consummated by July 2, 1997, the rate per
annum at which the Old Notes bear interest will be 11 1/8% per annum from and
including July 2, 1997 until but excluding the date of consummation of the
Exchange Offer. The Old Notes were issued pursuant to an offering (the
"Offering"), which was exempt from registration under the Securities Act, on
September 19, 1996 by First Nationwide Escrow Corp., a Delaware corporation
("FN Escrow"), which merged with and into Holdings on January 3, 1997.
The Notes will mature on October 1, 2003, and will bear interest at a rate
of 10 5/8% per annum, payable semi-annually on April 1 and October 1 of each
year, commencing April 1, 1997. The Notes will be redeemable at the option of
the Issuer, in whole or in part, during the 12-month period beginning January
1, 2001, at the redemption prices set forth herein, plus accrued and unpaid
interest to the date of redemption. Upon a Change of Control Call Event (as
defined herein) occurring on or prior to December 31, 2000, the Issuer will
have the option to redeem the Notes, in whole but not in part, at a
redemption price of 100% of the principal 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 Old Notes are, and the New Notes will be, subordinate in right of
payment to all existing and future Senior Indebtedness (as defined herein),
pari passu with all existing and future Parity Obligations (as defined
herein) and senior to all future subordinated debt, if any is issued, of the
Issuer. At September 30, 1996, the Issuer had outstanding $200 million of
Senior Indebtedness and $140 million of Parity Obligations. As of the date
hereof, the Issuer has no subordinated debt outstanding and there are no
current plans to issue any significant amount of debt which will be
subordinated in right of payment to the Notes. The Issuer is a holding
company, and therefore the Old Notes are, and the New Notes will be,
effectively subordinated to (i) all existing and future liabilities,
including deposits, indebtedness and trade payables, of the Issuer's
subsidiaries, including California Federal Bank, A Federal Savings Bank (the
"Bank"), and California Federal Preferred Capital Corporation ("Capital
Corporation"), a subsidiary of the Bank, and (ii) all preferred stock issued
by the Issuer's subsidiaries, including the 11 1/2% Noncumulative Perpetual
Preferred Stock of the Bank (the "11 1/2% Bank Preferred Stock"), the 10 5/8%
Noncumulative Perpetual Preferred Stock, Series B of the Bank (the "10 5/8%
Bank Preferred Stock" and, with the 11 1/2% Bank Preferred Stock, the "Bank
Preferred Stock") and the 9 1/8% Noncumulative Exchangeable Preferred Stock,
Series A of Capital Corporation (the "Capital Corporation Preferred Stock"
and, together with the Bank Preferred Stock, the "Subsidiary Preferred
Stock"). As of September 30, 1996, after giving effect to the Cal Fed
Acquisition (as defined herein), the Capital Corporation Offering (as defined
herein) and the Capital Contribution (as defined herein), the outstanding
interest-bearing liabilities, including deposits, of such subsidiaries would
have been approximately $27.5 billion, and other outstanding liabilities of
such subsidiaries, including trade payables and accrued expenses, would have
been approximately $652 million, and there would have been approximately $973
million aggregate liquidation value of Subsidiary Preferred Stock
outstanding.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on
the Old Notes, from September 19, 1996. Accordingly, if the relevant record
date for interest payment occurs after the consummation of the Exchange Offer
registered holders of New Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from September 19, 1996. If, however, the relevant
record date for interest payment occurs prior to the consummation of the
Exchange Offer registered holders of Old Notes on such record date will
receive interest accruing from the most recent date to which interest has
been paid or, if no interest has been paid, from September 19, 1996. Old
Notes accepted for exchange will cease to accrue interest from and after the
date of consummation of the Exchange Offer, except as set forth in the
immediately preceding sentence. Holders of Old Notes whose Old Notes are
accepted for exchange will not receive any payment in respect of interest on
such Old Notes otherwise payable on any interest payment date the record date
for which occurs on or after consummation of the Exchange Offer.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Issuer contained in the Registration Agreement dated
September 13, 1996 among the Issuer and the other signatories thereto (the
"Registration Agreement"). See "The Exchange Offer--Consequences of
Exchanging Old Notes" for a discussion of the Issuer's belief, based on
interpretations by the staff of the Securities and Exchange Commission (the
"SEC") as set forth in no action letters issued to third parties, as to the
transferability of the New Notes upon satisfaction of certain conditions.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that, for a
period of 180 days after the Expiration Date (as defined herein), it will
make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
The Issuer will not receive any proceeds from the Exchange Offer. The
Issuer will pay all the expenses incident to the Exchange Offer. Tenders of
Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date. In the event the Issuer terminates the Exchange Offer
and does not accept for exchange any Old Notes, the Issuer will promptly
return the Old Notes to the holders thereof. See "The Exchange Offer."
--------------------
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes, or
the ability of holders of the New Notes to sell their New Notes or the price
at which such holders may be able to sell their New Notes. Smith Barney Inc.,
Bear, Stearns & Co. Inc., CS First Boston, Citicorp Securities, Inc. and
NationsBanc Capital Markets, Inc. (the "Initial Purchasers") have advised the
Issuer that they currently intend to make a market in the New Notes. The
Initial Purchasers are not obligated to do so, however, and any market-making
with respect to the New Notes may be discontinued at any time without
notices. The Issuer does not intend to apply for listing or quotation of the
New Notes on any securities exchange or stock market.
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SEE "RISK FACTORS" COMMENCING ON PAGE 22 OF THIS PROSPECTUS FOR A
DESCRIPTION OF CERTAIN RISKS TO BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD
NOTES IN THE EXCHANGE OFFER.
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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.
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The date of this Prospectus is , 1997.
<PAGE>
AVAILABLE INFORMATION
The Issuer has filed with the SEC a Registration Statement on Form S-1
(the "Registration Statement") under the Securities Act, with respect to the
New 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. The SEC maintains a Web site that contains reports,
proxy and information statements and other information regarding registrants,
such as the Issuer, that file electronically with the SEC and the address of
such site is http://www.sec.gov. 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, dated as of September 19,
1996, between FN Escrow and The Bank of New York, as trustee (the "Trustee"),
as supplemented by the First Supplemental Indenture, dated as of January 3,
1997, among Holdings, FN Escrow and the Trustee (as so supplemented, the
"Indenture"), pursuant to which the Old Notes have been, and the New Notes
will be, issued, to continue to file with the SEC and to furnish to holders
of the Notes the information, documents and other reports specified in
Sections 13 and 15(d) of the Exchange Act, including reports on Form 10-K,
10-Q and 8-K, for so long as any Notes are outstanding.
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the consolidated
financial statements and the notes thereto contained elsewhere in this
Prospectus. On January 3, 1997, First Nationwide Escrow Corp. merged with and
into First Nationwide Holdings Inc. (the "FN Escrow Merger") and First
Nationwide Bank, A Federal Savings Bank merged with and into California
Federal Bank, A Federal Savings Bank (the "Cal Fed Acquisition"). Unless the
context otherwise indicates, (i) the "Issuer" refers to First Nationwide
Escrow Corp., as the obligor on the Old Notes prior to the consummation of
the FN Escrow Merger and to First Nationwide Holdings Inc. as the obligor on
the Notes after the consummation of the FN Escrow Merger, (ii) "First
Nationwide" refers to First Nationwide Bank, A Federal Savings Bank prior to
the consummation of the Cal Fed Acquisition, (iii) "Cal Fed" and "California
Federal" refer to Cal Fed Bancorp Inc. and California Federal Bank, A Federal
Savings Bank, respectively, prior to the consummation of the Cal Fed
Acquisition and (iv) the "Bank" refers to California Federal Bank, A Federal
Savings Bank, the surviving entity after consummation of the Cal Fed
Acquisition. An index of defined terms used in this Propsectus begins on page
252.
THE ISSUER
The Issuer is a holding company whose only significant asset is all of the
common stock, par value $.01 per share, of the Bank. As such, the Issuer's
principal business operations are conducted by the Bank and its subsidiaries.
THE BANK
After giving effect to the Cal Fed Acquisition, the Capital Corporation
Offering (as defined herein) and the Capital Contribution (as defined
herein), at September 30, 1996, the Bank would have had approximately $31.0
billion in assets, approximately $17.6 billion in deposits, would have
operated approximately 227 branches and would have ranked at such date as the
fourth largest thrift in the United States in terms of assets, based on
published sources. The Bank's principal business consists of operating retail
deposit branches and originating and/or purchasing residential real estate
loans and, to a lesser extent, certain consumer loans, and is conducted
primarily in California, Florida, Nevada and Texas. The Bank also actively
manages its portfolio of commercial real estate loans acquired through
acquisitions and is active in mortgage banking and loan servicing. These
operating activities are financed principally with customer deposits, secured
short-term and long-term borrowings, collections on loans, asset sales and
retained earnings. As of September 30, 1996, First Nationwide had
approximately $16.8 billion in assets and approximately $8.8 billion in
deposits and operated 116 branches.
The Bank is chartered as a federal stock savings bank under the Home
Owners' Loan Act ("HOLA") and regulated by the Office of Thrift Supervision
and the Federal Deposit Insurance Corporation ("FDIC"), which, through the
Savings Association Insurance Fund ("SAIF"), insures the deposit accounts of
the Bank, up to applicable limits. The Bank is also a member of the Federal
Home Loan Bank System ("FHLBS").
The Cal Fed Acquisition
On July 27, 1996, Holdings entered into an Agreement and Plan of Merger,
dated as of July 27, 1996, among Holdings, Cal Fed and California Federal
(the "Merger Agreement"), pursuant to which on January 3, 1997 Holdings
acquired Cal Fed and California Federal and First Nationwide merged with and
into California Federal. The aggregate consideration paid under the Merger
Agreement consisted of approximately $1.2 billion in cash and the issuance of
the Secondary Litigation Interests (as defined herein) by California Federal.
California Federal, headquartered in Los Angeles, was a federal stock savings
bank chartered under the HOLA, which operated 118 branches in California and
Nevada. Cal Fed was a Delaware chartered unitary savings and loan holding
company whose only significant asset was all of the common stock of
California Federal. Cal Fed was a publicly owned corporation whose common
shares were traded on the New York Stock Exchange under the symbol "CAL."
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Management believes that the Cal Fed Acquisition furthers its strategy of
building franchise value by expanding First Nationwide's retail branch
network in California. See "--Business Strategy." California Federal offered
a broad range of consumer financial services including demand and term
deposits, mortgage, consumer and small business loans, and insurance and
investment products. At September 30, 1996, California Federal had
approximately $14.1 billion in assets and $8.8 billion in deposits.
Management believes that the Cal Fed Acquisition substantially completes the
strategy initiated in 1994 to expand and focus First Nationwide's retail
franchise in California. See "--Business Strategy."
The Cal Fed Acquisition significantly enhances First Nationwide's presence
in Southern California, which management believes is an attractive area for
expansion and complements First Nationwide's existing branches in Northern
California. At September 30, 1996, First Nationwide had approximately $4.9
billion in retail deposits at 72 branches in Northern California and
approximately $.8 billion in retail deposits at 17 branches in Southern
California. After giving effect to the Cal Fed Acquisition, at September 30,
1996, the Bank would have had approximately $6.1 billion in retail deposits
at 89 branches in Northern California and $7.5 billion in retail deposits at
105 branches in Southern California.
In addition to significantly enhancing First Nationwide's statewide branch
network, the Cal Fed Acquisition will contribute significant earnings. See
"--Summary Pro Forma Financial Data." The economies of scale resulting from
the Cal Fed Acquisition will enable the Bank to continue to improve the
efficiency of its operations. The Cal Fed Acquisition also adds approximately
$3.5 billion to the loan servicing portfolio, which will enable First
Nationwide Mortgage Company ("FNMC"), the mortgage banking subsidiary of the
Bank, to realize continued operating efficiencies.
The Cal Fed Acquisition adheres to First Nationwide's strategy of
protecting the credit quality of its assets. In 1994, California Federal
completed a significant restructuring, which included the sale of
approximately $1.3 billion of non-performing and high-risk performing assets.
At December 31, 1995, the California Federal loan portfolio consisted of
predominantly 1-4 unit residential mortgage loans (76.8% of total loans) and
5+ unit residential mortgage loans (14.2% of total loans). The Cal Fed
Acquisition will be accounted for under the purchase method of accounting and
therefore the California Federal loan portfolio will be acquired at its
current fair market value. On a pro forma basis after giving effect to the
Cal Fed Acquisition at September 30, 1996, 70.5% of the Bank's loans would
have consisted of residential mortgages, compared to 59.8% on an historical
basis, and 28.9% of the Bank's loans would have consisted of commercial real
estate loans, compared to 39.6% on an historical basis. See "Business--First
Nationwide--Lending Activities."
Holdings financed the Cal Fed Acquisition with (i) the net proceeds of
approximately $555 million from the issuance of $575 million aggregate
principal amount of the Old Notes, (ii) an investment by a newly formed
Delaware corporation, all the common stock of which is owned by Gerald J.
Ford, the Chairman of the Board, Chief Executive Officer and a director of
the Bank ("Special Purpose Corp."), of $150 million in cash in Holdings in
exchange for $150 million aggregate liquidation value of Holdings' Cumulative
Perpetual Preferred Stock (the "Holdings Preferred Stock") and (iii) existing
cash. The net proceeds from the Old Notes and the Holdings Preferred Stock,
approximately $700 million, were contributed to First Nationwide prior to the
Cal Fed Acquisition (the "Capital Contribution"). See "Strategic Acquisitions
and Dispositions--The Cal Fed Acquisition."
Management expects the Bank to maintain its "well capitalized" status.
Further, it is expected that the issuance of the Capital Corporation
Preferred Stock in the Capital Corporation Offering, by increasing core
capital, will enable the Bank to retain a higher base of interest-earning
assets, resulting in incrementally higher related earnings. See "Strategic
Acquisitions and Dispositions--Dispositions--California Federal Preferred
Capital Corporation."
Business Strategy
With the Cal Fed Acquisition, the Bank has substantially completed its
business strategy initiated in 1994 by investing in its California retail
franchise and divesting most of its non-California branches. In
4
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addition, the Bank has significantly expanded its mortgage servicing
operations to gain increased economies of scale. The key elements of the
Bank's business strategy following the Cal Fed Acquisition include:
o Evaluating selective opportunities to further enhance the Bank's
retail branch network in California.
o Evaluating selective opportunities to increase the size and the
profitability of the Bank's mortgage banking operations.
o Protecting the credit quality of the assets of the Bank through,
among other things, continuing to originate single-family loans and
consumer loans in accordance with stringent underwriting standards
and actively managing the Bank's existing portfolio of commercial
real estate loans.
o Increasing the Bank's operating efficiency by, among other things,
expanding its customer base, increasing transaction account volumes
and reducing costs through consolidation of certain administrative
and managerial functions.
o Identifying new opportunities to serve the needs of the communities
in which the Bank is located.
Since the FN Acquisition (as defined herein) in 1994, First Nationwide has
consummated the following transactions to effect its business strategy. See
"Strategic Acquisitions and Dispositions."
o On June 1, 1996, First Nationwide acquired Home Federal Financial
Corporation ("HFFC") and its wholly owned federally chartered
savings association subsidiary, Home Federal Savings and Loan
Association of San Francisco ("Home Federal"), which had
approximately $717 million in assets and $632 million in deposits
and operated 15 branches in Northern California (the "Home Federal
Acquisition").
o On February 1, 1996, First Nationwide acquired SFFed Corp. ("SFFed")
and its wholly owned subsidiary, San Francisco Federal Savings and
Loan Association ("San Francisco Federal"), which had approximately
$4.0 billion in assets and approximately $2.7 billion in deposits
and operated 35 branches in the Northern California area (the "SFFed
Acquisition"). In connection with the SFFed Acquisition, Holdings
issued $140.0 million aggregate principal amount of 9 1/8% Senior
Subordinated Notes Due 2003 (the "Holdings 9 1/8% Senior
Subordinated Notes") and contributed the net proceeds therefrom to
First Nationwide as additional paid-in capital, which augmented
First Nationwide's regulatory capital to maintain its "well
capitalized" status after the SFFed Acquisition.
o In April 1995, First Nationwide acquired approximately $13 million
in deposits located in Tiburon, California from East-West Federal
Bank, a federal savings bank (the "Tiburon Purchase"). In August
1995, First Nationwide acquired three retail branches located in
Orange County, California with deposit accounts totalling
approximately $356 million from ITT Federal Bank, fsb (the "ITT
Purchase"). On December 8, 1995, First Nationwide consummated the
purchase of four retail branches located in Sonoma County,
California with associated deposit accounts of approximately $144
million from Citizens Federal Bank, a Federal Savings Bank (the
"Sonoma Purchase" and, collectively with the Tiburon Purchase and
the ITT Purchase, the "Branch Purchases").
o From January through June of 1996, First Nationwide consummated the
sale of its retail branches in Ohio (the "Ohio Branch Sale"), New
York and New Jersey (the "Northeast Branch Sales") and Michigan (the
"Michigan Branch Sale" and, collectively with the Ohio Branch Sale
and the Northeast Branch Sales, the "Branch Sales") at prices which
represented an average premium of 7.96% of the approximately $4.6
billion of deposits sold and resulted in gains of approximately
$363.0 million on a pre-tax basis through September 30, 1996.
o On February 28, 1995, First Nationwide (through FNMC), acquired a
1-4 unit residential mortgage loan servicing portfolio of
approximately $11.4 billion and other assets and liabilities (the
"Maryland Acquisition").
5
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o On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc.
("LMUSA") a loan servicing portfolio of approximately $11.1 billion,
a portfolio of $2.9 billion of mortgage servicing rights ("MSRs"),
which are rights to service mortgages held by others, which MSRs are
owned by third parties who have contracted with FNMC to monitor the
performance, and consolidate the reporting, of various other
servicers (a "master servicing portfolio") and other assets (the
"LMUSA 1995 Purchase"). On January 31, 1996, FNMC purchased LMUSA's
remaining loan servicing portfolio which, as of December 31, 1995,
totalled $14.1 billion, a master servicing portfolio of $2.7 billion
and other assets (the "LMUSA 1996 Purchase" and, together with the
LMUSA 1995 Purchase, the "LMUSA Purchases").
These transactions have significantly increased First Nationwide's
presence on the West Coast, providing additional economies of scale and
diversity of operations within its target California markets. Management
believes that consummation of the Cal Fed Acquisition further strengthens
First Nationwide's presence on the West Coast. As a result of these
transactions, including the Cal Fed Acquisition, approximately 86% of the
Bank's total retail deposits are located in California. The Bank's retail
deposits in California will have increased from $2.3 billion at the time of
the FN Acquisition in October 1994 to $13.6 billion at September 30, 1996
after giving effect to the Cal Fed Acquisition. The Bank's retail deposits
outside California will have decreased from $6.9 billion at the time of the
FN Acquisition to $2.2 billion at September 30, 1996 after giving effect to
the Cal Fed Acquisition.
The SFFed Acquisition, the Branch Sales and the Home Federal Acquisition
have enabled First Nationwide to enhance, and management expects that the Cal
Fed Acquisition will enable the Bank to further enhance, the value of its
franchise and improve its operating efficiency through the consolidation or
elimination of duplicative back office operations and administrative and
management functions. The efficiency of a financial institution is often
measured by its efficiency ratio, which represents the ratio of noninterest
expense to net interest income and noninterest income. First Nationwide has
improved its efficiency ratio from approximately 62.2% on an annualized basis
during the fourth quarter of 1994 to approximately 53.8% on an annualized
basis, excluding non-recurring gains and charges and certain incentive plan
accruals, during the third quarter of 1996.
The Maryland Acquisition and the LMUSA Purchases have enabled First
Nationwide to increase its noninterest income through fees generated from its
mortgage servicing operations. First Nationwide's excess servicing capacity
and existing servicing expertise enabled it to accommodate the loan servicing
portfolios acquired in these transactions without the need for significant
additional investment. Since the FN Acquisition, the Bank's mortgage
servicing portfolio will have increased from $6.7 billion to $46.2 billion at
September 30, 1996 after giving effect to the Cal Fed Acquisition.
The Bank applies stringent underwriting standards in originating
single-family residential loans and consumer loans, as well as in evaluating
acquisition opportunities. The Bank has a specialized credit risk management
group that is charged with the development of credit policies and performing
credit risk analyses for all asset portfolios. From October 1994 to November
1996, First Nationwide also used the Put Agreement (as defined herein) to
mitigate credit losses on certain acquired assets, thereby improving the
overall credit quality of its loan portfolio.
Background
First Nationwide was organized as "First Gibraltar Bank, FSB" ("First
Gibraltar"), in December 1988 to acquire substantially all of the assets and
certain liabilities of five insolvent Texas thrifts (the "Texas Closed
Banks") in a federally assisted transaction pursuant to an Assistance
Agreement, as amended (the "Assistance Agreement"), by and among First
Nationwide, FSLIC Resolution Fund (the "FSLIC/RF") (as successor to the
Federal Savings and Loan Insurance Corporation (the "FSLIC")), First
Gibraltar Holdings Inc. ("First Gibraltar Holdings") and MacAndrews & Forbes
Holdings Inc. ("MacAndrews Holdings"). On December 31, 1992, First Gibraltar
sold a substantial portion of its business operations in Oklahoma, consisting
of approximately $3 million of loans and 27 branches with $809 million in
deposits (the "First Gibraltar Oklahoma Sale"). On February 1, 1993, First
Gibraltar sold to Bank of America Texas, N.A. and Bank of America Corporation
(collectively, "BankAmerica") $829 million in loans and 130 branches with
approximately $6.9 billion in deposits (the "First Gibraltar Texas Sale"),
and First Nationwide changed its name to "First Madison Bank, FSB" ("First
Madison").
6
<PAGE>
Following the First Gibraltar Texas Sale, and through September 1994, First
Madison's principal business was the funding of the assets acquired from the
Texas Closed Banks (the "Covered Assets") and the performance of its
obligations under the Assistance Agreement.
On April 14, 1994, First Nationwide entered into the Asset Purchase
Agreement (the "Asset Purchase Agreement") with First Nationwide Bank, A
Federal Savings Bank ("Old FNB"), an indirect subsidiary of Ford Motor
Company ("Ford Motor"). On October 3, 1994, effective immediately after the
close of business on September 30, 1994, First Nationwide acquired
substantially all of the assets (other than certain non-performing and other
excluded assets) and certain of the liabilities (the "FNB Acquired Business")
of Old FNB (the "FN Acquisition") for $726.5 million. Effective on October 1,
1994, First Nationwide changed its name from "First Madison Bank, FSB" to
"First Nationwide Bank, A Federal Savings Bank."
In connection with the FN Acquisition, First Nationwide entered into a
Non-Performing Asset Sale Agreement (the "Put Agreement") with Granite
Management and Disposition, Inc. ("Granite"), a subsidiary of Ford Motor,
pursuant to which First Nationwide had the right through November 30, 1996 to
require Granite to purchase up to $500 million of principally non-performing
assets acquired from Old FNB. In the event that, as of November 30, 1996,
First Nationwide had not required Granite to purchase $500 million of
non-performing assets, it had the right to require Granite to purchase any
qualifying assets of First Nationwide, other than assets which previously
were eligible to be put to Granite and which First Nationwide did not require
Granite to purchase, up to such $500 million maximum. At September 30, 1996,
the remaining available balance under the Put Agreement was approximately
$70.5 million, which First Nationwide fully utilized on December 5, 1996. Of
the approximately $228 million in non-performing assets at September 30,
1996, approximately $17.3 million were eligible to be sold to Granite under
the Put Agreement. See "Business--First Nationwide--Other Activities--The Put
Agreement."
First Nationwide financed the FN Acquisition with: (i) a capital
contribution by Holdings funded with the net proceeds of (a) the issuance of
Holdings' 12-1/4% Senior Notes Due 2001 (the "Holdings Senior Notes") and (b)
the issuance of Holdings' class C common stock to First Nationwide (Parent)
Holdings Inc. ("Parent Holdings"), an indirect subsidiary of MacAndrews
Holdings (all of which class C common stock was redeemed on June 3, 1996),
(ii) the net proceeds from the issuance of the 11 1/2% Bank Preferred Stock
and (iii) existing cash and proceeds from securities sold under agreements to
repurchase. See "Certain Transactions."
California Federal Preferred Capital Corporation
In November 1996, First Nationwide established Capital Corporation for the
purpose of acquiring, holding and managing real estate mortgage assets. All
of Capital Corporation's common stock is owned by the Bank. It is expected
that substantially all of Capital Corporation's mortgage assets will be
acquired from the Bank and affiliates of the Bank. Capital Corporation has
entered into a subservicing agreement with FNMC pursuant to which FNMC will
service Capital Corporation's mortgage assets. On January 31, 1997, Capital
Corporation consummated the offering of 20,000,000 shares of its Capital
Corporation Preferred Stock (the "Capital Corporation Offering") and received
proceeds therefrom of approximately $484.3 million (net of underwriting
discounts).
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% indirectly owned by Hunter's Glen/Ford, Ltd. ("Hunter's Glen"), a limited
partnership controlled by Gerald J. Ford, Chairman of the Board, Chief
Executive Officer and a director of the Bank. See "Ownership of the Common
Stock" and "Certain Transactions--Transactions with Mr. Ford." The Issuer's
principal executive offices are located at 35 East 62nd Street, New York, New
York 10021 and its telephone number is (212) 572-8600. The Issuer was
incorporated in 1994 under the laws of the State of Delaware.
7
<PAGE>
The following chart sets forth in simplified form the ownership of the
common equity 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 Guarantor Corp.
-----------------------------------------------------
| 100%
-----------------------------------------------------
First Gibraltar Holdings Inc.
("First Gibraltar Holdings")
-----------------------------------------------------
- ----------------- | 100%
Hunter's Glen/ -----------------------------------------------------
Ford, Ltd. First Nationwide (Parent) Holdings Inc.
("Hunter's Glen") ("Parent Holdings")
- ----------------- -----------------------------------------------------
20%* | 80%*
-----------------------------------------------------
FIRST NATIONWIDE HOLDINGS INC.
("HOLDINGS" OR THE "ISSUER")
-----------------------------------------------------
| 100%
-----------------------------------------------------
California Federal Bank, A Federal Savings Bank
(the "Bank"), as successor by merger to
First Nationwide Bank, A Federal Savings Bank
-----------------------------------------------------
| 100%
-----------------------------------------------------
California Federal Preferred Capital Corporation
(the "Capital Corporation")
-----------------------------------------------------
- --------------
* Hunter's Glen, a limited partnership controlled by Gerald J. Ford, Chairman
of the Board, Chief Executive Officer and a director of the Bank, owns 100%
of the class B common stock of Holdings, representing 20% of its voting
common stock (representing approximately 15% of the voting power of its
common stock), and Parent Holdings beneficially owns 100% of the class A
common stock of Holdings, representing 80% of its voting common stock
(representing approximately 85% of the voting power of its common stock).
See "Ownership of the Common Stock."
8
<PAGE>
THE EXCHANGE OFFER
SECURITIES OFFERED ............ Up to $575,000,000 principal amount of
10 5/8% Senior Subordinated Exchange Notes Due
2003, which have been registered under the
Securities Act. The terms of the New Notes
and the Old Notes are identical in all
material respects, except for certain
transfer restrictions and registration
rights relating to the Old Notes and except
that, if the Exchange Offer is not
consummated by July 2, 1997, the rate per
annum at which the Old Notes bear interest
will be 11 1/8% per annum from and including
July 2, 1997 until but excluding the date of
consummation of the Exchange Offer.
THE EXCHANGE OFFER ............ The New Notes are being offered in exchange
for a like principal amount of Old Notes.
The issuance of the New Notes is intended to
satisfy obligations of the Issuer contained
in the Registration Agreement. For
procedures for tendering, see "The Exchange
Offer."
TENDERS, EXPIRATION DATE;
WITHDRAWAL ................... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on , 1997, or
such later date and time to which it is
extended. The tender of Old Notes pursuant
to the Exchange Offer may be withdrawn at
any time prior to the Expiration Date. Any
Old Note not accepted for exchange for any
reason will be returned without expense to
the tendering holder thereof as promptly as
practicable after the expiration or
termination of the Exchange Offer.
FEDERAL INCOME TAX
CONSEQUENCES ................ The exchange pursuant to the Exchange Offer
should not result in gain or loss to the
holders or the Issuer for federal income tax
purposes. See "Certain U.S. Federal Income
Tax Considerations."
USE OF PROCEEDS ............... There will be no proceeds to the Issuer from
the exchange pursuant to the Exchange Offer.
EXCHANGE AGENT ................ The Bank of New York is serving as exchange
agent (the "Exchange Agent") in connection
with the Exchange Offer.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuer does not
currently anticipate that it will register Old Notes under the Securities
Act. See "Description of the Notes--Registration Rights." Based on
interpretations by the staff of the SEC, as set forth in no-action letters
issued to third parties, the Issuer believes that New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold or otherwise transferred by
9
<PAGE>
holders thereof (other than any holder which is an "affiliate" of the Issuer
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of such New Notes. However, the Issuer does
not intend to request the SEC to consider, and the SEC has not considered,
the Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the SEC would make a similar determination with
respect to the Exchange Offer as in such other circumstances. Each holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and
does not intend to engage in, a distribution of New Notes and has no
arrangement or understanding to participate in a distribution of New Notes.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes must acknowledge that such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution." In addition, to comply
with the state securities laws, the New Notes may not be offered or sold in
any state unless they have been registered or qualified for sale in such
state or an exemption from registration or qualification is available and is
complied with. The offer and sale of the New Notes to "qualified
institutional buyers" (as such term is defined under Rule 144A of the
Securities Act) is generally exempt from registration or qualification under
the state securities laws. The Issuer currently does not intend to register
or qualify the sale of the New Notes in any state where an exemption from
registration or qualification is required and not available. See "The
Exchange Offer--Consequences of Exchanging Old Notes" and "Description of the
Notes--Registration Rights."
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respects, except for certain transfer restrictions and registration rights
relating to the Old Notes and except that, if the Exchange Offer is not
consummated by July 2, 1997, the rate per annum at which the Old Notes bear
interest will be 11 1/8% per annum from and including July 2, 1997 until but
excluding the date of consummation of the Exchange Offer. The New Notes will
bear interest from the most recent date to which interest has been paid on
the Old Notes or, if no interest has been paid on the Old Notes, from
September 19, 1996. Accordingly, if the relevant record date for interest
payment occurs after the consummation of the Exchange Offer registered
holders of New Notes on such record date will receive interest accruing from
the most recent date to which interest has been paid or, if no interest has
been paid, from September 19, 1996. If, however, the relevant record date for
interest payment occurs prior to the consummation of the Exchange Offer
registered holders of Old Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from September 19, 1996. Old Notes accepted for
exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer, except as set forth in the immediately
preceding sentence. Holders of Old Notes whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on such Old
Notes otherwise payable on any interest payment date the record date for
which occurs on or after consummation of the Exchange Offer.
SECURITIES OFFERED ............ Up to $575,000,000 aggregate principal
amount of 10 5/8% Senior Subordinated
Exchange Notes Due 2003, which have been
registered under the Securities Act.
MATURITY DATE ................. October 1, 2003.
INTEREST PAYMENT DATES ........ April 1 and October 1 of each year,
commencing April 1, 1997.
OPTIONAL REDEMPTION ........... Except as described below, the Notes may not
be redeemed prior to January 1, 2001. On and
after such date, the Notes will be
redeemable at the option of the Issuer, in
whole or in part, during the 12-month period
beginning January 1, 2001, at the redemption
prices set forth herein plus accrued and
unpaid interest to the date of redemption.
See "Description of the Notes--Optional
Redemption."
10
<PAGE>
CHANGE OF CONTROL ............. Upon a Change of Control Call Event
occurring on or prior to December 31, 2000,
the Issuer will have the option to redeem
the Notes, in whole but not in part, 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 to the date of redemption
plus, (iii) the Applicable Premium. Upon a
Change of Control Put Event, 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 a price equal to 101%
of the principal amount thereof plus accrued
and unpaid interest to the date of
repurchase. The Issuer's ability to purchase
the Notes may be limited by the amount of
available cash, covenants contained in the
indenture governing the Holdings Senior
Notes (the "Holdings Senior Notes
Indenture") and the indenture governing the
Holdings 9 1/8% Senior Subordinated Notes
(the "Holdings 9 1/8% Senior Subordinated
Notes Indenture") and other factors. See
"Risk Factors--Holding Company Structure;
Restrictions on Ability of Subsidiaries to
Pay Dividends," "Risk Factors--Indebtedness
and Ability to Pay Principal of the Notes,"
"Description of Other Indebtedness and
Preferred Stock" and "Description of the
Notes."
RANKING AND HOLDING
COMPANY STRUCTURE ............ The Old Notes are, and the New Notes will
be, unsecured senior subordinated
obligations of the Issuer and will rank
subordinate in right of payment to all
existing and future Senior Indebtedness of
the Issuer, including the Holdings Senior
Notes. The Notes will rank pari passu in
right of payment with all existing and
future Parity Obligations of the Issuer,
including the Holdings 9 1/8% Senior
Subordinated Notes, and senior to all future
subordinated debt of Holdings, if any is
issued. At September 30, 1996, after giving
effect to the Cal Fed Acquisition, the
Capital Corporation Offering, the Capital
Contribution and the Offering, Holdings
would have had outstanding $200 million of
Senior Indebtedness, consisting of the
Holdings Senior Notes, and $140 million of
Parity Obligations, consisting of the
Holdings 9 1/8% Senior Subordinated Notes.
As of the date hereof, Holdings has no
subordinated debt outstanding and has no
current plans to issue any significant
amount of debt which is subordinated in
right of payment to the Notes.
The Issuer is a holding company and
therefore the Old Notes are, and the New
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 Capital Corporation,
and (ii) all preferred stock issued by the
Issuer's subsidiaries, including the
Subsidiary Preferred Stock. At September 30,
1996, after giving effect to the Cal Fed
Acquisition, the Capital Corporation
Offering and the Capital Contribution, the
outstanding interest-bearing liabilities,
including deposits, of such subsidiaries
would have been approximately $27.5 billion,
the other liabilities of such
11
<PAGE>
subsidiaries, including trade payables and
accrued expenses, would have been
approximately $652 million, and there would
have been approximately $973 million
aggregate liquidation value of the
Subsidiary Preferred Stock outstanding. See
"Risk Factors--Subordination to Senior
Indebtedness and to Subsidiary Liabilities
and Subsidiary Preferred Stock" and
"Description of the Notes."
CERTAIN COVENANTS ............. The Indenture contains certain covenants
that, among other things, will limit: (i)
the issuance of additional debt by the
Issuer and certain subsidiaries, (ii) the
payment of dividends on the 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 herein) of
the Bank is less than the Minimum Common
Equity Amount (as defined herein), (iii) the
making of certain investments, (iv)
transactions with affiliates, (v) the
creation of liens on the assets of the
Issuer, (vi) the incurrence of additional
subordinated debt that is senior in right of
payment to the Notes, (vii) the termination
or amendment of the Tax Sharing Agreement
(as defined herein), (viii) the ability of
the Issuer or any subsidiary to restrict
dividends or distributions from
subsidiaries, (ix) consolidations, mergers
and transfers of all or substantially all of
the Issuer's assets and (x) other business
activities of the Issuer. All these
limitations and prohibitions, however, are
subject to a number of important
qualifications. See "Description of the
Notes--Certain Covenants."
USE OF PROCEEDS ............... The Issuer will not receive any proceeds
from the Exchange Offer. The net proceeds of
the Offering, which were approximately $555
million, were used together with an
investment by Special Purpose Corp. in
exchange for the Holdings Preferred Stock
and existing cash, to finance the Cal Fed
Acquisition. See "Use of Proceeds."
EXCHANGE OFFER; REGISTRATION
RIGHTS ........................ Holders of New Notes are not entitled to any
registration rights with respect to the New
Notes. Pursuant to the Registration
Agreement, the Issuer agreed to file, at its
cost, a registration statement with respect
to the Exchange Offer. The Registration
Statement of which this Prospectus is a part
constitutes the registration statement for
the Exchange Offer. See "Description of the
Notes--Registration Rights."
RISK FACTORS
Prospective holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate
the specific factors set forth under "Risk Factors" before making a decision
to tender their Old Notes in the Exchange Offer.
12
<PAGE>
SUMMARY PRO FORMA FINANCIAL DATA
The following summary pro forma financial data gives effect to the Cal Fed
Acquisition, the SFFed Acquisition and the LMUSA Purchases (collectively, the
"Acquisitions"), the Branch Sales, the Capital Corporation Offering and the
issuances of the Holdings Preferred Stock, the Holdings 9 1/8% Senior
Subordinated Notes and the Notes. The Branch Purchases and the Home Federal
Acquisition have not been reflected in the pro forma financial data because
such transactions are not material either individually or in the aggregate.
The following summary pro forma financial data as of and for the nine
months ended September 30, 1996 are based on (i) the historical consolidated
statement of financial condition of Holdings giving effect to the Cal Fed
Acquisition, the issuance of the Notes and the Capital Corporation Offering
as if such transactions occurred on September 30, 1996, and (ii) the
historical consolidated statement of operations of Holdings for the nine
months ended September 30, 1996 giving effect to the Cal Fed Acquisition, the
SFFed Acquisition, the LMUSA 1996 Purchase, the Branch Sales, the Capital
Corporation Offering and the issuances of the Holdings Preferred Stock, the
Holdings 9 1/8% Senior Subordinated Notes and the Notes as if such
transactions occurred on January 1, 1995. The following summary pro forma
financial data for the year ended December 31, 1995 is based on the
historical consolidated statement of operations of Holdings for the year
ended December 31, 1995 giving effect to the Acquisitions, the Branch Sales,
the Capital Corporation Offering and the issuances of the Holdings Preferred
Stock, the Holdings 9 1/8% Senior Subordinated Notes and the Notes as if such
transactions occurred on January 1, 1995. The pro forma adjustments are based
on available information and upon certain assumptions that management
believes are reasonable under the circumstances. The Acquisitions are
accounted for under the purchase method of accounting. Under this method of
accounting, the purchase price has been allocated to the assets and
liabilities acquired based on preliminary estimates of fair value. The actual
fair value is determined as of the consummation of each of the Acquisitions.
The summary pro forma financial data do not necessarily reflect the results
of operations or the financial position of Holdings that actually would have
resulted had the Acquisitions, the Branch Sales, the Capital Corporation
Offering and the issuances of the Holdings Preferred Stock, the Holdings 9
1/8% Senior Subordinated Notes and the Notes occurred at the dates indicated,
or project the results of operations or financial position of Holdings for
any future date or period.
The summary pro forma financial data should be read in conjunction with
the notes accompanying the "Pro Forma Financial Data" and the Unaudited Pro
Forma Financial Data included elsewhere in this Prospectus. In addition, the
summary pro forma financial data should be read in conjunction with the
Consolidated Financial Statements of Holdings and the notes thereto, the
Consolidated Financial Statements of SFFed and the notes thereto and the
Consolidated Financial Statements of Cal Fed and the notes thereto, contained
elsewhere in this Prospectus. See "Selected Historical Financial Data," "Pro
Forma Financial Data" and "Projected Pro Forma Regulatory Capital Ratios of
the Bank."
13
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HOLDINGS CAL FED PRO FORMA
HISTORICAL PRO FORMA(A) CAPITALIZATION(B) COMBINED
------------ ------------ ----------------- -------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ............................. $ 271,218 $ (794,939) $ 555,000 $ 31,279
Securities ............................................ 572,210 1,143,659 -- 1,715,869
Mortgage-backed securities ............................ 3,360,527 2,045,568 -- 5,406,095
Loans receivable, net ................................. 11,307,216 10,023,415 -- 21,330,631
Office premises and equipment, net .................... 92,088 7,367 -- 99,455
Mortgage servicing rights, net ........................ 406,669 32,258 -- 438,927
Core deposit and other intangible assets .............. 144,782 531,094 -- 675,876
Other assets .......................................... 814,768 490,774 20,000 1,325,542
------------ ------------ ----------------- -------------
Total assets .......................................... $16,969,478 $13,479,196 $ 575,000 $31,023,674
============ ============ ================= =============
LIABILITIES, MINORITY INTEREST AND
STOCKHOLDERS' EQUITY
Deposits .............................................. $ 8,799,990 $ 8,766,839 $ -- $17,566,829
Borrowings ............................................ 6,507,942 4,302,057 (482,650) 10,902,349
575,000
Other liabilities ..................................... 431,291 237,800 -- 669,091
------------ ------------ ----------------- -------------
Total liabilities ..................................... 15,739,223 13,306,696 92,350 29,138,269
Minority interest ..................................... 309,376 172,500 500,000 981,876
Stockholders' equity .................................. 920,879 172,500 (17,350) 903,529
------------ ------------ ----------------- -------------
Total liabilities, minority interest and stockholders'
equity ............................................... $16,969,478 $13,479,196 $ 575,000 $31,023,674
============ ============ ================= =============
</TABLE>
- --------------
(a) Represents the pro forma effect of the Cal Fed Acquisition.
(b) Represents adjustments to record (i) the issuance of the Old Notes in the
Offering, (ii) the Capital Corporation Offering and (iii) the utilization
of proceeds from the Capital Corporation Offering to reduce borrowings of
the Bank.
14
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA 1996
ACQUISITION PURCHASE
HOLDINGS PRO FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B)
------------ ------------- ------------
<S> <C> <C> <C>
Interest income ........................ $934,413 $26,012 $ --
Interest expense ....................... 613,283 18,515 (848)
------------ ------------- ------------
Net interest income .................... 321,130 7,497 848
Provision for loan losses .............. 29,700 500 --
Noninterest income ..................... 595,461 (511) 3,535
Noninterest expense .................... 379,305 3,873 3,169
------------ ------------- ------------
Income (loss) before income taxes and
minority interest ..................... 507,586 2,613 1,214
Income tax (benefit) expense ........... (79,724) 369 120
------------ ------------- ------------
Income (loss) before minority interest 587,310 2,244 1,094
Minority interest ...................... 34,584 -- --
------------ ------------- ------------
Net income (loss) ...................... 552,726 2,244 1,094
Holdings Preferred Stock dividends .... -- -- --
------------ ------------- ------------
Net income (loss) available
to common stockholders ................ $552,726 $ 2,244 $1,094
============ ============= ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAL FED BRANCH
ACQUISITION SALES
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTALS(C) TOTALS(D) ADJUSTMENTS(E) COMBINED
------------- ----------- -------------- ------------
<S> <C> <C> <C> <C>
Interest income ........................ $764,533 $ (110) $ -- $1,724,848
Interest expense ....................... 492,225 4,093 27,128 1,154,396
------------- ----------- -------------- ------------
Net interest income .................... 272,308 (4,203) (27,128) 570,452
Provision for loan losses .............. 30,800 -- -- 61,000
Noninterest income ..................... 57,100 (4,118) -- 651,467
Noninterest expense .................... 226,818 (7,724) 2,210 607,651
------------- ----------- -------------- ------------
Income (loss) before income taxes and
minority interest ..................... 71,790 (597) (29,338) 553,268
Income tax (benefit) expense ........... 11,439 (59) (1,859) (69,714)
------------- ----------- -------------- ------------
Income (loss) before minority interest 60,351 (538) (27,479) 622,982
Minority interest ...................... 18,900 -- 30,797 84,281
------------- ----------- -------------- ------------
Net income (loss) ...................... 41,451 (538) (58,276) 538,701
Holdings Preferred Stock dividends .... -- -- 13,859 13,859
------------- ----------- -------------- ------------
Net income (loss) available
to common stockholders ................ $ 41,451 $ (538) $(72,135) $ 524,842
============= =========== ============== ============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA SUPPLEMENTAL INFORMATION:
- ------------------------------------
<S> <C>
First Nationwide
Historical net income of the Bank (f) .............................................. $ 617,774
Pro forma adjustments:
SFFed Acquisition ................................................................. 2,244
Cal Fed Acquisition ............................................................... 60,351
LMUSA 1996 Purchase ............................................................... 1,094
Branch Sales ...................................................................... (538)
Reduction in borrowing expense, net ............................................... 17,813
-----------
Total pro forma adjustments ...................................................... 80,964
-----------
Add one half amortization of intangible assets (g) ................................. 26,237
-----------
Amount available for dividends ..................................................... 724,975
Preferred stock dividends:
11 1/2% Bank Preferred Stock ...................................................... (25,938)
10 5/8% Bank Preferred Stock ...................................................... (18,900)
Capital Corporation Preferred Stock, net .......................................... (30,797)
-----------
Total preferred stock dividends .................................................. (75,635)
-----------
Amount available for dividends to Holdings (h) ..................................... 649,340
Deduct Other Items, net of tax (i) ................................................. (392,700)
-----------
Amount available for dividends to Holdings after deducting Other Items (h) ........ $ 256,640
===========
Holdings
Amount available for dividends to Holdings after deducting Other Items ............ $ 256,640
Holdings interest expense:
Holdings Senior Notes ............................................................. (18,375)
Holdings 9 1/8% Senior Subordinated Notes ......................................... (9,581)
Notes ............................................................................. (45,820)
-----------
Total Holdings interest expense .................................................. (73,776)
Other income and expense, net ...................................................... (9,535)
Income tax benefit ................................................................. 5,353
-----------
Amount available for distributions or loans to stockholders of Holdings ........... 178,682
Cash dividends-Holdings Preferred Stock ............................................ (11,250)
-----------
Amount available for distributions or loans to Hunter's Glen and Parent Holdings
(j) ............................................................................... $ 167,432
===========
</TABLE>
15
<PAGE>
- --------------
(a) Represents pro forma results of operations related to the SFFed
Acquisition. See details on P-6.
(b) Represents pro forma results of operations related to the LMUSA 1996
Purchase. See details on P-9.
(c) Represents pro forma results of operations related to the Cal Fed
Acquisition. See details on P-11.
(d) Represents pro forma results of operations related to the Branch Sales. See
details on P-14.
(e) Represents adjustments to reflect (i) interest expense and amortization of
debt issuance costs associated with the Notes and the Holdings 9 1/8%
Senior Subordinated Notes, (ii) the Holdings Preferred Stock dividends,
(iii) the reductions in borrowing expenses related to the issuance of the
Capital Corporation Preferred Stock to reduce debt, (iv) dividends on the
Capital Corporation Preferred Stock, net of income tax benefit to the Bank,
and (v) the impact on income taxes from (i) through (iv).
(f) Reconciles to historical net income of Holdings as follows:
<TABLE>
<CAPTION>
<S> <C>
Historical net income of the Bank ................................ $617,774
Less: Net interest and other expenses of Holdings ................ 32,050
Minority interest .............................................. 34,584
--------
Plus: Extraordinary item--loss on early extinguishment of debt,
net ............................................................. 1,586
Historical net income of Holdings ................................ $552,726
========
</TABLE>
(g) By regulation, an association that meets its fully phased-in capital
requirements both before and after a proposed distribution and has not been
notified by the OTS that it is in need of more than normal supervision may,
after prior notice to but without the approval of the OTS, make capital
distributions during a calendar year up to 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
surplus capital ratio at the beginning of the calendar year. To the extent
amortization of goodwill increases the amount of such surplus, one-half of
that amount would be available for dividends.
(h) Assumes that no retention of retained earnings is necessary in order for
the Bank to retain its "well capitalized" status.
(i) Other Items represent items of a non-recurring nature, consisting of (i)
gains of approximately $334.0 million (on an after-tax basis) realized in
connection with the Branch Sales; (ii) gain of approximately $10.8 million
(on an after-tax basis) representing Cal Fed's gain on branch sales; (iii)
deferred tax benefit of First Nationwide of $125 million; (iv) after-tax
gain on sale of ACS common stock of $36.4 million; (v) $23.0 million in
after-tax gain recognized in connection with the termination of the
Assistance Agreement; (vi) the one-time Special SAIF Assessment of $106.4
million (on an after-tax basis) levied on the deposits of First Nationwide
and California Federal; and (vii) Incentive Plan expense of $30.2 million
(on an after-tax basis).
(j) The debt instruments of Holdings generally limit distributions to 75% of
the consolidated net income of Holdings. The debt instruments also permit
Holdings to loan the remaining 25% of its consolidated net income to
affiliates, provided that such loans are on an arm's length basis. See
"Risk Factors--Indebtedness and Ability to Pay Principal of the Notes."
16
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA
ACQUISITION PURCHASES
HOLDINGS PRO FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B)
------------ ------------- -----------
<S> <C> <C> <C>
Interest income ........................ $1,075,845 $303,801 $22,477
Interest expense ....................... 734,815 218,384 2,018
------------ ------------- -----------
Net interest income .................... 341,030 85,417 20,459
Provision for loan losses .............. 37,000 11,094 --
Noninterest income ..................... 150,973 7,828 77,284
Noninterest expense .................... 332,553 46,037 57,581
------------ ------------- -----------
Income (loss) before income taxes and
minority interest ..................... 122,450 36,114 40,162
Income tax (benefit) expense ........... (57,185) 4,890 3,952
------------ ------------- -----------
Income (loss) before minority interest 179,635 31,224 36,210
Minority interest ...................... 34,584 -- --
------------ ------------- -----------
Net income (loss) ...................... 145,051 31,224 36,210
Holdings Preferred Stock dividends .... -- -- --
------------ ------------- -----------
Net income (loss) available to common
stockholders .......................... $ 145,051 $ 31,224 $36,210
============ ============= ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAL FED BRANCH
ACQUISITION SALES
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTALS(C) TOTALS(D) ADJUSTMENTS(E) COMBINED
------------- ----------- -------------- ------------
$
<S> <C> <C> <C> <C>
Interest income ........................ $1,017,711 $ (623) -- $2,419,211
Interest expense ....................... 641,600 69,141 44,871 1,710,829
------------- ----------- -------------- ------------
Net interest income .................... 376,111 (69,764) (44,871) 708,387
Provision for loan losses .............. 31,800 -- -- 79,894
Noninterest income ..................... 54,700 (23,017) -- 267,768
Noninterest expense .................... 227,691 (45,299) 3,657 622,220
------------- ----------- -------------- ------------
Income (loss) before income taxes and
minority interest ..................... 171,320 (47,482) (48,528) 274,036
Income tax (benefit) expense ........... 22,692 (4,671) (3,075) (33,397)
------------- ----------- -------------- ------------
Income (loss) before minority interest 148,628 (42,811) (45,453) 307,433
Minority interest ...................... 25,600 -- 41,063 101,247
------------- ----------- -------------- ------------
Net income (loss) ...................... 123,028 (42,811) (86,516) 206,186
Holdings Preferred Stock dividends .... -- -- 18,139 18,139
------------- ----------- -------------- ------------
Net income (loss) available to common
stockholders .......................... $ 123,028 $(42,811) $(104,655) $ 188,047
============= =========== ============== ============
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA SUPPLEMENTAL INFORMATION:
- -----------------------------------
<S> <C>
First Nationwide
Historical net income of the Bank (f) .............................................. $ 211,260
Pro forma adjustments:
SFFed Acquisition ................................................................. 31,224
Cal Fed Acquisition ............................................................... 148,628
LMUSA 1996 Purchase ............................................................... 36,210
Branch Sales ...................................................................... (42,811)
Reduction in borrowing expense, net ............................................... 26,145
-----------
Total pro forma adjustments ...................................................... 199,396
-----------
Add one half amortization of intangible assets (g) ................................. 37,168
-----------
Amount available for dividends ..................................................... 447,824
Preferred stock dividends:
11 1/2% Bank Preferred Stock ...................................................... (34,584)
10 5/8% Bank Preferred Stock ...................................................... (25,600)
Capital Corporation Preferred Stock ............................................... (41,063)
-----------
Total preferred stock dividends .................................................. (101,247)
-----------
Amount available for dividends to Holdings (h) ..................................... 346,577
Deduct deferred tax benefit (i) .................................................... (69,000)
-----------
Amount available for dividends to Holdings after deducting deferred tax benefit (h) $ 277,577
===========
Holdings
Amount available for dividends to Holdings after deducting deferred tax benefit ... $ 277,577
Holdings interest expense:
Holdings Senior Notes ............................................................. (24,500)
Holdings 9 1/8% Senior Subordinated Notes ......................................... (12,775)
Notes ............................................................................. (61,094)
-----------
Total Holdings interest expense .................................................. (98,369)
Other income and expense, net ...................................................... (10,174)
Income tax benefit ................................................................. 8,987
-----------
Amount available for distributions or loans to stockholders of Holdings ........... 178,021
Cash dividends-Holdings Preferred Stock ............................................ (15,000)
-----------
Amount available for distributions or loans to Hunter's Glen and Parent Holdings
(j) ............................................................................... $ 163,021
===========
</TABLE>
17
<PAGE>
- --------------
(a) Represents pro forma results of operations related to the SFFed
Acquisition. See details on P-18.
(b) Represents pro forma results of operations related to the LMUSA Purchases.
See details on P-22.
(c) Represents pro forma results of operations related to the Cal Fed
Acquisition. See details on P-24.
(d) Represents pro forma results of operations related to the Branch Sales. See
details on P-27.
(e) Represents adjustments to reflect (i) interest expense and amortization of
debt issuance costs associated with the Notes and the Holdings 9 1/8%
Senior Subordinated Notes, (ii) the Holdings Preferred Stock dividends,
(iii) the reduction in interest expense on borrowings related to the
utilization of proceeds from the issuance of the Capital Corporation
Preferred Stock to reduce debt, (iv) dividends on the Capital Corporation
Preferred Stock, net of income tax benefit to the Bank, and (v) the impact
on income taxes from (i) through (iv).
(f) Reconciles to historical net income of Holdings as follows:
<TABLE>
<CAPTION>
<S> <C>
Historical net income of the Bank ................................. $211,260
Less: Net interest and other expenses of Holdings ................. (29,658)
Minority interest ............................................... (34,584)
Plus: Extraordinary item-gain on early extinguishment of debt, net (1,967)
----------
Historical net income of Holdings ................................. $145,051
==========
</TABLE>
(g) By regulation, an association that meets its fully phased-in capital
requirements both before and after a proposed distribution and has not been
notified by the OTS that it is in need of more than normal supervision may,
after prior notice to but without the approval of the OTS, make capital
distributions during a calendar year up to 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
surplus capital ratio at the beginning of the calendar year. To the extent
amortization of goodwill increases the amount of such surplus, one-half of
that amount would be available for dividends.
(h) Assumes that no retention of retained earnings is necessary in order for
the Bank to retain its "well capitalized" status.
(i) Represents an item of a non-recurring nature.
(j) The debt instruments of Holdings generally limit distributions to 75% of
the consolidated net income of Holdings. The debt instruments also permit
Holdings to loan the remaining 25% of its consolidated net income to
affiliates, provided that such loans are on an arm's length basis. See
"Risk Factors--Indebtedness and Ability to Pay Principal of the Notes."
18
<PAGE>
PROJECTED PRO FORMA REGULATORY CAPITAL RATIOS OF THE BANK
Prior to the consummation of the Cal Fed Acquisition, the Capital
Contribution totalling approximately $700 million was contributed by Holdings
to First Nationwide.
After giving effect to the Cal Fed Acquisition, the Capital Corporation
Offering and the Capital Contribution, at September 30, 1996, on a pro forma
basis, the Bank exceeded minimum regulatory capital requirements and
qualified for "well-capitalized" status. The following is a reconciliation of
the Bank's pro forma stockholders' equity to regulatory capital as of
September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of the Bank ........................ $2,317 $2,317 $2,317
Minority interest--Capital Corporation Preferred Stock . 500 500 500
Unrealized holding gain on securities available for
sale, net .............................................. (35) (35) (35)
Non-qualifying loan servicing rights .................... (44) (44) (44)
Non-allowable capital:
Preferred stock in excess of 50% of Tier 1 Capital .... (149) (149) (149)
Intangible assets ...................................... (699) (699) (699)
Goodwill Litigation Asset .............................. (133) (133) (133)
Investment in subsidiaries ............................. (35) (35) (35)
Excess deferred tax assets ............................. (74) (74) (74)
Supplemental capital:
Qualifying subordinated debt ........................... -- -- 108
General loan loss reserves ............................. -- -- 226
Assets required to be deducted:
Land loans with more than 80% LTV ratio ................ -- -- (2)
---------- --------- ------------
Regulatory capital of the Bank .......................... $1,648 $1,648 $1,980
========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
RISK-BASED
CORE -------------------------
CAPITAL TIER 1 TOTAL CAPITAL
RATIO RATIO RATIO
--------- -------- ---------------
<S> <C> <C> <C>
Regulatory capital of the Bank .... 5.50% 9.19% 11.04%
Well-capitalized ratio ............. 5.00% 6.00% 10.00%
--------- -------- ---------------
Excess above well-capitalized ratio 0.50% 3.19% 1.04%
========= ======== ===============
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios was approximately $30.0 billion. Risk-weighted assets used for the
risk-based core and total capital ratios amounted to approximately $17.9
billion.
19
<PAGE>
SUMMARY HISTORICAL FINANCIAL DATA
The summary historical financial data presented under the captions
"Selected Operating Data" and "Selected Financial Data," have been derived
from the Consolidated Financial Statements of Holdings.
The following data should be read in conjunction with the Consolidated
Financial Statements of Holdings and the notes thereto included elsewhere in
this Prospectus. See "Selected Historical Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Holdings."
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
--------------------- ------------------------
1996(1) 1995 1995 1994(2)
---------- --------- ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income ......................................... $934,413 798,166 $1,075,845 $293,139
Interest expense ........................................ 613,283 549,196 734,815 199,845
Net interest income ..................................... 321,130 248,970 341,030 93,294
Provision for loan losses ............................... 29,700 18,000 37,000 6,226
Noninterest income ...................................... 595,461 105,256 150,973 41,158
Noninterest expense ..................................... 379,305 249,828 332,553 96,298
Income before income taxes, extraordinary item and
minority interest ...................................... 507,586 86,398 122,450 31,928
Income tax (benefit) expense (3) ........................ (79,724) 7,429 (57,185) 2,558
Income before extraordinary item and minority interest . 587,310 78,969 179,635 29,370
Extraordinary item--(loss) gain on early extinguishment
of debt, net ........................................... (1,586) 1,967 1,967 1,376
Net income before minority interest ..................... 585,724 80,936 181,602 30,746
Minority interest ....................................... 34,584 25,938 34,584 --
Net income available to common shareholders ............. 551,140 54,998 147,018 30,746
SELECTED PERFORMANCE RATIOS
Return on average assets (4) ............................ 4.53% .74% 1.00% .69%
Return on average common equity (5) ..................... 102.71 21.17 39.33 16.05
Yield on interest-earning assets (6) .................... 7.74 7.65 7.71 6.85
Cost of interest-bearing liabilities (7) ................ 5.16 5.36 5.35 4.83
Net interest margin (8) ................................. 2.65 2.37 2.44 2.18
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, DECEMBER 31,
---------------- ---------------------------
1996 1995 1994(1)
---------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
SELECTED FINANCIAL DATA
Securities available for sale (9) .................. $ 567,933 $ 348,561 $ 45,000
Securities held to maturity (9) .................... 4,277 1,455 411,859
Mortgage-backed securities available for sale (9) . 1,660,140 1,477,514 --
Mortgage-backed securities held to maturity (9) ... 1,700,387 1,524,488 3,153,812
Loans receivable, net .............................. 11,307,216 8,831,018 9,966,886
Covered assets ..................................... -- 39,349 311,603
Total assets ....................................... 16,969,478 14,646,245 14,683,559
Deposits ........................................... 8,799,990 10,241,628 9,196,656
Securities sold under agreements to repurchase .... 2,127,574 969,510 1,883,490
Borrowings ......................................... 4,380,368 2,392,862 2,808,979
Total liabilities .................................. 15,739,223 13,883,099 14,029,957
Minority interest .................................. 309,376 300,730 300,730
Stockholders' equity ............................... 920,879 462,416 352,872
REGULATORY CAPITAL RATIOS OF THE BANK
Tangible capital ................................... 6.71% 5.84% 5.50%
Core capital ....................................... 6.71 5.84 5.50
Risk-based capital:
Core capital ...................................... 10.81 9.14 8.86
Total capital ..................................... 12.93 11.34 11.01
SELECTED OTHER DATA
Number of full service customer facilities ........ 116 160 156
Loans serviced for others (10) ..................... $43,826,250 $28,170,543 $ 7,475,119
Approximate number of employees .................... 3,466 3,619 3,573
Non-performing assets as a percentage of the Bank's
total assets ...................................... 1.36% 1.50% 1.49%
</TABLE>
- --------------
(1) On January 31, 1996, FNMC consummated the LMUSA 1996 Purchase, acquiring a
$14.1 billion loan servicing portfolio. On February 1, 1996, First
Nationwide acquired SFFed, with assets at fair values totalling
approximately $4 billion and liabilities (including deposit liabilities)
with fair values totalling approximately $3.8 billion. During the nine
months ended September 30, 1996, First Nationwide closed the Branch Sales,
with associated deposit accounts totalling $4.6 billion. Noninterest
income for the nine months ended September 30, 1996 includes pre-tax gains
of $363.0 million related to the Branch Sales. Noninterest expense for the
nine months ended September 30, 1996 includes a pre-tax charge of $60.1
million for the Special SAIF Assessment.
(2) 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.
(3) Income tax expense recorded in 1994 after the FN Acquisition represents
federal alternative minimum tax ("AMT") reduced, to the extent of 90%, by
net operating loss carryovers, and state tax of an assumed rate of 8%.
Income tax benefit for the nine months ended September 30, 1996 and in
1995 includes the recognition of a deferred tax benefit of $125 million
and of $69 million, respectively, offset by federal AMT tax reduced, to
the extent of 90%, by net operating loss carryovers and state tax at an
assumed rate of 8%.
(4) Return on average assets represents net income as a percentage of average
assets for the periods presented. For the periods ended September 30, 1996
and 1995, return on average assets is annualized.
(5) Return on average common equity represents net income available to common
stockholders as a percentage of average common equity for the periods
presented. For the periods ended September 30, 1996 and 1995, return on
average common equity is annualized.
(6) Yield on interest-earning assets represents interest income as a
percentage of average interest-earning assets. For the periods ended
September 30, 1996 and 1995, yield on interest-earning assets is
annualized.
(7) Cost of interest-bearing liabilities represents interest expense as a
percentage of average interest-bearing liabilities. For the periods ended
September 30, 1996 and 1995, cost of interest-bearing liabilities is
annualized.
(8) Net interest margin represents net interest income as a percentage of
average interest-earning assets. For the periods ended September 30, 1996
and 1995, net interest margin is annualized.
(9) Fluctuation in securities and mortgage-backed securities held to maturity
and securities and mortgage-backed securities available for sale from
December 31, 1994 to December 31, 1995 resulted from the reclassification
of substantially all securities and mortgage-backed securities (except for
mortgage-backed securities resulting from the securitization with recourse
of certain of the Bank's loans) from held-to-maturity to securities
available for sale.
(10) Includes loans serviced by FNMC, the Bank and FGB Realty (as defined
herein), excluding loans serviced for the Bank by FNMC.
21
<PAGE>
RISK FACTORS
Prospective holders of New Notes should consider carefully all of the
information set forth in this Prospectus and, in particular, should evaluate
the following risks before tendering their Old Notes in the Exchange Offer,
although the risk factors set forth below (other than "--Consequences of
Failure to Exchange and Requirements for Transfer of New Notes") are
generally applicable to the Old Notes as well as the New Notes. This
Prospectus contains certain forward-looking statements and information
relating to the Issuer that are based on the beliefs of management as well as
assumptions made by and information currently available to management. Such
forward looking statements are principally contained in the sections
"Business -- Strategy" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." In addition, in those and other
portions of this document, the words "anticipate," "believe," "estimate,"
"expect," "intends" and similar expressions, as they relate to the Issuer or
the Issuer's management, are intended to identify forward-looking statements.
Such statements reflect the current views of the Issuer with respect to
future events and are subject to certain risks, uncertainties and
assumptions, including the risk factors described in this Prospectus. Should
one or more of these risks or uncertainties materialize, or should underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated or expected. The Issuer
does not intend to update these forward-looking statements.
CONSEQUENCES OF FAILURE TO EXCHANGE AND REQUIREMENTS FOR TRANSFER OF NEW NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuer does not
currently anticipate that it will register Old Notes under the Securities
Act. Based on interpretations by the staff of the SEC, as set forth in
no-action letters issued to third parties, the Issuer believes that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by holders thereof (other
than any such holder which is an "affiliate" of the Issuer within the meaning
of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holders' business and such holders have no arrangement with any person to
participate in the distribution of such New Notes. However, the Issuer does
not intend to request the SEC to consider, and the SEC has not considered,
the Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the SEC would make a similar determination with
respect to the Exchange Offer as in such other circumstances. Each holder,
other than a broker-dealer, must acknowledge that it is not engaged in, and
does not intend to engage in, a distribution of New Notes and has no
arrangement or understanding to participate in a distribution of New Notes.
If any holder is an affiliate of the Issuer, is engaged in or intends to
engage in or has any arrangement or understanding with respect to the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
such holder (i) could not rely on the applicable interpretations of the staff
of the SEC and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Issuer has agreed that, for a
period of 180 days after the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale.
See "Plan of Distribution." However, to comply with the state securities
laws, the New Notes may not be offered or sold in any state unless they have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with. The offer
and sale of the New Notes to "qualified institutional buyers" (as such term
is defined under Rule 144A of the Securities
22
<PAGE>
Act) is generally exempt from registration or qualification under the state
securities laws. The Issuer currently does not intend to register or qualify
the sale of the New Notes in any state where an exemption from registration
or qualification is required and not available. See "The Exchange
Offer--Consequences of Exchanging Old Notes."
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 September
30, 1996, on an unconsolidated basis Holdings had outstanding $340 million of
indebtedness, consisting of the Holdings Senior Notes and the Holdings 9 1/8%
Senior Subordinated Notes. After giving effect to the Cal Fed Acquisition and
the Offering, on an unconsolidated basis Holdings' total indebtedness would
have been $915 million. See "Consolidated Capitalization." The annual
interest payable on the Holdings Senior Notes is $24.5 million, the annual
interest payable on the Holdings 9 1/8% Senior Subordinated Notes is $12.8
million and the annual interest payable on the Notes is $61.1 million. In
addition, the annual cash dividends payable on the Holdings Preferred Stock
are estimated to be $15.0 million and the annual cash dividends payable on
the Capital Corporation Preferred Stock (before tax benefit to the Bank) are
estimated to be $45.6 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 the 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 and its subsidiaries, including
the Subsidiary Preferred Stock, or under applicable federal thrift laws or
regulations. See "Description of Other Indebtedness and Preferred Stock."
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, as the case may be (collectively,
"Bank Junior Stock")) with respect to any Bank Junior Stock or repurchase,
redeem or otherwise acquire, or set apart funds for the repurchase,
redemption or other acquisition of any Bank Junior Stock (including the
common stock held by Holdings) through a sinking fund or otherwise, unless
and until: (i) the Bank has paid full dividends on the 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 terms of the
Capital Corporation Preferred Stock provide that Capital Corporation may not
declare or pay any dividends or other distributions (other than in shares of
common stock of Capital Corporation or other classes of equity securities of
Capital Corporation ranking junior to the Capital Corporation Preferred
Stock, as the case may be (collectively, "Capital Corporation Junior Stock"))
with respect to any Capital Corporation Junior Stock or repurchase, redeem or
otherwise acquire, or set apart funds for the repurchase, redemption or other
acquisition of any Capital Corporation Junior Stock (including the common
stock held by the Bank) through a sinking fund or otherwise, unless and
until: (i) Capital Corporation has paid full dividends on the Capital
Corporation Preferred Stock for the four most recent dividend periods (or
such lesser number of dividend periods during which shares of Capital
Corporation Preferred Stock have been outstanding), or funds have been paid
over to the dividend disbursing agent for payment of such dividends, and (ii)
Capital Corporation has declared a cash dividend on the Capital Corporation
Preferred Stock at the annual dividend rate for the current dividend period,
and sufficient funds have been paid over to the dividend disbursing agent for
the payment of a cash dividend for such current dividend period.
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The federal thrift laws, including the regulations 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 regulatory capital requirements. See "Regulation--Regulation of
Federal Savings Banks--Capital Distribution Regulation." 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. See "Regulation--Regulation of Federal Savings
Banks--Capital Distribution Regulation" and "Business--Dividend Policy."
As of September 30, 1996, First Nationwide met the capital requirements of
a "well capitalized" institution under the FDICIA prompt corrective action
standards. Although management 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 (as defined herein) unless it
received a waiver from the FDIC.
INDEBTEDNESS AND ABILITY TO PAY PRINCIPAL OF THE NOTES
At September 30, 1996, on an unconsolidated basis Holdings had outstanding
$340 million of indebtedness, consisting of the Holdings Senior Notes and the
Holdings 9 1/8% Senior Subordinated Notes, and after giving effect to the Cal
Fed Acquisition and the Offering, on an unconsolidated basis Holdings' total
indebtedness would have been $915 million. See "Consolidated Capitalization."
In addition, subject to the restrictions imposed by the Indenture, the
Holdings 9 1/8% Senior Subordinated Notes Indenture and the Holdings Senior
Notes Indenture, Holdings may incur from time to time additional indebtedness
that is pari passu with, or 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 Holdings Senior Notes Indenture, the Holdings 9 1/8% 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 Subsidiary Preferred Stock
or any other class of preferred stock issued by the Bank and its
subsidiaries, or under applicable federal thrift laws or regulations.
The terms of the Holdings 9 1/8% Senior Subordinated Notes Indenture, the
Holdings Senior Notes Indenture and the Indenture, generally will permit
Holdings to make distributions and other Restricted Payments (as defined
therein) of up to 75% of the consolidated net income of Holdings 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 therein) of the Bank is at least
equal to the Minimum Common Equity Amount (as defined therein). Holdings will
be able to loan funds to its affiliates pursuant to the Holdings 9 1/8%
Senior Subordinated Notes Indenture, the Holdings Senior Notes Indenture and
the Indenture, provided that the Consolidated Common Shareholders' Equity (as
defined therein) of the Bank is at least equal to the Minimum Common Equity
Amount (as defined therein), and
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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 Holdings, whether or not such funds may be distributed
or otherwise paid as a Restricted Payment (as defined therein) pursuant to
the terms of the Holdings 9 1/8% Senior Subordinated Notes Indenture, the
Holdings Senior Notes Indenture or the Indenture. See "Description of the
Notes--Certain Covenants" and "Description of Other Indebtedness and
Preferred Stock." It is currently expected that, after payment of its debt
service and other obligations, the Issuer will make Restricted Payments,
including dividends and distributions, and loans to its affiliates to the
extent permitted by the terms of its debt instruments. 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 SENIOR INDEBTEDNESS AND TO SUBSIDIARY LIABILITIES AND
SUBSIDIARY PREFERRED STOCK
The Notes are subordinate in right of payment to all Senior Indebtedness.
At September 30, 1996, after giving effect to the Cal Fed Acquisition and the
Offering, Holdings would have had outstanding $200 million of Senior
Indebtedness, consisting of the Holdings Senior Notes. The Issuer may not pay
principal of, premium or interest on the Notes, make any deposit pursuant to
defeasance provisions or repurchase, redeem or otherwise retire the Notes if
any Senior Indebtedness is not paid when due or any other default on Senior
Indebtedness occurs and the maturity of such Senior Indebtedness is
accelerated in accordance with its terms unless, in either case, and until
such default has been cured or waived or has ceased to exist, any such
acceleration has been rescinded or such Senior Indebtedness has been
discharged or paid in full. In addition, if a default exists with respect to
certain Senior Indebtedness and certain other conditions are satisfied, the
Issuer may not make any payments on the Notes for a designated period of
time. Upon any payment or distribution of assets of the Issuer upon a total
or partial liquidation, dissolution, reorganization or similar proceeding,
the holders of Senior Indebtedness will be entitled to receive payment in
full before the holders of the Notes are entitled to receive any payment. See
"Description of the Notes--Subordination."
In addition, any right of the Issuer and its creditors, including holders
of the Notes, to participate in the assets of any of Holdings' subsidiaries,
including the Bank and Capital Corporation, 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, after giving effect to the Cal Fed
Acquisition, the Capital Corporation Offering and the Capital Contribution,
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 Capital Corporation, and (ii)
all preferred stock issued by the Issuer's subsidiaries, including the
Subsidiary Preferred Stock. At September 30, 1996, after giving effect to the
Cal Fed Acquisition, the Capital Corporation Offering and the Capital
Contribution, the outstanding interest-bearing liabilities, including
deposits, of such subsidiaries would have been approximately $27.5 billion,
the other liabilities of such subsidiaries, including trade payables and
accrued expenses, would have been approximately $652 million, and there would
have been approximately $973 million aggregate liquidation value of the
Subsidiary Preferred Stock outstanding. In the event of the liquidation or
dissolution of the Bank or Capital Corporation, the holders of the Bank
Preferred Stock or the Capital Corporation Preferred Stock, as the case may
be, will have preference over Holdings, as the holder of all of the common
stock of the Bank, with respect to the assets of the Bank or Capital
Corporation, as the case may be. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation--Holdings--Liquidity."
The ability of the Issuer to repurchase the Notes as a result of the
occurrence of a Change of Control Put Event will be subject to the ability of
the Issuer to make restricted payments at that time under the Holdings Senior
Notes Indenture and the Holdings 9 1/8% Senior Subordinated Notes Indenture.
Accordingly, the repurchase of the Notes, if not permitted by the Holdings
Senior Notes Indenture, could create an event of default under the Holdings
Senior Notes Indenture as a result of which any repurchase
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would, absent a waiver, be blocked by the subordination provisions of the
Indenture. See "Description of the Notes--Subordination." Failure of Holdings
to repurchase the Notes when required could result in an Event of Default
with respect to the Notes whether or not such repurchase is permitted by the
subordination provisions.
RESTRICTIONS IMPOSED BY TERMS OF THE ISSUER'S INDEBTEDNESS; CONSEQUENCES OF
FAILURE TO COMPLY
The terms and conditions of the Indenture, the Holdings 9 1/8% Senior
Subordinated Notes Indenture and the Holdings Senior 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,"
"Business--Holdings--Sources of Funds" 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. See "Business
Strategy." The continued implementation of any of management's strategies is
subject to numerous contingencies beyond management's control. These
contingencies include general and regional economic conditions, competition
and changes in regulation and interest rates. Accordingly, no assurance can
be given that any of these strategies will prove to be effective or that
management's goals will be achieved.
ECONOMIC CONDITIONS
The Bank's loan portfolio is concentrated in California. As a result, the
financial condition of the Bank will be subject to general economic
conditions and, in particular, to conditions in the California residential
real estate market. Due to the slow recovery of the economy, particularly in
California's market for real estate, the Bank may find it difficult to
originate a sufficient volume of high-quality residential mortgage loans or
maintain its asset quality, either of which could negatively impact future
performance. In addition, any downturn in the economy generally, and in
California in particular, could further reduce real estate values and the
volume of mortgages originated. Real estate values in California could also
be affected by earthquakes.
INTEREST RATE RISK AND CREDIT RISK
It is expected that the Bank will continue to realize income primarily
from the differential or "spread" between the interest earned on loans,
securities and other interest-earnings assets, and interest paid on deposits,
borrowings and other interest-bearing liabilities. Net interest spreads are
affected by the difference between the maturities and repricing
characteristics of interest-earning assets and interest-bearing liabilities.
In addition, loan volume and yields are affected by market interest rates on
loans, and rising interest rates generally are associated with a lower volume
of loan originations. It is expected that a substantial majority of the
Bank's assets will continue to be indexed to changes in market interest rates
and a substantial majority of its liabilities will continue to be short term,
which will mitigate the negative effect of a decline in yield on its assets.
At September 30, 1996, First Nationwide had $12.2 billion in assets indexed
to changes in market rates and $12.9 billion in liabilities maturing or
repricing within one year. At September 30, 1996, after giving effect to the
Cal Fed Acquisition, the Capital Corporation Offering
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and the Capital Contribution, the Bank would have had $22.7 billion in assets
indexed to changes in market rates and $22.1 billion in liabilities maturing
or repricing within one year. In addition, the lag in implementation
repricing terms on the Bank's adjustable rate assets may result in a decline
in net interest income in a rising interest rate environment. There can be no
assurance that the Bank's interest rate risk will be minimized or eliminated.
In addition, an increase in the general level of interest rates may adversely
affect the ability of certain borrowers to pay the interest on and prinicipal
of their obligations. Accordingly, changes in levels of market interest rates
could materially adversely affect the Bank's net interest spread, asset
quality, loan origination volume and overall results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Asset and Liability Management."
Securities owned by the Bank are accounted for financial reporting
purposes in accordance with Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." On November 15, 1995, the Financial Accounting Standards Board
("FASB") issued a special report, "A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities" (the
"Special Report"). The Special Report provided all entities a one-time
opportunity to reassess their ability and intent to hold securities to
maturity and allowed a one-time reclassification of securities from
held-to-maturity to securities available-for-sale without "tainting" the
remaining held-to-maturity securities. On December 29, 1995, First Nationwide
reclassified $1.5 billion and $231.8 million in carrying value of
mortgage-backed securities and U.S. government and agency securities,
respectively, from the held-to-maturity to the available-for-sale portfolio,
resulting in a net after-tax increase of $22.5 million in stockholders'
equity. If the market value of these securities and mortgage-backed
securities is subsequently less than the carrying value, there will be a
negative impact on consolidated stockholders' equity for financial reporting
purposes; however, there will be no impact on the Bank's regulatory capital
because, by definition, the SFAS No. 115 equity component is not included in
regulatory capital.
ASSET QUALITY; SATISFACTION OF OBLIGATIONS OF GRANITE, OLD FNB AND FORD MOTOR
In the several years preceding the FN Acquisition, the FNB Acquired
Business had experienced losses stemming from increases in non-performing
assets. While the Bank may also experience such losses, management believes
that the risk that the Bank will suffer future adverse effects from any
additional deterioration of the portfolio acquired from Old FNB is minimized
by the disposition by Old FNB of non-performing assets prior to the FN
Acquisition, the retention by Old FNB of certain assets, principally
non-performing or other problem assets (with a net book value of
approximately $441 million at September 30, 1994), and the right of First
Nationwide pursuant to the Put Agreement to sell Granite up to $500 million
of certain assets, primarily multi-family and commercial real estate loans
and residential mortgage loans with an original principal balance greater
than $250,000 (the "Putable Assets"), which were primarily non-performing,
through November 30, 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 September 30, 1996,
the remaining available balance under the Put Agreement was approximately
$70.5 million, which First Nationwide fully utilized on December 5, 1996. Of
the approximately $228 million in non-performing assets at September 30,
1996, approximately $17.3 million were eligible to be sold to Granite under
the Put Agreement.
Since First Nationwide had not required Granite to purchase $500 million
of non-performing assets as of November 30, 1996, it had the right to require
Granite to purchase any qualifying Putable Assets of First Nationwide, other
than assets which previously became Putable Assets and which First Nationwide
did not require Granite to purchase, up to such $500 million maximum.
The Put Agreement did not protect the Bank from losses: (i) on the assets
not covered by the Put Agreement or the assets covered by the Put Agreement
in excess of the coverage limits described above, (ii) on the assets owned by
First Nationwide prior to the FN Acquisition, (iii) on the Putable Assets
which become non-performing and which First Nationwide did not require
Granite to purchase prior to the expiration of its rights under the Put
Agreement, (iv) on the assets acquired following the FN Acquisition or (v)
incurred after November 30, 1996. There can be no assurance that the Bank
will not experience losses from non-performing assets.
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Pursuant to the Asset Purchase Agreement, Old FNB has agreed to indemnify
the Bank from certain breaches of representations, warranties and covenants.
Although the Bank believes that the obligations of Old FNB under the Asset
Purchase Agreement are enforceable against Old FNB, and that Old FNB will
have the ability to satisfy its obligations under such provisions, there can
be no assurance that a court will enforce such provisions or that Old FNB
will have the ability to satisfy their respective obligations. Ford Motor has
guaranteed the obligations of Old FNB under the Asset Purchase Agreement.
MORTGAGE PORTFOLIO AND MSRS
At September 30, 1996, First Nationwide held a 1-4 unit residential
mortgage loan portfolio of approximately $6.3 billion, and MSRs on a 1-4 unit
residential loan portfolio totalling approximately $42.7 billion. First
Nationwide's MSRs had a book value of $406.7 million at September 30, 1996.
After giving effect to the Cal Fed Acquisition, at September 30, 1996, the
Bank would have held a 1-4 unit residential mortgage loan portfolio of
approximately $14.6 billion, MSRs on a 1-4 unit residential loan portfolio
totalling approximately $46.2 billion and the Bank's MSRs would have had a
book value of $438.9 million. A decline in long-term interest rates generally
results in an acceleration in mortgage loan prepayments, and higher than
anticipated levels of prepayments generally cause the accelerated
amortization of MSRs and generally will result in reductions in the market
value of the MSRs and in the Bank's servicing fee income. There can be no
assurance that long-term interest rates will not decline and the rate of
mortgage loan prepayments will not exceed management's estimates, resulting
in a charge to earnings in the period of adjustment and reductions in the
market value of the MSRs and in loan servicing fee income, or that management
will be able to reinvest the cash from mortgage loan prepayments in assets
earning yields comparable to the yields on the prepaid mortgages.
COMPETITION
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money
market mutual funds and brokerage firms in attracting and retaining deposits.
Competition for deposits from large commercial banks is particularly strong.
Many of the nation's thrift institutions and many large commercial banks have
a significant number of branch offices in the areas in which the Bank
operates.
In addition, there is strong competition in originating and purchasing
real estate and consumer loans, principally from other savings and loan
associations, commercial banks, mortgage banking companies, insurance
companies, consumer finance companies, pension funds and commercial finance
companies. The primary factors in competing for loans are the quality and
extent of service to borrowers and brokers, economic factors such as interest
rates, interest rate caps, rate adjustment provisions, loan maturities,
loan-to-value ("LTV") ratios, loan fees, and the amount of time it takes to
process a loan from receipt of the loan application to date of funding. The
Bank's future performance is dependent on its ability to originate a
sufficient volume of mortgage loans in its local market areas and through its
wholesale network and, if it is unable to originate a sufficient volume of
mortgage loans, to purchase a sufficient quantity of high-quality
mortgage-backed securities with adequate yields. There can be no assurance
that the Bank will be able to effect such actions on satisfactory terms.
REGULATION
The financial institutions industry is subject to extensive regulation,
which materially affects the business of the Issuer and the Bank. Statutes
and regulations to which the Bank and its parent companies are subject may be
changed at any time, and the interpretation of these statutes and regulations
is also subject to change. There can be no assurance that future changes in
such statutes and regulations or in their interpretation will not adversely
affect the business of the Issuer and the Bank.
TAX SHARING AGREEMENT; AVAILABILITY OF NET OPERATING LOSS CARRYOVERS
The Bank, Holdings and Mafco Holdings have entered into a tax sharing
agreement (the "Tax Sharing Agreement") effective as of January 1, 1994,
pursuant to which: (i) the Bank will pay to Holdings
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amounts equal to the taxes that the Bank would be required to pay if it were
to file a return separately from the affiliated group of which Mafco Holdings
is the common parent (the "Mafco Group"), and (ii) Holdings will pay to Mafco
Holdings amounts equal to the taxes that Holdings would be required to pay if
it were to file a consolidated return on behalf of itself and the Bank
separately from the Mafco Group. The Tax Sharing Agreement allows the Bank to
take into account, in determing its liability to Holdings, any net operating
loss carryovers that it would have been entitled to utilize if it had filed
separate returns for each year since the formation of First Nationwide. The
Tax Sharing Agreement also allows Holdings to take into account in
determining its liability to Mafco Holdings, any net operating losses that it
would have been entitled to utilize if it had filed a consolidated return on
behalf of itself and the Bank for each year since the formation of First
Nationwide. Accordingly, pursuant to the Tax Sharing Agreement, the benefits
of any net operating losses generated by First Nationwide since its formation
are retained by the Bank and Holdings.
First Nationwide generated significant federal income tax net operating
losses since it was organized in December 1988. This was due, in part, to the
fact that under applicable federal income tax law, certain financial
assistance received by First Nationwide pursuant to the Assistance Agreement
was excluded from the taxable income of First Nationwide. In addition to such
tax-free financial assistance, First Nationwide had been entitled to its
normal operating deductions, including interest expense and certain losses
relating to its loan portfolio. As a result, First Nationwide generated
significant net operating losses for federal income tax purposes even though
its operations were profitable. Furthermore, under the reorganization
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
First Nationwide succeeded to certain net operating loss carryovers of the
Texas Closed Banks.
At December 31, 1995, if Holdings would have filed a consolidated tax
return on behalf of itself (as common parent) and First Nationwide for each
year since the formation of First Nationwide, it would have had approximately
$2.6 billion of regular net operating losses and approximately $992 million
of AMT net operating losses, both of which Holdings 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 Holdings will be able to eliminate through 1997 a
significant portion of the amounts that they otherwise would be required to
pay to Holdings and Mafco Holdings, respectively, under the Tax Sharing
Agreement in respect of federal income tax and, accordingly, it is not
expected that the Bank or Holdings will record significant amounts of federal
income tax expense through 1997 as members of the Mafco Group. Payments made
by Holdings 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. During 1998, the Bank and Holdings anticipate that the AMT
net operating losses will be fully utilized and the Bank and Holdings will
begin providing federal income tax expense at a rate of 20 percent. Prior to
1998, the Bank and Holdings provided federal income tax expense at a 2
percent rate because 90 percent of AMT net operating losses were available to
offset AMT income.
If for any reason the Bank and Holdings were to deconsolidate from the
Mafco Group, only the amount of the net operating loss carryovers of the Bank
and Holdings not already utilized by the Mafco Group would be available to
offset the taxable income of the Bank and Holdings. If the Bank and Holdings
had deconsolidated as of December 31, 1995, the Bank and Holdings would have
had approximately $1.1 billion of regular net operating loss carryforwards.
If for any reason the Bank were to deconsolidate from Holdings with Holdings
remaining a member of the Mafco Group, the net operating losses of the Bank
not already utilized by the Mafco Group would be available to offset the
taxable income of the Bank subsequent to the date of deconsolidation, but
would no longer be available to offset the taxable income of Holdings
subsequent to the date of deconsolidation. If the Bank had deconsolidated as
of December 31, 1995, the Bank would have had approximately $1.0 billion of
regular net operating loss carryforwards. It cannot be predicted to what
extent the Mafco Group will utilize the net operating losses of Holdings
and/or the Bank in the future or the amount, if any, of net operating loss
carryforwards that Holdings or the Bank may have upon deconsolidation. The
net operating loss carryovers are subject to review and potential
disallowance, in whole or in part, by the Internal Revenue Service (the
"IRS"). Any disallowance of the Bank's net operating loss carryovers may
increase the amounts that the Bank would
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be required to pay to Holdings under the Tax Sharing Agreement and that
Holdings would be required to pay to Mafco Holdings and would therefore
decrease the earnings of the Bank available for dividends on the Bank
Preferred Stock. See "Certain Transactions--Tax Sharing Agreement."
TAX EFFECTS OF DIVIDEND PAYMENTS BY THE BANK
Dividend distributions made to Holdings, as the sole owner of the Bank's
Common Stock, and to holders of the 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 Holdings under the
Tax Sharing Agreement. As a result, Holdings may be required to make payments
to Mafco Holdings under the Tax Sharing Agreement if Holdings has
insufficient expenses and losses to offset such income.
TAXATION OF THE BANK
As a result of the Small Business Job Protection Act of 1996, which
provided for the repeal of the Section 593 reserve method of accounting for
bad debts by thrift institutions which are treated as large banks, the Bank
will generally be required to take into income the balance of its post-1987
bad debt reserves over a six year period beginning in 1996 subject to a two
year deferral if certain residential loan tests are satisfied. Consequently,
the Bank may be required to make payments to Holdings under the Tax Sharing
Agreement if the Bank has insufficient expenses and losses to offset such
income. As of December 31, 1995, First Nationwide had tax bad debt reserves
totaling $203 million, all of which is subject to recapture into income and
has been provided for in deferred tax liabilities. Additionally, as of
December 31, 1995, Cal Fed and SFFed had tax bad reserves of $196 million and
$25 million, respectively, of which $73 million and $1 million is post-1987
bad debt reserves subject to recapture into income.
LACK OF A PUBLIC MARKET FOR THE NOTES
The New Notes are being offered to the holders of the Old Notes. The Old
Notes were issued on September 19, 1996 to a small number of institutional
investors and are eligible for trading in the Private Offering, Resale and
Trading through Automated Linkages (PORTAL) Market, the National Association
of Securities Dealers' screenbased, automated market for trading of
securities eligible for resale under Rule 144A. To the extent that Old Notes
are tendered and accepted in the Exchange Offer, the trading market for the
remaining untendered Old Notes could be adversely affected. There is no
existing trading market for the New Notes, and there can be no assurance
regarding the future development of a market for the New Notes, or the
ability of holders of the New Notes to sell their New Notes or the price at
which such holders may be able to sell their New Notes. Although the Initial
Purchasers have informed the Issuer that they currently intend to make a
market in the New Notes, they are not obligated to do so and any such market
making may be discontinued at any time without notice. As a result, the
market price of the New Notes could be adversely affected. The Issuer does
not intend to apply for listing or quotation of the New Notes on any
securities exchange or stock market.
CONTROL BY MACANDREWS & FORBES
The Issuer is 80% indirectly owned through MacAndrews & Forbes by Ronald
O. Perelman and 20% indirectly owned by Hunter's Glen, a limited partnership
controlled by Gerald J. Ford, the Chairman of the Board, Chief Executive
Officer and a director of the Bank. Parent Holdings owns 100% of the class A
common stock of the Issuer, representing 80% of its voting common stock
(representing approximately 85% of the voting power of its voting common
stock) and Hunter's Glen owns 100% of the class B common stock of the Issuer,
representing 20% of its voting common stock (representing approximately 15%
of the voting power of its common stock). See "Ownership of the Common Stock"
and "Certain Transactions--Transactions with Mr. Ford." As a result,
MacAndrews & Forbes will be able to direct and control the policies of the
Issuer and its subsidiaries, including mergers, sales of assets and similar
transactions. See "Certain Transactions--Relationship with MacAndrews &
Forbes."
30
<PAGE>
STRATEGIC ACQUISITIONS AND DISPOSITIONS
First Nationwide's total consolidated assets have grown from $924 million
as of September 30, 1994, immediately prior to the FN Acquisition, to
approximately $16.8 billion at September 30, 1996 on an historical basis and,
after giving effect to the Cal Fed Acquisition, the Capital Corporation
Offering and the Capital Contribution, the Bank's total consolidated assets
would be approximately $31.0 billion. The current composition of First
Nationwide's assets and operations resulted principally from certain of the
acquisitions and dispositions described below. The FN Acquisition laid the
foundation for the Bank's current strategy, the implementation of which is
reflected in subsequent acquisitions and dispositions. See
"Business--Business Strategy."
THE CAL FED ACQUISITION
The Cal Fed Acquisition
On July 27, 1996, Holdings entered in the Merger Agreement with Cal Fed
and California Federal, pursuant to which on January 3, 1997 Holdings
acquired Cal Fed and California Federal. At September 30, 1996, California
Federal had approximately $14.1 billion in assets and $8.8 billion in
deposits and operated 118 branches in California and Nevada. Under the Merger
Agreement, each share of Cal Fed common stock outstanding at the effective
time of the merger (other than shares for which dissenter's rights are
perfected, shares held directly or indirectly by Holdings and shares held as
treasury stock) was converted into and became the right to receive a cash
payment of $23.50 and one-tenth of one Secondary Litigation Interest. See
"Business--Sources of Funds--Cal Fed Contingent Litigation Recovery
Participation Interests." The holders of options or warrants to purchase the
common stock of Cal Fed received for each share subject to such options or
warrants the difference between $23.50 and the applicable per share option
price, one-tenth of one Secondary Litigation Interest and, in certain
circumstances, one-tenth of one Litigation Interest (as defined herein). No
fractional Secondary Litigation Interests were issued in the merger. The
Merger Agreement was amended and restated as of September 20, 1996 to (i)
make CFB Holdings, Inc., a wholly owned subsidiary of Holdings, a party to
the Merger Agreement and (ii) amend the provisions relating to fractional
Secondary Litigation Interests. Pursuant to such amendment and restatement,
the stockholders of Cal Fed who would otherwise receive fractional interests
shall not be entitled to receive fractional interests. Such stockholders are
expected to receive their ratable share of the aggregate net cash proceeds
obtained (after deducting certain selling expenses) from aggregating the
fractional interests into the nearest whole number of Secondary Litigation
Interests and selling such Secondary Litigation Interests on the open market.
The aggregate cash consideration paid under the Merger Agreement was
approximately $1.2 billion.
Upon consummation of the Cal Fed Acquisition, Holdings contributed the
capital stock of Cal Fed to First Nationwide. Cal Fed was liquidated and
First Nationwide merged with California Federal, with California Federal
being the surviving bank. In connection with the merger of California Federal
with First Nationwide, each share of the 11 1/2% Noncumulative Perpetual
Preferred Stock of First Nationwide was converted into and became one share
of 11 1/2% Bank Preferred Stock of the surviving bank, California Federal,
which 11 1/2% Bank Preferred Stock has the same relative rights, terms and
preferences as the 11 1/2% Noncumulative Perpetual Preferred Stock issued by
First Nationwide. All references in this Prospectus to the 11 1/2% Bank
Preferred Stock for the period preceding consummation of the Cal Fed
Acquisition will be deemed references to the comparable preferred stock
issued by First Nationwide.
After giving effect to the Cal Fed Acquisition, the Capital Corporation
Offering and the Capital Contribution, at September 30, 1996, the Bank would
have had approximately $31.0 billion in assets, approximately $17.6 billion
in deposits, would have operated approximately 227 branches and would have
ranked at such date as the fourth largest thrift in the United States in
terms of assets, based on published sources. As a result of the Cal Fed
Acquisition, the Bank gained a substantial presence in Southern California.
In order to realize economies of scale and cost reduction opportunities
presented by the Cal Fed Acquisition, the Bank plans to consolidate or
eliminate duplicative back office operations and administrative and
management functions as soon as practicable. The Bank presently estimates
that it will save approximately $74 million in noninterest expense during the
first twelve months of operations following the Cal Fed Acquisition as
compared to operating Cal Fed on a stand-alone basis. In connection with the
Cal Fed Acquisition and the consolidation of Cal Fed's operations with those
of First Nationwide, the Bank expects to capitalize acquisition costs
totalling approximately $110 million.
31
<PAGE>
Holdings financed the Cal Fed Acquisition with (i) the net proceeds of
approximately $555 million from the issuance of the Old Notes, (ii) an
investment by Special Purpose Corp. of $145 million in exchange for the
Holdings Preferred Stock and (iii) existing cash. The net proceeds from the
Old Notes and the Holdings Preferred Stock were contributed to First
Nationwide as the Capital Contribution prior to the Cal Fed Acquisition.
As a result of the Cal Fed Acquisition, the Bank is obligated with respect
to the following outstanding securities of California Federal (in addition to
the outstanding securities of First Nationwide): (i) $50 million of 10.668%
Senior Subordinated Notes due 1998 (the "Cal Fed Senior Subordinated Notes"),
(ii) $2.7 million of 6 1/2% Convertible Subordinated Debentures Due 2001 (the
"Cal Fed 6 1/2% Convertible Subordinated Debentures"), (iii) $4.3 million of
10% Subordinated Debentures Due 2003 (the "Cal Fed 10% Subordinated
Debentures") and (iv) the 10 5/8% Bank Preferred Stock with liquidation value
of $172.5 million. See "Business--Holdings--Sources of Funds" and
"Business--Cal Fed--Sources of Funds."
OTHER ACQUISITIONS
The Home Federal Acquisition
On June 1, 1996, First Nationwide consummated the Home Federal
Acquisition, pursuant to which First Nationwide acquired HFFC and its wholly
owned federally chartered savings association subsidiary, Home Federal, which
had approximately $717 million in assets and $632 million in deposits and
operated 15 branches in the Northern California area. The aggregate
consideration paid in connection with the Home Federal Acquisition was
approximately $67.8 million. First Nationwide financed the Home Federal
Acquisition with existing cash.
The SFFed Acquisition
On February 1, 1996, First Nationwide consummated the SFFed Acquisition
pursuant to which First Nationwide acquired SFFed and its wholly owned
federal savings association subsidiary, San Francisco Federal. The aggregate
consideration paid in the SFFed Acquisition was approximately $264 million.
San Francisco Federal operated 35 branches in the Northern California area,
and as a result of the SFFed Acquisition and the related consolidation of
branches, the number of First Nationwide's retail branches in Northern
California increased to 63. On February 1, 1996, San Francisco Federal had
approximately $4.0 billion in assets and approximately $2.7 billion in
deposits.
First Nationwide financed the SFFed Acquisition with existing cash and
other borrowings, some of which were repaid with the $311.8 million of
proceeds from the sale of consumer loans on February 23, 1996.
In connection with the SFFed Acquisition, First Nationwide assumed $50
million of 11.20% Senior Notes issued by SFFed in September 1994 (the "SFFed
Notes"). See "Business--Holdings--Sources of Funds--SFFed Notes."
The LMUSA Purchases
On October 2, 1995, FNMC purchased from LMUSA in the LMUSA 1995 Purchase a
loan servicing portfolio of approximately $11.1 billion (including $3.1
billion of MSRs that are owned by third parties who have subcontracted to
FNMC the servicing function (a "subservicing portfolio")), a master servicing
portfolio of $2.9 billion and other assets, principally existing loans and
loan production operations of LMUSA, for $100 million, payable in
installments, and the assumption of certain indebtedness relating to the
acquired loan portfolio. On January 31, 1996, FNMC purchased in the LMUSA
1996 Purchase LMUSA's remaining $14.1 billion loan servicing portfolio
(including a subservicing portfolio of $2.4 billion), a master servicing
portfolio of $2.7 billion, its real estate acquired through loan foreclosures
in connection with its servicing operations and its trade names for $160.0
million (as adjusted pursuant to the terms of the agreement) payable in
installments and subject to certain adjustments, and the assumption of
certain of LMUSA's obligations secured by its mortgage servicing operations.
32
<PAGE>
The Branch Purchases
In April 1995, First Nationwide consummated the Tiburon Purchase in which
it acquired approximately $13 million in deposits located in Tiburon,
California from East-West Federal Bank, a federal savings bank. In August
1995, First Nationwide consummated the ITT Purchase in which it acquired
three retail branches located in Orange County, California with deposit
accounts totalling approximately $356 million from ITT Federal Bank, fsb. On
December 8, 1995, First Nationwide consummated the Sonoma Purchase in which
it acquired four retail branches located in Sonoma County, California with
associated deposit accounts of approximately $144 million from Citizens
Federal Bank, a Federal Savings Bank. The weighted average deposit premium
paid in connection with the Branch Purchases was 3.78%.
The Maryland Acquisition
In December 1994, FNMC entered into a series of agreements with the
Resolution Trust Corporation as conservator for Standard Federal Savings
Association, America's Mortgage Servicing, Inc., A Mortgage Company,
America's Lending Network, Inc., and StanFed Financial Services, Inc.
(collectively, "StanFed"), of Frederick, Maryland, to acquire certain of
StanFed's mortgage servicing assets and assume certain of StanFed's mortgage
servicing liabilities for approximately $178 million. As a result of the
Maryland Acquisition, FNMC acquired a 1-4 unit residential mortgage loan
servicing portfolio of approximately $11.4 billion (including a sub-servicing
portfolio of $1.8 billion) and certain other assets and liabilities. The
transaction was consummated on February 28, 1995. In connection with the
Maryland Acquisition, FNMC has moved its mortgage servicing operations to
Maryland from its former location in Sacramento, California. Costs totalling
$5.7 million associated with such consolidation are included in noninterest
expense in Holdings' consolidated statement of operations for the year ended
December 31, 1995.
In April 1995, First Nationwide closed substantially all of its retail
loan production offices. Costs associated with closures of approximately $2.1
million are included in noninterest expense in Holdings' consolidated
statement of operations for the year ended December 31, 1995.
The FN Acquisition
On April 14, 1994, First Nationwide entered into the Asset Purchase
Agreement with Old FNB, an indirect subsidiary of Ford Motor, pursuant to
which, on October 3, 1994, effective immediately after the close of business
on September 30, 1994, First Nationwide purchased the FNB Acquired Business
for $726.5 million. Effective on October 1, 1994, First Nationwide changed
its name from "First Madison Bank, FSB" to "First Nationwide Bank, A Federal
Savings Bank."
First Nationwide financed the FN Acquisition and paid related fees and
expenses with: (i) a capital contribution by Holdings funded with the net
proceeds of (a) the issuance of the Holdings Senior Notes and (b) the
issuance of Holdings' class C common stock to Parent Holdings (all of which
class C common stock was redeemed on June 3, 1996), (ii) the net proceeds
from the issuance of the 11 1/2% Bank Preferred Stock, and (iii) existing
cash and proceeds from securities sold under agreements to repurchase. See
"Certain Transactions."
33
<PAGE>
DISPOSITIONS
The Branch Sales
From January through June of 1996, First Nationwide consummated the Branch
Sales in the following transactions:
<TABLE>
<CAPTION>
CARRYING VALUE AT
SALE RESPECTIVE SALE DATE
CONSUMMATION NUMBER OF ----------------------- PRE-TAX
BRANCH LOCATION DATE BRANCHES SOLD DEPOSITS ASSETS GAIN
- --------------- -------------- --------------- ------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New York 1/12/96 7 $ 416,476 $ 5,997 $ 32,991
Ohio 1/19/96 28 1,392,561 20,480 130,660
New York 2/23/96 3 270,046 1,838 17,027
New York 3/15/96 5 615,572 8,083 48,933
New Jersey 3/22/96 4 501,262 6,396 35,938
New York 3/22/96 11 637,045 9,465 41,286
Michigan 6/28/96 21 799,226 15,060 56,177
--------------- ------------ --------- ---------
Total 79 $4,632,188 $67,319 $363,012
=============== ============ ========= =========
</TABLE>
The Branch Sales resulted in gains of approximately $363.0 million on a
pre-tax basis through September 30, 1996, which represented an average
premium of 7.96% of the approximately $4.6 billion of deposits sold. The
gains from the Branch Sales were used, as necessary, to augment First
Nationwide's regulatory capital to maintain its "well capitalized" status
after the SFFed Acquisition.
The Illinois Sale
On October 7, 1994, First Nationwide sold (the "Illinois Sale") the FNB
Acquired Business' branch network located in Illinois consisting of 26
branches with approximately $1.2 billion in deposits to Household Bank,
f.s.b. The $89 million deposit premium received by First Nationwide was
treated as a reduction of intangible assets related to the FN Acquisition.
California Federal Preferred Capital Corporation
In November 1996, First Nationwide established Capital Corporation for the
purpose of acquiring, holding and managing real estate mortgage assets. All
of Capital Corporation's common stock is owned by the Bank. It is expected
that substantially all of Capital Corporation's mortgage assets will be
acquired from the Bank and affiliates of the Bank. Capital Corporation has
entered into a servicing agreement with FNMC pursuant to which FNMC will
service Capital Corporation's mortgage assets. On January 31, 1997, Capital
Corporation consummated the offering of 20,000,000 shares of the Capital
Corporation Preferred Stock in the Capital Corporation Offering and received
proceeds therefrom of approximately $484.3 million (net of underwriting
discounts).
USE OF PROCEEDS
The Issuer will not receive any proceeds from the Exchange Offer. The net
proceeds of the Offering, which were approximately $555 million, were used
together with an investment by Special Purpose Corp. in exchange for the
Holdings Preferred Stock and existing cash, to finance the Cal Fed
Acquisition.
34
<PAGE>
CONSOLIDATED CAPITALIZATION
The following table sets forth the actual consolidated capitalization of
Holdings at September 30, 1996 and the capitalization of Holdings on a
consolidated basis at such date as adjusted to give effect to the Cal Fed
Acquisition, the issuance of the Notes and the Capital Corporation Offering.
The following table should be read in conjunction with the Consolidated
Financial Statements of Holdings and the notes thereto, "Pro Forma Financial
Data" and the Unaudited Pro Forma Financial Data included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
CONSOLIDATED
CAPITALIZATION
OF HOLDINGS,
HOLDINGS ADJUSTMENTS AS ADJUSTED
-------------- --------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Deposits .................................................... $8,799,990 $ 8,766,839 (a) $17,566,829
============== =============== ==============
Borrowings:
Securities sold under agreements to repurchase ............ $2,127,574 $ 962,700 (a) $ 2,607,624
(482,650)(b)
Other borrowings (primarily FHLB advances) ................. 3,943,696(c) 3,282,357 (a) 7,226,053
-------------- --------------- --------------
Total .................................................... $6,071,270 $ 3,762,407 $ 9,833,677
============== =============== ==============
Long-term notes:
Notes ...................................................... $ -- $ 575,000 (d) $ 575,000
Holdings Senior Notes ...................................... 200,000 -- 200,000
Holdings 9 1/8% Senior Subordinated Notes .................. 140,000 -- 140,000
Old FNB Debentures ......................................... 89,831 -- 89,831
SFFed Notes ................................................ 6,841 -- 6,841
Cal Fed 10.668% Subordinated Notes ......................... -- 50,000 (e) 50,000
Cal Fed 10% Subordinated Debentures ........................ -- 4,300 (e) 4,300
Cal Fed 6 1/2% Convertible Subordinated Debentures ........ -- 2,700 (e) 2,700
-------------- --------------- --------------
Total long-term notes .................................... $ 436,672 $ 632,000 $ 1,068,672
-------------- --------------- --------------
Minority interest ........................................... $ 309,376 $ 172,500 (a) $ 981,876
-------------- --------------- --------------
$ 500,000 (f)
Stockholders' equity:
As adjusted:
Holdings Preferred Stock (par value $1.00 per share;
10,000 shares authorized; no shares issued and
outstanding actual, 10,000 shares issued and outstanding
as adjusted) ............................................. $ 150,000 $ -- $ 150,000
Class A common stock (par value $1.00 per share; 800
shares authorized, 800 shares issued and outstanding) ... 1 -- 1
Class B common stock (par value $1.00 per share; 200
shares authorized, 200 shares issued and outstanding) ... -- -- --
Additional paid-in capital ................................ 47,752 (17,350) (f) 30,402
Net unrealized holding gain on securities available for
sale ..................................................... 35,087 -- 35,087
Retained earnings ......................................... 688,039 -- 688,039
-------------- --------------- --------------
Total stockholders' equity ............................... 920,879 (17,350) 903,529
-------------- --------------- --------------
Total capitalization ........................................ $1,666,927 $ 1,287,150 $ 2,954,077
============== =============== ==============
</TABLE>
- --------------
(a) Represents deposits, borrowed funds (including accrued interest payable on
all borrowings) and minority interest of Cal Fed to be assumed by Holdings
at their approximate respective fair values at September 30, 1996.
(b) Includes accrued interest payable with respect to the Holdings Senior
Notes and the Holdings 9 1/8% Senior Subordinated Notes.
(c) Represents utilization of proceeds from the issuance of the Capital
Corporation Preferred Stock.
(d) Represents the assumption of the Notes by Holdings.
(e) Represents long-term notes of Cal Fed to be assumed by Holdings at their
approximate respective fair values at September 30, 1996, excluding
accrued interest payable.
(f) Represents the issuance of the Capital Corporation Preferred Stock and
related issuance costs.
35
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data gives effect to the Acquisitions,
the Branch Sales, the Capital Corporation Offering and the issuances of the
Holdings Preferred Stock, the Holdings 9 1/8% Senior Subordinated Notes and
the Notes. The Branch Purchases and the Home Federal Acquisition have not
been reflected in the pro forma financial data because such transactions are
not material either individually or in the aggregate.
The following pro forma financial data as of and for the nine months ended
September 30, 1996 are based on (i) the historical consolidated statement of
financial condition of Holdings giving effect to the Cal Fed Acquisition, the
issuance of the Notes and the Capital Corporation Offering as if such
transactions occurred on September 30, 1996, and (ii) the historical
consolidated statement of operations of Holdings for the nine months ended
September 30, 1996 giving effect to the Cal Fed Acquisition, the SFFed
Acquisition, the LMUSA 1996 Purchase, the Branch Sales, the Capital
Corporation Offering and the issuances of the Holdings Preferred Stock, the
Holdings 9 1/8% Senior Subordinated Notes and the Notes as if such
transactions occurred on January 1, 1995. The following pro forma financial
data for the year ended December 31, 1995 is based on the historical
consolidated statement of operations of Holdings for the year ended December
31, 1995 giving effect to the Acquisitions, the Branch Sales, the Capital
Corporation Offering and the issuances of the Holdings Preferred Stock, the
Holdings 9 1/8% Senior Subordinated Notes and the Notes as if such
transactions occurred on January 1, 1995. The pro forma adjustments are based
on available information and upon certain assumptions that management
believes are reasonable under the circumstances. The Acquisitions are
accounted for under the purchase method of accounting. Under this method of
accounting, the purchase price has been allocated to the assets and
liabilities acquired based on preliminary estimates of fair value. The actual
fair value is determined as of the consummation of each of the Acquisitions.
The pro forma financial data do not necessarily reflect the results of
operations or the financial position of Holdings that actually would have
resulted had the Acquisitions, the Branch Sales, the Capital Corporation
Offering and the issuances of the Holdings Preferred Stock, the Holdings 9
1/8% Senior Subordinated Notes and the Notes occurred at the dates indicated,
or project the results of operations or financial position of Holdings for
any future date or period.
The pro forma financial data should be read in conjunction with the
accompanying notes thereto and the Unaudited Pro Forma Financial Data
included elsewhere in this Prospectus. In addition, the pro forma financial
data should be read in conjunction with the Consolidated Financial Statements
of Holdings and the notes thereto, the Consolidated Financial Statements of
SFFed and the notes thereto and the Consolidated Financial Statements of Cal
Fed and the notes thereto, contained elsewhere in this Prospectus. See
"Selected Historical Financial Data" and "Projected Pro Forma Regulatory
Capital Ratios of the Bank."
36
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAL FED ACQUISITION
-------------------------------------------------------------
CAL FED
HOLDINGS CAL FED VALUATION PRO FORMA ACQUISITION
HISTORICAL HISTORICAL(I) ADJUSTMENTS(II) ADJUSTMENTS(III) PRO FORMA
------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents . $ 271,218 $ 197,900 $ -- $(992,839)(2) $ (794,939)
Securities ................. 572,210 1,444,400 (741)(1) (300,000)(2) 1,143,659
Mortgage-backed securities 3,360,527 2,040,800 4,768 (1) -- 2,045,568
Loans receivable, net ..... 11,307,216 10,055,100 (31,685)(1) -- 10,023,415
Office premises and
equipment, net ............ 92,088 64,000 (56,633)(1) -- 7,367
Mortgage servicing rights,
net ....................... 406,669 4,866 27,392 (1) -- 32,258
Core deposit and other
intangible assets ......... 144,782 14,580 (14,580)(1) 531,094 (1) 531,094
Other assets ............... 814,768 305,054 185,720 (1) -- 490,774
------------- ------------- --------------- -------------- -------------
Total assets ............... $16,969,478 $14,126,700 $114,241 $(761,745) $13,479,196
============= ============= =============== ============== =============
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits ................... $ 8,799,990 $ 8,763,000 $ 3,839 (1) $ -- $ 8,766,839
Borrowings ................. 6,507,942 4,304,100 (2,043)(1) -- 4,302,057
Other liabilities .......... 431,291 232,500 5,300 (1) -- 237,800
------------- ------------- --------------- -------------- -------------
Total liabilities .......... 15,739,223 13,299,600 7,096 -- 13,306,696
------------- ------------- --------------- -------------- -------------
Minority interest .......... 309,376 172,500 -- -- 172,500
Stockholders' Equity:
Preferred Stock ........... 150,000 -- -- -- --
Common Stock .............. 1 49,400 -- (49,400)(3) --
Additional paid-in
capital .................. 47,752 841,000 -- (841,000)(3) --
Net unrealized holding
gain on securities ....... 35,087 -- -- -- --
Retained earnings
(deficit) ................ 688,039 (235,800) 107,145 (1) 128,655 (3) --
------------- ------------- --------------- -------------- -------------
Stockholders' equity .... 920,879 654,600 107,145 (761,745) --
------------- ------------- --------------- -------------- -------------
Total liabilities, minority
interest and stockholders'
equity .................... $16,969,478 $14,126,700 $114,241 $(761,745) $13,479,196
============= ============= =============== ============== =============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
CAPITALIZATION COMBINED
-------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . $ 555,000 (4) $ 31,279
Securities ................. -- 1,715,869
Mortgage-backed securities -- 5,406,095
Loans receivable, net ..... -- 21,330,631
Office premises and
equipment, net ............ -- 99,455
Mortgage servicing rights,
net ....................... -- 438,927
Core deposit and other
intangible assets ......... -- 675,876
Other assets ............... 20,000 (4) 1,325,542
-------------- -------------
Total assets ............... $ 575,000 $31,023,674
============== =============
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits ................... $ -- $17,566,829
Borrowings ................. (482,650)(5) 10,902,349
575,000 (4)
Other liabilities .......... -- 669,091
-------------- -------------
Total liabilities .......... 92,350 29,138,269
-------------- -------------
Minority interest .......... 500,000 (5) 981,876
Stockholders' Equity:
Preferred Stock ........... -- 150,000
Common Stock .............. -- 1
Additional paid-in
capital .................. (17,350)(5) 30,402
Net unrealized holding
gain on securities ....... -- 35,087
Retained earnings
(deficit) ................ -- 688,039
-------------- -------------
Stockholders' equity .... (17,350) 903,529
-------------- -------------
Total liabilities, minority
interest and stockholders'
equity .................... $ 575,000 $31,023,674
============== =============
</TABLE>
- --------------
(i) Represents historical amounts obtained from Cal Fed's unaudited
financial statements.
(ii) Represents adjustments to (i) record Cal Fed's assets and liabilities
at preliminary estimates of their respective fair values and (ii) the
elimination of Cal Fed's historical intangible assets.
(iii) Represents adjustments to record (i) the purchase price of the Cal Fed
Acquisition, and (ii) the elimination of the common equity of Cal Fed.
37
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
CAL FED ACQUISITION
(1) The Cal Fed Acquisition will be accounted for using the purchase method
of accounting. The total purchase cost will be allocated first to the
tangible and identifiable intangible assets and liabilities of Cal Fed
based on their respective fair values and the remainder will be allocated
to goodwill. The aggregate purchase price was determined as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price, as defined:
Shares outstanding at September 30, 1996 . 49,427,074
Options outstanding at September 30, 1996 1,355,140
------------
Total .................................. 50,782,214
Purchase price per share .................. $ 23.50
------------
Purchase price for outstanding shares .... $ 1,193,382
Exercise of options outstanding (a) ...... (10,800)
------------
Purchase price ............................ 1,182,582
Acquisition fees and expenses (b) ........ 110,257
------------
Total .................................. $ 1,292,839
============
</TABLE>
The following is a reconciliation of the common equity of Cal Fed to the
fair value of the net assets acquired by Holdings:
<TABLE>
<CAPTION>
<S> <C> <C>
Common equity of Cal Fed at September 30, 1996 .. $ 654,600
Fair value adjustments (c):
Securities ...................................... $ (741)
Mortgage-backed securities ...................... 4,768
Loans receivable, net ........................... (31,685)
Mortgage servicing rights ....................... 27,392
Office premises and equipment (d) ............... (56,633)
Litigation receivable, net (other assets) (e) .. 132,720
Other assets (f) ................................ 53,000
Deposits accounts ............................... (3,839)
Borrowings ...................................... 2,043
Other liabilities (g) ........................... (5,300)
Elimination of historical intangible assets .... (14,580)
---------- -----------
107,145 107,145
-----------
Fair value of net assets acquired ............... 761,745
Purchase cost ................................... 1,292,839
-----------
Excess of purchase cost over net assets acquired
("goodwill") ................................... $ 531,094
===========
</TABLE>
(a) Represents cash received by Cal Fed in settlement of stock options and
stock appreciation rights outstanding as of September 30, 1996
(1,355,140 options outstanding at an average price of $7.97 per
share).
38
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
CAL FED ACQUISITION (CONTINUED)
(b) Represents fees and costs consisting of the following:
<TABLE>
<CAPTION>
<S> <C>
Severance costs ....................................... $ 45,500
Pension plan termination costs ........................ 6,700
Conversion and contract termination costs ............. 33,257
Investment banking, legal and other professional costs 24,800
---------
$110,257
=========
</TABLE>
Severance costs were estimated based on (i) obligations assumed by
Holdings under Cal Fed's compensation agreements with eleven of its executive
officers; (ii) transaction bonuses paid to six California Federal executive
officers; (iii) severance benefits paid or payable pursuant to a letter
agreement between Cal Fed and Holdings for approximately 850 employees who
are parties to separate employment agreements; and (iv) relocation benefits
for employees who have been offered employment opportunities in northern
California. The obligations of Holdings pursuant to items (i) and (ii) above
approximate $15.5 million and $10 million, respectively. Non-contract
employees are eligible to be paid three weeks of severance per year of
service, with a minimum payment of eight weeks severance. In addition, 52
employees have guaranteed minimum severance payments, which often exceed the
three weeks per year of service. Holdings' termination plan has been
developed, and employees to be terminated have been so notified. Termination
dates generally fall within six months of the consummation of the Cal Fed
Acquisition.
Pension termination costs represent lump sum distributions which are
required under Cal Fed's defined benefit programs upon termination of such
plans. These amounts, totalling $4.2 million, have not been previously
accrued. In addition, the purchase agreement includes $2.5 million to be
allocated to an employee retention pool, established to provide additional
incentive to critical employees to remain with Cal Fed until the Cal Fed
Acquisition was consummated.
The majority of conversion and contract costs of $33.3 million represents
costs and penalties expected to be incurred by Holdings in connection with
the cancellation of outstanding contracts. Such contracts consist primarily
of data processing services and real property lease arrangements. This amount
also includes the transfer cost of mortgage loan servicing, estimated at $40
per loan, based on First Nationwide's historical experience.
(c) Fair value adjustments are amortized against (accreted to) net income
as follows:
<TABLE>
<CAPTION>
PERIOD OF AMORTIZATION
ITEM METHOD OF AMORTIZATION (ACCRETION) (ACCRETION)
- ------------------------------ ------------------------------------------------ --------------------------
<S> <C> <C>
Mortgage-backed securities Level yield method over effective terms of such 6 to 9 years
assets, considering estimated prepayments
Loans receivable Level yield method over effective terms of 2 to 12 years
such assets, considering estimated
prepayments
Mortgage servicing rights Level yield method over effective terms of 2 to 7 years
such assets, considering estimated
prepayments
Goodwill Straight-line method 15 years
Deposit accounts Level yield method over stated terms of such 1 to 6 years
liabilities
Borrowings Level yield method over stated terms of such 1 to 9 years
liabilities
</TABLE>
39
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
CAL FED ACQUISITION (CONTINUED)
With respect to goodwill, representing the excess of the purchase price
over the fair value of tangible assets acquired and liabilities assumed (the
"Excess"), Holdings does not currently anticipate that any of the Excess will
be allocated to "identifiable intangible assets" (i.e., core deposit
intangible) in connection with the Cal Fed Acquisition. Based on prior core
deposit intangible studies, management estimates that the value of California
deposits would approximate $135 million, at September 30, 1996. The average
life of this intangible, based on historical experience, is approximately
five years. On the other hand, goodwill related to financial institutions is,
by industry standards, typically amortized over a 25 year period. Holdings
has elected to amortize the Excess over 15 years. This treatment is
predicated on the fact that 15 years is a reasonable approximation of the
combined lives of a separately determinable core deposit intangible and the
remaining Excess, and that non-segregation of these assets would not have a
significant effect on Holdings' financial statements.
(d) Includes (i) $45.7 million in fair value adjustments to reflect
obligations assumed under master lease arrangements on Cal Fed's two
corporate facilities at market rental rates, net of sub-lease income;
(ii) fair value adjustments to reflect lease obligations on branch
facilities at market rates; and (iii) fair value adjustments related
to certain data processing hardware and software.
(e) Represents the estimated after-tax recovery that will inure to
Holdings from the California Federal Litigation, net of amounts
payable to holders of the Litigation Interests and the Secondary
Litigation Interests. The estimated fair value of such litigation
asset was determined based on the following methodology:
CALCULATION OF ESTIMATED GROSS PROCEEDS (WHOLE DOLLARS)
<TABLE>
<CAPTION>
<S> <C>
CALGZ Closing Price at September 30, 1996 $ 11.375
CALGZ Shares Outstanding ................. 5,075,549
---------------
CALGZ Total Value ........................ $ 57,734,370
CALGZ Share of Litigation Proceeds ...... 25.37775%
---------------
Total Value, After-tax Proceeds .......... $227,499,955
Gross-up for Tax Effect (1-40.2%) ....... 59.80%
---------------
$380,434,708(i)
Subjective Discount (ii) ................. 57,065,206
---------------
Estimated Gross Proceeds ................. $323,369,502
===============
</TABLE>
(i) No adjustment for expenses included due to immateriality to total
proceeds.
(ii) Subjective discount of approximately 15% was applied in
consideration of the variability of the market prices of the CALGZ
interests over time (which may be attributed in part to the
market's assumptions concerning, among other things, the time
frame for the final settlement of the California Federal
Litigation, the related discount for the time value of money, and
past and future expenses incurred in pursuing the California
Federal Litigation). After discount, estimated gross proceeds
represent a CALGZ price of $9.67 per share.
40
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
CAL FED ACQUISITION (CONTINUED)
DISTRIBUTION OF PROCEEDS
<TABLE>
<CAPTION>
<S> <C>
Estimated Gross Proceeds .................... $ 323,370
Tax Liability, Estimated at 40.2% ........... 129,995
----------
Total After-tax Proceeds .................... $ 193,375
==========
Distribution to Class A Certificate Holders $ 193,375
CALGZ Share of After-tax Proceeds ........... 25.37775%
----------
Total Distribution to Class A Holders ...... $ 49,074
==========
Remaining After-tax Proceeds ................ $ 144,301
Holdings Initial Distribution ............... 125,000
----------
Remainder for Secondary Distribution ....... $ 19,301
==========
Holdings--40% Distribution .................. $ 7,720
Class B Certificate Holders--60%
Distribution ............................... 11,581
----------
Total Secondary Distribution ............... $ 19,301
==========
Holdings Distribution:
Initial Distribution ....................... $ 125,000
40% Secondary Distribution ................. 7,720
----------
Total Holdings Distribution ............... $ 132,720
==========
</TABLE>
Once the allocation of purchase price has been made, Holdings will incur
periodic charges against earnings for any market value declines in the
carrying value of this asset. Market value will be determined based upon
the market value of the CALGZ and Secondary Litigation Interests, and
will also consider a decline in value related to factors of which
management is aware which may not be reflected in the market values of
these securities. Any increases in market value above the original cost
basis established through purchase accounting will be deferred until the
final realization of the settlement.
(f) Includes fair value adjustments to reflect (i) federal income tax and
interest receivable, net of California franchise tax and interest
payable, and (ii) investor advances accounts related to the loan
servicing operation.
(g) Includes fair value adjustments to deficit escrow accounts.
(2) Represents payment by Holdings in connection with the Cal Fed
Acquisition. The cash portion of the purchase price was obtained by
liquidating certain of Cal Fed's assets at book value, as follows:
<TABLE>
<CAPTION>
<S> <C>
Existing cash .................................................... $ 992,839
Sale of securities available for sale and proceeds from
securities purchased under agreements to resell ................. 300,000
----------
Purchase Price ................................................. $1,292,839
==========
</TABLE>
(3) Represents the elimination of the common equity components of Cal Fed of
$761,745.
41
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
CAPITALIZATION
(4) Represents the issuance of the Notes:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Notes $575,000
Less: deferred issuance costs .......... (20,000)
---------
Net proceeds .......................... $555,000
=========
</TABLE>
(5) Represents the proceeds from the Capital Corporation Offering:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Capital Corporation
Preferred Stock .......................................... $500,000
Less: issuance costs (additional paid-in capital) ........ (17,350)
--------
Net proceeds ............................................. $482,650
========
</TABLE>
Net proceeds will be used to reduce borrowings of the Bank.
42
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA 1996
ACQUISITION PURCHASE
HOLDINGS PRO FORMA PRO FORMA
HISTORICAL TOTALS (1) TOTALS (2)
------------ ------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $716,523 $21,821 $ --
Securities .................................. 24,875 1,017 --
Mortgage-backed securities .................. 191,602 3,174 --
Other interest income ....................... 1,413 -- --
------------ ------------- ------------
Total interest income ...................... 934,413 26,012 --
INTEREST EXPENSE:
Deposits .................................... 323,246 12,401 --
Borrowings .................................. 290,037 6,114 (848)
Total interest expense ..................... 613,283 18,515 (848)
Net interest income ......................... 321,130 7,497 848
Provision for loan losses ................... 29,700 500 --
------------ ------------- ------------
Net interest income after provision for loan
losses ..................................... 291,430 6,997 848
NONINTEREST INCOME:
Customer banking fees ....................... 34,356 199 --
Mortgage banking operations ................. 92,150 191 3,484
Net gain (loss) on sales of assets .......... 414,413 (1,140) --
Other ....................................... 54,542 239 51
------------ ------------- ------------
Total noninterest income ................... 595,461 (511) 3,535
NONINTEREST EXPENSE:
Compensation and benefits ................... 155,976 1,257 2,070
Other ....................................... 223,329 2,616 1,099
------------ ------------- ------------
Total noninterest expense .................. 379,305 3,873 3,169
------------ ------------- ------------
Income (loss) before income taxes and
minority interest .......................... 507,586 2,613 1,214
Income tax (benefit) expense ................ (79,724) 369 120
------------ ------------- ------------
Income (loss) before minority interest ..... 587,310 2,244 1,094
MINORITY INTEREST ........................... 34,584 -- --
------------ ------------- ------------
Net income (loss) ........................... 552,726 2,244 1,094
Holdings Preferred Stock dividends .......... -- -- --
------------ ------------- ------------
Net income (loss) available to common
stockholders ............................... $552,726 $ 2,244 $1,094
============ ============= ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAL FED
ACQUISITION BRANCH SALES
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTALS (3) TOTALS (4) ADJUSTMENTS (5) COMBINED
------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $579,125 $ (110) $ -- $1,317,359
Securities .................................. 80,200 -- -- 106,092
Mortgage-backed securities .................. 127,000 -- -- 321,776
Other interest income ....................... (21,792) -- -- (20,379)
------------- -------------- --------------- ------------
Total interest income ...................... 764,533 (110) -- 1,724,848
INTEREST EXPENSE:
Deposits .................................... 318,700 (40,742) -- 613,605
Borrowings .................................. 173,525 44,835 27,128 540,791
Total interest expense ..................... 492,225 4,093 27,128 1,154,396
Net interest income ......................... 272,308 (4,203) (27,128) 570,452
Provision for loan losses ................... 30,800 -- -- 61,000
------------- -------------- --------------- ------------
Net interest income after provision for loan
losses ..................................... 241,508 (4,203) (27,128) 509,452
NONINTEREST INCOME:
Customer banking fees ....................... 36,300 (3,965) -- 66,890
Mortgage banking operations ................. 3,500 -- -- 99,325
Net gain (loss) on sales of assets .......... 1,800 10 -- 415,083
Other ....................................... 15,500 (163) -- 70,169
------------- -------------- --------------- ------------
Total noninterest income ................... 57,100 (4,118) -- 651,467
NONINTEREST EXPENSE:
Compensation and benefits ................... 50,994 (4,337) -- 205,960
Other ....................................... 175,824 (3,387) 2,143 401,691
67
------------- -------------- --------------- ------------
Total noninterest expense .................. 226,818 (7,724) 2,210 607,651
------------- -------------- --------------- ------------
Income (loss) before income taxes and
minority interest .......................... 71,790 (597) (29,338) 553,268
Income tax (benefit) expense ................ 11,439 (59) (1,859) (69,714)
------------- -------------- --------------- ------------
Income (loss) before minority interest ..... 60,351 (538) (27,479) 622,982
MINORITY INTEREST ........................... 18,900 -- 30,797 84,281
------------- -------------- --------------- ------------
Net income (loss) ........................... 41,451 (538) (58,276) 538,701
Holdings Preferred Stock dividends .......... -- -- 13,859 13,859
------------- -------------- --------------- ------------
Net income (loss) available to common
stockholders ............................... $ 41,451 $ (538) $(72,135) $ 524,842 (6)
============= ============== =============== ============
</TABLE>
43
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
<S> <C>
PRO FORMA SUPPLEMENTAL INFORMATION:
- -----------------------------------
First Nationwide
Historical net income of the Bank (a) .............................................. $ 617,774
Pro forma adjustments:
SFFed Acquisition ................................................................. 2,244
Cal Fed Acquisition ............................................................... 60,351
LMUSA 1996 Purchase ............................................................... 1,094
Branch Sales ...................................................................... (538)
Reduction in borrowing expense, net ............................................... 17,813
Total pro forma adjustments ...................................................... 80,964
Add one half amortization of intangible assets (b) ................................. 26,237
-----------
Amount available for dividends ..................................................... 724,975
Preferred stock dividends:
11 1/2% Bank Preferred Stock ...................................................... (25,938)
10 5/8% Bank Preferred Stock ...................................................... (18,900)
Capital Corporation Preferred Stock, net .......................................... (30,797)
-----------
Total preferred stock dividends .................................................. (75,635)
-----------
Amount available for dividends to Holdings (c) ..................................... 649,340
Deduct Other Items, net of tax (d) ................................................. (392,700)
-----------
Amount available for dividends to Holdings after deducting Other Items (c) ........ $ 256,640
===========
Holdings
Amount available for dividends to Holdings after deducting Other Items ............ $ 256,640
Holdings interest expense:
Holdings Senior Notes ............................................................. (18,375)
Holdings 9 1/8% Senior Subordinated Notes ......................................... (9,581)
Notes ............................................................................. (45,820)
-----------
Total Holdings interest expense .................................................. (73,776)
Other income and expense, net ...................................................... (9,535)
Income tax benefit ................................................................. 5,353
-----------
Amount available for distributions or loans to stockholders of Holdings ........... 178,682
Cash dividends--Holdings Preferred Stock ........................................... (11,250)
-----------
Amount available for distributions or loans to Hunter's Glen and Parent Holdings
(e) ............................................................................... $ 167,432
===========
</TABLE>
- --------------
(a) Reconciles to historical net income of Holdings as follows:
<TABLE>
<CAPTION>
<S> <C>
Historical net income of the Bank ........................... $617,774
Less:Net interest and other expenses of Holdings ............ 32,050
Minority interest ...................................... 34,584
Plus: Extraordinary item--loss on early extinguishment of
debt, net ................................................... 1,586
----------
Historical net income of Holdings ........................... $552,726
==========
</TABLE>
(b) By regulation, an association that meets its fully phased-in capital
requirements both before and after a proposed distribution and has not been
notified by the OTS that it is in need of more than normal supervision may,
after prior notice to but without the approval of the OTS, make capital
distributions during a calendar year up to 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
surplus capital ratio at the beginning of the calendar year. To the extent
amortization of goodwill increases the amount of such surplus, one-half of
that amount would be available for dividends.
(c) Assumes that no retention of retained earnings is necessary in order for
the Bank to retain its "well capitalized" status.
(d) Other Items represent items of a non-recurring nature, consisting of (i)
gains of approximately $334.0 million (on an after-tax basis) realized in
connection with the Branch Sales; (ii) gain of approximately $10.8 million
(on an after-tax basis) representing Cal Fed's gain on branch sales; (iii)
deferred tax benefit of First Nationwide of $125 million; (iv) after-tax
gain on sale of ACS common stock of $36.4 million; (v) $23.0 million in
after-tax income recognized in connection with the termination of the
Assistance Agreement; (vi) the one-time Special SAIF Assessment of $106.4
million (on an after-tax basis) levied on the deposits of First Nationwide
and California Federal; and (vii) Incentive Plan expense of $30.2 million
(on an after-tax basis).
<PAGE>
(e) The debt instruments of Holdings generally limit distributions to 75% of
the consolidated net income of Holdings. The debt instruments also permit
Holdings to loan the remaining 25% of its consolidated net income to
affiliates, provided that such loans are on an arm's length basis. See
"Risk Factors--Indebtedness and Ability to Pay Principal of the Notes."
44
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(1) Represents historical results of operations of SFFed for the month ended
January 31, 1996. The SFFed Acquisition was consummated on February 1,
1996. Historical results have been adjusted to reflect:
(a) the amortization or accretion of fair value adjustments;
(b) the elimination of amortization of historical goodwill;
(c) the elimination of certain noninterest expense due to consolidation of
SFFed operations with those of First Nationwide; and
(d) income taxes relative to the SFFed Acquisition.
(2) Represents historical results of operations for the month ended January
31, 1996 related to the LMUSA 1996 Purchase (unaudited). The LMUSA 1996
Purchase was consummated January 31, 1996. Historical results have been
adjusted to reflect:
(a) the amortization of the fair value of mortgage servicing rights;
(b) the elimination of amortization of historical mortgage servicing
rights;
(c) the decrease in interest expense resulting from the transfer of
custodial accounts acquired to First Nationwide;
(d) the elimination of certain other noninterest expense due to
consolidation with First Nationwide's existing mortgage banking
operations; and
(e) income taxes relative to the LMUSA 1996 Purchase.
(3) Represents historical results of operations of Cal Fed for the nine months
ended September 30, 1996. Historical results have been adjusted to
reflect:
(a) the amortization or accretion of fair value adjustments;
(b) the elimination of amortization of historical intangible assets;
(c) the reduction in interest income relative to the loss in yield on the
purchase price of the Cal Fed Acquisition funded with existing cash;
(d) the elimination of certain noninterest expense of $57.7 million,
representing a 36% reduction over historical levels, due to
consolidation of Cal Fed operations with those of First Nationwide;
and
(e) income taxes relative to the Cal Fed Acquisition.
(4) Represents adjustments necessary to record the impact of the Branch Sales:
(a) the elimination of historical interest income and expense from January
1, 1996 through the respective sale date on the savings account loans
and deposits sold during the six months ended June 30, 1996;
(b) the elimination of historical noninterest income (customer banking
fees and other noninterest income) from January 1, 1996 through the
respective sale date related to the deposits sold during the six
months ended June 30, 1996;
(c) the elimination of historical noninterest expense from January 1, 1996
through the respective sale date, including compensation and benefits,
occupancy, SAIF insurance premiums, marketing, OTS assessments, data
processing and telecommunications directly attributable to the Ohio,
Michigan, and Northeast retail branch operations sold during the six
months ended June 30, 1996;
(d) interest expense for the borrowings used to fund the Branch Sales; and
(e) income taxes relative to the Branch Sales.
(5) Represents adjustments to reflect:
(a) interest expense and amortization of debt issuance costs associated
with the Notes and the Holdings 9 1/8% Senior Subordinated Notes;
(b) the Holdings Preferred Stock dividends;
(c) the reduction in interest expense on borrowings related to the
utilization of proceeds from the issuance of the Capital Corporation
Preferred Stock to reduce debt;
(d) dividends on the Capital Corporation Preferred Stock, net of income
tax benefit to the Bank; and
(e) income taxes relative to items (a) through (c).
It is expected that the issuance of the Capital Corporation Preferred
Stock, by increasing core capital, will enable the Bank to retain a higher
base of interest-earning assets, resulting in incrementally higher related
earnings.
45
<PAGE>
(6) Includes the following:
(a) gains of approximately $334.0 million (on an after-tax basis) realized
in connection with the Branch Sales;
(b) deferred tax benefit of First Nationwide of $125 million;
(c) after-tax gain on sale of ACS (as defined herein) common stock of
$36.4 million;
(d) Incentive Plan expense of $30.2 million (on an after-tax basis);
(e) gain of approximately $10.8 million (on an after-tax basis)
representing Cal Fed's gain on branch sales.
(f) $23.0 million in after-tax income recognized in connection with the
termination of the Assistance Agreement; and
(g) the one-time Special SAIF Assessment of $106.4 million (on an
after-tax basis) levied on the deposits of First Nationwide and
California Federal.
46
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA
ACQUISITION PURCHASES
HOLDINGS PRO FORMA PRO FORMA
HISTORICAL TOTALS (1) TOTALS (2)
------------ ------------- -----------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ 823,864 $230,713 $22,477
Securities .................................. 28,396 10,685 --
Mortgage-backed securities .................. 212,880 62,403 --
Other interest income ....................... 10,705 -- --
------------ ------------- -----------
Total interest income ...................... 1,075,845 303,801 22,477
INTEREST EXPENSE:
Deposits .................................... 447,359 143,797 --
Borrowings .................................. 287,456 74,587 2,018
------------ ------------- -----------
Total interest expense ..................... 734,815 218,384 2,018
Net interest income ......................... 341,030 85,417 20,459
Provision for loan losses ................... 37,000 11,094 --
------------ ------------- -----------
Net interest income after provision for loan
losses ..................................... 304,030 74,323 20,459
NONINTEREST INCOME:
Customer banking fees ....................... 47,493 5,291 --
Mortgage banking operations ................. 70,265 860 76,445
Net gain (loss) on sales of assets .......... 147 -- (1,851)
Other ....................................... 33,068 1,677 2,690
------------ ------------- -----------
Total noninterest income ................... 150,973 7,828 77,284
NONINTEREST EXPENSE:
Compensation and benefits ................... 154,288 11,141 19,500
Other ....................................... 178,265 34,896 38,081
------------ ------------- -----------
Total noninterest expense .................. 332,553 46,037 57,581
------------ ------------- -----------
Income (loss) before income taxes and
minority interest .......................... 122,450 36,114 40,162
Income tax (benefit) expense ................ (57,185) 4,890 3,952
------------ ------------- -----------
Income (loss) before minority interest ..... 179,635 31,224 36,210
MINORITY INTEREST ........................... 34,584 -- --
------------ ------------- -----------
Net income (loss) ........................... 145,051 31,224 36,210
Holdings Preferred Stock dividends .......... -- -- --
------------ ------------- -----------
Net income (loss) available to common
stockholders ............................... $ 145,051 $ 31,224 $36,210
============ ============= ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CAL FED
ACQUISITION BRANCH SALES
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
TOTALS (3) TOTALS (4) ADJUSTMENTS (5) COMBINED
------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ 722,000 $ (623) $ -- $1,798,431
Securities .................................. 124,200 -- -- 163,281
Mortgage-backed securities .................. 192,600 -- -- 467,883
Other interest income ....................... (21,089) -- -- (10,384)
------------- -------------- --------------- ------------
Total interest income ...................... 1,017,711 (623) -- 2,419,211
INTEREST EXPENSE:
Deposits .................................... 396,200 (211,530) (28,998) 775,826
Borrowings .................................. 245,400 280,671 61,094 935,003
12,775
------------- -------------- --------------- ------------
Total interest expense ..................... 641,600 69,141 44,871 1,710,829
Net interest income ......................... 376,111 (69,764) (44,871) 708,382
Provision for loan losses ................... 31,800 -- -- 79,894
------------- -------------- --------------- ------------
Net interest income after provision for loan
losses ..................................... 344,311 (69,764) (44,871) 628,488
NONINTEREST INCOME:
Customer banking fees ....................... 42,100 (22,228) -- 72,656
Mortgage banking operations ................. 3,600 -- -- 151,170
Net gain (loss) on sales of assets .......... 6,600 -- -- 4,896
Other ....................................... 2,400 (789) -- 39,046
------------- -------------- --------------- ------------
Total noninterest income ................... 54,700 (23,017) -- 267,768
NONINTEREST EXPENSE:
Compensation and benefits ................... 69,408 (19,476) -- 234,861
Other ....................................... 158,283 (25,823) 2,857 387,359
800
------------- -------------- --------------- ------------
Total noninterest expense .................. 227,691 (45,299) 3,657 622,220
------------- -------------- --------------- ------------
Income (loss) before income taxes and
minority interest .......................... 171,320 (47,482) (48,528) 274,036
Income tax (benefit) expense ................ 22,692 (4,671) (3,075) (33,397)
------------- -------------- --------------- ------------
Income (loss) before minority interest ..... 148,628 (42,811) (45,453) 307,433
MINORITY INTEREST ........................... 25,600 -- 41,063 101,247
------------- -------------- --------------- ------------
Net income (loss) ........................... 123,028 (42,811) (86,516) 206,186
Holdings Preferred Stock dividends .......... -- -- 18,139 18,139
------------- -------------- --------------- ------------
Net income (loss) available to common
stockholders ............................... $ 123,028 $ (42,811) $(104,655) $ 188,047
============= ============== =============== ============
</TABLE>
47
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA SUPPLEMENTAL INFORMATION:
- -----------------------------------
<S> <C>
First Nationwide
Historical net income of the Bank (a) .............................................. $ 211,260
Pro forma adjustments:
SFFed Acquisition ................................................................. 31,224
Cal Fed Acquisition ............................................................... 148,628
LMUSA 1996 Purchase ............................................................... 36,210
Branch Sales ...................................................................... (42,811)
Reduction in borrowing expense, net ............................................... 26,145
Total pro forma adjustments ...................................................... 199,396
Add one half amortization of intangible assets (b) ................................. 37,168
-----------
Amount available for dividends ..................................................... 447,824
Preferred stock dividends:
11 1/2% Bank Preferred Stock ...................................................... (34,584)
10 5/8% Bank Preferred Stock ...................................................... (25,600)
Capital Corporation Preferred Stock, net .......................................... (41,063)
Total preferred stock dividends .................................................. (101,247)
-----------
Amount available for dividends to Holdings (c) ..................................... 346,577
Deduct deferred tax benefit (d) .................................................... (69,000)
-----------
Amount available for dividends to Holdings after deducting deferred tax benefit (c) $ 277,577
===========
Holdings
Amount available for dividends to Holdings after deducting deferred tax benefit ... $ 277,577
Holdings interest expense:
Holdings Senior Notes ............................................................. (24,500)
Holdings 9 1/8% Senior Subordinated Notes ......................................... (12,775)
Offering .......................................................................... (61,094)
-----------
Total Holdings interest expense .................................................. (98,369)
Other income and expense, net ...................................................... (10,174)
Income tax benefit ................................................................. 8,987
-----------
Amount available for distributions or loans to stockholders of Holdings ........... 178,021
Cash dividends--Holdings Preferred Stock ........................................... (15,000)
-----------
Amount available for distributions or loans to Hunter's Glen and Parent Holdings
(e) ............................................................................... $ 163,021
===========
</TABLE>
- ------------
(a) Reconciles to historical net income of Holdings as follows:
<TABLE>
<CAPTION>
<S> <C>
Historical net income of the Bank .................... $211,260
Less:Net interest and other expenses of Holdings ..... (29,658)
Minority interest ............................... (34,584)
Extraordinary item--gain on early extinguishment
of debt, net .................................. (1,967)
----------
Historical net income of Holdings .................... $145,051
==========
</TABLE>
(b) By regulation, an association that meets its fully phased-in capital
requirements both before and after a proposed distribution and has not been
notified by the OTS that it is in need of more than normal supervision may,
after prior notice to but without the approval of the OTS, make capital
distributions during a calendar year up to 100% of its net income to date
during the calendar year plus the amount that would reduce by one-half its
surplus capital ratio at the beginning of the calendar year. To the extent
amortization of goodwill increases the amount of such surplus, one-half of
that amount would be available for dividends.
(c) Assumes that no retention of retained earnings is necessary in order for
the Bank to retain its "well capitalized" status.
(d) Represents an item of a non-recurring nature.
(e) The debt instruments of Holdings generally limit distributions to 75% of
the consolidated net income of Holdings. The debt instruments also permit
Holdings to loan the remaining 25% of its consolidated net income to
affiliates, provided that such loans are on an arm's length basis. See
"Risk Factors--Indebtedness and Ability to Pay Principal of the Notes."
48
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(1) Represents historical results of operations of SFFed for the year ended
December 31, 1995. Historical results have been adjusted to reflect:
(a) the amortization or accretion of fair value adjustments;
(b) the elimination of amortization of historical goodwill;
(c) the elimination of certain noninterest expense due to consolidation of
SFFed operations with those of First Nationwide; and
(d) income taxes relative to the SFFed Acquisition.
(2) Represents historical results of operations for the nine months ended
September 30, 1995 and the year ended December 31, 1995 related to the
LMUSA 1995 Purchase and LMUSA 1996 Purchase, respectively (unaudited).
(LMUSA 1995 Purchase consummated October 2, 1995). Historical results have
been adjusted to reflect:
(a) the amortization of the fair value of mortgage servicing rights;
(b) the elimination of amortization of historical mortgage servicing
rights;
(c) the decrease in interest expense resulting from the transfer of
custodial accounts acquired to First Nationwide;
(d) decreases in compensation and benefits expense due to reduction in
staffing;
(e) the elimination of certain other noninterest expenses due to
consolidation with First Nationwide's existing mortgage banking
operations; and
(f) income taxes relative to the LMUSA Purchases.
(3) Represents historical results of operations of Cal Fed for the year ended
December 31, 1995. Historical results have been adjusted to reflect:
(a) the amortization or accretion of fair value adjustments;
(b) the elimination of amortization of historical intangible assets;
(c) the reduction in interest income relative to the loss in yield on the
purchase price of the Cal Fed Acquisition funded with existing cash;
(d) the elimination of certain noninterest expense of $78 million,
representing a 35% reduction over historical levels, due to
consolidation of Cal Fed operations with those of First Nationwide;
and
(e) income taxes relative to the Cal Fed Acquisition.
(4) Represents adjustments necessary to record the impact of the Branch Sales:
(a) the elimination of historical interest income and expense for the year
ended December 31, 1995 on the savings account loans and deposits
being sold;
(b) the elimination of historical noninterest income (customer banking
fees and other noninterest income) for the year ended December 31,
1995 related to the deposits being sold;
(c) the elimination of historical noninterest expense for the year ended
December 31, 1995, including compensation and benefits, occupancy,
SAIF insurance premiums, marketing, OTS assessments, data processing
and telecommunications directly attributable to the Ohio, Michigan,
and Northeast retail branch operations;
(d) interest expense for the borrowings used to fund the Branch Sales; and
(e) income taxes relative to the Branch Sales.
(5) Represents adjustments to reflect:
(a) interest expense and amortization of debt issuance costs associated
with the Notes and the Holdings 9 1/8% Senior Subordinated Notes;
(b) the Holdings Preferred Stock dividends;
(c) the reduction in interest expense on borrowings related to the
utilization of proceeds from the issuance of the Capital Corporation
Preferred Stock to reduce debt;
(d) dividends on the Capital Corporation Preferred Stock, net of income
tax benefit to the Bank; and
(e) income taxes relative to items (a) through (d).
It is expected that the issuance of the Capital Corporation Preferred
Stock, by increasing core capital, will enable the Bank to retain a higher
base of interest-earning assets, resulting in incrementally higher related
earnings.
49
<PAGE>
PROJECTED PRO FORMA REGULATORY CAPITAL RATIOS OF THE BANK
Prior to the consummation of the Cal Fed Acquisition, the Capital
Contribution totalling approximately $700 million was contributed by Holdings
to First Nationwide.
After giving effect to the Cal Fed Acquisition, the Capital Contribution,
and the Capital Corporation Offering, at September 30, 1996, on a pro forma
basis, the Bank exceeded minimum regulatory capital requirements and
qualified for "well-capitalized" status. The following is a reconciliation of
the Bank's pro forma stockholders' equity to regulatory capital as of
September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of the Bank ........................ $2,317 $2,317 $2,317
Minority interest--Capital Corporation Preferred Stock . 500 500 500
Unrealized holding gain on securities available for
sale, net .............................................. (35) (35) (35)
Non-qualifying loan servicing rights .................... (44) (44) (44)
Non-allowable capital:
Preferred stock in excess of 50% of Tier 1 Capital .... (149) (149) (149)
Intangible assets ...................................... (699) (699) (699)
Goodwill Litigation Asset .............................. (133) (133) (133)
Investment in subsidiaries ............................. (35) (35) (35)
Excess deferred tax assets ............................. (74) (74) (74)
Supplemental capital:
Qualifying subordinated debt ........................... -- -- 108
General loan loss reserves ............................. -- -- 226
Assets required to be deducted:
Land loans with more than 80% LTV ratio ................ -- -- (2)
---------- --------- ------------
Regulatory capital of the Bank .......................... $1,648 $1,648 $1,980
========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
RISK-BASED
CORE -------------------------
CAPITAL TIER 1 TOTAL CAPITAL
RATIO RATIO RATIO
--------- -------- ---------------
<S> <C> <C> <C>
Regulatory capital of the Bank .... 5.50% 9.19% 11.04%
Well-capitalized ratio ............. 5.00% 6.00% 10.00%
--------- -------- ---------------
Excess above well-capitalized ratio 0.50% 3.19% 1.04%
========= ======== ===============
</TABLE>
The amount of adjusted total assets used for the tangible and core capital
ratios was approximately $30.0 billion. Risk-weighted assets used for the
risk-based core and total capital ratios amounted to approximately $17.9
billion.
50
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
Holdings is a holding company whose only significant asset is all of the
Common Stock of the Bank. As such, Holdings' principal business operations
are conducted by the Bank and its subsidiaries. The selected historical
financial data for Holdings presented under the captions "Selected Operating
Data" and "Selected Financial Data" have been derived from the Consolidated
Financial Statements of Holdings.
The following data should be read in conjunction with the Consolidated
Financial Statements of Holdings and the notes thereto, the Consolidated
Financial Statements of the FNB Acquired Business and the notes thereto and
the Consolidated Financial Statements of SFFed and the notes thereto included
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Holdings."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------- ---------------------------------------------------------
1996 (1) 1995 1995 1994 (2) 1993 (3) 1992 (4) 1991
-------- -------- ---------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA
Interest income .......................... $934,413 $798,166 $1,075,845 $293,139 $ 95,264 $659,201 $990,596
Interest expense ......................... 613,283 549,196 734,815 199,845 74,728 450,240 663,016
Net interest income ...................... 321,130 248,970 341,030 93,294 20,536 208,961 327,580
Provision for loan losses ................ 29,700 18,000 37,000 6,226 1,402 16,193 17,698
Noninterest income ....................... 595,461 105,256 150,973 41,158 190,876 384,336 128,366
Noninterest expense ...................... 379,305 249,828 332,553 96,298 63,392 361,549 464,624
Income (loss) before income taxes,
extraordinary item and minority interest 507,586 86,398 122,450 31,928 146,618 215,555 (26,376)
Income tax (benefit) expense (5) ........ (79,724) 7,429 (57,185) 2,558 2,500 -- --
Income (loss) before extraordinary item
and minority interest ................... 587,310 78,969 179,635 29,370 144,118 215,555 (26,376)
Extraordinary item: gain on early
extinguishment of FHLB advances, net ... (1,586) 1,967 1,967 1,376 -- -- --
Net income (loss) before minority
interest ................................ 585,724 80,936 181,602 30,746 144,118 215,555 (26,376)
Minority interest ........................ 34,584 25,938 34,584 -- -- -- --
Net income (loss) available to common
stockholders ............................ 551,140 54,998 147,018 30,746 144,118 215,555 (26,376)
SELECTED PERFORMANCE RATIOS
Return (loss) on average assets (6) ..... 4.53% .74% 1.00% .69% 7.84% 2.52% (0.25)%
Return (loss) on average common
equity (7) .............................. 102.71 21.17 39.33 16.05 69.41 58.89 (6.64)
Yield on interest-earning assets (8) .... 7.74 7.65 7.71 6.85 5.42 8.32 9.99
Cost of interest-bearing liabilities (9) 5.16 5.36 5.35 4.83 4.70 5.73 6.78
Net interest margin (10) ................. 2.65 2.37 2.44 2.18 1.14 2.63 3.30
RATIO OF EARNINGS TO FIXED CHARGES (11)
Excluding interest on deposits (12) ..... 2.44x 1.24x 1.27x 1.32x 9.59x 10.74x --
Including interest on deposits (12) ..... 1.73 1.10 1.11 1.16 3.02 1.46 --
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, AT DECEMBER 31,
----------------- -------------------------------------------------------------------
1996 (1) 1995 1994 (2) 1993 (3) 1992 (4) 1991
----------- ----------- ----------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
SELECTED FINANCIAL DATA
Securities available for sale (13) .. $ 567,933 $ 348,561 $ 45,000 $ -- $ -- $ --
Securities held to maturity (13)(14) 4,277 1,455 411,859 15,118 2,034,842 90,416
Mortgage-backed securities available
for sale (10) ....................... 1,660,140 1,477,514 -- -- -- --
Mortgage-backed securities held to
maturity ............................ 1,700,387 1,524,488 3,153,812 341,224 77,622 1,771,168
Loans receivable, net ................ 11,307,216 8,831,018 9,966,886 29,244 777,265 2,541,600
Covered assets ....................... -- 39,349 311,603 592,593 839,538 1,398,906
Total assets ......................... 16,969,478 14,646,245 14,683,559 1,125,222 8,961,473 10,178,061
Deposits ............................. 8,799,990 10,241,628 9,196,656 431,778 7,809,478 9,148,901
Securities sold under agreements to
repurchase .......................... 2,127,574 969,510 1,883,490 119,144 30,647 305,000
Borrowings ........................... 4,380,368 2,392,862 2,808,979 440,792 597,564 192,117
Total liabilities .................... 15,739,223 13,883,099 14,029,957 1,012,328 8,488,697 9,761,664
Minority interest .................... 309,376 300,730 300,730 -- -- --
Stockholders' equity ................. 920,879 462,416 352,872 112,894 472,776 416,397
REGULATORY CAPITAL RATIOS OF THE BANK
Tangible capital ..................... 6.71% 5.84% 5.50% 9.50% 4.59% 3.37%
Core capital ......................... 6.71 5.84 5.50 9.50 5.13 3.88
Risk-based capital:
Core capital ........................ 10.81 9.14 8.86 67.71 15.67 12.39
Total capital ....................... 12.93 11.34 11.01 68.97 16.24 13.09
SELECTED OTHER DATA
Number of full service customer
facilities .......................... 116 160 156 4 162 162
Loans serviced for others (15) ...... $43,826,250 $28,170,543 $ 7,475,119 $ 327,449 $10,156,020 $ 4,466,467
Approximate number of employees ..... 3,466 3,619 3,573 317 3,030 2,693
Non-performing assets as a percentage
of the Bank's total assets .......... 1.36% 1.50% 1.49% 0.98% 0.12% 0.53%
</TABLE>
- --------------
(1) On January 31, 1996, FNMC consummated the LMUSA 1996 Purchase, acquiring a
$14.1 billion loan servicing portfolio. On February 1, 1996, First
Nationwide acquired SFFed, with assets at fair values totalling
approximately $4 billion and liabilities (including deposit liabilities)
with fair values totalling approximately $3.8 billion. During the nine
months ended September 30, 1996, First Nationwide closed the Branch Sales,
with associated deposit accounts totalling $4.6 billion. Noninterest
income for the nine months ended September 30, 1996 includes pre-tax gains
of $363.0 million related to the Branch Sales. Noninterest expense for the
nine months ended September 30, 1996 includes a pre-tax charge of $60.1
million for the Special SAIF Assessment.
(2) On October 3, 1994, effective immediately following the close of business
on September 30, 1994, 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.
(3) During the first quarter of 1993, Holdings sold certain assets,
liabilities, and substantially all of its branch operations located in
Texas, including $829 million of loans and 130 branches with $6.9 billion
in deposits, in the First Gibraltar Texas Sale. A net gain of $141 million
was recorded in connection with this sale.
(4) During the last quarter of 1992, Holdings 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.
52
<PAGE>
(5) Utilization of net operating loss carryovers resulted in no provisions for
income taxes until the FN Acquisition. Income tax expense of $2.5 million
was recorded in the first quarter of 1993 representing AMT expense related
to the gain recognized on the First Gibraltar Texas Sale (see Footnote 3).
Income tax expense recorded in 1994 after the FN Acquisition represents
federal AMT reduced, to the extent of 90%, by net operating loss
carryovers, and state tax at an assumed rate of 8%. Income tax benefit for
the nine months ended September 30, 1996 and in 1995 includes the
recognition of a deferred tax benefit of $125 million and of $69 million,
respectively, offset by federal AMT tax reduced, to the extent of 90%, by
net operating loss carryovers and state tax at an assumed rate of 8%.
(6) Return (loss) on average assets represents net income (loss) as a
percentage of average assets for the periods presented. For the periods
ended September 30, 1996 and 1995, return on average assets is annualized.
(7) Return (loss) on average common equity represents net income (loss)
available to common stockholders as a percentage of average common equity
for the periods presented. For the periods ended September 30, 1996 and
1995, return on average common equity is annualized.
(8) Yield on interest-earning assets represents interest income as a
percentage of average interest-earning assets. For the periods ended
September 30, 1996 and 1995, yield on interest-earning assets is
annualized.
(9) Cost of interest-bearing liabilities represents interest expense as a
percentage of average interest-bearing liabilities. For the periods ended
September 30, 1996 and 1995, cost of interest-bearing liabilities is
annualized.
(10) Net interest margin represents net interest income as a percentage of
average interest-earning assets. For the periods ended September 30, 1996
and 1995, net interest margin is annualized.
(11) Earnings used in computing the ratio of earnings to fixed charges consist
of income before income taxes, extraordinary item and minority interest.
Fixed charges consist of preferred stock dividends paid by the Bank,
interest expense on borrowings, the interest component of lease expense
and, where indicated, interest expense on deposits.
(12) Earnings were insufficient to cover fixed charges in 1991 by $26.4 million
excluding interest on deposits, and $26.4 million including interest on
deposits.
(13) Fluctuation in securities and mortgage-backed securities held to maturity
and securities and mortgage-backed securities available for sale from
December 31, 1994 to December 31, 1995 resulted from the reclassification
of substantially all securities and mortgage-backed securities (except for
mortgage-backed securities resulting from the securitization with recourse
of certain of the Bank's loans) from held-to-maturity to securities
available for sale.
(14) Increase in securities to be held to maturity at December 31, 1992
resulted from the investment of proceeds on sale of certain long-term
interest-bearing assets, primarily loans and mortgage-backed securities,
in cash, cash equivalents and securities in anticipation of the First
Gibraltar Texas Sale.
(15) Includes loans serviced by FNMC, the Bank, and FGB Realty, excluding loans
serviced for the Bank by FNMC.
53
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of Holdings and Cal Fed and the notes
thereto included elsewhere in this Prospectus. The following discussion
includes information relating to Holdings prior to consummation of the Cal
Fed Acquisition. Each of Holdings and Cal Fed is a holding company with no
business operations of its own. Accordingly, except as otherwise indicated,
the following discussion of Holdings relates to First Nationwide and the
following discussion of Cal Fed relates to California Federal.
HOLDINGS
GENERAL
The principal business of Holdings consists of operating retail deposit
branches and originating and/or purchasing residential real estate loans and,
to a lesser extent, certain consumer loans, for investment. Holdings actively
manages its commercial real estate loan portfolio and is active in mortgage
banking and loan servicing. Revenues are derived primarily from interest
charged on loans, interest received on government and agency securities and
mortgage-backed securities, gains on sales of loans and other investments,
and fees received in connection with loan servicing, securities brokerage and
other customer service transactions. Expenses primarily consist of interest
on customer deposit accounts, interest on short-term and long-term
borrowings, provisions for losses, general and administrative expenses
consisting of compensation and benefits, advertising and marketing, premises
and equipment, communications, deposit insurance assessments, data processing
and other general and administrative expenses.
The Cal Fed Acquisition
On July 27, 1996, Holdings entered into the Merger Agreement providing for
the acquisition of Cal Fed and its subsidiary, California Federal, which as
of September 30, 1996, had approximately $14.1 billion in assets, $8.8
billion in deposits and operated 118 branches in California and Nevada. After
giving effect to the Cal Fed Acquisition, the issuance of the Capital
Corporation Preferred Stock and the Capital Contribution, at September 30,
1996, the Bank would have had approximately $31.0 billion in assets,
approximately $17.6 billion in deposits, would have operated approximately
227 branches and would have ranked at such date as the fourth largest thrift
in the United States in terms of assets, based on published sources. See
"--Pro Forma Financial Condition and Results of Operations."
Impact of Other Acquisitions and Dispositions
The FN Acquisition was consummated on October 3, 1994, effective
immediately after the close of business on September 30, 1994, and was
recorded using the purchase method of accounting. Accordingly, the
accompanying financial data include the results of operations related to the
approximately $14.1 billion in assets and $13.4 billion in liabilities
acquired in the FN Acquisition. Minority interest increased by $301 million
due to the issuance of the 11 1/2% Bank Preferred Stock. In connection with
the FN Acquisition, common stockholders' equity increased by $210 million as
a result of the issuance of Holdings' class C common stock to Parent
Holdings, which stock has been fully redeemed.
On February 28, 1995, FNMC consummated the Maryland Acquisition and
acquired a loan servicing portfolio of approximately $11.4 billion, including
a subservicing portfolio of $1.8 billion, and certain assets and liabilities
from StanFed for approximately $178 million. The transaction was accounted
for as a purchase, and Holdings' consolidated statement of operations for the
year ended December 31, 1995 includes the results of operations of the
acquired mortgage servicing operation for the period from March 1, 1995
through December 31, 1995.
In April 1995, First Nationwide acquired approximately $13 million in
deposits in the Tiburon Purchase. In August 1995, First Nationwide acquired
three retail branches located in Orange County, California with deposit
accounts totalling approximately $356 million in the ITT Purchase. On
December 8, 1995, First Nationwide acquired four retail branches with deposit
accounts of approximately $144
54
<PAGE>
million in the Sonoma Purchase. The Branch Purchases were accounted for as
purchases, and the results of operations of the acquired retail deposit
operations are included in Holdings' consolidated statement of operations for
the year ended December 31, 1995 from the date each of the transactions was
consummated.
On October 2, 1995, FNMC consummated the LMUSA 1995 Purchase and acquired
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a master servicing portfolio of
$2.9 billion and other assets, principally existing loans and loan production
operations for approximately $100 million, payable in installments, and the
assumption of certain indebtedness secured by the acquired loan portfolio
totalling approximately $274 million. The LMUSA 1995 Purchase was accounted
for as a purchase and Holdings' consolidated statement of operations for the
year ended December 31, 1995 includes the results of operations of the
acquired mortgage servicing operations for the period from October 3, 1995
through December 31, 1995.
On January 31, 1996, FNMC consummated the acquisition of a $14.1 billion
loan servicing portfolio, a master servicing portfolio of $2.7 billion and
other assets in the LMUSA 1996 Purchase. The LMUSA 1996 Purchase was
accounted for as a purchase and Holdings' consolidated statement of
operations for the nine months ended September 30, 1996 includes the results
of operations of the acquired mortgage servicing operations for the period
from February 1, 1996 through September 30, 1996.
On February 1, 1996, First Nationwide consummated the SFFed Acquisition
involving assets totalling $4.0 billion and retail deposits totalling $2.7
billion. The SFFed Acquisition was accounted for as a purchase, and Holdings'
consolidated statement of operations for the nine months ended September 30,
1996 includes the results of operations of the acquired operations of SFFed
for the period from February 1, 1996 through September 30, 1996.
On June 1, 1996, First Nationwide consummated the Home Federal
Acquisition, involving approximately $717 million in assets and $632 million
in deposits. The Home Federal Acquisition was accounted for as a purchase,
and Holdings' consolidated statement of operations for the nine months ended
September 30, 1996 includes the results of operations of the acquired
operations of HFFC for the period from June 1, 1996 through September 30,
1996.
During the first half of 1996, First Nationwide closed the Branch Sales
with associated deposit accounts totalling $4.6 billion, resulting in pre-tax
gains totalling $363.0 million. Holdings' consolidated statement of
operations for the nine months ended September 30, 1996 includes the results
of operations of those branches sold in the Branch Sales for the period prior
to sale.
The First Gibraltar Texas Sale was effective February 1, 1993 resulting in
the sale of $829 million of loans and $6.9 billion in deposits in 130
branches. The accompanying financial data for 1993 reflect the results of
operations in 1993 including these sold assets and liabilities during the
first month of the year. Subsequent to the First Gibraltar Texas Sale, First
Nationwide managed four retail branches in Texas and supplemented the retail
deposit base with wholesale funds from Brokered Deposits and Federal Home
Loan Bank ("FHLB") advances.
Prior to and during 1993, most of the mortgage banking operations of First
Nationwide were conducted through First Gibraltar Mortgage Holdings, Inc.
("FGMH") prior to the distribution by First Nationwide of the stock of FGMH
to its then immediate parent in the first quarter of 1993. Therefore, the
accompanying financial data for 1993 reflect the results of such mortgage
banking operations during 1993 prior to the distribution. See
"Business--Holdings--Background."
Special SAIF Assessment
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act of 1996 (the "Reduction Act") was enacted. The Reduction Act
included a special assessment ("Special SAIF Assessment") related to the
recapitalization of the SAIF, which was levied based on a rate of 65.7 cents
per $100 of SAIF-insured domestic deposits held as of March 31, 1995. As a
result of the Reduction Act, First Nationwide recorded a pre-tax charge of
$60.1 million on September 30, 1996. The portion of the assessment related to
deposits sold in Ohio, New York, New Jersey and Michigan will be borne,
pursuant
55
<PAGE>
to each sales contract, by the respective purchasers and accordingly, such
amounts are not included in the expense recorded by First Nationwide.
Management expects the 1997 SAIF deposit premiums (including a separate
assessment to fund the obligations of the Financial Corporation, which will
expire after December 31, 1999) to decline to 6.4 cents per $100 of
SAIF-insured deposits per year from the prior rate of 23 cents.
Accrued Termination and Facilities Costs
During 1995, Holdings recorded $12.7 million in noninterest expense
related to four specific actions. In connection with the Maryland
Acquisition, the former residential loan servicing center in Sacramento,
California was relocated to Maryland, resulting in a charge of $5.7 million
for employee termination and facilities costs, net of expected sublease
income. Additionally, $2.1 million was provided for employee termination and
facilities costs (net of expected sublease income) related to the closing of
First Nationwide's residential loan production offices. Holdings also
recorded a charge of $4.0 million related to employee termination benefits
for positions which were eliminated over a twelve month period in conjunction
with First Nationwide's cost reduction plan. In connection with the
elimination of these positions, First Nationwide identified opportunities for
office space consolidation and has established additional liabilities
totalling $.4 million for lease termination payments. Additionally, First
Nationwide identified certain of its retail banking facilities which will be
closed and marketed for sale, with the related operations consolidated into
other retail banking facilities acquired in the ITT Purchase. In connection
with such closures and consolidations, a liability totalling $.5 million was
established to record such facilities at fair value. During the nine months
ended September 30, 1996, Holdings recorded liabilities totalling $1.4
million in connection with the closures and consolidations into other banking
facilities acquired in the SFFed Acquisition.
Accounting Changes
On June 28, 1996, FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities based on consistent
application of a financial-components approach that focuses on control. Under
that approach, after a transfer of financial assets, an entity recognizes the
financial and servicing assets it controls and the liabilities it has
incurred, derecognizes financial assets when control has been surrendered,
and derecognizes liabilities when extinguished. This statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management has not yet analyzed SFAS No. 125 and is unable to
determine the effect, if any, implementation may have on Holdings'
consolidated financial statements.
In March 1995, FASB issued SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
provides guidance for the recognition and measurement of impairment of
long-lived assets, certain identifiable intangibles and goodwill related both
to assets to be held and used by an entity and assets to be disposed of. SFAS
No. 121 is effective for financial statements for fiscal years beginning
after December 15, 1995. Holdings adopted SFAS No. 121 effective January 1,
1996. Such adoption had no material impact on Holdings' consolidated
financial statements.
Holdings adopted SFAS No. 114, "Accounting by Creditors for Impairment of
a Loan," as amended by SFAS No. 118, "Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures," effective January 1, 1995.
Under SFAS No. 114, a loan is impaired when it is "probable" that a creditor
will be unable to collect all amounts due (i.e., both principal and interest)
according to the contractual terms of the loan agreement. The measurement of
impairment may be based on: (i) the present value of the expected future cash
flows of the impaired loan discounted at the loan's original effective
interest rate, (ii) the loan's observable market price, or (iii) the fair
value of the loan's collateral. SFAS No. 114 does not apply to large groups
of smaller balance homogeneous loans that are collectively
56
<PAGE>
evaluated for impairment. For 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 Holdings' consolidated financial
statements as Holdings' existing policy of measuring loan impairment was
consistent with methods prescribed in these standards.
Holdings considers a loan to be impaired when, based upon current
information and events, it believes it is probable that Holdings 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, Holdings considers large
non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios or other
indications that the borrowers are experiencing increased levels of financial
difficulty. Holdings bases the measurement of collateral-dependent impaired
loans on the fair value of their collateral. The amount, if any, by which the
recorded investment of the loan exceeds the measure of the impaired loan's
value is recognized by recording a valuation allowance.
Generally, specific allowances for loan losses relative to impaired
multi-family and commercial real estate loans, which comprised the majority
of impaired loans at September 30, 1996, have not been established because
most would be eligible to be sold to Granite under the Put Agreement.
Holdings considers the volume of impaired loans that are not eligible under
the Put Agreement and the level in excess of the amount available under the
Put Agreement in its evaluation of the adequacy of the established allowance
for loan losses. There have not been any significant multi-family or
commercial real estate loans originated since October 1, 1994. At September
30, 1996, the specific allowances for loan losses reflected on Holdings'
books represent allowances established by predecessor institutions and were
acquired in the SFFed and Home Federal Acquisitions.
At September 30, 1996, the carrying value of loans that are considered to
be impaired under SFAS No. 114 totalled $136.2 million (of which $31.4
million were on nonaccrual status). The average recorded investment in
impaired loans during the nine months ended September 30, 1996 was
approximately $136.9 million. For the nine months ended September 30, 1996,
Holdings recognized interest income on these impaired loans of $12.3 million
which included $.3 million of interest income recognized using the cash basis
method of income recognition.
On May 12, 1995, the FASB issued SFAS No. 122, "Accounting for Mortgage
Servicing Rights, an amendment to Statement No. 65." This statement provides
guidance for the recognition of mortgage servicing rights as an asset when a
mortgage loan is sold or securitized and servicing rights are retained.
Holdings adopted this standard effective April 1, 1995.
SFAS No. 122 requires that a portion of the cost of originating a mortgage
loan be allocated to the mortgage servicing rights based on its fair market
value. To determine the fair value of the servicing rights created since
April 1, 1995, Holdings uses the market prices under comparable servicing
sale contracts, when available, or alternatively, uses a valuation model that
calculates the present value of future net servicing income. In using this
valuation method, Holdings incorporated assumptions that market participants
would use in estimating future net servicing income which included estimates
of the cost of servicing, the discount rate, mortgage escrow earnings rate,
an inflation rate, ancillary income, prepayment speeds and default rates and
losses. As a result of Holdings' adoption of SFAS No. 122, mortgage servicing
rights related to loans originated by Holdings totalling $52.1 million were
capitalized during the nine months ended September 30, 1996.
Also, SFAS No. 122 requires enterprises to measure the impairment of
servicing rights based on the difference between the carrying amount of the
servicing rights and their current fair value. In determining impairment,
Holdings aggregates all mortgage servicing rights and stratifies them based
on the predominant risk characteristics of interest rate, loan type and
investor type. Further, mortgage servicing rights capitalized prior to the
adoption of SFAS No. 122 were stratified by acquisition to measure
impairment. A valuation allowance is established for any excess of amortized
book value over the current fair value, by risk stratification, by a charge
to income. Based on this analysis, no allowance for loss on impairment of
loan servicing rights was necessary at September 30, 1996.
57
<PAGE>
Effective January 1, 1994, Holdings adopted SFAS No. 115 for financial
reporting purposes. SFAS No. 115 directs that securities held to maturity be
reported at amortized cost. Securities bought and held principally for the
purpose of selling them in the near term are classified as trading securities
and reported at fair value, with unrealized gains and losses included in
earnings. All other securities held for investment purposes are classified as
held for sale and are carried at fair value, with unrealized gains and losses
excluded from earnings and reported in a separate component of stockholders'
equity, net of tax. There was no impact on the consolidated financial
statements of Holdings as a result of such adoption. At December 31, 1994,
all U.S. government and agency securities and mortgage-backed securities were
classified in the held-to-maturity portfolio.
On November 15, 1995, the FASB issued the Special Report, which provided
all entities an opportunity to reconsider their ability and intent to hold
securities to maturity and allowed a one-time reclassification of securities
from held to maturity to available for sale without "tainting" the remaining
held-to-maturity securities. On December 29, 1995, Holdings reclassified $1.5
billion and $231.8 million in carrying value of mortgage-backed securities
and U.S. government and agency securities, respectively, from the respective
held-to-maturity categories to securities available-for-sale, resulting in a
net after-tax increase of $22.5 million in stockholders' equity. There was no
impact on the Bank's regulatory capital as a result of this reclassification.
Holdings adopted SFAS No. 109, "Accounting for Income Taxes" effective
January 1, 1993. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. There was no
impact on the consolidated financial statements of Holdings as a result of
such adoption.
As of December 31, 1994, Holdings recorded a valuation allowance for 100%
of the net deferred tax asset because at that time it was not more likely
than not that such deferred tax asset would be realized. Based on a favorable
earnings trend since the consummation of the FN Acquisition and future
earnings expectations, management changed its judgment about the
realizability of Holdings' net deferred tax asset and recognized a deferred
tax benefit of $69 million in the fourth quarter of 1995 and an additional
$125 million in the second quarter of 1996. Management believes that the
realization of such asset is more likely than not, based upon the expectation
that Holdings will generate the necessary amount of taxable income in future
periods.
PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the pro forma condensed combined statement of
financial condition at September 30, 1996 gives effect to the Cal Fed
Acquisition, the Offering and the Capital Corporation Offering and the pro
forma condensed combined statement of operations for the nine months ended
September 30, 1996 gives effect to the Cal Fed Acquisition, the SFFed
Acquisition, the LMUSA 1996 Purchase, the Branch Sales, the Capital
Corporation Offering and the issuances of the Holdings Preferred Stock, the
Holdings 9 1/8% Senior Subordinated Notes and the Notes. The discussion of
the pro forma condensed combined statement of operations for the year ended
December 31, 1995 gives effect to the Acquisitions, the Branch Sales, the
Capital Corporation Offering and the issuances of the Holdings Preferred
Stock, the Holdings 9 1/8% Senior Subordinated Notes and the Notes. The
following discussion should be read in conjunction with the Unaudited Pro
Forma Financial Data included elsewhere in this Prospectus. See "Projected
Pro Forma Capital Ratios of the Bank."
Pro Forma Statement of Financial Condition at September 30, 1996
The Cal Fed Acquisition, the Capital Corporation Offering and the
issuances of the Holdings Preferred Stock and the Notes have a significant
effect, on a pro forma basis, on Holdings' September 30, 1996 historical
consolidated statement of financial condition. Total assets increase $14.1
billion, or 82.8%, from $17.0 billion on an historical basis to $31.0 billion
pro forma combined.
58
<PAGE>
Cash and cash equivalents decrease by approximately $239.9 million from
the historical amount, representing the net impact of the payment made in
connection with the purchase price of California Federal, partially offset by
the proceeds from the issuance of the Notes and cash acquired in the Cal Fed
Acquisition.
Securities and mortgage-backed securities increase by approximately $3.2
billion from the historical amount.
Loans receivable increase approximately $10.0 billion from the historical
amount, including approximately $8.2 billion of 1-4 unit residential loans,
approximately $1.3 billion of multi-family residential loans, approximately
$497 million of commercial real estate loans, and approximately $196 million
of principally consumer loans, net of allowances for loan losses of
approximately $170.1 million. Approximately 84% of these loans are
adjustable-rate mortgage loans and approximately 88% are collateralized with
properties located in California.
MSRs increase approximately $32.3 million from the historical amount as a
result of the Cal Fed Acquisition, which is expected to add a loan servicing
portfolio of approximately $3.5 billion and 39,315 loans.
Intangible assets increase by approximately $531.1 million from the
historical amount as a result of the purchase accounting applied in the Cal
Fed Acquisition.
Other assets increase by approximately $510.8 million from the historical
amount as a result of other assets (primarily interest and accounts
receivable, real estate held for sale, FHLB stock, servicing-related
receivables, tax receivables, and miscellaneous other assets) acquired in the
Cal Fed Acquisition. Other assets also include $132.7 million representing
the estimated after-tax recovery that will inure to the Bank from the
California Federal Litigation, net of amounts payable to holders of the
Litigation Interests and Secondary Litigation Interests.
Deposits increase by approximately $8.8 billion from the historical
amount, representing deposits acquired in the Cal Fed Acquisition. First
Nationwide operated 116 full service branches in four major metropolitan
areas at September 30, 1996. After giving effect to the Cal Fed Acquisition,
First Nationwide will operate 227 full service branches (194 of which will be
in California) in four major metropolitan areas.
Borrowings increase by approximately $4.4 billion from the historical
amount, representing borrowings assumed in connection with the Cal Fed
Acquisition (principally securities sold under agreements to repurchase and
FHLB advances) and the issuance of the Notes, net of borrowings reduced
through the utilization of proceeds from the issuance of the Capital
Corporation Preferred Stock.
Other liabilities increase by approximately $237.8 million from the
historical amount, principally related to other liabilities and accrued
expenses assumed by the Bank as part of the Cal Fed Acquisition.
Minority interest increases by approximately $672.5 million as a result of
the issuance of the Capital Corporation Preferred Stock and the 10 5/8% Bank
Preferred Stock assumed in the Cal Fed Acquisition.
Stockholders' equity decreases by approximately $17.3 million from the
historical amount, representing the issuance costs related to the Capital
Corporation Preferred Stock.
Pro Forma Results of Operations
Nine Months ended September 30, 1996
On a pro forma basis, Holdings' historical net income before minority
interest for the nine months ended September 30, 1996 increases approximately
$35.7 million, or 6.1%, as a result of the Cal Fed Acquisition, the SFFed
Acquisition, the LMUSA 1996 Purchase, the Branch Sales, the Capital
Corporation Offering and the issuances of the Holdings Preferred Stock, the
Holdings 9 1/8% Senior Subordinated Notes and the Notes.
Net interest income after provision for loan losses increases
approximately $218.0 million from the historical amount, due in part to the
utilization of the proceeds from the issuance of the Capital Corporation
Preferred Stock to reduce debt and the net effect of the interest-earning
assets acquired and
59
<PAGE>
the interest-bearing liabilities assumed in the Cal Fed Acquisition. The
positive impact of the Cal Fed Acquisition is partially offset by the pro
forma interest expense from the 9 1/8% Senior Subordinated Notes, from the
Notes and from borrowings to replace deposits sold in the Branch Sales, which
is approximately $4.1 million higher than the interest expense on such
deposits.
Noninterest income increases approximately $56.0 million from the
historical amount, substantially all of which relates to customer banking
fees on the additional $8.8 billion deposit portfolio acquired in connection
with the Cal Fed Acquisition. California Federal's historical amounts include
a $12 million gain on the sale of branches.
Noninterest expense increases approximately $228.3 million from the
historical amount, principally due to incremental expenses of operations
acquired in the Cal Fed Acquisition, offset by the elimination of historical
noninterest expense directly attributable to the Ohio, Michigan, and
Northeast retail branch operations. The pro forma results of operations for
the Cal Fed Acquisition include a $57.7 million reduction in noninterest
expense over historical Cal Fed levels relative to a staff reduction of
approximately 36%, the consolidation of seven branch offices and two
administrative facilities and other economies of scale, offset in part by the
amortization of goodwill.
Net income available to common stockholder decreases by $27.9 million,
reflecting the $30.8 million Capital Corporation Preferred Stock dividends
net of tax benefit, the $18.9 million in dividends on the 10 5/8% Bank
Preferred Stock and the $13.9 million in dividends on the Holdings Preferred
Stock.
Year ended December 31, 1995
On a pro forma basis, Holdings' historical net income before minority
interest for the year ended December 31, 1995 increases approximately $127.8
million, or 71.1%, as a result of the Acquisitions, the Branch Sales, the
Capital Corporation Offering and the issuances of the Holdings Preferred
Stock, the Holdings 9 1/8% Senior Subordinated Notes and the Notes.
Net interest income after provision for loan losses increases
approximately $324.5 million from the historical amount, due in part to the
utilization of the proceeds from the issuance of the Capital Corporation
Preferred Stock to reduce debt and the net effect of the interest-earning
assets acquired and the interest-bearing liabilities assumed in the Cal Fed
and SFFed Acquisitions. In addition, the loans receivable acquired as part of
the LMUSA Purchases contributed to this increase. The positive impact of the
Cal Fed and SFFed Acquisitions and the LMUSA Purchases is offset by the pro
forma interest expense from the 9 1/8% Senior Subordinated Notes, from the
Notes and from borrowings to replace deposits sold in the Branch Sales, which
is approximately $69.1 million higher on a pro forma basis than the interest
expense on such deposits.
Noninterest income increases approximately $116.8 million from the
historical amount, which relates to loan servicing fee income on the
additional $25.2 billion loan servicing portfolio acquired in connection with
the LMUSA Purchases and customer banking fees generated from the $11.5
billion deposit portfolio acquired through the Cal Fed and SFFed Acquisitions
offset by a loss of customer banking fees relating to deposits sold in the
Branch Sales.
Noninterest expense increases approximately $289.7 million from the
historical amount, principally due to incremental expenses of operations
acquired in the Cal Fed and SFFed Acquisitions and the LMUSA Purchases,
offset by the elimination of historical noninterest expense directly
attributable to the Ohio, Michigan, and Northeast retail branch operations.
The pro forma results of operations for the Cal Fed Acquisition include a
$78.0 million reduction in noninterest expense from historical Cal Fed levels
as a result of consolidation with First Nationwide's operations, including a
35% reduction in staff and consolidation of seven branch offices and two
administrative facilities. The pro forma results of operations for the SFFed
Acquisition include a $45.6 million reduction in noninterest expense over
historical SFFed levels relative to a staff reduction of approximately 58%,
the consolidation of nine branch offices and administrative facilities, the
elimination of nonrecurring historical expenses related to the SFFed
Acquisition and other economies of scale, offset in part by the amortization
of goodwill. Similarly, the pro forma results of operations for the LMUSA
Purchases include a $280.9 million reduction in noninterest
60
<PAGE>
expense over historical LMUSA levels, representing the effect of significant
staff reductions, reductions in facilities costs due to the consolidation and
the elimination of certain historical amounts related to operations not
acquired as part of the LMUSA Purchases.
Net income available to common stockholder increases by $43.0 million,
reflecting the $41.1 million Capital Corporation Preferred Stock dividends
net of tax benefit, the $25.6 million in dividends on the 10 5/8% Bank
Preferred Stock and the $18.1 million in dividends on the Holdings Preferred
Stock.
RESULTS OF OPERATIONS
The period to period comparisons set forth below, including the changes in
magnitude of the various items between periods, have been affected by the
acquisitions and dispositions consummated during the periods involved.
The following tables set forth, for the periods and at the dates
indicated, information regarding Holdings' consolidated average statements of
financial condition, together with the total dollar amounts of interest
income and interest expense and the weighted average interest rates for the
periods presented. Average balances are calculated on a daily basis. The
information presented represents the historical activity of First Nationwide
and includes the impact of the LMUSA 1996 Purchase, the SFFed Acquisition and
the Home Federal Acquisition from their respective acquisition dates of
January 31, 1996, February 1, 1996 and June 1, 1996.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------------
1996 1995
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------- --------- --------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1):
Securities (2)(5) ................................ $ 569 $ 25 5.86% $ 431 $ 21 6.53%
Mortgage-backed securities available for sale (5) 1,723 88 6.81 -- -- --
Mortgage-backed securities held to maturity (5) . 1,804 103 7.61 2,996 156 6.94
Loans held for sale, net ......................... 850 46 7.22 110 7 8.42
Loans receivable, net ............................ 11,103 671 8.06 10,170 604 7.92
Covered Assets (3) ............................... 35 1 5.43 206 10 6.40
--------- ---------- --------- --------- ---------- ---------
Total interest-earning assets ................... 16,084 934 7.74% 13,913 798 7.65%
---------- ========= ---------- =========
Noninterest-earning assets ........................ 1,162 728
--------- ---------
Total assets .................................... $17,246 $14,641
========= =========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS'
EQUITY
Interest-bearing liabilities:
Deposits ......................................... $ 9,629 $323 4.48% $ 9,876 $329 4.45%
Securities sold under agreements to repurchase .. 2,118 90 5.68 1,554 78 6.71
Borrowings (4) ................................... 4,129 200 6.47 2,278 142 8.35
--------- ---------- --------- --------- ---------- ---------
Total interest-bearing liabilities .............. 15,876 613 5.16% 13,708 549 5.36%
---------- ========= ---------- =========
Noninterest-bearing liabilities ................... 348 286
Minority interest ................................. 307 301
Stockholders' equity .............................. 715 346
--------- ---------
Total liabilities and stockholders' equity ..... $17,246 $14,641
========= =========
Net interest income ................................ $321 $249
========== ==========
Interest rate spread ............................... 2.58% 2.29%
========= =========
Net interest margin ................................ 2.65% 2.37%
========= =========
Average equity to average assets ................... 4.15% 2.36%
========= =========
</TABLE>
- --------------
(1) Nonaccruing assets are included in the average balances for the periods
indicated.
(2) Includes interest-bearing deposits in other banks and securities purchased
under agreements to resell.
(3) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
(4) Interest and average rate include the impact of interest rate swaps.
(5) Prior to December 29, 1995, all U.S. government agency and mortgage-backed
securities were classified in the held to maturity category. On December
29, 1995, Holdings reclassified $1.5 billion and $231.8 million,
respectively, of securities and mortgage-backed securities from the
held-to-maturity category to the available-for-sale category. The
information presented in the "securities" line for 1996 includes
securities held to maturity of $4 million and related interest of less
than $.01 million with the remainder representing securities available for
sale. Average balances presented for 1996 represent the original amortized
cost of the securities without the effect of unrealized gains and losses
recorded as a result of the available for sale classification.
61
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1995 1994
-------------------------------- --------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST RATE BALANCE INTEREST RATE
--------- ---------- --------- --------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets (1):
U.S. government and agency
securities held to maturity
(2)(3) ....................... $ 435 $ 28 6.42% $ 138 $ 7 4.95%
Mortgage-backed securities
held to maturity (3)(4) ..... 2,985 213 7.14 711 43 6.05
Loans held for sale ........... 304 24 7.89 11 1 5.22
Loans receivable, net (4) .... 10,058 800 7.95 2,926 212 7.27
Covered Assets, net (5) ...... 165 11 6.67 491 30 6.11
--------- ---------- --------- --------- ---------- ---------
Total interest-earning
assets ...................... 13,947 1,076 7.71% 4,277 293 6.85%
---------- ========= --------- ---------- =========
Noninterest-earning assets .... 751 161
--------- ---------
Total assets ................. $14,698 $4,438
========= =========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits ...................... $ 9,959 $ 447 4.49% $2,605 $101 3.88%
Securities sold under
agreements to repurchase .... 1,577 105 6.66 351 19 5.37
Borrowings (6) ................ 2,210 183 8.26 1,181 80 6.77
--------- ---------- --------- --------- ---------- ---------
Total interest-bearing
liabilities ................. 13,746 735 5.35% 4,137 200 4.83%
---------- ========= ---------- =========
Noninterest-bearing
liabilities ................... 277 53
Minority Interest .............. 301 75
Stockholders' equity ........... 374 173
--------- ---------
Total liabilities and
stockholders' equity ........ $14,698 $4,438
========= =========
Net interest income ............. $ 341 $ 93
========== ==========
Interest rate spread ............ 2.36% 2.02%
========= =========
Net interest margin ............. 2.44% 2.18%
========= =========
Average equity to average assets 2.54% 3.90%
========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1993
--------------------------------
AVERAGE AVERAGE
BALANCE INTEREST RATE
--------- ---------- ---------
<S> <C> <C> <C>
ASSETS
Interest-earning assets (1):
U.S. government and agency
securities held to maturity
(2)(3) ....................... $ 710 $24 3.43%
Mortgage-backed securities
held to maturity (3)(4) ..... 120 6 5.04
Loans held for sale ........... -- -- --
Loans receivable, net (4) .... 124 16 12.67
Covered Assets, net (5) ...... 804 49 6.11
--------- ---------- ---------
Total interest-earning
assets ...................... 1,758 95 5.42%
--------- ---------- =========
Noninterest-earning assets .... 81
---------
Total assets ................. $1,839
=========
LIABILITIES, MINORITY INTEREST
AND STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
Deposits ...................... $1,197 $55 4.59%
Securities sold under
agreements to repurchase .... 21 1 3.83
Borrowings (6) ................ 373 19 5.09
--------- ---------- ---------
Total interest-bearing
liabilities ................. 1,591 75 4.70%
---------- =========
Noninterest-bearing
liabilities ................... 40
Minority Interest .............. --
Stockholders' equity ........... 208
---------
Total liabilities and
stockholders' equity ........ $1,839
=========
Net interest income ............. $20
==========
Interest rate spread ............ .72%
=========
Net interest margin ............. 1.14%
=========
Average equity to average assets 11.31%
=========
</TABLE>
- --------------
(1) Nonaccruing assets are included in the average balances for the
periods indicated.
(2) Includes interest-bearing deposits in other banks and short-term
investment securities.
(3) Substantially all securities held to maturity (except for mortgage-backed
securities resulting from the securitization with recourse of certain of
First Nationwide's loans) were reclassified to securities available for
sale on December 29, 1995. The average balance of such securities for
three days is not material and is therefore not presented.
(4) In late December 1994, $1.3 billion of single-family loans were
securitized with recourse. The large increase in the average balance of
mortgage-backed securities held to maturity from 1994 to 1995 is primarily
due to such securitized loans.
(5) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
(6) Interest and average rate include the impact of interest rate swaps.
62
<PAGE>
The following tables present certain information regarding changes in
interest income and interest expense of Holdings during the periods
indicated. The dollar amount of interest income and interest expense
fluctuates depending upon changes in the respective interest rates and upon
changes in the respective amounts (volume) of Holdings' interest-earning
assets and interest-bearing liabilities. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (i) changes in volume (changes in
average outstanding balances multiplied by the prior period's rate) and (ii)
changes in rate (changes in average interest rate multiplied by the prior
period's volume). Changes attributable to both volume and rate have been
allocated proportionately.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996 VS. 1995
INCREASE (DECREASE) DUE TO
---------------------------------------------
VOLUME RATE NET
------------ ---------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Interest Income:
Securities ..................................... $ 6 $ (2) $ 4
Mortgage-backed securities available for sale . 88 -- 88
Mortgage-backed securities held to maturity ... (70) 17 (53)
Loans held for sale, net ....................... 40 (1) 39
Loans receivable, net .......................... 56 11 67
Covered assets ................................. (8) (1) (9)
------------ ---------- ---------
Total ......................................... 112 24 136
------------ ---------- ---------
Interest Expense:
Deposits ....................................... (9) 3 (6)
Securities sold under agreements to repurchase 21 (9) 12
Borrowings ..................................... 80 (22) 58
------------ ---------- ---------
Total ......................................... 92 (28) 64
------------ ---------- ---------
Change in net interest income ................ $ 20 $ 52 $ 72
============ ========== =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 VS. 1994 1994 VS. 1993
INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO
-------------------------- --------------------------
VOLUME RATE NET VOLUME RATE NET
-------- ------ ------ -------- ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Securities (1) ..................... $ 18 $ 3 $ 21 $(38) $21 $(17)
Mortgage-backed securities ......... 160 10 170 36 1 37
Loans held for sale ................ 23 0 23 1 0 1
Loans receivable, net .............. 566 22 588 200 (4) 196
Covered assets, net (2) ............ (22) 3 (19) (19) 0 (19)
-------- ------ ------ -------- ------ -------
Total ............................. 745 38 783 180 18 198
-------- ------ ------ -------- ------ -------
Interest Expense:
Deposits ........................... 328 18 346 53 (7) 46
Securities sold under agreements to
repurchase ........................ 80 6 86 18 0 18
Borrowings ......................... 82 21 103 53 8 61
-------- ------ ------ -------- ------ -------
Total ............................. 490 45 535 124 1 125
-------- ------ ------ -------- ------ -------
Change in net interest income ... $255 $(7) $248 $ 56 $17 $ 73
======== ====== ====== ======== ====== =======
</TABLE>
- ------------
(1) Includes interest-bearing deposits in banks and short-term investments.
(2) Includes unconsolidated subsidiaries covered by FSLIC/RF yield
maintenance.
The volume variances in total interest income and total interest expense
from the nine months ended September 30, 1995 to the corresponding period in
1996 are largely due to the additional $4.2 billion in interest-earning
assets acquired and $4.4 billion in interest-bearing liabilities assumed in
the SFFed and Home Federal Acquisitions. The overall volume change in net
interest income is positive due to the SFFed and Home Federal Acquisitions
and the Branch Sales. The positive total rate variance of $52 million is
attributed to increasing rates on adjustable-rate assets as such assets
repriced to their fully-indexed yields and the decrease in overall market
rates on interest-bearing liabilities between the
63
<PAGE>
two periods, offset slightly by the impact of the additional wholesale
borrowings used to finance the Branch Sales. During the first nine months of
1996, deposits totalling $4.6 billion with a weighted average rate of 4.59%
were sold and replaced with $4.1 billion of FHLB advance borrowings and
securities sold under agreements to repurchase with a weighted average rate
of 5.45%.
The positive volume variance of $255 million from 1994 to 1995 is largely
due to $13.4 billion in interest-earning assets acquired offset in part by
the $13.3 billion in interest-bearing liabilities assumed in the FN
Acquisition on October 3, 1994, which contributed to net interest income
during the last quarter of 1994 and all of 1995. The negative rate variance
of $7 million is attributed to the interest-bearing liabilities acquired in
the FN Acquisition, which rates reflect the overall increase in market
interest rates from the fourth quarter of 1994 through 1995, and the issuance
of the Holdings Senior Notes to finance the FN Acquisition. In an increasing
rate environment, Holdings' cost of interest-bearing liabilities reacts more
quickly to changes in rates than the yields on interest-bearing assets, due
to the volume of adjustable rate interest-bearing assets which generally
reprice on an annual or semi-annual basis.
The positive volume variance of $56 million from 1993 to 1994 is largely
due to the FN Acquisition, which resulted in $14 billion in interest-earning
assets contributing to net interest income during the last quarter of 1994.
In addition, the Holdings Senior Notes were issued to partially finance the
FN Acquisition. The positive total rate variance of $17 million is also
attributed to the FN Acquisition, as the majority of the interest-earning
assets acquired were variable-rate assets, reflecting the overall increase in
market interest rates from 1993 to 1994.
Nine Months Ended September 30, 1996 versus Nine Months Ended September 30,
1995
Interest income. Total interest income was $934.4 million for the nine
months ended September 30, 1996, an increase of $136.2 million from the nine
months ended September 30, 1995. The interest-earning assets acquired in the
SFFed and Home Federal Acquisitions resulted in total interest-earning assets
for the nine months of 1996 averaging $16.1 billion, compared to $13.9
billion for the corresponding period in 1995. In addition, the yield on total
interest-earning assets during the nine months ended September 30, 1996
increased to 7.74% from the 7.65% yield on total interest-earning assets for
the nine months ended September 30, 1995.
Holdings earned $671.1 million of interest income on loans receivable for
the nine months ended September 30, 1996, an increase of $67.3 million from
the nine months ended September 30, 1995. The loans acquired in the SFFed and
Home Federal Acquisitions contributed most of the increased interest income
in 1996, and resulted in an increase in the average balance of loans
receivable to $11.1 billion from $10.2 billion for the nine months ended
September 30, 1995. The weighted average yield on loans receivable increased
to 8.06% for the nine months ended September 30, 1996 from 7.92% for the same
period in 1995 due to upward rate adjustments on adjustable rate residential
loans as such loans repriced to their fully indexed rates, without the effect
of teaser rates or annual interest rate adjustment caps.
Holdings earned $45.4 million of interest income on loans held for sale
for the nine months ended September 30, 1996, an increase of $38.5 million
from the nine months ended September 30, 1995. The increased income is the
net effect of a higher average volume of loans held for sale due to increased
originations from the operations acquired in the Maryland Acquisition and the
LMUSA Purchases, partially offset by a decrease in the weighted average rate
of such loans. The average balance of loans held for sale was $850 million
for the nine months ended September 30, 1996, an increase of $740 million
over the same period in 1995. The weighted average yield on loans held for
sale decreased to 7.22% for the nine months ended September 30, 1996 from
8.42% during the nine months ended September 30, 1995 due to generally
decreasing market rates during the period and the portfolio consisting of a
higher percentage of comparatively lower-rate adjustable rate loans in 1996
compared to a higher fixed rate in 1995.
Interest income on all mortgage-backed securities, including the
available-for-sale portfolio and mortgage-backed securities held to maturity,
was $191.6 million for the nine months ended September 30, 1996, an increase
of $35.2 million from the nine months ended September 30, 1995. The average
portfolio balances increased $.5 billion, to $3.5 billion, during the nine
months ended September 30, 1996 compared to $3.0 billion during the nine
months ended September 30, 1995. The weighted average yield on all
64
<PAGE>
mortgage-backed securities increased to 7.22% for the nine months ended
September 30, 1996 from 6.94% for the corresponding period in 1995, primarily
due to the upward rate adjustments of adjustable rate mortgage-backed
securities as the loans underlying such securities repriced to their fully
indexed rates, without the effect of teaser rates or annual interest rate
adjustment caps.
The interest income from Covered Assets declined $8.5 million, to $1.4
million, for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995. The decline is due to a reduction in the
volume of Covered Assets resulting from the FDIC Purchase (as defined herein)
in June 1995 and the termination of the Assistance Agreement in August 1996.
Interest income from securities and interest-bearing deposits in banks was
$24.9 million for the nine months ended September 30, 1996, an increase of
$3.8 million from the nine months ended September 30, 1995. The average
portfolio balances during the nine months ended September 30, 1996 and 1995
increased to $569 million from $431 million, respectively, primarily due to
assets acquired in the SFFed Acquisition. The weighted average yield on these
assets decreased to 5.86% for the nine months ended September 30, 1996 from
6.53% for the nine months ended September 30, 1995, primarily due to an
overall decline in interest rates.
Interest Expense. Total interest expense was $613.3 million for the nine
months ended September 30, 1996, an increase of $64.1 million from the nine
months ended September 30, 1995. The increase is the result of additional
interest-bearing liabilities assumed in the SFFed and Home Federal
Acquisitions and incrementally higher rates paid on the additional borrowings
incurred to replace the retail deposits sold in the Branch Sales.
Interest expense on customer deposits, including Brokered Deposits, was
$323.2 million for the nine months ended September 30, 1996, a decrease of
$5.6 million from the nine months ended September 30, 1995. The average
balance of customer deposits outstanding decreased from $9.9 billion to $9.6
billion for the nine months ended September 30, 1995 and 1996, respectively.
The $4.6 billion in deposits sold in the Branch Sales decreased the average
balance from period to period by $3.4 billion while deposits of approximately
$3.8 billion acquired in the SFFed and Home Federal Acquisitions and the
Branch Purchases increased the average balance from period to period by $3.2
billion due to the timing of such acquisitions and sales. The overall
weighted average cost of deposits increased from 4.45% for the nine months
ended September 30, 1995 to 4.48% for the nine months ended September 30,
1996, due principally to the effect of the deposits assumed in the SFFed and
Home Federal Acquisitions having a weighted average rate of 5.08% and the
deposits sold in the Branch Sales having a weighted average rate of
approximately 4.59%, as well as slight increases in the market rates of
interest paid for Brokered Deposits, partially offset by the impact of higher
average balances of lower rate custodial transaction accounts related to the
additional loan servicing acquired in the Maryland Acquisition and the LMUSA
Purchases.
Interest expense on securities sold under agreements to repurchase
totalled $89.9 million for the nine months ended September 30, 1996, an
increase of $11.9 million from the nine months ended September 30, 1995. The
average balance of such borrowings for the nine months ended September 30,
1996 and 1995 was $2.1 billion and $1.6 billion, respectively. The increase
is attributed to $.8 billion of such liabilities acquired in the SFFed and
Home Federal Acquisitions together with $1.5 billion in additional short-term
borrowings to fund the Branch Sales during 1996, partially offset by
maturities and payoffs that were refinanced with deposits acquired from the
Home Federal Acquisition and FHLB advances. The weighted average interest
rate on these instruments decreased to 5.68% during the nine months ended
September 30, 1996 from 6.71% for the nine months ended September 30, 1995,
primarily due to the impact of decreases in overall market interest rates for
such borrowings.
Interest expense on borrowings totalled $200.1 million for the nine months
ended September 30, 1996, an increase of $57.8 million from the nine months
ended September 30, 1995. The increase is attributed to the net effect of a
volume increase for borrowings assumed in the SFFed and Home Federal
Acquisitions, the issuance of the Holdings 9 1/8% Senior Subordinated Notes,
and additional borrowings to replace the deposits sold in the Branch Sales,
partially offset by the impact of decreases in the rates paid on such
borrowings largely due to the shorter weighted average maturity of the
borrowings at September
65
<PAGE>
30, 1996 compared to September 30, 1995. The average balance outstanding for
the nine months ended September 30, 1996 and 1995 was $4.1 billion and $2.3
billion, respectively. The weighted average interest rate on these
instruments decreased to 6.47% during the nine months ended September 30,
1996 from 8.35% for the nine months ended September 30, 1995, primarily due
to the impact of decreases in overall market interest rates and the shorter
average maturity of the portfolio.
Net Interest Income. Net interest income was $321.1 million for the nine
months ended September 30, 1996, an increase of $72.2 million from the nine
months ended September 30, 1995. The interest rate spread increased to 2.58%
for the nine months ended September 30, 1996 from 2.29% for the nine months
ended September 30, 1995.
Noninterest Income. Total noninterest income, consisting primarily of loan
servicing fees, customer banking fees, management fees and gains on the
Branch Sales and on sales of assets, was $595.5 million for the nine months
ended September 30, 1996, an increase of $490.2 million from the nine months
ended September 30, 1995. This increase includes (i) gains on sales of
branches of $363.0 million, (ii) gain from the sale of ACS stock of $40.4
million and (iii) the income recognized in connection with the termination of
the Assistance Agreement of $25.6 million.
Loan servicing fees, net of amortization of mortgage servicing rights,
were $92.2 million for the nine months ended September 30, 1996, compared to
$48.1 million for the nine months ended September 30, 1995. This increase is
due to the addition of the mortgage servicing portfolios acquired in the
Maryland Acquisition, the LMUSA Purchases and the SFFed and Home Federal
Acquisitions, as well as servicing rights originated through the increased
origination capacity provided by these acquisitions. The single-family
residential loan servicing porfolio, excluding loans serviced for the Bank,
increased from $7.4 billion at January 1, 1995 to $27.0 billion at January 1,
1996 and to $42.7 billion at September 30, 1996. During the nine months ended
September 30, 1996, Holdings sold $3.8 billion in single-family mortgage
loans originated for sale as part of its ongoing mortgage banking operations
compared to $457.3 million of such sales for the corresponding period in
1995.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $34.4 million for the nine months ended September 30, 1996,
compared to $34.8 million for the nine months ended September 30, 1995. The
decrease is attributable to the impact of decreased revenues associated with
the Branch Sales, partially offset by the increased revenues from the retail
banking operations acquired in the Branch Purchases and the SFFed and Home
Federal Acquisitions.
Management fees totalled $8.0 million for the nine months ended September
30, 1996, compared to $11.1 million for the nine months ended September 30,
1995. The decrease is attributable principally to the reduced number of
assets under management as a result of contracts with the Resolution Trust
Corporation and other third parties which have expired.
Gain on sales of branches was $363.0 million for the nine months ended
September 30, 1996.
Gain on sales of loans was $13.0 million for the nine months ended
September 30, 1996, compared to a loss of $1.1 million for the nine months
ended September 30, 1995. The increase is attributed in part to a gain of
$7.5 million on the sale of $298.0 million of consumer loans during the first
quarter of 1996. In addition, the Bank experienced increased gains on sales
of single-family mortgage loans due to the adoption of SFAS No. 122 on April
1, 1995. See "--Mortgage Banking Operations."
Gain on sales of assets was $38.4 million for the nine months ended
September 30, 1996. The gain is primarily the result of a $40.4 million gain
from the sale of ACS stock, partially offset by a writedown recorded on
certain collateralized mortgage obligations ("CMOs") in the mortgage-backed
securities available-for-sale portfolio determined to have a permanent
impairment in value.
Other noninterest income was $46.5 million for the nine months ended
September 30, 1996, an increase of $34.0 million from the nine months ended
September 30, 1995. The increase is primarily attributed to $25.6 million
recognized in connection with the termination of the Assistance Agreement, an
increase of $3.5 million in dividends on FHLB stock related to an increase in
the volume of such stock owned by First Nationwide and $2.3 million of
interest received related to the favorable outcome of an arbitration hearing.
66
<PAGE>
Noninterest Expense. Total noninterest expense was $379.3 million for the
nine months ended September 30, 1996, an increase of $129.5 million from the
nine months ended September 30, 1995. The increase is principally due to
additional conpensation, loan expense, deposit insurance premiums and other
noninterest expenses, primarily related to the growth of the Bank through the
various acquisitions in 1995 and the first half of 1996 and the Special SAIF
Assessment.
Total compensation and employee benefits expense was $156.0 million for
the nine months ended September 30, 1996, an increase of $38.1 million from
the nine months ended September 30, 1995, primarily attributable to $33.6
million of Incentive Plan accruals. The number of full time employees
increased by 245 to 3,466 for the nine months ended September 30, 1996,
compared to the nine months ended September 30, 1995. This increase is
primarily due to the net impact of employee additions in the mortgage banking
operations related to the servicing portfolios acquired in the LMUSA
Purchases and an increase in retail banking employees attributable to the
SFFed and Home Federal Acquisitions, partially offset by a reduction in
employees due to the Branch Sales and First Nationwide's cost reduction
program. The nine months ended September 30, 1995 includes accruals for
termination benefits of $6.6 million related to the cost reduction plan and
the relocation of loan servicing operations to Frederick, Maryland from
Sacramento, California.
Occupancy and equipment expense was $37.4 million for the nine months
ended September 30, 1996, a decrease of $2.0 million from the nine months
ended September 30, 1995, attributed primarily to accruals established in
1995 for facilities costs related to the relocation of First Nationwide's
mortgage loan servicing operations to Maryland, the closure of retail
mortgage loan production offices and the cost reduction project. In addition,
the decrease in occupancy expenses includes the net effect of operations sold
in the Branch Sales, partially offset by increased expenses due to the
Maryland, SFFed and Home Federal Acquisitions.
Loan expense was $20.5 million for the nine months ended September 30,
1996, an increase of $14.2 million from the nine months ended September 30,
1995. The increase relates to additional expenses associated with the higher
volume of loans serviced due to the LMUSA Purchases and the Maryland
Acquisition. Such expenses include subservicing fees paid on acquired
servicing portfolios prior to conversion to FNMC's systems and increased
pass-through interest expense for loan payoffs in serviced loan pools. In
addition, such expenses also include outside appraisal fees, inspection fees,
and provision for losses on loans insured by the Federal Housing
Administration or guaranteed by the Veterans Administration.
SAIF deposit insurance premiums increased $60.7 million, to $77.0 million,
for the nine months ended September 30, 1996. The increase is primarily due
to a $60.1 million accrual for the Special SAIF Assessment.
Data processing expense was $8.3 million for the nine months ended
September 30, 1996, an increase of $1.2 million from the nine months ended
September 30, 1995. The increase is attributed to the SFFed and Home Federal
Acquisitions and expenses associated with the higher volume of loans serviced
in connection with the LMUSA Purchases and the Maryland Acquisition.
Marketing expense was $7.7 million for the nine months ended September 30,
1996, a decrease of $3.6 million from the nine months ended September 30,
1995, due to reduced nationwide marketing efforts as a result of the Branch
Sales.
Professional fees increased $5.2 million, to $13.4 million, for the nine
months ended September 30, 1996. This increase includes additional expenses
related to the servicing portfolios acquired in the LMUSA Purchases, as well
as additional accruals for various legal and litigation expenses.
Foreclosed real estate operations, including gains on sales, resulted in a
net gain of $6.8 million for the nine months ended September 30, 1996
compared to a net gain of $.2 million for the same period in 1995. The change
is attributed to a higher volume of sales in 1996 at comparatively higher
prices to carrying values.
Amortization of intangible assets increased to $6.9 million for the nine
months ended September 30, 1996 from $.5 million for the corresponding period
in 1995, primarily due to the amortization of the $133.8 million intangible
asset recorded in connection with the SFFed and Home Federal Acquisitions.
67
<PAGE>
Other noninterest expense was $58.9 million for the nine months ended
September 30, 1996, an increase of $16.1 million from the nine months ended
September 30, 1995, principally due to increased telecommunications, postage,
office supplies, insurance, OTS assessments and travel expenses, all of which
are attributed primarily to the increased loan servicing activity as a result
of the Maryland Acquisition and the LMUSA Purchases.
Provision for Income Taxes. During the nine months ended September 30,
1996 and 1995, Holdings recorded income tax benefit of $79.7 million and
income tax expense of $7.4 million, respectively. Based on a favorable
earnings trend since the consummation of the FN Acquisition and future
earnings expectations, management changed its judgment about the
realizability of Holdings' deferred tax assets and recognized a deferred tax
benefit of $125.0 million in the second quarter of 1996. In order to
recognize the total net deferred tax asset recorded as of September 30, 1996,
Holdings must have future earnings of approximately $865 million. Included in
tax expense for the nine months ended September 30, 1995 is the reversal of
1993 and 1994 over accruals of federal taxes totalling $2.2 million.
Holdings' effective federal tax rates, before extraordinary items were (24%)
and 1% during the nine months ended September 30, 1996 and 1995,
respectively, while its statutory federal tax rate was 35% during both
periods. The difference between the effective and statutory rates was
primarily the result of the utilization of net operating loss carryforwards
for both periods, the reversal of 1993 and 1994 over accruals for the nine
months ended September 30, 1995 and the recognition of a $125.0 million
deferred tax benefit in 1996. Holdings' effective state tax rate before
extraordinary item was approximately 7% and 8% during the nine months ended
September 30, 1996 and 1995, respectively.
Extraordinary Item. During the nine months ended September 30, 1996, the
Bank repurchased $44 million aggregate principal amount of the SFFed Notes,
resulting in a loss of $1.6 million, net of income taxes.
During the nine months ended September 30, 1995, First Nationwide recorded
a gain of $2.0 million on the early extinguishment of $250 million in FHLB
advances, net of income taxes.
Minority Interest. Dividends on the 11 1/2% Bank Preferred Stock totalling
$34.6 million were declared and paid during the nine months ended September
30, 1996.
Net Income. Holdings had net income of $551.1 million for the nine months
ended September 30, 1996, an increase of $496.1 million from the nine months
ended September 30, 1995.
Year Ended December 31, 1995 versus Year Ended December 31, 1994
Interest Income. Total interest income was $1.1 billion for the year ended
December 31, 1995, an increase of $783 million from the year ended December
31, 1994.
The interest-bearing assets acquired in the FN Acquisition resulted in
total interest-earning assets for 1995 averaging $13.9 billion, compared to
$4.3 billion in 1994. In addition, the yield on total interest-earning assets
during 1995 increased .86% from the yield on total interest-earning assets
during 1994, principally due to changes in overall market interest rates and
higher yielding assets acquired in the FN Acquisition.
Holdings earned $800 million of interest income on loans receivable for
the year ended December 31, 1995, an increase of $588 million from the year
ended December 31, 1994. The loans acquired in the FN Acquisition resulted in
an increase in the average balance of loans receivable to $10.1 billion from
$2.9 billion for the years ended December 31, 1995 and 1994, respectively.
The weighted average yield on loans receivable increased to 7.95% for 1995
from 7.27% during 1994, primarily due to the repricing of the adjustable rate
loans in the portfolio acquired in the FN Acquisition.
Holdings earned $24 million of interest income on loans held for sale for
the year ended December 31, 1995, an increase of $23 million from the year
ended December 31, 1994. The additional loan production from the Maryland
Acquisition and the LMUSA 1995 Purchase resulted in an increase in the
average balance of loans held for sale to $304 million from $11 million for
the years ended December 31, 1995 and 1994, respectively. The weighted
average yield on loans held for sale increased to 7.89% for 1995 from 5.22%
during 1994.
68
<PAGE>
Interest income on mortgage-backed securities was $213 million for the
year ended December 31, 1995, an increase of $170 million from the year ended
December 31, 1994. The mortgage-backed securities acquired in the FN
Acquisition, including $1.3 billion of qualifying single-family loans
securitized from First Nationwide's loan portfolio in late 1994 and an
additional $.4 billion securitized in 1995, resulted in the average portfolio
balances increasing from $711 million to $3.0 billion during the years ended
December 31, 1994 and 1995, respectively. The weighted average yield on
mortgage-backed securities increased to 7.14% for 1995 from 6.05% for 1994,
primarily due to the addition of higher-yielding securities from the FN
Acquisition, including loan securitizations, and the subsequent upward rate
adjustments of adjustable rate mortgage-backed securities related to an
overall increase in market interest rates.
Interest income from Covered Assets declined $19 million, to $11 million,
for the year ended December 31, 1995. This decline is due to a reduction in
the volume of Covered Assets, due to sales, repayments and other dispositions
of Covered Assets, including the purchase by the FDIC of substantially all of
the remaining Covered Assets at the fair market value of such assets (the
"FDIC Purchase"), offset in part by an increase in the effective rate earned
on such Covered Assets, which was 6.67% for 1995 compared to 6.11% for 1994.
The higher rate is due to the net effect of the increase in the TCOF (as
defined herein) between the two periods due to generally increasing interest
rates, partially offset by the reduction in the applicable margin over TCOF
prescribed in the Assistance Agreement.
Interest income from securities and interest-bearing deposits in banks was
$28 million for the year ended December 31, 1995, an increase of $21 million
from the year ended December 31, 1994. The average portfolio balances during
the years ended December 31, 1995 and 1994 increased to $435 million from
$138 million, respectively, due to the securities acquired in the FN
Acquisition being held for an entire year in 1995 versus the fourth quarter
only in 1994. The weighted average yield on these assets increased to 6.42%
for 1995 from 4.95% for 1994, primarily due to the increase in overall market
interest rates.
Interest Expense. Total interest expense was $735 million for the year
ended December 31, 1995, an increase of $535 million from the year ended
December 31, 1994. The increase is generally due to the inclusion for a full
year in 1995 of the additional interest-bearing liabilities from the
operations acquired in the FN Acquisition and changes in overall market rates
of interest paid as discussed in more detail below.
Interest expense on deposits, including Brokered Deposits, was $447
million for the year ended December 31, 1995, an increase of $346 million
from the year ended December 31, 1994. The deposits of approximately $10
billion acquired in the FN Acquisition, net of $1.2 billion in deposits sold
in the Illinois Sale, and the $513 million of deposits assumed in the Branch
Purchases, resulted in an increase in the average balance of deposits
outstanding from $2.6 billion to $10.0 billion for the years ended December
31, 1994 and 1995, respectively. The overall weighted average cost of
deposits increased from 3.88% for 1994 to 4.49% for 1995, due principally to
increases in the overall level of interest rates between the two years.
Interest expense on securities sold under agreements to repurchase and
borrowings totalled $288 million for the year ended December 31, 1995, an
increase of $189 million from the year ended December 31, 1994.
The timing of the FN Acquisition and the Illinois Sale, offset in part by
the reduction of borrowings from funds received in connection with the Branch
Purchases, resulted in the average balance outstanding of securities sold
under agreements to repurchase and borrowings for the years ended December
31, 1995 and 1994 increasing to $3.8 billion from $1.5 billion, respectively.
The weighted average interest rate on these instruments increased to 7.60% in
1995 from 6.46% for 1994, primarily due to the impact of increases in overall
market interest rates.
Net Interest Income. Net interest income before provision for loan losses
was $341 million for the year ended December 31, 1995, an increase of $248
million from the year ended December 31, 1994. The interest rate spread
increased to 2.36% in 1995 from 2.02% in 1994. The increase in net interest
income is generally due to the inclusion in 1995 of the operations acquired
in the FN Acquisition for a full year compared to the inclusion of the
operations acquired in the FN Acquisition for only the fourth quarter of
1994.
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<PAGE>
Noninterest Income. Total noninterest income, consisting primarily of
mortgage banking, customer banking and management fee income, was $151
million for the year ended December 31, 1995, an increase of $110 million
from the year ended December 31, 1994. The increase is generally due to the
inclusion in 1995 of the operations acquired in the FN Acquisition for a full
year compared to the inclusion of the operations acquired in the FN
Acquisition for only the fourth quarter of 1994. In addition, additional fee
revenues were generated from operations acquired in the Maryland Acquisition
and the LMUSA 1995 Purchase.
Fees and service charges related to mortgage banking operations, which
consist principally of loan servicing income and borrower fees, were $70
million for the year ended December 31, 1995, compared to $10 million for the
year ended December 31, 1994. This increase is due to the inclusion in 1995
of the mortgage banking operations acquired in the FN Acquisition for an
entire year versus only the fourth quarter in 1994, as well as additional fee
revenues received as a result of the inclusion of the mortgage banking
operations acquired in the Maryland Acquisition and the LMUSA 1995 Purchase.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $48 million for the year ended December 31, 1995 compared to
$11 million for the year ended December 31, 1994. The increase of $37 million
is due to the inclusion in 1995 of the retail banking operations acquired in
the FN Acquisition for an entire year compared to only the fourth quarter of
such operations in 1994, as well as a slight increase in such fees related to
the operations acquired in the Branch Purchases.
Management fees, principally from commercial loan servicing and asset
management services provided for third-party investors, totalled $15 million
for the year ended December 31, 1995, an increase of $2 million over 1994.
This $2 million increase is the net effect of a $3.8 million increase in the
revenues from the asset servicing agreements entered into with Granite in
conjunction with the FN Acquisition, offset by decreases in disposition and
other third-party fees received by FGB Realty Advisors, Inc. ("FGB Realty"),
principally due to the expiration of certain government contracts, totalling
$1.8 million.
Other noninterest income was $18 million for the year ended December 31,
1995, an increase of $10.4 million from the year ended December 31, 1994. The
increase is attributed to an increase of $3.4 million in dividends on FHLB
stock, $1.7 million in fees earned on check disbursement products, $1.1
million in early withdrawal penalties on deposits, and $4.2 million in
miscellaneous other income. The increases are attributed to the inclusion in
1995 of the operations acquired in the FN Acquisition for a full year
compared to the inclusion of the operations acquired in the FN Acquisition
for only the fourth quarter of 1994.
Noninterest Expense. Total noninterest expense was $333 million for the
year ended December 31, 1995, an increase of $237 million from the year ended
December 31, 1994. All categories of noninterest expense increased, primarily
due to the inclusion in 1995 of expenses related to the operations acquired
in the FN Acquisition for an entire year compared to including such expenses
for only the fourth quarter in 1994. In addition, the year ended December 31,
1995 includes charges totalling $13 million related to accrued termination
and facilities costs for specific cost reduction actions taken by First
Nationwide during the year.
Total compensation and employee benefits expense was $154 million for the
year ended December 31, 1995, an increase of $105 million from the year ended
December 31, 1994. The increase is primarily due to the inclusion in 1995 of
a full year of such charges related to the operations acquired in the FN
Acquisition compared to only the fourth quarter of such expenses in 1994. In
addition, 1995 includes expenses totalling $7 million related to employee
severance and termination costs for the relocation of First Nationwide's
mortgage loan servicing operations to Maryland, the closure of First
Nationwide's retail mortgage loan production offices, and a bank-wide cost
reduction project.
Occupancy and equipment expense was $50 million for the year ended
December 31, 1995, an increase of $38 million from the year ended December
31, 1994. The increase is primarily due to the inclusion in 1995 of a full
year of such charges related to the operations acquired in the FN Acquisition
compared to only the fourth quarter of such expenses in 1994. In addition,
1995 includes expenses
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totalling $6 million related to space reductions and lease termination
charges for the relocation of First Nationwide's mortgage loan servicing
operations to Maryland, the closure of First Nationwide's retail mortgage
loan production offices, a bank-wide cost reduction project, and retail
branch consolidations due to duplicate facilities resulting from the Branch
Purchases.
Data processing expense increased to $10 million for the year ended
December 31, 1995 from $3 million for the same period in 1994. The increase
is primarily due to the inclusion in 1995 of a full year of such charges
related to the operations acquired in the FN Acquisition compared to only the
fourth quarter of such charges in 1994.
SAIF deposit insurance premiums increased to $22 million in 1995 compared
to $7 million for the year ended December 31, 1994. The increase is primarily
due to the inclusion in 1995 of a full year of such charges related to the
operations acquired in the FN Acquisition compared to only the fourth quarter
of such charges in 1994.
Marketing expense was $11 million for the year ended December 31, 1995, an
increase of $8 million from the year ended December 31, 1994. The increase is
primarily due to the inclusion in 1995 of a full year of such charges related
to the operations acquired in the FN Acquisition compared to only the fourth
quarter of such charges in 1994.
Loan expense was $12 million for the year ended December 31, 1995, an
increase of $11 million from the year ended December 31, 1994. The increase
is due to the inclusion in 1995 of a full year of the mortgage banking
operations acquired in the FN Acquisition compared to only the fourth quarter
in 1994, as well as increased expenses related to operations acquired in the
Maryland Acquisition and the LMUSA 1995 Purchase.
Other noninterest expense was $73 million for the year ended December 31,
1995, an increase of $52 million from the year ended December 31, 1994,
principally due to increased telecommunications, postage, office supplies,
travel and professional fees expenses, all of which are attributed primarily
to the inclusion in 1995 of a full year of the operations acquired in the FN
Acquisition compared to only the fourth quarter in 1994. The Branch
Purchases, Maryland Acquisition and LMUSA 1995 Purchase also contributed to
these increases in these expenses.
Provision for Income Taxes. During the years ended December 31, 1995 and
1994, Holdings recorded income tax (benefit) expense of $(57.2) million and
$2.6 million, respectively. The net benefit in 1995 was largely the result of
the recognition of a deferred tax benefit of $69 million. Included in tax
expense for the year ended December 31, 1995 is the reversal of 1993 and 1994
overaccruals of federal taxes totalling $2.2 million. Holdings' effective
federal tax rates were (56)% and 0% during the years ended December 31, 1995
and 1994, respectively, while its statutory federal tax rate was 35% during
both periods. The difference between effective and statutory rates was
primarily the result of the utilization of net operating loss carryforwards
and, in 1995, the recognition of a deferred tax benefit of $69 million.
Holdings' effective state tax rates were 9% and 8% for the years ended
December 31, 1995 and 1994, respectively.
Extraordinary Item. During the year ended December 31, 1995, Holdings had
a gain of $2.0 million on the early extinguishment of $250 million in FHLB
advances, net of income taxes. During the year ended December 31, 1994,
Holdings had a gain of $1.4 million on the early extinguishment of $95
million in FHLB advances, net of income taxes.
Minority Interest. Dividends on the 11 1/2% Bank Preferred Stock totalling
$34.6 million were declared and paid during the year ended December 31, 1995.
Net Income. Holdings reported net income for 1995 of $147 million compared
with net income of $31 million for 1994. Net income for 1995 includes an
income tax benefit of $57 million (largely due to the recognition of a $69
million deferred tax benefit), and an extraordinary gain from the early
extinguishment of FHLB advances of $2.0 million, net of tax. Net income for
1994 includes income tax expense totalling $2.6 million and $1.4 million, net
of tax, in extraordinary gain from the early extinguishment of FHLB advances.
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Holdings reported income before income taxes, extraordinary item and
minority interest of $122 million in 1995 compared with pre-tax income of $32
million in 1994. The increase is generally due to the inclusion in 1995 of
the operations acquired in the FN Acquisition for a full year compared to the
operations acquired in the FN Acquisition for only the fourth quarter of
1994.
Net interest income was $341 million for 1995, compared with $93 million
for 1994, an increase of $248 million. The increase is generally due to the
inclusion in 1995 of the operations acquired in the FN Acquisition for a full
year compared with the inclusion of the operations acquired in the FN
Acquisition for only the fourth quarter of 1994.
Year Ended December 31, 1994 versus Year Ended December 31, 1993
Interest Income. Total interest income was $293 million for the year ended
December 31, 1994, an increase of $198 million from the year ended December
31, 1993. The interest-bearing assets acquired in the FN Acquisition resulted
in total interest-earning assets for 1994 averaging $4.3 billion, compared to
$1.8 billion for 1993 and contributed $245 million of total interest income
in 1994. The assets sold in the First Gibraltar Texas Sale contributed $26
million in total interest income in 1993. In addition, yields on
mortgage-backed securities, securities to be held to maturity and all
interest-earning assets during 1994 increased 1.01%, 1.52% and 1.43%,
respectively, from the yields on mortgage-backed securities, securities to be
held to maturity and all interest-earning assets during 1993, principally due
to increases in overall market interest rates and the FN Acquisition.
Holdings earned $212 million of interest income on loans receivable for
the year ended December 31, 1994, an increase of $196 million from the year
ended December 31, 1993. The loans acquired in the FN Acquisition contributed
$211 million of interest income in 1994, and resulted in an increase in the
average balance of loans receivable to $2.9 billion from $124 million for the
years ended December 31, 1994 and 1993, respectively. The weighted average
yield on real estate loans decreased to 7.27% for 1994 from 12.67% during
1993, primarily due to the absorption of the smaller, but higher-yielding
1993 portfolio balance into the larger, market rate sensitive portfolio
acquired in the FN Acquisition.
Interest income on mortgage-backed securities was $43 million for the year
ended December 31, 1994, an increase of $37 million from the year ended
December 31, 1993. The mortgage-backed securities acquired in the FN
Acquisition contributed $29 million of the increase and resulted in the
average portfolio balances increasing from $120 million to $711 million
during the years ended December 31, 1993 and 1994, respectively. The weighted
average yield on mortgage-backed securities increased to 6.05% for 1994 from
5.04% for 1993, primarily due to the addition of higher-yielding securities
from the FN Acquisition and the subsequent upward rate adjustments of
adjustable-rate mortgage-backed securities related to an overall increase in
market interest rates.
The interest income from Covered Assets declined $19 million, to $30
million for the year ended December 31, 1994. This decline is due to a
reduction in the volume of Covered Assets due to sales, repayments and other
dispositions net of a slight increase in the effective rate earned on such
Covered Assets. The higher rate is due to the net effect of the increase in
the Texas Cost of Funds ("TCOF") between the two periods due to generally
increasing interest rates offset by the reduction in the applicable margin
over the TCOF prescribed in the Assistance Agreement.
Interest income from securities to be held to maturity and
interest-bearing deposits in other banks was $7 million for the year ended
December 31, 1994, a decrease of $17 million from the year ended December 31,
1993. The average portfolio balances during the years ended December 31, 1994
and 1993 decreased to $138 million from $710 million, respectively, due to
restructuring of the balance sheet as a result of the FN Acquisition. The
weighted average yield on these assets increased to 4.95% for 1994 from 3.43%
for 1993, primarily due to the increase in market interest rates.
Interest Expense. Total interest expense was $200 million for the year
ended December 31, 1994, an increase of $125 million from the year ended
December 31, 1993. The increase is the result of additional interest-bearing
liabilities from the FN Acquisition and the increase in overall market
interest rates.
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Interest expense on deposits, including Brokered Deposits, was $101
million for the year ended December 31, 1994, an increase of $46 million from
the year ended December 31, 1993. The deposits of approximately $10 billion
acquired in the FN Acquisition, net of $1.2 billion in deposits sold in the
Illinois Sale, contributed an additional $85 million in interest expense in
1994 and resulted in an increase in the average balance of deposits
outstanding from $1.2 billion to $2.6 billion for the years ended December
31, 1993 and 1994, respectively. The deposit liabilities included in the
First Gibraltar Texas Sale contributed $26 million of interest expense in
1993. The overall weighted average cost of deposits decreased from 4.59% for
1993 to 3.88% for 1994, due principally to the larger volume of lower rate
transaction accounts acquired in the FN Acquisition. The FN Acquisition
decreased First Nationwide's reliance on Brokered Deposits as a source of
funds.
Interest expense on securities sold under agreements to repurchase and
borrowings totalled $99 million for the year ended December 31, 1994, an
increase of $79 million from the year ended December 31, 1993. Approximately
$55 million of the increase is attributed to liabilities acquired in the FN
Acquisition, with an additional $18 million attributable to the FHLB advances
which replaced the deposits sold in the Illinois Sale. The average balance of
securities sold under agreements to repurchase and borrowings outstanding for
the years ended December 31, 1994 and 1993 was $1.5 billion and $394 million,
respectively. The weighted average interest rate on these instruments
increased to 6.46% in 1994 from 4.91% for 1993, primarily due to the impact
of increases in overall market interest rates between December 1993 through
the date of the FN Acquisition and continued increasing rates thereafter
through year end 1994.
Net Interest Income. Net interest income before provision for loan losses
was $93 million for the year ended December 31, 1994, an increase of $73
million from the year ended December 31, 1993. The interest rate spread
increased to 2.02% in 1994 from .72% in 1993.
Noninterest Income. Total noninterest income, consisting primarily of
mortgage banking, customer banking and management fee income, was $41 million
for the year ended December 31, 1994, a decrease of $150 million from the
year ended December 31, 1993. Noninterest income in 1993 included gains of
$165 million from the sales of branches and loans related to the First
Gibraltar Texas Sale. After adjusting for these gains, other noninterest
income increased $16 million from the year ended December 31, 1993 to
December 31, 1994, which represents the net of $25 million additional income
related to operations acquired in the FN Acquisition offset in part by $9
million of income in 1993 related to the operations included in the First
Gibraltar Texas Sale.
Fees and service charges related to mortgage banking operations,
principally loan servicing income and borrower fees, were $10 million for the
year ended December 31, 1994, compared to $9 million for the year ended
December 31, 1993. This increase is due to the addition of the mortgage
banking operations from the FN Acquisition, offset in part by the
distribution of FGMH to First Gibraltar Holdings (the then immediate parent
of First Nationwide) in the first quarter of 1993. During 1994, Holdings sold
$47 million in principally fixed rate single-family mortgage loans originated
as part of Holdings' ongoing mortgage banking operations.
Fees and service charges related to retail banking operations, consisting
of depositor fees for transaction accounts, overdrafts, and miscellaneous
other fees, were $11 million for the year ended December 31, 1994 compared to
$3 million for the year ended December 31, 1993. The increase of $8 million
is composed of $11 million in income related to retail banking operations
acquired in the FN Acquisition, offset in part by $3 million received in 1993
related to the retail banking operations sold in the First Gibraltar Texas
Sale.
Management fees, which were recorded as other noninterest income, totalled
$13 million for the year ended December 31, 1994, an increase of $5 million
over 1993. This increase is due to a $3.5 million increase in disposition and
other fees for assets serviced by FGB Realty and $1.5 million in fees related
to the shared services and asset servicing contracts with Granite entered
into in conjunction with the FN Acquisition.
Noninterest Expense. Total noninterest expense was $96 million for the
year ended December 31, 1994, an increase of $33 million from the year ended
December 31, 1993, principally due to increased compensation, occupancy and
SAIF deposit insurance premiums, primarily related to the FN Acquisition.
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Total compensation and employee benefits expense was $49 million for the
year ended December 31, 1994, an increase of $24 million from the year ended
December 31, 1993. This increase of $24 million is composed principally of a
$32 million increase attributable to the FN Acquisition, offset in part by $5
million of the expense in 1993 related primarily to operations sold in the
First Gibraltar Texas Sale.
Occupancy and equipment expense was $12 million for the year ended
December 31, 1994, an increase of $7 million from the year ended December 31,
1993. This increase of $7 million is comprised principally of $9 million due
to the FN Acquisition, offset in part by $2 million of the expense
represented by operations sold in the First Gibraltar Texas Sale.
Extraordinary Item. Holdings had a net gain on the early extinguishment of
FHLB advances of $1.4 million during the year ended December 31, 1994. Such
gain resulted from the prepayment of $95.2 million in FHLB advances.
Net Income. Holdings reported net income for 1994 of $31 million compared
with net income of $144 million for 1993. Net income for 1994 includes $1.4
million, net of tax effect, in extraordinary gain from the early
extinguishment of FHLB advances. Net income for 1993 includes a pre-tax gain
of $141 million from the First Gibraltar Texas Sale.
Holdings reported income before income taxes and extraordinary item of $32
million in 1994 compared with pre-tax income of $147 million in 1993. Pre-tax
income was reduced by provision for income taxes of $2.6 million and $2.5
million in 1994 and 1993, respectively.
Net interest income was $93 million for the year ended December 31, 1994,
compared with $20 million for 1993, an increase of $73 million. The
interest-bearing assets and liabilities acquired in the FN Acquisition
contributed $83 million of net interest income in 1994 and the Holdings
Senior Notes issued by Holdings in 1994 contributed $6 million of interest
expense in 1994.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
During the years ended December 31, 1995, 1994 and 1993, Holdings recorded
income tax (benefit) expense, excluding the tax effects associated with
extraordinary items in 1995 and 1994, of $(57.2) million, $2.6 million and
$2.5 million respectively. Holdings' effective tax rates were (47)%, 8% and
2% in 1995, 1994 and 1993, respectively. Holdings' statutory federal tax rate
was 35% in each of 1995, 1994 and 1993. The difference between effective and
statutory rates was primarily the result of offsetting certain deductions and
losses with the receipt of non-taxable FSLIC/RF assistance payments and, in
1995, the recognition of a deferred tax benefit totalling $69 million. The
non-taxable portions of the FSLIC/RF assistance payments decreased to $5
million in 1995 from $9 million in 1994. During 1995, Holdings used the
experience method for purposes of calculating its bad debt reserve.
The Bank, Holdings and Mafco Holdings are parties to the Tax Sharing
Agreement effective as of January 1, 1994, pursuant to which (i) the Bank
will pay to Holdings amounts equal to the taxes that the Bank would be
required to pay if it were to file a return separately from the Mafco Group
and (ii) Holdings will pay to Mafco Holdings amounts equal to the taxes that
Holdings would be required to pay if it were to file a consolidated return on
behalf of itself and the Bank separately from the Mafco Group. The Tax
Sharing Agreement allows the Bank to take into account, in determining its
liability to Holdings, any net operating loss carryovers that it would have
been entitled to utilize if it had filed separate returns for each year since
the formation of First Nationwide. The Tax Sharing Agreement also allows
Holdings to take into account, in determining its liability to Mafco
Holdings, any net operating losses that it would have been entitled to
utilize if it had filed a consolidated return on behalf of itself and First
Nationwide for each year since the formation of First Nationwide.
Accordingly, pursuant to the Tax Sharing Agreement, the benefits of any net
operating losses generated by First Nationwide since its formation are
retained by the Bank and Holdings.
First Nationwide had generated significant federal income tax net
operating losses since it was organized in December 1988. This was due, in
part, to the fact that under applicable federal income tax law, certain
financial assistance received by First Nationwide pursuant to the Assistance
Agreement was excluded from the taxable income of First Nationwide. In
addition to such tax-free financial assistance, the
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Bank had been entitled to its normal operating deductions, including interest
expense and certain losses relating to its loan portfolio. As a result, First
Nationwide generated significant net operating losses for federal income tax
purposes even though its operations were profitable. Furthermore, under the
reorganization provisions of the Code, First Nationwide succeeded to certain
net operating loss carryovers of the Texas Closed Banks.
At December 31, 1995, if Holdings had filed a consolidated tax return on
behalf of itself and its subsidiaries for each year since the formation of
the Bank, it would have had approximately $2.6 billion of regular tax net
operating losses and approximately $992 million of AMT net operating losses,
both of which Holdings would have been entitled to utilize. A portion of such
losses, to the extent not previously used to offset income, will expire in
the year 2002 and thereafter and will fully expire in 2007. Under applicable
tax law, only 90% of a corporation's alternative minimum taxable income may
be offset by carryovers from other years. Thus, 10% of the alternative
minimum taxable income earned by Holdings in the current period will be
subject to federal income tax at an effective rate of 20%. For the year ended
December 31, 1995 this resulted in federal income tax benefit, including the
tax effects associated with extraordinary items, of $68.7 million. Included
in federal income tax benefit for the year ended December 31, 1995 was the
recognition of a $69 million deferred tax benefit in the fourth quarter of
1995 and an adjustment reducing prior years' tax expense by $2.2 million. It
is not anticipated that Holdings' liability for alternative minimum tax under
the Tax Sharing Agreement will be significant. Accordingly, it is expected
that under the Tax Sharing Agreement, and Holdings will be able to eliminate
a significant portion of the amounts that it otherwise would be required to
pay to Holdings, in respect of federal income tax and, accordingly, it is not
expected that the Bank or Holdings will record significant amounts of federal
income tax expense as a member of the Mafco Group. Payments made by Holdings
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.
During 1998, the Bank and Holdings anticipate that the AMT net operating
losses will be fully utilized and the Bank and Holdings will begin providing
federal income tax expense at a rate of 20%. Prior to 1998, the Bank and
Holdings provided federal income tax expense at a 2% rate because 90% of AMT
net operating losses were available to offset AMT revenue.
TAX EFFECTS OF DIVIDEND PAYMENTS BY FIRST NATIONWIDE
Dividend distributions made to Holdings, as the sole owner of First
Nationwide's Common Stock, and to holders of the Bank Preferred Stock, in
each case in excess of First Nationwide's accumulated earnings and profits,
as well as any distributions in dissolution or in redemption or liquidation
of stock, may cause First Nationwide to recognize a portion of its tax bad
debt reserves as income and, accordingly, could cause First Nationwide to
make payments to Holdings under the Tax Sharing Agreement. As a result,
Holdings may be required to make payments to Mafco Holdings under the Tax
Sharing Agreement if Holdings has insufficient expenses and losses to offset
such income. First Nationwide does not expect to generate substantial amounts
of federal taxable income (after taking into account its net operating loss
carryovers) from any recapture of its bad debt reserve. Accordingly, the
recapture of its bad debt reserve as a result of distributions to
stockholders, or of the redemption of stock, would not be expected to have a
material adverse effect on First Nationwide.
TAXATION OF THE BANK
As a result of the Small Business Job Protection Act of 1996, which
provided for the repeal of the Section 593 reserve method of accounting for
bad debts by thrift institutions which are treated as large banks, the Bank
will generally be required to take into income the balance of its post-1987
bad debt reserves over a six year period beginning in 1996. Consequently, the
Bank may be required to make payments to Holdings under the Tax Sharing
Agreement if the Bank has insufficient expenses and losses to offset such
income. As of December 31, 1995, First Nationwide had tax bad debt reserves
totaling $203
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million, all of which had been provided for in deferred tax liabilities. The
Bank does not expect to generate substantial amounts of federal taxable
income (after taking into account its net operating loss carryovers) from any
recapture of the Bank's bad debt reserve. Accordingly, the repeal of the
section 593 reserve method of accounting for bad debts by thrift institutions
is not expected to have a material adverse effect on the Bank.
PROVISION FOR LOAN LOSSES
The adequacy of the allowance for loan losses is periodically evaluated by
management in order to maintain the allowance at a level that is sufficient
to absorb expected loan losses. Holdings charges current earnings with a
provision for estimated credit losses on loans receivable. The provision
considers both specifically identified problem loans as well as credit risks
not specifically identified in the loan portfolio. Holdings established
provisions for loan losses of $37 million, $6 million and $1 million for the
years ended December 31, 1995, 1994 and 1993, respectively, and established
provisions for loan losses of $29.7 million and $18 million for the nine
months ended September 30, 1996 and 1995, respectively. The allowance for
loan losses is increased by provisions for loan losses and decreased by
charge-offs (net of recoveries). See "--General--Accounting Changes." The
increase in the provision for losses in 1995 over 1994 is due to the
increased loan production activity (primarily single-family residential) and
loans acquired through acquisitions in 1995 compared to 1994.
A significant portion of Holdings' loans is secured by real estate located
within markets where real estate prices continue to be weak. Accordingly, the
ultimate collectibility of those loans is susceptible to changes in the
economic conditions in such regions. Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, potential adverse situations that may affect
the borrower's ability to repay, estimated value of any underlying collateral
and current prospective economic conditions. At September 30, 1996, First
Nationwide had a remaining available balance under the Put Agreement of $70.5
million, which First Nationwide fully utilized on December 5, 1996.
Although management believes that its present allowance for loan losses is
adequate, it will continue to review its loan portfolio to determine the
extent to which any changes in economic conditions or loss experience may
require further provisions in the future.
ASSET AND LIABILITY MANAGEMENT
Financial institutions are subject to interest rate risk to the degree
that their interest-bearing liabilities, consisting principally of deposits,
securities sold under agreements to repurchase and FHLB advances, mature or
reprice more or less frequently, or on a different basis, than their
interest-earning assets. A key element of banking is the monitoring and
management of liquidity risk and interest rate risk. The process of planning
and controlling asset and liability mixes, volumes and maturities to
influence the net interest spread is referred to as asset and liability
management. The objective of Holdings' asset and liability management is to
maximize the net interest yield within the constraints imposed by prudent
lending and investing practices, liquidity needs and capital planning.
Holdings actively pursues investment and funding strategies to minimize
the sensitivity of its earnings to interest rate fluctuations while
maintaining the flexibility required to execute its business strategy. First
Nationwide measures the interest rate sensitivity of the balance sheet
through gap and duration analysis, as well as net interest income and market
value simulation, and, after taking into consideration both the variability
of rates and the maturities of various instruments, evaluates strategies
which may reduce the sensitivity of its earnings to interest rate and market
value fluctuations. An important decision is the selection of
interest-bearing liabilities and the generation of interest-earning assets
which best match relative to interest rate changes. In order to reduce
interest rate risk by increasing the percentage of interest sensitive assets,
the Bank has continued its emphasis on the origination of adjustable rate
mortgage ("ARM") products for its portfolio. Where possible, First Nationwide
seeks to originate real
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estate loans that reprice frequently and that on the whole adjust in
accordance with the repricing of its liabilities. In general, most of the
fixed rate real estate loans originated have been sold in the secondary
market and substantially all of the ARM loans ("ARMs") originated prior to
September 30, 1995 have been retained for the investment portfolio. In the
fourth quarter of 1995, however, all of the ARMs originated were sold in the
secondary market in anticipation of the SFFed Acquisition. During the nine
months ended September 30, 1996, most of the fixed and variable rate real
estate loans originated were sold in the secondary market to provide funds
for the acquisition and divestiture activity occurring during the period. At
September 30, 1996, approximately 89% of First Nationwide's real estate loan
portfolio consisted of ARMs.
ARMs have from time to time been offered with low initial interest rates
as marketing inducements. In addition, most ARMs are also subject to periodic
interest rate adjustment caps or floors. In a period of rising interest
rates, ARMs could reach a periodic adjustment cap while still at a rate
significantly below their contractual margin over existing market rates.
Since repricing liabilities are typically not subject to such interest rate
adjustment constraints, Holdings' net interest margin would most likely be
negatively impacted in this situation. Certain ARMs now offered by the Bank
have a fixed monthly payment for a given period, with any changes as a result
of market interest rates reflected in the unpaid principal balance through
negative amortization. From the lender's perspective, these loans respond
most quickly to rate changes because interest accruals immediately reflect
the loans as though they were fully indexed. In general, the closer the
interest rate on a portfolio of ARMs is to the ultimate contractual margin
over market rates, the more sensitive the portfolio yield is to changes in
market interest rates.
As a result of the FN Acquisition, First Nationwide acquired the rights
and assumed the obligations of Old FNB under certain interest rate swap
agreements. Under the terms of these agreements, First Nationwide pays the
variable rate based on LIBOR and receives fixed rates. During 1995 and 1994,
Holdings' net interest margin decreased by $12.9 million and $4.2 million,
respectively, as a result of these interest rate swap agreements, largely due
to the amortization of the premium assigned to these agreements in the FN
Acquisition. Similarly, during the nine months ended September 30, 1996,
Holdings' net interest income increased by $0.1 million as a result of these
interest rate swap agreements largely due to a decrease in the variable rate
paid due to changing market interest rates, net of the fixed rate payments
received and the amortization of the premium assigned to these agreements at
the time of acquisition.
One of the most important sources of a financial institution's net income
is net interest income, which is the difference between the income earned on
interest-earning assets and the expense paid on interest-bearing liabilities.
Net interest income is also dependent on the relative balances of
interest-earning assets and interest-bearing liabilities.
A traditional measure of interest-rate risk within the savings industry is
the interest rate sensitivity gap, which is the sum of all interest-earning
assets minus the sum of all interest-bearing liabilities to be repriced
within a given period. A gap is considered positive when the amount of
interest rate sensitive assets exceeds interest rate sensitive liabilities,
while the opposite results in a negative gap. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income, and a positive gap would tend to result in an increase in net
interest income, while the opposite would tend to occur in a period of
falling rates.
The following table sets forth the projected maturities based upon
contractual maturities as adjusted for projected prepayments and "repricing
mechanisms" (provisions for changes in the interest rates of assets and
liabilities), and the impact of interest rate swap agreements as of September
30, 1996. Prepayment rates are assumed in each period on substantially all of
Holdings' loan portfolio based upon expected loan prepayments. Repricing
mechanisms on Holdings' assets are subject to limitations such as caps on the
amount that interest rates and payments on its loans may adjust and,
accordingly, such assets may not respond in the same manner or to the same
extent to changes in interest rates as the Bank's liabilities. In addition,
the interest rate sensitivity of Holdings' assets and liabilities illustrated
in the table would vary substantially if different assumptions were used or
if actual experience differed from the assumptions set forth. Holdings'
estimated interest rate sensitivity gap at September 30, 1996 is as follows:
77
<PAGE>
<TABLE>
<CAPTION>
MATURITY/RATE SENSITIVITY
---------------------------------------------------------
WITHIN 1-5 OVER 5 NONINTEREST
1 YEAR YEARS YEARS BEARING TOTAL
--------- ---------- -------- ------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Securities held to maturity,
interest-bearing deposits in other
banks and short-term investment
securities (1)(2) ...................... $ 156 $ -- $ -- -- $ 156
Securities available for sale (3) ...... 568 -- -- -- 568
Mortgage-backed securities available for
sale (3) ............................... 1,660 -- -- -- 1,660
Mortgage-backed securities held to
maturity (1)(5) ........................ 1,686 2 3 -- 1,691
Loans held for sale, net (3) ............ 710 -- -- -- 710
Loans receivable, net (1)(4) ............ 9,590 740 351 -- 10,681
Investment in FHLB ...................... 218 -- -- -- 218
--------- ---------- -------- ------------- ---------
Total interest-earning assets ........ 14,588 742 354 -- 15,684
Noninterest-earning assets .............. -- -- -- 1,285 1,285
--------- ---------- -------- ------------- ---------
$14,588 $ 742 $354 $1,285 $16,969
========= ========== ======== ============= =========
INTEREST-BEARING LIABILITIES:
Deposits (6) ............................ $ 7,544 $ 1,224 $ 32 -- $ 8,800
Securities sold under agreements to
repurchase (1) ......................... 2,073 55 -- -- 2,128
FHLB advances (1) ....................... 3,249 671 6 -- 3,926
Other borrowings (1) .................... 5 209 240 -- 454
--------- ---------- -------- ------------- ---------
Total interest-bearing liabilities ... 12,871 2,159 278 -- 15,308
Noninterest-bearing liabilities ........ -- -- -- 431 431
Minority interest ....................... 8 301 309
Stockholders' equity .................... -- -- -- 921 921
--------- ---------- -------- ------------- ---------
$12,879 $ 2,159 $278 $1,653 $16,969
========= ========== ======== ============= =========
Gap before interest rate swap agreements $ 1,717 $(1,417) $ 76 $ 376
Interest rate swap agreements ........... (400) 400 -- --
--------- ---------- -------- ---------
Gap adjusted for interest rate swap
agreements ............................. $ 1,317 $(1,017) $ 76 $ 376
========= ========== ======== =========
Cumulative gap .......................... $ 1,317 $ 300 $376 $ 1,393
========= ========== ======== =========
Gap as a percentage of total assets .... 7.8% (6.0)% .4% 2.2%
========= ========== ======== =========
Cumulative gap as a percentage of total
assets ................................. 7.8% 1.8% 2.2% 2.2%
========= ========== ======== =========
</TABLE>
- --------------
(1) Based upon (a) contractual maturity, (b) instrument repricing date, if
applicable, and (c) projected repayments and prepayments of principal, if
applicable. Prepayments were estimated generally by using the prepayment
rates forecast by various large brokerage firms as of September 30, 1996.
The actual maturity and rate sensitivity of these assets could vary
substantially if future prepayments differ from prepayment estimates.
(2) Consists of $4 million of securities held to maturity, $25 million of
interest-bearing deposits in other banks and $127 million of short-term
investment securities.
(3) As securities available for sale may be sold within one year, they are
considered to be maturing within one year.
(4) Excludes allowance for loan losses of $244 million and nonaccrual loans of
$160 million.
(5) Excludes underlying loans on nonaccrual status of $9 million.
(6) Fixed rate deposits and deposits with a fixed pricing interval are
reflected as maturing in the year of contractual maturity or first
repricing date. Money market deposit accounts, demand deposit accounts and
passbook accounts are reflected as maturing within one year.
At September 30, 1996, interest-earning assets of Holdings exceeded
interest-bearing liabilities by approximately $100 million. At December 31,
1995, interest-earning assets of Holdings exceeded interest-bearing
liabilities by approximately $132 million. The change in the cumulative gap
between the two periods is due principally to the SFFed and Home Federal
Acquisitions and the Branch Sales.
78
<PAGE>
The maturity/rate sensitivity analysis is a static view of the balance
sheet with assets and liabilities grouped into certain defined time periods,
and thus only partially depicts the dynamics of the Bank's sensitivity to
interest rate changes. Being at a point in time, this analysis may not fully
describe the complexity of relationships between product features and
pricing, market rates and future management of the balance sheet mix.
Holdings utilizes computer modeling, under various interest rate scenarios,
to provide a dynamic view of the effects of the changes in rates, spreads,
and yield curve shifts on net interest income.
Holdings' risk management policies are established by the Asset/Liability
Management Committee ("ALCO") of the Bank. ALCO meets monthly to formulate
the Bank's investment and risk management strategies. The basic
responsibilities of ALCO include management of net interest income and market
value of portfolio equity to measure the stability of earnings, management of
liquidity to provide adequate funding, and the establishment of asset product
priorities by formulating performance evaluation criteria, risk evaluation
techniques and a system to standardize the analysis and reporting of
originations, competitive trends, profitability and risk. On a quarterly
basis, the Board of Directors of the Bank is apprised of ALCO strategies
adopted and their impact on operations. At least annually, the Board of
Directors of the Bank reviews the Bank's interest rate risk management policy
statements.
On November 15, 1995, the FASB issued the Special Report. On December 29,
1995, Holdings reclassified substantially all of its securities and
mortgage-backed securities from held to maturity to available for sale. The
impact on the gap schedule of reclassifying securities from the
held-to-maturity portfolio to the available-for-sale portfolio was to shorten
the maturity and interest rate sensitivity of such assets. See
"--General--Accounting Changes."
LIQUIDITY
The standard measure of liquidity in the savings industry is the ratio of
cash and short-term U.S. government and other specified securities to
deposits and borrowings due within one year. The OTS has currently
established a minimum liquidity ratio requirement of 5.00%. First
Nationwide's liquidity ratio was 5.31% and 5.46% at September 30, 1996 and
December 31, 1995, respectively.
Holdings' funds are obtained from the repayment and maturities of loans
and mortgage-backed securities, customer and Brokered Deposits, loan sales,
securities sold under agreements to repurchase, FHLB advances and other
secured and unsecured borrowings.
A major source of First Nationwide's funding is expected to be its retail
deposit branch network, which management believes will be sufficient to meet
its long-term liquidity needs. The ability of First Nationwide to retain and
attract new deposits is dependent upon the variety and effectiveness of its
customer account products, customer service and convenience, and rates paid
to customers. First Nationwide also obtains funds from the repayment and
maturities of loans and mortgage-backed securities, while additional funds
can be obtained from a variety of sources including customer and Brokered
Deposits, loan sales, securities sold under agreements to repurchase, FHLB
advances, and other secured and unsecured borrowings. It is anticipated that
FHLB advances and securities sold under agreements to repurchase will be
secondary sources of funding, and management expects there to be adequate
collateral for such funding requirements.
First Nationwide's primary uses of funds are the origination or purchase
of loans, the funding of maturing certificates of deposit, demand deposit
withdrawals, and the repayment of borrowings. Certificates of deposit
scheduled to mature during the twelve months ending September 30, 1997 total
$4.6 billion. The Bank may renew these certificates, attract new replacement
deposits, replace such funds with other borrowings, or it may elect to reduce
the size of the balance sheet. In addition, at September 30, 1996, First
Nationwide had FHLB advances and other borrowings of $4.6 billion maturing
within twelve months. The Bank may elect to pay off such debt or to replace
such borrowings with additional FHLB advances or other borrowings at
prevailing rates.
During 1994, First Nationwide issued 3,007,300 shares of the 11 1/2% Bank
Preferred Stock. Cash dividends on the 11 1/2% Bank Preferred Stock are
noncumulative and are payable at an annual rate of 11 1/2% if, when, and as
declared by the Board of Directors of the Bank. The payment of dividends by
the
79
<PAGE>
Bank is subject to certain federal laws applicable to savings associations.
Dividends on the 11 1/2% Bank Preferred Stock totalling $25.9 million were
declared and paid during the nine months ended September 30, 1996.
During 1995, the FSLIC/RF purchased substantially all remaining Covered
Assets at the fair market value of such assets in the FDIC Purchase. Any
losses sustained by First Nationwide from this directed purchase were
reimbursed under the Capital Loss Provision of the Assistance Agreement. See
"Business--Other Activities--The Assistance Agreement." Proceeds from this
transaction were reinvested in the normal course of business. As a result of
the FDIC Purchase, First Nationwide's reliance on dispositions of Covered
Assets as a source of funds has been eliminated.
In the FN Acquisition, First Nationwide assumed $92.1 million of Old FNB's
Subordinated Debentures which have an annual interest rate of 10% and an
annual interest cost of $9.2 million. In the SFFed Acquisition, First
Nationwide assumed $50 million of the SFFed Notes which have an annual
interest rate of 11.20%. On September 12, 1996, First Nationwide repurchased
$44 million aggregate principal amount of the SFFed Notes at a price of
approximately 116.45% of the principal amount, plus the accrued interest
thereon. The $6.0 million of SFFed Notes that remain outstanding have an
annual interest cost of $0.7 million.
Holdings anticipates the cash flow from assets as well as other sources of
funds will provide adequate liquidity in the future. In addition to cash and
cash equivalents of $271.2 million at September 30, 1996, First Nationwide
has substantial additional borrowing capacity with the FHLB and other
sources. During 1996, First Nationwide used existing cash and the proceeds
from borrowings under reverse repurchase agreements and advances from the
FHLB to finance the Branch Sales and the SFFed and Home Federal Acquisitions.
The primary sources of funds in the first nine months of 1996 were sales
of loans held for sale, net of originations, of $471.2 million, repayments of
mortgage backed securities totalling $720.3 million, a net decrease in loans
receivable of $1.3 billion, and additional borrowings and securities sold
under agreements to repurchase of $7.3 billion. The primary uses of funds
were the $4.6 billion funding of the Branch Sales, principal payments on
borrowings of $5.2 billion, net cash paid for the SFFed and Home Federal
Acquisitions and the LMUSA 1996 Purchase of $52.4 million and dividends paid
of $39.0 million.
Net cash provided by investing activities for the year ended December 31,
1995 totalled $1.7 billion, an increase of $1.7 billion from the year ended
December 31, 1994. Cash flows provided by investing activities included $272
million from the FDIC Purchase and other dispositions of the Covered Assets,
principal payments on mortgage-backed securities totalling $571 million and
proceeds from maturities of securities of $344 million. Proceeds from sales
of loans receivable, including loans sold to Granite pursuant to the Put
Agreement of $199.5 million, totalled $431 million. Redemptions of FHLB stock
provided $26 million, and proceeds from sales of foreclosed real estate
provided $71 million. Proceeds from the Branch Purchases provided $501
million. Cash flows used in investing activities included $215 million for
the Maryland Acquisition and LMUSA 1995 Purchase, purchases of securities of
$158 million, purchases of $20 million in mortgage-backed securities, a net
increase in loans receivable of $86 million, and purchases of office premises
and equipment of $15 million.
Net cash used in financing activities for the year ended December 31, 1995
totalled $1.2 billion. Principal payments on borrowings totalled $6.9
billion, and the net decrease in securities sold under agreements to
repurchase totalled $913 million. Cash flows provided by financing activities
included increases in deposits (other than the Branch Purchases) of $543
million and additional borrowings of $6.2 billion. Additionally, dividends on
and redemptions of Holdings' Class C Common Stock totalled $29 million and
$61 million, respectively.
Net cash provided by financing activities for the year ended December 31,
1994 totalled $183 million. The issuance of the 11 1/2% Bank Preferred Stock
and the capital contribution from Holdings in connection with the FN
Acquisition provided $289 million and $391 million, respectively. These funds
were partially offset by an overall net decrease in borrowings and securities
sold under agreements to repurchase of $435 million. Additionally, deposits
decreased $84 million as Brokered Deposits were allowed to mature.
80
<PAGE>
The terms of the 11 1/2% Bank Preferred Stock provide that the Bank may
not declare or pay any full dividends with respect to any parity stock, such
as the 10 5/8% Bank Preferred Stock, unless and until the Bank has paid full
dividends on the 11 1/2% Bank Preferred Stock for the most recent dividend
period. The Bank is currently in compliance with such requirement.
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 Bank Junior Stock), with respect to any
Bank Junior Stock or repurchase, redeem or otherwise acquire, or set apart
funds for the repurchase, redemption or other acquisition of any Bank Junior
Stock (including the common stock held by Holdings) through a sinking fund or
otherwise, unless and until: (i) the Bank has paid full dividends on the 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.
Similarly, the terms of the Capital Corporation Preferred Stock provide that
Capital Corporation may not declare or pay any dividends or other
distributions (other than in shares of common stock of Capital Corporation or
other Capital Corporation Junior Stock), with respect to any Capital
Corporation Junior Stock or repurchase, redeem or otherwise acquire, or set
apart funds for the repurchase, redemption or other acquisition of any
Capital Corporation Junior Stock (including the common stock held by the
Bank) through a sinking fund or otherwise, unless and until: (i) Capital
Corporation has paid full dividends on the Capital Corporation Preferred
Stock for the four most recent dividend periods or funds have been paid over
to the dividend disbursing agent of Capital Corporation for payment of such
dividends, and (ii) Capital Corporation has declared a cash dividend on the
Capital Corporation 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 Capital Corporation for the payment of a cash
dividend for such current dividend period.
Holdings currently anticipates that, in order to pay the principal amount
of the Holdings 9 1/8% Senior Subordinated Notes, the Holdings Senior Notes
or the Notes upon the occurrence of an Event of Default or to redeem or
repurchase the Holdings 9 1/8% Senior Subordinated Notes, the Holdings Senior
Notes, or 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 Holdings
to enable it to pay the principal amount of the Holdings 9 1/8% Senior
Subordinated Notes, the Holdings Senior Notes or the Notes at maturity,
Holdings may be required to adopt one or more alternatives, such as borrowing
funds, selling its equity securities or equity securities or assets of the
Bank, or seeking capital contributions or loans from its affiliates. None of
the affiliates of Holdings are required to make any capital contributions or
other payments to Holdings with respect to Holdings' obligations on the
Holdings 9 1/8% Senior Subordinated Notes, the Holdings Senior Notes or 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 Holdings to pay the principal amount of the Holdings Senior Notes, the
Holdings 9 1/8% Senior Subordinated Notes or the Notes or that any of such
actions would be permitted by the terms of the Holdings Senior Notes
Indenture, the Holdings 9 1/8% Senior Subordinated Notes Indenture, or the
Indenture, or any other debt instruments of Holdings or Holdings'
subsidiaries then in effect, by the terms of the Subsidiary Preferred Stock
or any other class of preferred stock issued by the Bank and its
subsidiaries, or under applicable federal thrift laws or regulations. See
"Risk Factors--Indebtedness and Ability to Pay Principal of the Notes."
The terms of the Holdings 9 1/8% Senior Subordinated Notes Indenture, the
Holdings Senior Notes Indenture and the Indenture generally will permit
Holdings to make distributions and other Restricted Payments (as defined
therein) of up to 75% of the consolidated net income of Holdings 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 therein) of the Bank is at least
equal to the Minimum Common Equity Amount (as defined therein). Holdings is
able to loan funds to its affiliates pursuant to the Holdings 9 1/8% Senior
Subordinated Notes Indenture, the Holdings Senior Notes Indenture and the
Indenture provided that the Consolidated Common Shareholders' Equity (as
defined therein) of the Bank is at least equal to the Minimum Common Equity
Amount (as defined therein), and
81
<PAGE>
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 Holdings, whether or not such funds may be distributed
or otherwise paid as a Restricted Payment (as defined therein) pursuant to
the terms of the Holdings 9 1/8% Senior Subordinated Notes Indenture, the
Holdings Senior Notes Indenture and the Indenture. See "Description of the
Notes--Certain Covenants." It is currently expected that, after payment of
its debt service and other obligations, Holdings will make Restricted
Payments, including dividends and distributions, and loans to its affiliates
to the extent permitted by the terms of its debt instruments. Accordingly,
there can be no assurance that, notwithstanding the receipt by Holdings of
sufficient funds to enable it to pay the principal amount of the Holdings 9
1/8% Senior Subordinated Notes, the Holdings Senior Notes or the Notes at
maturity, Holdings will have funds available to pay the principal amount of
the Holdings 9 1/8% Senior Subordinated Notes, the Holdings Senior Notes or
the Notes at maturity or prior to maturity upon the occurrence of an Event of
Default or to redeem or repurchase the Holdings 9 1/8% Senior Subordinated
Notes, the Holdings Senior Notes or the Notes upon a Change of Control Put
Event.
The terms and conditions of the Holdings 9 1/8% Senior Subordinated Notes
Indenture, the Holdings Senior Notes Indenture and the Indenture impose
restrictions that affect, among other things, the ability of Holdings 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 Holdings to comply with the foregoing provisions can be
affected by events beyond Holdings' control. The breach of any of these
covenants could result in a default under one or more of the debt instruments
of Holdings. In the event of a default under any indebtedness of Holdings or
Holdings' 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 Holdings or
Holdings' subsidiaries is likely to result in an event of default under one
or more of the other debt instruments of Holdings or Holdings' subsidiaries.
If indebtedness of Holdings or Holdings' subsidiaries were to be accelerated,
there could be no assurance that the assets of Holdings or Holdings'
subsidiaries, as the case may be, would be sufficient to repay in full
borrowings under all of such debt instruments, including the Notes. See "Risk
Factors--Indebtedness and Ability to Pay Principal of the Notes,"
"Business--Holdings--Sources of Funds--Old FNB Debentures," "Description of
Other Indebtedness and Preferred Stock" and "Description of the Notes."
Any right of Holdings and its creditors, including holders of the Notes,
to participate in the assets of any of Holdings' subsidiaries, including the
Bank and Capital Corporation, 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 Holdings may itself be a creditor of such subsidiary).
Accordingly, after giving effect to the Cal Fed Acquisition, the Capital
Corporation Offering and the Capital Contribution, the Notes will be
effectively subordinated to (i) all existing and future liabilities,
including deposits, indebtedness and trade payables, of Holdings'
subsidiaries, including the Bank and Capital Corporation, and (ii) all
preferred stock issued by the Bank, including the Subsidiary Preferred Stock.
At September 30, 1996, after giving effect to the Cal Fed Acquisition, the
Capital Corporation Offering and the Capital Contribution, the outstanding
interest-bearing liabilities, including deposits, of such subsidiaries would
have been approximately $27.5 billion, the other liabilities of such
subsidiaries, including trade payables and accrued expenses, would have been
approximately $652 million, and there would have been approximately $973
million aggregate liquidation value of Subsidiary Preferred Stock
outstanding. In the event of the liquidation or dissolution of the Bank or
Capital Corporation, the holders of the Bank Preferred Stock or the Capital
Corporation Preferred Stock, as the case may be, will have preference over
Holdings, as the holder of all of the common stock of the Bank, with respect
to the assets of the Bank or Capital Corporation, as the case may be.
IMPACT OF INFLATION AND CHANGING PRICES
Prevailing interest rates have a more significant impact on Holdings'
performance than does the general level of inflation. While interest rates
may bear some relationship to the general level of inflation (particularly in
the long run), over short periods of time interest rates may not necessarily
move in the
82
<PAGE>
same direction or change in the same magnitude as the general level of
inflation. As a result, the business of Holdings is generally not affected by
inflation in the short run, but may be affected by inflation in the long run.
NON-PERFORMING ASSETS AND IMPAIRED LOANS
Pursuant to SFAS No. 114, as amended by SFAS No. 118, effective January 1,
1995, loans collectively reviewed for impairment by Holdings 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 Holdings' consolidated financial statements as Holdings' existing
policy of measuring loan impairment was consistent with methods prescribed in
these standards. See "--General--Accounting Changes."
Holdings considers a loan to be impaired when, based upon current
information and events, it believes it is probable that the Bank will be
unable to collect all amounts due according to the contractual terms of the
loan agreement. Any insignificant delay (i.e., 60 days or less) or
insignificant shortfall in amount of payments will not cause a loan to be
considered impaired. In determining impairment, Holdings considers large
non-homogeneous loans including nonaccrual loans, troubled debt
restructurings, and performing loans which exhibit, among other
characteristics, high LTV ratios, low debt-coverage ratios, or other
indications that the borrowers are experiencing increased levels of financial
difficulty. Holdings bases the measurement of collateral-dependent impaired
loans, which represents substantially all of Holdings' loan portfolio, on the
fair value of the loan's collateral. The amount, if any, by which the
recorded investment of the loan exceeds the measure of the impaired loan's
value is recognized by recording a valuation allowance.
At September 30, 1996, the carrying value of loans that are considered to
be impaired totalled $136.2 million (of which $31.4 million were on
non-accrual status). The average recorded investment in impaired loans during
the nine months ended September 30, 1996 was approximately $136.9 million.
For the nine months ended September 30, 1996, Holdings recognized interest
income on those impaired loans of $12.3 million, which included $0.3 million
of interest income recognized using the cash basis method of income
recognition.
The following table presents the amounts, net of specific allowances for
losses and purchase accounting adjustments, of Holdings' nonaccrual loans,
foreclosed real estate, troubled debt restructurings, and impaired loans as
of the dates indicated. These categories are not mutually exclusive; certain
loans are included in more than one classification.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 DECEMBER 31, 1995
---------------------------------------------- ----------------------------------------------
NONACCRUAL IMPAIRED RESTRUCTURED NONACCRUAL IMPAIRED RESTRUCTURED
-------------- ------------ ---------------- -------------- ------------ ----------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real Estate:
1-4 unit residential ............. $134 $ -- $ 4 $136 $ -- $ 8
5+ unit residential .............. 19 66 66 23 73 147
Commercial and other ............. 13 70 63 9 52 79
Land ............................. -- -- -- -- -- --
Construction ..................... -- -- -- -- -- --
-------------- ------------ ---------------- -------------- ------------ ----------------
Total real estate .............. 166 136 133 168 125 234
Non-real estate .................... 3 -- -- 3 -- --
-------------- ------------ ---------------- -------------- ------------ ----------------
Total loans, net ............... $169 $136(b) $133(c) 171 $125(b) $234(c)
============ ================
Foreclosed real estate, net ....... 59 49
-------------- --------------
Total non-performing assets ... $228(a) $220
============== ==============
</TABLE>
- --------------
(a) Includes loans securitized with recourse on nonaccrual status of $9
million.
(b) Includes loans on nonaccrual status of $31.4 million and $29.6 million at
September 30, 1996 and December 31, 1995, respectively, and loans
classified as troubled debt restructurings of $28.4 million and $31.9
million at September 30, 1996 and December 31, 1995, respectively.
(c) Includes nonaccrual loans of $3.4 million and $1.2 million at September
30, 1996 and December 31, 1995, respectively. At September 30, 1996, $2.4
million of these nonaccrual, troubled debt restructurings were also
considered impaired. The decrease from $234 million at December 31, 1995
to $133 million at September 30, 1996 is due to loans which have been
performing under the restructured terms for greater than twelve months
which then cease to be reported as "restructured."
83
<PAGE>
There were no accruing loans contractually past due 90 days or more at
September 30, 1996 or December 31, 1995.
Non-performing assets at September 30, 1996 include $49.3 million of
non-performing loans and $19.2 million of foreclosed real estate which were
acquired in the SFFed and Home Federal Acquisitions. Foreclosed real estate
also includes $6.0 million of single-family foreclosed real estate acquired
in the LMUSA 1996 Purchase that is covered for loss under the indemnification
provisions of the related contract, provided such real estate is sold prior
to January 31, 1997. The decrease in the percentage of Holdings'
non-performing assets to total assets was due to the level of Holdings'
non-performing assets remaining relatively constant while the total assets
significantly increased over such time period. During the nine months ended
September 30, 1996, $41.9 million of assets were sold to Granite under the
Put Agreement, leaving a remaining available balance under the Put Agreement
of $70.5 million, which Holdings fully utilized on December 5, 1996. Of the
$228 million in non-performing assets at September 30, 1996, approximately
$17.3 million were eligible to be sold to Granite pursuant to the Put
Agreement.
Holdings' non-performing assets, consisting of nonaccrual loans, net of
specific allowances for loan losses and purchase accounting adjustments, and
foreclosed real estate, net, increased slightly to $220 million at December
31, 1995, compared with $218 million at December 31, 1994. Non-performing
assets as a percentage of the Bank's total assets increased slightly to 1.50%
at December 31, 1995, from 1.49% of total assets at December 31, 1994.
Holdings' non-performing assets increased slightly to $228 million at
September 30, 1996, but decreased as a percentage of First Nationwide's total
assets at September 30, 1996 to 1.36% from 1.50% at December 31, 1995.
Holdings, through First Nationwide, continuously manages its credit risk
by assessing the current and estimated future performance of the real estate
markets in which it operates. First Nationwide continues to place a high
degree of emphasis on the management of its asset portfolio. First Nationwide
has three distinct asset management functions: performing loan asset
management, problem loan asset management and credit review. Each of these
three functions is charged with the responsibility of reducing the risk
profile within the residential, commercial and multi-family asset portfolios
by applying asset management and risk evaluation techniques that are
consistent with Holdings' portfolio management strategy and regulatory
requirements. In addition to these asset management functions, Holdings has a
specialized credit risk management group that is charged with development of
credit policies and performing credit risk analyses for all asset portfolios.
The following table presents non-performing real estate assets by
geographic region of the country as of September 30, 1996:
<TABLE>
<CAPTION>
TOTAL
NONACCRUAL FORECLOSED NON-PERFORMING
REAL ESTATE REAL ESTATE, REAL ESTATE GEOGRAPHIC
REGION LOANS, NET(2) NET(2) ASSETS CONCENTRATION
------ ------------- -------------- -------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Northeast(1) $ 37 $12 $ 49 21.71%
California .. 99 42 141 62.83
Other regions 30 5 35 15.46
------------- -------------- -------------- ---------------
Total ....... $166 $59 $225 100.00%
============= ============== ============== ===============
</TABLE>
- ------------
(1) Includes Connecticut, Massachusetts, Maine, New Hampshire, New Jersey, New
York, Pennsylvania, Rhode Island and Vermont.
(2) Net of purchase accounting adjustments and specific allowances for losses.
84
<PAGE>
The level of non-performing assets is directly affected by economic
conditions throughout the country. The following table indicates nonaccrual
real estate loans, net of purchase accounting adjustments, by collateral type
and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL
RESIDENTIAL RESIDENTIAL AND OTHER
------------------- ------------------- -------------------
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED
----- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California ....... $ 53 $ 4 $10 $ 1 $ 7 $--
New York ......... 27 2 1 1 -- --
Ohio ............. 3 2 2 4 -- --
Hawaii ........... 10 1 -- -- -- --
New Jersey ....... 7 2 -- -- -- --
Illinois ......... 2 1 -- 3 1 --
Florida .......... 2 3 -- -- 1 --
Pennsylvania ..... 2 -- -- 1 -- --
Connecticut ...... 2 -- -- -- -- --
Massachusetts ... 1 1 -- -- -- --
Other states (1) 8 3 -- -- -- --
---------- ------- ---------- ------- ---------- -------
Total .......... $117 $19 $13 $10 $ 9 $--
========== ======= ========== ======= ========== =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TOTAL
NONACCRUAL
REAL
ESTATE % OF
STATE LOANS TOTAL
----- ---------- -----
<S> <C> <C>
California ....... $ 75 44.64%
New York ......... 31 18.45
Ohio ............. 11 6.55
Hawaii ........... 11 6.55
New Jersey ....... 9 5.36
Illinois ......... 7 4.17
Florida .......... 6 3.57
Pennsylvania ..... 3 1.79
Connecticut ...... 2 1.19
Massachusetts ... 2 1.19
Other states (1) 11 6.54
----- -------
Total .......... $168 100.00%
===== =======
</TABLE>
- --------------
(1) There are 27 states, Puerto Rico, and the District of Columbia, of which
no one state had nonaccrual loans in excess of 1% of the total.
At September 30, 1996, Holdings' largest non-performing asset was
approximately $3.6 million, and it had seven non-performing assets over $2
million in size with balances averaging approximately $2.8 million. Holdings
has 1,873 non-performing assets below $2 million in size, including 1,783
non-performing 1-4 unit residential assets.
The following table indicates outstanding balances of troubled debt
restructured loans, net of purchase accounting adjustments, by collateral
type, interest rate type and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT COMMERCIAL
RESIDENTIAL RESIDENTIAL AND OTHER
------------------- ------------------- ------------------
STATE VARIABLE FIXED VARIABLE FIXED VARIABLE FIXED
----- ---------- ------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California ....... $ 1 $ 5 $29 $ 5 $19 $23
New York ......... -- 1 3 35 -- 22
New Jersey ....... -- -- 16 2 -- --
Pennsylvania ..... -- -- 17 1 -- --
Florida .......... -- -- 4 1 8 --
Missouri ......... -- -- 1 3 5 --
Georgia .......... -- -- -- 6 -- --
Texas ............ -- -- 2 4 -- --
Other states (1) -- 1 4 14 1 1
---------- ------- ---------- ------- ---------- -------
Total .......... $ 1 $ 7 $76 $71 $33 $46
========== ======= ========== ======= ========== =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
TOTAL
TROUBLED
DEBT % OF
STATE RESTRUCTURED TOTAL
----- ----------- -------
<S> <C> <C>
California ....... $ 82 35.04%
New York ......... 61 26.07
New Jersey ....... 18 7.69
Pennsylvania ..... 18 7.69
Florida .......... 13 5.56
Missouri ......... 9 3.85
Georgia .......... 6 2.56
Texas ............ 6 2.56
Other states (1) 21 8.98
----------- -------
Total .......... $234 100.00%
=========== =======
</TABLE>
- --------------
(1) There are 12 states of which no one state had troubled debt restructured
loans in excess of 2% of the total.
85
<PAGE>
The following table indicates outstanding balances of impaired loans, net
of purchase accounting adjustments, by collateral type, interest rate type
and state concentration as of December 31, 1995:
<TABLE>
<CAPTION>
5+ UNIT COMMERCIAL
RESIDENTIAL AND OTHER TOTAL % OF
------------------- ------------------- IMPAIRED TOTAL
VARIABLE FIXED VARIABLE FIXED ---------- --------
STATE (DOLLARS IN MILLIONS)
-----
<S> <C> <C> <C> <C> <C> <C>
California ....... $29 $ 3 $38 $10 $ 80 64.00%
New York ......... 4 12 1 -- 17 13.60
Georgia .......... -- 6 -- -- 6 4.80
Ohio ............. 2 4 -- -- 6 4.80
Arizona .......... 1 3 -- -- 4 3.20
Illinois ......... -- 4 1 -- 5 4.00
Other states (1) 2 3 1 1 7 5.60
---------- ------- ---------- ------- ---------- --------
Total .......... $38 $35 $41 $11 $125 100.00%
========== ======= ========== ======= ========== ========
</TABLE>
- --------------
(1) There are 8 states of which no one state had impaired loans in excess of
1.5% of the total.
A summary of the activity in the allowance for loan losses by loan type is
as follows for the years ended December 31, 1994 and 1995 and the nine months
ended September 30, 1996:
<TABLE>
<CAPTION>
5+ UNIT
RESIDENTIAL
1-4 UNIT AND COMMERCIAL CONSUMER
RESIDENTIAL REAL ESTATE AND OTHER TOTAL
------------- -------------- ----------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance -- December 31, 1994 ......... $ 111 $ 83 $ 9 $ 203
Provision for loan losses .......... 31 3 3 37
Charge-offs ........................ (27) (1) (5) (33)
Recoveries ......................... 1 -- 2 3
------------- -------------- ----------- --------
Balance -- December 31, 1995 ......... $ 116 $ 85 $ 9 $ 210
------------- -------------- ----------- --------
Purchases/acquisitions ............. 12 32 1 45
Provision for loan losses .......... 25 2 3 30
Charge-offs ........................ (36) (3) (5) (44)
Recoveries ......................... 2 -- 1 3
------------- -------------- ----------- --------
Balance -- September 30, 1996 ....... $ 119 $ 116 $ 9 $ 244
============= ============== =========== ========
Ratio of allowance for loan losses to
non-performing loans:
December 31, 1994 ................. 83.5% 188.6% 225.0% 112.2%
============= ============== =========== ========
December 31, 1995 ................. 85.3% 265.6% 300.0% 122.8%
============= ============== =========== ========
September 30, 1996 ................ 88.8% 362.5% 300.0% 144.4%
============= ============== =========== ========
</TABLE>
For additional discussion on the non-performing assets of Holdings, see
"Business--Non-performing Assets."
MORTGAGE BANKING OPERATIONS
Holdings, through First Nationwide and FNMC, has significantly expanded
and enhanced the efficiency of its mortgage banking operations. With the
consummation of the LMUSA 1996 Purchase on January 31, 1996 and the
acquisition of the single-family loan servicing portfolio in the SFFed and
Home Federal Acquisitions, other acquisitions and the originated servicing,
the single-family residential loans serviced for others totalled $42.7
billion at September 30, 1996, an increase of $15.7 billion from December 31,
1995. During the first three quarters of 1996, Holdings, through First
Nationwide and FNMC, originated and sold (generally with servicing retained)
single-family residential loans totalling approximately $3.6 billion and $3.8
billion, respectively. Gross revenues from mortgage loan servicing activities
for the first three quarters of 1996 total $155.5 million, an increase of
$89.4 million from the nine months ended September 30, 1995.
86
<PAGE>
In accounting for its mortgage loan sales prior to April, 1995, a gain or
loss was recognized based on the sum of three components: (i) the difference
between the cash proceeds of the loan sales and the carrying value of the
loans; (ii) the "excess servicing," if any; less (iii) provisions for
estimated losses to be incurred from limited recourse obligations, if any.
Excess servicing results in a capitalized asset that is amortized as an
offset to servicing fee income using the interest method over the estimated
remaining lives of the loans sold.
Effective April 1, 1995, Holdings adopted SFAS No. 122, which requires
that, when a mortgage loan is sold and servicing rights are retained, a
portion of the cost of originating a mortgage loan be allocated to the
mortgage servicing rights based on its fair market value. This cost of
originating the loan is capitalized and amortized as an offset to servicing
fee income using the interest method over the estimated remaining lives of
the loans sold. The net gains on sales of single-family mortgage loans during
the nine months ended September 30, 1996 totalled $5.5 million and included
amounts related to the capitalization of originated and excess mortgage
servicing rights of $55.0 million.
The following is a summary of activity in mortgage servicing rights
purchased ("Purchased"), originated ("Originated") and excess servicing fees
receivable ("Excess") for the nine months ended September 30, 1996 (in
thousands):
<TABLE>
<CAPTION>
PURCHASED ORIGINATED EXCESS TOTAL
----------- ------------ -------- ----------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $223,749 $16,370 $1,236 $241,355
Additions .................. 175,823 52,121 2,852 230,796
Amortization ............... (62,058) (2,980) (444) (65,482)
Impairment ................. -- -- -- --
----------- ------------ -------- ----------
Balance at September 30, 1996 $337,514 $65,511 $3,644 $406,669
=========== ============ ======== ==========
</TABLE>
Capitalized mortgage servicing rights are amortized over the period of
estimated future net servicing income. No allowance for loss due to
impairment of mortgage servicing rights was necessary at September 30, 1996.
CAPITAL RESOURCES
OTS capital regulations require savings banks to satisfy three minimum
capital requirements: tangible capital, core capital and risk-based capital.
In general, an institution's tangible capital, which must be at least 1.5% of
adjusted total assets, is the sum of common stockholders' equity (including
retained earnings), noncumulative perpetual preferred stock and minority
interest in equity accounts of fully consolidated subsidiaries, less
disallowed intangibles. An institution's ratio of core capital to adjusted
total assets (the "leverage capital ratio") must be at least 3%. Core capital
generally is the sum of tangible capital plus certain other qualifying
intangibles. Under the risk-based capital requirement, a savings bank must
have total capital (core capital plus supplementary capital) equal to at
least 8% of risk-weighted assets (which equals assets plus the credit risk
equivalent of certain off-balance sheet items, each multiplied by the
appropriate risk weight). Supplementary capital, which may not exceed 100% of
core capital for purposes of the risk-based requirements, includes, among
other things, certain permanent capital instruments such as qualifying
cumulative perpetual preferred stock, as well as some forms of term capital
instruments, such as qualifying subordinated debt. These capital requirements
are viewed as minimum standards by the OTS, and most institutions are
expected to maintain capital levels well above the minimum. In addition, the
OTS regulations provide that minimum capital levels higher than those
provided in the regulations may be established by the OTS for individual
savings associations, depending upon their particular circumstances. The Bank
is not subject to any such individual minimum regulatory capital requirement.
These capital requirements are applicable to the Bank but not to Holdings.
See "Regulation--Regulation of Federal Savings Banks--Regulatory Capital
Requirements."
87
<PAGE>
At September 30, 1996, First Nationwide's regulatory capital levels
exceeded the minimum regulatory capital requirements, with tangible, core and
risk-based capital ratios of 6.71%, 6.71% and 12.93%, respectively. The
following is a reconciliation of the Bank's stockholders' equity to
regulatory capital as of September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Stockholders' equity of First Nationwide ..................... $1,462 $1,462 $1,462
Unrealized holding gain on securities available for sale, net (35) (35) (35)
Non-qualifying loan-servicing rights ......................... (41) (41) (41)
Non-allowable capital:
Intangible assets .......................................... (145) (145) (145)
Investment in subsidiaries ................................. (8) (8) (8)
Excess deferred tax assets ................................... (125) (125) (125)
Supplemental capital:
Qualifying subordinated debt debentures .................... -- -- 90
General loan loss reserves ................................. -- -- 129
Assets required to be deducted:
Land loans with more than 80% LTV ratio .................... -- -- (2)
---------- --------- ------------
Regulatory capital of First Nationwide ....................... 1,108 1,108 1,325
Minimum regulatory capital requirement ....................... 248 495 820
---------- --------- ------------
Excess above minimum capital requirement ..................... $ 860 $ 613 $ 505
========== ========= ============
</TABLE>
<TABLE>
<CAPTION>
TANGIBLE LEVERAGE RISK-BASED
CAPITAL CAPITAL CAPITAL
RATIO RATIO RATIO
---------- ---------- ------------
<S> <C> <C> <C>
Regulatory capital of First Nationwide .. 6.71% 6.71% 12.93%
Minimum regulatory capital requirement .. 1.50 3.00 8.00
---------- ---------- ------------
Excess above minimum capital requirement 5.21% 3.71% 4.93%
========== ========== ============
</TABLE>
The amount of adjusted total assets used for the tangible and leverage
capital ratios is $16.5 billion. Risk-weighted assets used for the risk-based
capital ratio amounted to $10.3 billion.
The Bank is also subject to the provisions of the FDICIA, which, among
other things, define specific capital categories based on an institution's
capital ratios. The capital categories, in declining order, are "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized," and "critically undercapitalized." Institutions
categorized as "undercapitalized" or worse are subject to certain
restrictions, including the requirement to file a capital plan with the OTS,
prohibitions on the payment of dividends and management fees, restrictions on
executive compensation, and increased supervisory monitoring, among other
things. Other restrictions may be imposed on the institution either by the
OTS or by the FDIC, including requirements to raise additional capital, sell
assets, or sell the entire institution. Once an institution becomes
"critically undercapitalized" it is generally placed in receivership or
conservatorship within 90 days.
At September 30, 1996, First Nationwide's leverage capital, Tier 1 (core
capital) risk-based and total risk-based capital ratios were sufficient for
it to be considered "well capitalized":
<TABLE>
<CAPTION>
RISK-BASED
-------------------------
CORE CAPITAL TIER 1 TOTAL CAPITAL
-------------- -------- ---------------
<S> <C> <C> <C>
Regulatory capital of First Nationwide 6.71% 10.81% 12.93%
Well capitalized ratio ................. 5.00 6.00 10.00
-------------- -------- ---------------
Excess above well capitalized ratio ... 1.71% 4.81% 2.93%
============== ======== ===============
</TABLE>
Management expects that the Bank will remain a "well capitalized"
institution after consummation of the Cal Fed Acquisition.
88
<PAGE>
OTS capital regulations allow a savings bank to include a net deferred tax
asset under SFAS No. 109 in regulatory capital, subject to certain
limitations. To the extent that the realization of a deferred tax asset
depends on a savings bank's future taxable income, such deferred tax asset is
limited for regulatory capital purposes to the lesser of the amount that can
be realized within one year or 10 percent of core capital. As of December 31,
1994, First Nationwide recorded a valuation adjustment for 100% of First
Nationwide's net deferred tax asset because First Nationwide believed at that
time, it was not more likely than not that such deferred tax assets would be
realized.
Based on a favorable earnings trend since the consummation of the FN
Acquisition and future earnings expectations, management changed its judgment
about the realizability of First Nationwide's net deferred tax assets and
recognized a deferred tax benefit of $69 million in the fourth quarter of
1995, and an additional $125 million in the second quarter of 1996. The net
tax benefit of $69 million was determined based upon the amount of taxable
income that may be realized within one year. This amount does not exceed 10
percent of core capital and therefore is allowed without limitation under OTS
capital regulations. The additional $125 million net tax benefit recorded in
the second quarter of 1996 was determined based upon the amount of taxable
income that may be realized in periods beyond one year. Accordingly, such
amount has been excluded from regulatory capital at September 30, 1996.
CAL FED
OVERVIEW
California Federal maintained 118 full service branches in California and
Nevada and was one of the largest savings associations in the United States
with assets of $14.1 billion at September 30, 1996 and $14.3 billion at
December 31, 1995. California Federal offered a broad range of consumer
financial services including demand and term deposits, mortgage, consumer and
small business loans, and insurance and investment products.
During the fourth quarter of 1995, California Federal obtained regulatory
and shareholder approval to reorganize into a holding company structure,
designed to provide greater flexibility for meeting future financial and
competitive needs. As a result of the reorganization, on January 1, 1996,
each share of California Federal's common stock was converted into one share
of Cal Fed common stock. Consequently, California Federal became a
wholly-owned subsidiary of Cal Fed.
During the third quarter of 1996, federal legislation was enacted, which,
among other things, will fund the SAIF through the Special SAIF Assessment
for SAIF members, such as California Federal. The Special SAIF Assessment was
based on California Federal's deposits as of March 31, 1995 at an assessment
rate of 65.7 basis points. During the third quarter of 1996, California
Federal accrued $58.1 million for the Special SAIF Assessment. The Special
SAIF Assessment was paid on November 27, 1996.
89
<PAGE>
The following is a summary of Cal Fed's financial highlights for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATE)
<S> <C> <C>
Net interest income before provision for loan losses ................ $ 260.9 $ 229.1
Provisions for losses on loans and operations of real estate held
for sale ........................................................... 38.8 31.8
General and administrative expenses ................................. 176.5 179.2
(Loss) earnings available for common shareholders ................... 30.4 49.1
Loan originations ................................................... 1,562.7 1,379.8
Loan purchases ...................................................... 628.5 408.5
Net interest rate spread ............................................ 2.20% 1.94%
Net interest rate margin ............................................ 2.49% 2.19%
General and administrative expenses as a percentage of average
assets (annualized)(A), (B) ........................................ 1.65% 1.68%
Operating efficiency ratio(B) ....................................... 56.94% 65.28%
Return on average assets (annualized)(A) ............................ 0.57% 0.64%
Return on average equity (annualized)(A), (C) ....................... 9.46% 10.93%
</TABLE>
- --------------
(A) Annualized ratios are based upon results for the nine months ended
September 30. Results may vary from quarter to quarter and for the year.
(B) The computation excludes the $58.1 million Special SAIF Assessment.
(C) Average equity includes preferred stock of subsidiary totalling $172.5
million and $266.0 million at September 30, 1996 and 1995, respectively.
For the nine months ended September 30, 1996 earnings available to common
shareholders were $30.4 million compared to $49.1 million for the same period
of 1995, primarily attributable to the $58.1 million accrual for the Special
SAIF Assessment.
Net interest income for the nine months ended September 30, 1996 was
$260.9 million compared to $229.1 million for the same period of 1995. The
increase in the level of net interest income is the result of an improvement
in Cal Fed's net interest rate spread. The improvement in Cal Fed's net
interest rate spread for the nine months ended September 30, 1996 compared to
the same period of 1995 resulted primarily from a decrease in the cost of
interest-bearing liabilities.
90
<PAGE>
The following is a summary of Cal Fed's financial highlights for the
periods indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net interest income .................................. $ 311.9 $ 341.6 $ 402.0
Provisions for losses on loans and operations of real
estate held for sale ................................ 39.8 120.8 281.8
General and administrative expenses .................. 241.9 290.3 323.3
Net earnings (loss) .................................. 93.6 (423.1) (145.5)
Primary net earnings (loss) per common share ........ 1.36 (10.10) (5.98)
Fully-diluted net earnings (loss) per common share .. 1.36 (10.10) (5.98)
Loan originations .................................... 1,768.4 2,545.3 2,827.5
Loan purchases ....................................... 578.2 229.2 115.0
Interest rate spread ................................. 2.00% 2.23% 2.62%
Net interest margin .................................. 2.23% 2.34% 2.59%
General and administrative expenses as a percentage
of average assets ................................... 1.70% 1.97% 1.99%
Return on average assets ............................. 0.66% (2.87)% (0.89)%
Return on average equity ............................. 11.10% (50.10)% (15.88)%
</TABLE>
Cal Fed's net earnings of $93.6 million, or $1.36 per common share for the
year ended December 31, 1995 represented a $516.7 million increase from the
net loss for 1994. The 1994 net loss included certain nonrecurring items: (i)
a $135.0 million net gain from the sale of California Federal's Southeast
Division (as defined herein), (ii) a $273.7 million charge for the effect of
a change in accounting for goodwill and (iii) a $274.8 million loss on assets
held for accelerated disposition.
The improvement in operations for 1995 compared to 1994 resulted primarily
from decreases in provisions for loan losses, lower general and
administrative expenses and improvements in real estate operations.
Provisions for loan losses for the year ended December 31, 1995 were $31.8
million, a 57.5% decrease from 1994. Further, general and administrative
expenses for 1995 were $241.9 million, a 16.7% decrease from 1994. The
reduction in general and administrative expenses reflects the sale of
California Federal's Southeast Division in 1994 and cost containment measures
implemented in California Federal's California operations during 1994 and
1995. Real estate operations were positively affected by a reduction in the
volume of real estate held for sale and a reduced need for allowances for
losses on real estate held for sale.
During 1995, Cal Fed sold $952.2 million of U.S. Treasury securities, that
had been designated as available for sale, and realized a gain of $6.9
million. Cal Fed reinvested the proceeds from the sale of the securities into
short-term liquid investments. Due to the small yield differential between
short-term and medium-term instruments, the near term impact to Cal Fed's net
interest income is not expected to be material.
During 1994, Cal Fed successfully completed a number of strategic
initiatives. Those initiatives included (i) the raising of $347.5 million of
new equity capital through the issuance of preferred and common stock, (ii)
the accelerated disposition of $1.3 billion of non-performing assets
("NPA's") and certain performing loans with higher risk profiles than Cal Fed
wished to retain in its portfolio (the "1994 Bulk Sales"), (iii) the sale of
43 depository branches located in Florida and one branch in Georgia (the
"Southeast Division") and (iv) the reduction in operating costs in California
Federal's California operations. Cal Fed realized a net gain of $135.0
million from the sale of the Southeast Division during the third quarter of
1994.
In 1994, Cal Fed recorded a $273.7 million charge to earnings from the
application of SFAS No. 72, Accounting for Certain Acquisitions of Banking or
Thrift Institutions to California Federal's acquisitions initiated prior to
September 30, 1982. The cumulative effect of the retroactive application of
SFAS No. 72 resulted in the acceleration of California Federal's goodwill
amortization arising from
91
<PAGE>
California Federal's thrift institution acquisitions initiated prior to
September 30, 1982, to the extent that $273.7 million of remaining
unamortized goodwill was eliminated effective January 1, 1994.
The 1994 strategic initiatives and the change in accounting for goodwill
are the primary reasons for the material changes in Cal Fed's operating
results between 1993, 1994 and 1995.
The following table presents the primary composition of Cal Fed's gross
income for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------------------
1996 1995
------------------ ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Total interest income $761.6 92.5% $747.6 93.7%
Total other income ... 61.9 7.5 50.3 6.3
-------- -------- -------- --------
Total gross income . $823.5 100.0% $797.9 100.0%
======== ======== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Total interest income $1,008.0 94.1% $ 908.1 81.9% $1,013.9 93.5%
Total other income ... 63.5 5.9 201.2 18.1 70.2 6.5
---------- -------- ---------- -------- ---------- --------
Total gross income . $1,071.5 100.0% $1,109.3 100.0% $1,084.1 100.0%
========== ======== ========== ======== ========== ========
</TABLE>
Cal Fed's gross income is primarily derived from interest earned on loans,
mortgage-backed securities, investment securities and other assets that earn
interest ("interest earning assets"). See "--Net Interest." Other income is
primarily comprised of fees and gains from the sale of assets. As previously
discussed, the nonrecurring gain from the sale of the Southeast Division is
reflected as a component of California Federal's other income for 1994.
The following table compares Cal Fed's financial condition, asset quality
and capital position as of the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
--------------- ---------------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE DATA)
<S> <C> <C>
Total assets .......................................... $14,126.7 $14,208.9
Interest earning asets ................................ $13,704.6 $13,645.8
Deposits .............................................. $ 8,763.6 $ 9,438.0
Borrowings ............................................ $ 4,281.0 $ 3,712.3
Total shareholders' equity ............................ $ 654.6 $ 867.3
NPA's ................................................. $ 164.5 $ 211.6
Non-performing loans ("NPL's") ........................ $ 152.3 $ 182.2
Ratio of NPA's to total assets ........................ 1.16% 1.49%
Number of depository branches ......................... 118 126
Shareholders' equity as a percentage of total assets . 4.63% 6.10%
Tangible capital ratio of California Federal ......... 5.40% 5.80%
Core capital ratio of California Federal .............. 5.40% 5.80%
Risk-based capital ratio of California Federal ....... 11.18% 12.17%
Tier 1 risk-based capital ratio of California Federal 9.72% 10.60%
</TABLE>
During the second quarter of 1996, California Federal called for
redemption all of the 3,740,000 outstanding shares of its 7 3/4%
Noncumulative Convertible Preferred Stock, Series A (the "California Federal
Preferred Stock, Series A"). Except for the conversion of 18,820 shares into
23,336 shares of Cal Fed's common stock, all shares of the California Federal
Preferred Stock, Series A were redeemed effective June 14, 1996 at a
redemption price of $25.00 per share, plus a dividend of $0.398264 per share.
On October 18, 1996 California Federal declared a regular quarterly dividend
of $2.65625 per share on the 10 5/8% Bank Preferred Stock.
92
<PAGE>
The following table compares Cal Fed's financial condition, asset quality
and capital position as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
-------------- -------------- --------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Interest earning assets .............................. $13,755.0 $13,520.0 $13,558.6
Total assets ......................................... $14,320.6 $14,182.4 $15,325.9
Deposits ............................................. $ 9,476.7 $ 8,360.9 $12,600.8
Borrowings ........................................... $ 3,786.4 $ 4,818.8 $ 1,647.0
Total shareholders' equity ........................... $ 887.5 $ 798.3 $ 890.7
NPA's ................................................ $ 231.8 $ 223.1 $ 805.7
Number of depository branches ........................ 125 119 168
Book value per common share .......................... $ 12.63 $ 10.82 $ 31.93
Tangible book value per common share ................. $ 12.28 $ 10.74 $ 20.96
Ratio of NPA's to total assets ....................... 1.62% 1.57% 5.26%
Shareholder's equity as a percentage of total assets 6.20% 5.63% 5.81%
Tangible capital ratio ............................... 5.91% 5.60% 3.98%
Core capital ratio ................................... 5.91% 5.60% 4.73%
Risk-based capital ratio ............................. 12.36% 12.45% 9.67%
</TABLE>
During 1995, California Federal acquired three branch offices and $138.6
million in deposits of Pacific Heritage Bank and six branch offices and
$359.4 million in deposits of Continental Savings of America.
During 1995, California Federal made a non-taxable distribution of its
Litigation Interests to its common shareholders. The Litigation Interests
represent a right to receive a portion of the net cash proceeds, if any,
resulting from California Federal's pending goodwill lawsuit against the
Federal government. The Litigation Interests trade on the NASDAQ Small Cap
Market under the symbol "CALGZ". See "Business--Holdings--Other
Activities--Cal Fed Contingent Litigation Recovery Participation Interests."
NET INTEREST INCOME
Net interest income is the difference between interest income earned from
interest-earning assets and interest expense paid on savings deposits and
borrowings ("interest-bearing liabilities").
For the nine months ended September 30, 1996 net interest income totaled
$260.9 million compared to $229.1 million for the same period of 1995.
Net interest income totaled $311.9 million for the year ended December 31,
1995, compared to $341.6 million and $402.0 million for 1994 and 1993,
respectively. Net interest income is affected by (i) the average volume and
repricing characteristics of California Federal's interest-earning assets and
interest-bearing liabilities, (ii) the level and volatility of market
interest rates and (iii) the performance of California Federal's loan
portfolio and investments. Net interest income also depends upon the excess
of yields earned on interest-earning assets over rates paid on
interest-bearing liabilities ("interest rate spread").
93
<PAGE>
The following table presents the primary determinants of Cal Fed's net
interest income for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Average interest-earning assets ..... $13,977.1 $13,964.7 $13,989.6 $14,624.5 $15,535.8
Less: Average non-performing
loans (A) ........................... 184.1 178.0 184.3 387.4 675.1
----------- ----------- ----------- ----------- -----------
Average performing interest-earning
assets .............................. 13,793.0 13,786.7 13,805.3 14,237.1 14,860.7
Less: Average interest-bearing
liabilities ......................... 13,156.6 13,298.3 13,347.6 14,217.7 15,634.3
----------- ----------- ----------- ----------- -----------
Average performing interest-earning
assets over (under) average
interest-bearing liabilities ........ $ 636.4 $ 488.4 $ 457.7 $ 19.4 $ (773.6)
=========== =========== =========== =========== ===========
Yield earned on average-interest
earning assets ...................... 7.27% 7.14% 7.21% 6.21% 6.53%
Rate paid on average interest-bearing
liabilities ......................... 5.07 5.20 5.21 3.98 3.91
----------- ----------- ----------- ----------- -----------
Net interest rate spread ............. 2.20% 1.94% 2.00% 2.23% 2.62%
=========== =========== =========== =========== ===========
Net interest rate margin ............. 2.49% 2.19% 2.23% 2.34% 2.59%
=========== =========== =========== =========== ===========
Total interest income ................ $ 761.6 $ 747.6 $ 1,008.0 $ 908.1 $ 1,013.9
Total interest expense ............... 500.7 518.5 696.1 566.5 611.9
----------- ----------- ----------- ----------- -----------
Net interest income .................. $ 260.9 $ 229.1 $ 311.9 $ 341.6 $ 402.0
=========== =========== =========== =========== ===========
</TABLE>
- --------------
(A) Average NPL's include non-accrual and restructured loans.
As indicated in the table above, net interest income increased by $31.8
million for the nine months ended September 30, 1996 compared to the nine
months ended September 30, 1995. The increase in net interest income was
primarily due to an improvement in Cal Fed's net interest rate spread. Cal
Fed's net interest rate spread has increased during the nine months ended
September 30, 1996 compared to the same period of 1995. The improvement in
Cal Fed's net interest rate spread is primarily due to a decline in its cost
of funds. Cal Fed's cost of funds declined by 13 basis points for the nine
months ended September 30, 1996 compared to the same period of 1995.
Net interest income has declined since 1993 due to a decrease in the
average level of interest earning assets and due to an increase in short-term
interest rates that has increased Cal Fed's cost of funds. As indicated in
the table above, net interest income decreased by $29.7 million for the year
ended December 31, 1995 as compared to the same period of 1994. The decrease
in net interest income was primarily due to an increase in Cal Fed's cost of
funds. During 1994 and continuing into the first half of 1995, short-term
market rates, offering rates on deposits, LIBOR rates and the Eleventh
District Cost of Funds Index ("COFI") increased. The increase in rates
resulted in increased costs of deposits and borrowings and to a lesser
extent, increased yields on loans and investments. California Federal, and
most of its competitors in its deposit markets, raised interest rates on
deposits during 1994 and throughout most of 1995 in order to keep them an
attractive investment vehicle for consumers relative to other investment
alternatives. Additionally, a substantial amount of Cal Fed's borrowings bore
interest that was based on the 1 month LIBOR index. Because LIBOR has
increased significantly since 1993, the cost of Cal Fed's borrowings have
also increased. During the second half of 1995 the cost of funds began to
stabilize; however, the yield on Cal Fed's interest-earning assets increased
due to the lagging effect of the repricing characteristics of Cal Fed's
adjustable rate loans and mortgage-backed securities. The lagging repricing
of Cal Fed's
94
<PAGE>
adjustable rate loans and mortgage-backed securities ("MBS's") has led to an
improvement in Cal Fed's interest rate spread at December 31, 1995 as
compared to December 31, 1994.
The majority of Cal Fed's loans receivable and MBS's, (approximately 83.3%
of the total amount of loans receivable and MBS's) earn interest based upon
the movement of COFI and the 1-year constant maturity Treasury. Changes in
the COFI have historically lagged other indices and market rates. Therefore,
the repricing of Cal Fed's loans typically lags the repricing of its deposits
and borrowings. Additionally, the extent to which loans and mortgage-backed
securities can reprice upward may be limited by contractual terms that
restrict the frequency of repricing and periodic interest rate adjustment
caps ("periodic caps").
The following table presents information on the yields earned, rates paid
and interest rate spreads for Cal Fed:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995 DECEMBER 31, 1995
----------------------- ----------------------- -------------------
FOR THE AT THE FOR THE AT THE FOR THE AT THE
NINE MONTHS PERIOD NINE MONTHS PERIOD YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
------------- -------- ------------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Weighted Average Yield
Earned:
Loans Receivable .......... 7.76% 7.60% 7.64% 7.88% 7.71% 7.93%
Mortgage-Backed Securities 6.71 6.78 6.59 6.92 6.66 6.93
Repurchase Agreements(A) . 5.51 5.56 5.60 5.87 5.97 6.01
Other (B) ................. 5.41 6.11 6.00 5.57 5.59 5.87
Total Interest-Earning
Assets .................. 7.27 7.26 7.14 7.42 7.21 7.54
Weighted Average Rate Paid:
Deposits .................. 4.80 4.66 4.71 4.91 4.77 4.87
FHLB Advances(C) .......... 5.71 5.67 6.34 6.16 6.28 6.06
Reverse Repurchase
Agreements(D) ............ 5.37 5.25 5.95 5.85 5.91 5.56
Other Borrowings .......... 6.83 10.42 6.80 6.35 6.71 6.85
Total Interest-Bearing
Liabilities ............. 5.07 4.98 5.20 5.25 5.21 5.19
Interest Rate Spread ..... 2.20 2.28 1.94 2.17 2.00 2.35
Net Margin on Average
Interest-Earning Assets . 2.49% 2.52% 2.19% 2.38% 2.23% 2.55%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------- -------------------
FOR THE AT THE FOR THE AT THE
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Weighted Average Yield
Earned:
Loans Receivable .......... 6.92% 7.14% 7.22% 6.73%
Mortgage-Backed Securities 5.61 6.08 5.59 5.41
Repurchase Agreements(A) . 4.26 5.70 3.21 3.15
Other (B) ................. 4.71 5.43 5.46 4.81
Total Interest-Earning
Assets .................. 6.21 6.67 6.53 6.30
Weighted Average Rate Paid:
Deposits .................. 3.68 4.02 3.94 3.67
FHLB Advances(C) .......... 5.05 6.25 3.83 3.82
Reverse Repurchase
Agreements(D) ............ 4.52 5.87 3.17 3.40
Other Borrowings .......... 5.53 6.88 4.91 4.71
Total Interest-Bearing
Liabilities ............. 3.98 4.83 3.91 3.70
Interest Rate Spread ..... 2.23 1.84 2.62 2.60
Net Margin on Average
Interest-Earning Assets . 2.34% 1.99% 2.59% 2.45%
</TABLE>
- --------------
(A) Securities purchased under agreements to resell ("repurchase agreements").
(B) Consists of U.S. Treasury securities, short-term liquid investments and
other investment securities.
(C) Federal Home Loan Bank Advances ("FHLB advances").
(D) Securities sold under agreements to repurchase ("reverse repurchase
agreements").
95
<PAGE>
The table below presents Cal Fed's loans and mortgage-backed securities
and the various indices which dictate their repricing:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
-------------------------- --------------------------
MORTGAGE- MORTGAGE-
BACKED BACKED
LOANS SECURITIES(A) LOANS SECURITIES(A)
----------- ------------- ---------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Adjustable Rates:
COFI ..................... $ 5,735.1 $ 979.6 $5,495.2 $1,114.6
Treasury ................. 2,712.4 877.9 2,613.7 1,138.9
Prime rate ............... 127.2 -- 147.7 --
Other adjustable ......... 24.3 -- 29.6 --
----------- ------------- ---------- -------------
8,599.0 1,857.5 8,286.2 2,253.5
----------- ------------- ---------- -------------
Fixed Rates:
Fixed .................... 559.2 49.2 573.8 256.8
Fixed for 3-5 years
converting to ARM ....... 1,047.4 134.6 505.1 --
----------- ------------- ---------- -------------
1,606.6 183.8 1,078.9 256.8
----------- ------------- ---------- -------------
10,205.6 2,041.3 9,365.1 2,510.3
----------- ------------- ---------- -------------
Deferred (fees) costs,
discounts and
other items, net ......... 19.6 (0.5) 0.8 (0.4)
Allowance for loan losses (170.1) -- (177.6) --
----------- ------------- ---------- -------------
$10,055.1 $2,040.8 $9,188.3 $2,509.9
=========== ============= ========== =============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- -----------------------
MORTGAGE- MORTGAGE-
BACKED BACKED
LOANS SECURITIES LOANS SECURITIES
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Adjustable Rates:
COFI ..................... $5,511.4 $1,081.4 $4,925.5 $ 918.5
Treasury ................. 2,612.1 1,063.8 2,795.3 1,306.9
Prime rate ............... 142.5 -- 107.3 --
Other adjustable ......... 28.7 -- 143.0 10.6
---------- ------------ ---------- ------------
$8,294.7 2,145.2 7,971.1 2,236.0
---------- ------------ ---------- ------------
Fixed Rates:
Fixed .................... 559.4 222.0 612.5 280.3
Fixed for 3-5 years
converting to ARM ....... 625.4 -- 384.8 --
---------- ------------ ---------- ------------
1,184.8 222.0 997.3 280.3
---------- ------------ ---------- ------------
9,479.5 2,367.2 8,968.4 2,516.3
---------- ------------ ---------- ------------
Deferred (fees) costs,
discounts and
other items, net ......... 5.1 (0.5) (9.5) (2.6)
Allowance for loan losses (181.0) -- (211.6) --
---------- ------------ ---------- ------------
$9,303.6 $2,366.7 $8,747.3 $2,513.7
========== ============ ========== ============
</TABLE>
- --------------
(A) Included in the Consolidated Statement of Financial Condition of Cal Fed
with securities held to maturity.
The table below lists representative rates of various indices at the dates
indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
INDEX 1996 1995 1995 1994 1993
----- --------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
COFI .................. 4.84% 5.13% 5.12% 4.37% 3.82%
30 year treasury bond 6.93 6.49 5.96 7.89 6.35
1 year treasury bill . 5.71 5.65 5.18 7.20 3.63
6 month treasury bill 5.17 5.27 5.04 6.24 3.21
Prime rate ............ 8.25 8.75 8.50 8.50 6.00
Federal funds ......... 6.09 6.20 4.73 5.50 2.85
1 month LIBOR ......... 5.37 5.88 5.63 6.00 3.25
</TABLE>
During 1995, the difference between short and long-term interest rates
decreased as compared to 1994 and 1993. As a result, the risk of Cal Fed's
borrowers refinancing from adjustable rate loans to fixed rate loans
increased. Should Cal Fed experience a significant level of such
refinancings, and should the difference between short-term and long-term
rates remain relatively small, Cal Fed's interest rate spread and net
interest income would be negatively impacted.
Cal Fed's deposits are its primary funding source. Deposits generally tend
to reprice on a comparable basis with similar term U.S. Treasury securities
and other market rates. During 1994 and continuing through the first half of
1995, Cal Fed increased its offering rates on deposits as a result of
increases in market rates. The pricing of deposits is based upon competitive
demand and the desirability of increasing or decreasing Cal Fed's level of
deposits. As a result of Cal Fed funding a portion of the sale of the
Southeast Division with various borrowings, Cal Fed's level of borrowings was
a more significant source of funding during 1994 than in 1993 and 1995.
During 1994 and the first half of 1995, the indices that contractually
affected the cost of Cal Fed's borrowings increased. This contributed to the
increase in Cal
96
<PAGE>
Fed's cost of funds during 1995 as compared to 1994 and 1993. During 1995,
Cal Fed reduced the level of its borrowings by obtaining additional time
deposits, primarily certificates of deposit, with maturities of less than two
years.
The table below shows the changes in Cal Fed's total interest income,
total interest expense and net interest income, attributable to changes in
average balances outstanding (volume) and to changes in average interest
rates earned and paid on balances:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1996 YEAR ENDED DECEMBER 31, 1995
VERSUS NINE MONTHS ENDED VERSUS YEAR ENDED
SEPTEMBER 30, 1995 DECEMBER 31, 1994
---------------------------- ----------------------------
AMOUNT OF INCREASE AMOUNT OF INCREASE
(DECREASE) DUE TO CHANGE IN: (DECREASE) DUE TO CHANGE IN:
---------------------------- ----------------------------
VOLUME RATE TOTAL(A) VOLUME RATE TOTAL(A)
-------- -------- -------- -------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Interest Income:
Loans receivable ............. $ 37.8 $ 9.3 $ 47.1 $ 3 $ 74 $ 77
Other interest earning assets (31.3) (1.8) (33.1) (24) 47 23
-------- -------- -------- -------- ------- --------
Total Interest Income ...... 6.5 7.5 14.0 (21) 121 100
-------- -------- -------- -------- ------- --------
Interest Expense:
Deposits ..................... 0.4 3.0 3.4 (29) 80 51
Borrowings ................... (7.8) (13.4) (21.2) 22 57 79
-------- -------- -------- -------- ------- --------
Total Interest Expense ..... (7.4) (10.4) (17.8) (7) 137 130
-------- -------- -------- -------- ------- --------
Change in Net Interest Income $ 13.9 $ 17.9 $ 31.8 $(14) $(16) $(30)
======== ======== ======== ======== ======= ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
VERSUS YEAR ENDED
DECEMBER 31, 1993
----------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO CHANGE
IN:
----------------------------
VOLUME RATE TOTAL(A)
-------- ------- --------
<S> <C> <C> <C>
Interest Income:
Loans receivable ............. $(108) $(18) $(126)
Other interest earning assets 17 3 20
-------- ------- --------
Total Interest Income ...... (91) (15) (106)
-------- ------- --------
Interest Expense:
Deposits ..................... (96) (29) (125)
Borrowings ................... 46 34 80
-------- ------- --------
Total Interest Expense ..... (50) 5 (45)
-------- ------- --------
Change in Net Interest Income $ (41) $(20) $ (61)
======== ======= ========
</TABLE>
- --------------
(A) Changes in rate/volume (change in rate multiplied by the change in average
volume) which cannot be segregated have been allocated to the change in
rate or the change in average volume based upon their respective
percentages of the combined totals.
The decreases in average balances of interest-earning assets and
interest-bearing liabilities for 1995 compared to 1994 resulted primarily
from the sale of interest earning assets included with the 1994 Bulk Sales
and the reduction of deposits from the sale of the Southeast Division.
During 1995 compared to 1994, increases in market rates improved the yield
earned on Cal Fed's interest-earning assets, however, such improvements were
exceeded by increases in the cost of interest-bearing liabilities, resulting
in a negative impact on Cal Fed's interest rate spread and net interest
income.
During 1994, Cal Fed's net interest income, compared to 1993, was
negatively impacted by a decline in the level of average interest-earning
assets partially offset by a decline in the volume of interest-bearing
liabilities. The decline in the amount of interest-earning assets was due to
the payoffs at maturity of certain securities, the use of short-term liquid
investments to fund the sale of the Southeast Division and the 1994 Bulk
Sales. Cal Fed's net interest income is negatively affected by declines in
average interest-earning assets and average interest-bearing liabilities
whenever the yield of the assets exceeds the cost of the liabilities.
ASSET/LIABILITY MANAGEMENT
To the extent that yields earned on assets respond to changes in market
interest rates differently from rates paid on liabilities, earnings will be
sensitive to changes in market interest rates. The objective of Cal Fed's
interest rate risk management is to maintain a balance between stable income
growth and its exposure to potential earnings fluctuations resulting from
differences in the amount of interest-earning assets and interest-bearing
liabilities maturing or repricing in different time periods ("interest rate
sensitivity"). Cal Fed controls its interest rate sensitivity through a
variety of methods including originating loans that reprice monthly or
semi-annually and the use of interest rate exchange agreements. Adjustable
rate loans have interest rates that reprice periodically based upon changes
in COFI, the one
97
<PAGE>
year Treasury constant maturity index (the "CMT") and other indices. However,
such repricing characteristics are subject to periodic caps. As a result of
the rise in interest rates during 1994 and early 1995, Cal Fed's net interest
rate spread was negatively impacted due to the periodic caps associated with
many of Cal Fed's adjustable rate loans, including those indexed to COFI.
Additionally, many of Cal Fed's adjustable loans reprice at periodic
intervals. The contractual limitation of the adjustment period and periodic
caps have a negative impact on earnings during periods of increasing market
rates.
Cal Fed's use of derivative financial instruments is limited to interest
rate exchange agreements. Cal Fed utilizes interest rate exchange agreements
as an integral part of its asset/liability management program.
On a quarterly basis, Cal Fed simulated the level of net interest income
expected to be earned over a twelve month period following the date of the
simulation. The simulation is based on a projection of market interest rates
at varying levels, and estimates the impact of such market rates on the
levels of interest-earning assets and interest-bearing liabilities during the
measurement period. Also, any periodic or lifetime caps that contractually
limit the repricing of any interest-earning asset are considered.
Based upon the outcome of the simulation analysis, Cal Fed may consider
the use of interest rate exchange agreements as a means of reducing the
volatility of projected net interest income within certain ranges of
projected changes in interest rates. Cal Fed evaluates the effectiveness of
entering into any interest rate exchange agreements by measuring the cost of
such agreements in relation to the reduction in net interest income
volatility within an assumed range of interest rates.
Cal Fed has historically used interest rate swaps, caps and floors as a
means of controlling the potential negative impact on net interest income
from potential changes in interest rates. Cal Fed was a party to interest
rate swap agreements in the notional amounts of $2.7 billion and $1.8 billion
at September 30, 1996 and September 30, 1995, respectively. Cal Fed was a
party to notional amounts of $100.0 million of interest rate floor agreements
at both September 30, 1996 and September 30, 1995. Cal Fed was not a party to
interest rate cap agreements at September 30, 1996 or at September 30, 1995.
Cal Fed was a party to interest rate swap agreements in the notional amounts
of $2.4 billion, $541.5 million and $465.9 million at December 31, 1995, 1994
and 1993, respectively. Cal Fed was a party to notional amounts of $100.0
million, $150.0 million and $150.0 million of interest rate floor agreements
at December 31, 1995, 1994 and 1993, respectively. Cal Fed was not a party to
interest rate cap agreements at December 31, 1995, December 31, 1994 or at
December 31, 1993.
During 1995, $1.6 billion of Cal Fed's FHLB advances, utilized as a
funding source for the sale of the Southeast Division, matured. Those
borrowings bore an interest rate based upon the 1 month LIBOR plus 0.27%.
When those borrowings matured, the FHLB offered to renew them. In order to
reduce the cost of those borrowings, Cal Fed entered into an interest rate
swap agreement which reduces the cost of the advances to approximately the
one month LIBOR plus 0.20%. The notional amount of the swaps totalled $1.5
billion at December 31, 1995 and the maturity of the swaps is identical to
that of the FHLB advances. The counterparty to the interest rate swaps is an
internationally recognized broker-dealer.
Cal Fed also monitored the difference between the amount of interest rate
sensitive assets and interest rate sensitive liabilities which reprice within
one year ("one year gap"). At September 30, 1996, the one year gap as a
percentage of total interest-earning assets was positive 6.19% as compared to
positive 17.10% at September 30, 1995. At December 31, 1995, the one year gap
as a percentage of total interest-earning assets was positive 12.0% as
compared to negative 0.74% at December 31, 1994 and positive 2.02% at
December 31, 1993.
98
<PAGE>
The following table summarizes interest rate sensitive assets and
liabilities for California Federal (exclusive of subsidiaries) at September
30, 1996. In preparing the table below, assumptions were made regarding
estimated prepayments and maturities of mortgage-backed securities and loans.
These assumptions were based upon California Federal's historical experience
of maturities and prepayments for similar assets. For all other
interest-earning assets and liabilities, contractual maturities were used.
Additionally, California Federal used the inherent contractual repricing
characteristics of its interest-earning assets and interest-bearing
liabilities in categorizing the interest rate sensitivity period.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY PERIOD
-----------------------------------------------------
0 TO 91 TO 181 TO OVER
90 DAYS 180 DAYS 365 DAYS 1 YEAR TOTAL
--------- ---------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Short-term investments and investment securities $1,438 $ -- $ -- $ 6 $ 1,444
Mortgage-backed securities ....................... 1,405 465 127 44 2,041
Loans, net:
Real Estate Mortgage:
Adjustable rate ................................ 6,153 1,556 995 729 9,433
Fixed rate ..................................... 17 14 33 429 493
Equity .......................................... 135 9 6 38 188
Commercial ...................................... 6 -- -- -- 6
Consumer ........................................ 34 25 7 13 79
Loans to subsidiaries ........................... 112 -- -- -- 112
--------- ---------- ---------- -------- --------
Impact of hedging ................................ -- -- -- -- --
--------- ---------- ---------- -------- --------
Total interest-earning assets ................. 9,300 2,069 1,168 1,259 13,796
--------- ---------- ---------- -------- --------
Interest-bearing liabilities:
Deposits:
Passbook and demand ............................. 736 -- -- -- 736
Money market and NOW accounts ................... 1,960 -- -- -- 1,960
Certificates of deposit ......................... 2,170 1,774 1,424 713 6,081
--------- ---------- ---------- -------- --------
Total deposits ................................ 4,866 1,774 1,424 713 8,777
--------- ---------- ---------- -------- --------
Borrowings:
FHLB advances .................................... 2,950 -- -- 311 3,261
Other borrowings ................................. 969 -- -- 54 1,023
--------- ---------- ---------- -------- --------
Total borrowings .............................. 3,919 -- -- 365 4,284
--------- ---------- ---------- -------- --------
Impact of hedging ................................ (300) -- -- 300 --
--------- ---------- ---------- -------- --------
Total interest-bearing liabilities ............ 8,485 1,774 1,424 1,378 13,061
--------- ---------- ---------- -------- --------
Total interest-earning assets less total
interest-bearing liabilities ..................... $ 815 $ 295 $ (256) $ (119) $ 735
========= ========== ========== ======== ========
Cumulative total interest-earning assets less
cumulative total interest-bearing liabilities as
a percentage of total interest-earning assets ... 5.91% 8.05% 6.19% 5.33% 5.33%
========= ========== ========== ======== ========
</TABLE>
99
<PAGE>
NON-PERFORMING ASSETS
Net interest income is also affected by the composition, quality and type
of interest-earning assets. NPA's totaled $164.5 million or 1.16% of total
assets at September 30, 1996, as compared to $211.6 million or 1.49% of total
assets at September 30, 1995. The average amount of NPL's negatively impacted
Cal Fed's interest rate spread by 9 and 10 basis points during the third
quarters of 1996 and 1995, respectively. NPL's reduced Cal Fed's interest
rate spread by 10 basis points for both the nine months ended September 30,
1996 and 1995.
The following table presents Cal Fed's total NPA's by type at the dates
indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
TYPE 1996 1995
---- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
REO, net of allowances ................. $ 12.2 $ 29.4
Non-accrual loans ...................... 148.4 179.3
Restructured loans ..................... 3.9 2.9
------------- -------------
Total NPL's ........................ 152.3 182.2
------------- -------------
Total NPA's ........................ $164.5 $211.6
============= =============
Performing NPA's (included above) ..... $ 60.8 $ 46.1
============= =============
Performing NPA's as a % of total NPA's 37.0% 21.8%
============= =============
COMPOSITION
-----------
Residential 1-4 ........................ $ 85.6 $124.1
Multi-family ........................... 60.4 61.2
Commercial real estate ................. 16.9 23.0
Other .................................. 1.6 3.3
--------------- ---------------
Total NPA's ........................ $164.5 $211.6
=============== ===============
NPA's as a percentage of total assets . 1.16% 1.49%
=============== ===============
</TABLE>
Net interest income is also affected by the composition, quality and type
of interest-earning assets. NPA's totaled $231.8 million or 1.62% of total
assets at December 31, 1995, as compared to $223.1 million or 1.57% of total
assets at December 31, 1994 and $805.7 million or 5.26% of total assets at
December 31, 1993. The average amount of NPL's negatively impacted Cal Fed's
interest rate spread by 10, 18 and 31 basis points during 1995, 1994 and
1993, respectively.
100
<PAGE>
The following table presents Cal Fed's total NPA's by type at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
TYPE 1995 1994
---- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
REO, net of allowances ................ $ 22.2 $ 39.1
Non-accrual loans ..................... 206.3 178.2
Restructured loans .................... 3.3 5.8
Past due loans ........................ -- --
------------ ------------
Total NPL's ....................... 209.6 184.0
------------ ------------
Total NPA's ....................... $231.8 $223.1
============ ============
Performing NPA's (included above) .... $ 81.3 $ 34.5
============ ============
Performing NPA's as a % of total NPA's 35.1% 15.5%
============ ============
COMPOSITION
- --------------------------------------
Residential 1-4 ....................... $122.6 $124.9
Multi-family .......................... 88.1 61.0
Commercial real estate ................ 17.6 35.3
Other ................................. 3.5 1.9
------------ ------------
Total NPA's ....................... $231.8 $223.1
============ ============
NPA's as a percentage of total assets 1.62% 1.57%
============ ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
TYPE 1993 1992 1991
---- ------------ ------------ ------------
<S> <C> <C> <C>
REO, net of allowances ................ $273.5 $ 432.6 $ 267.4
Non-accrual loans ..................... 515.4 725.1 712.0
Restructured loans .................... 16.8 64.2 45.3
Past due loans ........................ -- 3.9 2.6
------------ ------------ ------------
Total NPL's ....................... 532.2 793.2 759.9
------------ ------------ ------------
Total NPA's ....................... $805.7 $1,225.8 $1,027.3
============ ============ ============
Performing NPA's (included above) .... $156.5 $ 310.1 $ 266.4
============ ============ ============
Performing NPA's as a % of total NPA's 19.4% 25.3% 25.9%
============ ============ ============
COMPOSITION
-----------
Residential 1-4 ....................... $340.4 $ 383.5 $ 253.8
Multi-family .......................... 241.4 460.0 313.3
Commercial real estate ................ 218.0 288.2 355.8
Other ................................. 5.9 94.1 104.4
------------ ------------ ------------
Total NPA's ....................... $805.7 $1,225.8 $1,027.3
============ ============ ============
NPA's as a percentage of total assets 5.26% 7.11% 5.64%
============ ============ ============
</TABLE>
The 1994 Bulk Sales included the sale of approximately $1.3 billion of
performing and non-performing assets. Although Cal Fed recorded a $274.8
million loss from the 1994 Bulk Sales, the transactions resulted in a $529.1
million reduction of NPA's. However, Cal Fed's net interest income was
negatively impacted by the sale of the $822.1 million of performing
interest-earning assets.
The table below presents the composition of the assets sold in the 1994
Bulk Sales:
<TABLE>
<CAPTION>
PERFORMING NON-ACCRUAL RESTRUCTRED
LOANS LOANS LOANS REO TOTAL
------------ ------------- ------------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Residential 1-4 .............. $ 62.4 $121.8 $ -- $ 47.0 $ 231.2
Multi-family ................. 487.3 183.5 7.6 34.7 713.1
Other commercial real estate 272.4 113.9 -- 20.6 406.9
------------ ------------- ------------- -------- ---------
$822.1 $419.2 $7.6 $102.3 $1,351.2
============ ============= ============= ======== =========
</TABLE>
During 1993, Cal Fed completed the sale of a pool of $232.1 million of
non-performing assets and collected $52.4 million of discounted payoffs on
non-performing assets (the "1993 Bulk Sale"). Those transactions resulted in
a $228.7 million reduction in non-accrual loans and a $55.8 million reduction
in REO and were the primary reason for the decline in NPA's during 1993 as
compared to 1992. The 1993 Bulk Sale resulted in $80.0 million of
charge-offs.
In May 1993, the FASB issued SFAS No. 114. Under SFAS No. 114, a loan is
impaired when it is "probable" that a creditor will be unable to collect all
amounts due (i.e., both principal and interest) according to the contractual
terms of the loan agreement. The measurement of impairment may be based on
(i) the present value of the expected future cash flows of the impaired loan
discounted at the loan's original effective interest rate, (ii) the
observable market price of the impaired loan, or (iii) the fair value of the
collateral of a collateral-dependent loan. The amount by which the recorded
investment of the loan exceeds the measure of the impaired loan is recognized
by recording a valuation allowance with a corresponding charge to the
provision for losses. Additionally, SFAS No. 114 eliminates the requirement
that a creditor account for certain loans as foreclosed assets until the
creditor has taken possession of the collateral. SFAS No. 114 became
effective for financial statements issued for fiscal years beginning after
101
<PAGE>
December 15, 1994 and is required to be adopted prospectively. Cal Fed
adopted SFAS No. 114 as of January 1, 1995. All loans designated by Cal Fed
as "impaired" are either placed on non-accrual status or are designated as
restructured and are included with those loans reported as non-performing.
Cal Fed did not experience a material impact upon its financial condition or
operations from the implementation of SFAS No. 114.
Impaired and Potential Problem Loans
Cal Fed has established a monitoring system for its loans in order to
identify impaired loans, potential problem loans and to permit periodic
evaluation of impairment and the adequacy of allowances for losses in a
timely manner. Total loans include the following portfolios: (i) residential
1-4 loans, (ii) income property loans and (iii) consumer loans. In analyzing
these loans, Cal Fed has established specific monitoring policies and
procedures suitable for the relative risk profile and other characteristics
of the loans within the various portfolios. Cal Fed's residential 1-4 and
consumer loans are relatively homogeneous and no single loan is individually
significant in terms of its size or potential risk of loss. Therefore, Cal
Fed generally reviews its residential 1-4 and consumer portfolios by
analyzing their performance and the composition of their collateral for the
portfolios as a whole. All homogenous loans that are 90 days or more
delinquent or are in foreclosure are automatically placed on non-performing
status. Additionally, homogenous loans that have had a modification of terms
are individually reviewed to determine if they meet the definition of a
troubled debt restructuring. Cal Fed stratifies its income property loan
portfolio by size and by type and treats smaller performing multi-family
loans with outstanding principal balances less than $750,000 and commercial
real estate loans with balances less than $500,000 as homogenous portfolios.
For income property loans exceeding the homogenous threshold, Cal Fed
conducts a periodic review of each loan in order to test each loan for
impairment. The frequency and type of review is dependent upon the inherent
risk attributed to each loan. The level of risk is measured by a scale which
evaluates each loan on a continuum of multiple grades. The frequency and
intensity of the loan review is directly proportionate to the adversity of
the loan grade. Cal Fed evaluates the risk of default and the risk of loss
for each loan subject to individual monitoring. During the fourth quarter of
1995, Cal Fed expanded the scope of its individual loan monitoring to include
commercial real estate loans with an outstanding principal balance in excess
of $500,000. Previously, Cal Fed had utilized a threshold of $750,000 for all
income property loans. Cal Fed expanded the scope of its non-homogenous loans
to assure that a majority of its commercial real estate loans was subject to
individual review.
Loans on which Cal Fed has ceased the accrual of interest ("non-accrual
loans") and loans on which various concessions have been made due to the
inability of the borrower to service the obligation under the original terms
of the agreement ("restructured loans") constitute the primary components of
the portfolio of NPL's. Loans are generally placed on non-accrual status when
the payment of interest is 90 days or more delinquent, or if the loan is in
the process of foreclosure, or earlier if the timely collection of interest
and/or principal appears doubtful. In addition, Cal Fed monitors its loan
portfolio in order to identify performing loans with excessive risk
characteristics indicating that the collection of principal and interest may
not be probable. In the event that Cal Fed believes collection of principal
and interest does not appear probable, Cal Fed will designate the loan as
impaired and place the loan on non-accrual status. Cal Fed's policy allows
for loans to be designated as impaired and placed on non-accrual status even
though the loan may be current as to principal and interest payments and may
continue to perform in accordance with its contractual terms. If a performing
loan is placed on non-accrual status, cash collections of interest are
generally applied as a reduction to the recorded investment of the loan.
Cal Fed restructures a loan when the borrower or the collateral is
experiencing financial or operational problems that are expected to be
relatively short-term in nature with the expectation that the borrower and/or
the collateral will rebuild cash flow over time.
102
<PAGE>
The following table presents impaired loans with specific allowances and
impaired loans without specific allowances by property type and by the method
that impairment is determined at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------
GROSS SPECIFIC NET
AMOUNT ALLOWANCE AMOUNT
-------- ----------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Impairment Measured By Individual Review:
Impaired Loans with Specific Allowances:
Multi-family ................................ $ 58.7 $ (9.8) 48.9
Commercial real estate:
Office buildings ........................... 5.7 (2.0) 3.7
Shopping centers ........................... 4.8 (0.2) 4.6
Industrial ................................. 3.7 (0.3) 3.4
Other ...................................... 0.8 (0.3) 0.5
-------- ----------- --------
Total commercial real estate ................ 15.0 (2.8) 12.2
-------- ----------- --------
Total impaired loans with specific allowances 73.7 (12.6) 61.1
-------- ----------- --------
Impaired Loans without Specific Allowances:
Residential 1-4 ............................. 2.1 -- 2.1
Multi-family ................................ 0.6 -- 0.6
Commercial real estate ...................... 1.4 -- 1.4
-------- ----------- --------
Total impaired loans without specific
allowances .................................. 4.1 -- 4.1
-------- ----------- --------
Total impaired loans measured by individual
review ....................................... 77.8 (12.6) 65.2
-------- ----------- --------
Impairment Measured on a Pool Basis:
Residential 1-4 ............................. 72.9 -- 72.9
Consumer .................................... 1.6 -- 1.6
-------- ----------- --------
74.5 -- 74.5
-------- ----------- --------
Total impaired loans .......................... $152.3 $(12.6) $139.7
======== =========== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1995
-------------------------------
GROSS SPECIFIC NET
AMOUNT ALLOWANCE AMOUNT
-------- ----------- --------
<S> <C> <C> <C>
Impairment Measured By Individual Review:
Impaired Loans with Specific Allowances:
Multi-family ................................ $ 56.7 $(10.8) $ 45.9
Commercial real estate:
Office buildings ........................... 6.4 (1.5) 4.9
Shopping centers ........................... 2.2 (0.3) 1.9
Industrial ................................. 1.9 (0.2) 1.7
Other ...................................... 0.9 (0.3) 0.6
-------- ----------- --------
Total commercial real estate ................ 11.4 (2.3) 9.1
-------- ----------- --------
Total impaired loans with specific allowances 68.1 (13.1) 55.0
-------- ----------- --------
Impaired Loans without Specific Allowances:
Residential 1-4 ............................. 0.8 -- 0.8
Multi-family ................................ 1.6 -- 1.6
Commercial real estate ...................... 9.7 -- 9.7
-------- ----------- --------
Total impaired loans without specific
allowances .................................. 12.1 -- 12.1
-------- ----------- --------
Total impaired loans measured by individual
review ....................................... 80.2 (13.1) 67.1
-------- ----------- --------
Impairment Measured on a Pool Basis:
Residential 1-4 ............................. 98.7 -- 98.7
Consumer .................................... 3.3 -- 3.3
-------- ----------- --------
102.0 -- 102.0
-------- ----------- --------
Total impaired loans .......................... $182.2 $(13.1) $169.1
======== =========== ========
</TABLE>
Cal Fed has designated all impaired loans at September 30, 1996 and
September 30, 1995 as non-accrual or as troubled debt restructuring. For all
impaired loans, Cal Fed evaluates the need for a specific allowance by
comparing the fair value of the related collateral to the net recorded
investment of the loan. In the event that the fair value of the related
collateral is less than the net recorded investment in the loan, Cal Fed
allocates a specific allowance equal to the excess of the net recorded
investment in the loan over the fair value of the related collateral with
consideration given to holding and selling costs. All uncollected interest
relating to impaired loans has been fully reversed from income. At September
30, 1996, Cal Fed had designated $60.8 million of loans that were performing
in accordance with their contractual terms as impaired. Cal Fed applies cash
collections from impaired loans as a reduction of the loan's carrying amount.
The average recorded investment in the impaired loans measured by individual
review was $184.0 million for the nine months ended September 30, 1996.
During the nine months ended September 30, 1996, Cal Fed recognized $1.9
million of interest income on restructured loans designated as impaired
loans.
103
<PAGE>
The following table summarizes Cal Fed's gross NPL's by type at the dates
indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Non-accrual loans:
Real estate
Residential 1-4 .............. $ 72.9 $ 99.6
Multi-family ................. 58.8 86.3
--------------- --------------
Total residential real estate 131.7 185.9
--------------- --------------
Commercial real estate
Hotels ....................... -- --
Shopping centers ............. 4.8 1.3
Office buildings ............. 5.7 8.8
Other ........................ 4.6 6.8
--------------- --------------
Total commercial real estate . 15.1 16.9
--------------- --------------
Total real estate ............. 146.8 202.8
Commercial banking ............ -- --
Consumer ...................... 1.6 3.5
--------------- --------------
Total non-accrual loans ........ $148.4 $206.3
=============== ==============
Restructured loans:
Real estate
Residential 1-4 .............. $ 2.1 $ 3.0
Multi-family ................. 0.5 0.3
--------------- --------------
Total residential real estate 2.6 3.3
--------------- --------------
Commercial real estate ........ 1.3 --
--------------- --------------
Total real estate ............. 3.9 3.3
Commercial banking ............ -- --
--------------- --------------
Total restructured loans ...... $ 3.9 $ 3.3
=============== ==============
Past due loans:
Consumer ...................... $ -- $ --
--------------- --------------
Total past due loans ........... $ -- $ --
=============== ==============
$152.3 $209.6
=============== ==============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1992
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Non-accrual loans:
Real estate
Residential 1-4 .............. $ 97.7 $214.3 $291.5 $201.9
Multi-family ................. 55.9 172.4 251.5 248.5
-------------- -------------- -------------- --------------
Total residential real estate 153.6 386.7 543.0 450.4
-------------- -------------- -------------- --------------
Commercial real estate
Hotels ....................... 0.2 30.5 52.2 54.3
Shopping centers ............. 2.3 4.0 17.5 27.0
Office buildings ............. 6.7 68.5 28.8 53.5
Other ........................ 13.5 19.8 18.9 25.0
-------------- -------------- -------------- --------------
Total commercial real estate . 22.7 122.8 117.4 159.8
-------------- -------------- -------------- --------------
Total real estate ............. 176.3 509.5 660.4 610.2
Commercial banking ............ -- 2.7 61.1 99.2
Consumer ...................... 1.9 3.2 3.6 2.6
-------------- -------------- -------------- --------------
Total non-accrual loans ........ $178.2 $515.4 $725.1 $712.0
============== ============== ============== ==============
Restructured loans:
Real estate
Residential 1-4 .............. $ 5.8 $ 2.9 $ -- $ --
Multi-family ................. -- 13.9 28.0 19.1
-------------- -------------- -------------- --------------
Total residential real estate 5.8 16.8 28.0 19.1
-------------- -------------- -------------- --------------
Commercial real estate ........ -- -- 10.7 26.2
-------------- -------------- -------------- --------------
Total real estate ............. 5.8 16.8 38.7 45.3
Commercial banking ............ -- -- 25.5 --
-------------- -------------- -------------- --------------
Total restructured loans ...... $ 5.8 $ 16.8 $ 64.2 $ 45.3
============== ============== ============== ==============
Past due loans:
Consumer ...................... $ -- $ -- $ 3.9 $ 2.6
-------------- -------------- -------------- --------------
Total past due loans ........... $ -- $ -- $ 3.9 $ 2.6
============== ============== ============== ==============
$184.0 $532.2 $793.2 $759.9
============== ============== ============== ==============
</TABLE>
At September 30, 1996, $60.8 million or 39.9% of Cal Fed's NPL's were
performing in accordance with their contractual terms. For the nine months
ended September 30, 1996, additional interest income of $8.3 million would
have been recorded had the non-accrual loans performed in accordance with
their original terms.
The increase in non-accrual loans during 1995 was primarily due to an
increase in performing loans placed on non-accrual status. Additionally,
during the fourth quarter of 1995 Cal Fed expanded its scope of loans subject
to individual monitoring. The performing loans that were placed on
non-accrual status had risk profiles that included: (i) inverted loan to
value ratios, (ii) low levels of operating income insufficient to service the
required loan payments, or (iii) had other adverse characteristics. Please
refer to the activity of NPA's by property type tables for further
information on the change in non-accrual loans from December 31, 1994 to
December 31, 1995 and from December 31, 1993 to December 31, 1994. At
December 31, 1995, $81.3 million or 38.8% of Cal Fed's NPL's were performing
in accordance with their contractual terms.
For the year ended December 31, 1995, additional interest income of $10.6
million would have been recorded had the non-accrual loans been performing in
accordance with their original terms, compared
104
<PAGE>
to $18.0 million and $50.7 million of additional interest income which would
have been recorded for the years ended December 31, 1994 and 1993,
respectively.
Cal Fed has designated all impaired loans at December 31, 1995 as
non-accrual or as troubled debt restructuring. At December 31, 1995, Cal Fed
had designated $81.3 million of loans that were performing in accordance with
their contractual terms as impaired. The average recorded investment in the
impaired loans was $89.2 million for the year ended December 31, 1995. During
the year ended December 31, 1995, Cal Fed did not recognize interest income
on impaired loans.
The following table shows Cal Fed's delinquent loans at the dates
indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1996 1995
--------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Residential 1-4 loans:
30-59 days delinquent ....... $ 12.5 $ 23.7
60-89 days delinquent ....... 2.3 6.3
90 or more days delinquent . 70.1 98.6
--------------- ---------------
84.9 128.6
--------------- ---------------
Multi-family loans:
30-59 days delinquent ....... 1.8 0.6
60-89 days delinquent ....... 0.2 --
90 or more days delinquent . 10.1 16.3
--------------- ---------------
12.1 16.9
--------------- ---------------
Commercial real estate loans:
30-59 days delinquent ....... 0.8 0.3
60-89 days delinquent ....... 0.4 --
90 or more days delinquent . 3.6 12.6
--------------- ---------------
4.8 12.9
--------------- ---------------
Commercial banking loans:
30-59 days delinquent ....... -- --
60-89 days delinquent ....... -- --
90 or more days delinquent . -- --
--------------- ---------------
-- --
--------------- ---------------
Consumer loans:
30-59 days delinquent ....... 1.2 2.4
60-89 days delinquent ....... 0.9 0.9
90 or more days delinquent . 1.7 3.3
--------------- ---------------
3.8 6.6
--------------- ---------------
Total .................... $105.6 $165.0
=============== ===============
Total delinquent loans:
30-59 days delinquent ....... $ 16.3 $ 27.0
60-89 days delinquent ....... 3.8 7.2
90 or more days delinquent . 85.5 130.8
--------------- ---------------
$105.6 $165.0
=============== ===============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
-------------- -------------- --------------
<S> <C> <C> <C>
Residential 1-4 loans:
30-59 days delinquent ....... $ 24.1 $ 31.5 $ 34.6
60-89 days delinquent ....... 3.5 7.7 5.2
90 or more days delinquent . 99.6 96.1 212.3
-------------- -------------- --------------
127.2 135.3 252.1
-------------- -------------- --------------
Multi-family loans:
30-59 days delinquent ....... 0.8 0.5 3.3
60-89 days delinquent ....... -- 0.7 0.1
90 or more days delinquent . 18.1 36.4 95.4
-------------- -------------- --------------
18.9 37.6 98.8
-------------- -------------- --------------
Commercial real estate loans:
30-59 days delinquent ....... 0.2 0.1 6.3
60-89 days delinquent ....... -- 0.7 0.8
90 or more days delinquent . 2.6 16.4 42.7
-------------- -------------- --------------
2.8 17.2 49.8
-------------- -------------- --------------
Commercial banking loans:
30-59 days delinquent ....... -- -- --
60-89 days delinquent ....... -- -- --
90 or more days delinquent . -- -- 2.2
-------------- -------------- --------------
-- -- 2.2
-------------- -------------- --------------
Consumer loans:
30-59 days delinquent ....... 3.5 2.9 3.3
60-89 days delinquent ....... 1.0 1.5 1.2
90 or more days delinquent . 3.5 3.5 4.6
-------------- -------------- --------------
8.0 7.9 9.1
-------------- -------------- --------------
Total .................... $156.9 $198.0 $412.0
============== ============== ==============
Total delinquent loans:
30-59 days delinquent ....... $ 28.6 $ 35.0 $ 47.5
60-89 days delinquent ....... 4.5 10.6 7.3
90 or more days delinquent . 123.8 152.4 357.2
-------------- -------------- --------------
$156.9 $198.0 $412.0
============== ============== ==============
</TABLE>
105
<PAGE>
The primary factor for the improvement in the level of delinquent loans of
September 30, 1996 as compared to the level of delinquencies at September 30,
1995, was the sale of $34.7 million of delinquent residential 1-4 loans
during the second quarter of 1996.
Delinquent loans have continued to decline since December 31, 1993. The
1994 Bulk Sale and the 1993 Bulk Sale transactions reduced the levels of
delinquent loans and performing loans with a high risk of default. The sale
of those performing loans has been a factor in the reduced level of
delinquent loans between 1995 and 1994.
The following tables present activity of NPA's by property type for the
periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------------------------
PAYOFFS/
BALANCE NEW FORE- CURES/ BALANCE
12/31/95 NPA'S CLOSURES SALES OTHER 9/30/96
---------- ---------- ---------- ---------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential 1-4 ....... $ 99.6 $ 45.5(A) $(72.2) $ -- $ -- $ 72.9
Multi-family .......... 86.3 51.5 (22.3) (52.8) (3.9) 58.8
Commercial real estate 16.9 19.3 (2.5) (17.5) (1.1) 15.1
Consumer .............. 3.5 -- -- (1.9)(A) -- 1.6
---------- ---------- ---------- ---------- -------- ---------
206.3 116.3 (97.0) (72.2) (5.0) 148.4
---------- ---------- ---------- ---------- -------- ---------
Restructured loans:
Residential 1-4 ....... 3.0 -- -- (0.8) (0.1) 2.1
Multi-family .......... 0.3 0.5 -- (0.3) -- 0.5
Commercial real estate -- 1.3 -- -- -- 1.3
---------- ---------- ---------- ---------- -------- ---------
3.3 1.8 -- (1.1) (0.1) 3.9
---------- ---------- ---------- ---------- -------- ---------
REO, net:
Residential 1-4 ....... 20.0 -- 57.6 (66.1) (0.9) 10.6
Multi-family .......... 1.5 -- 15.4 (15.2) (0.6) 1.1
Commercial real estate 0.7 -- 1.4 (1.5) (0.1) 0.5
---------- ---------- ---------- ---------- -------- ---------
22.2 -- 74.4 (82.8) (1.6) 12.2
---------- ---------- ---------- ---------- -------- ---------
Total NPA's ........... $231.8 $118.1 $(22.6) $(156.1) $(6.7) $164.5
========== ========== ========== ========== ======== =========
</TABLE>
- --------------
(A) Represents net activity for the period.
106
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------------------------
PAYOFFS/
BALANCE NEW FORE- CURES/ BALANCE
12/31/94 NPL'S CLOSURES SALES OTHER 12/31/95
---------- ---------- ---------- ---------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential 1-4 .......... $ 97.7 $ 93.1(A) $ (91.1) $ -- $ (0.1) $ 99.6
Multi-family ............. 55.9 147.6 (48.5) (64.3) (4.4) 86.3
Commercial income
property ................ 22.7 59.2 (6.6) (52.0) (6.4) 16.9
Consumer ................. 1.9 1.6(A) -- -- -- 3.5
---------- ---------- ---------- ---------- --------- ----------
178.2 301.5 (146.2) (116.3) (10.9) 206.3
---------- ---------- ---------- ---------- --------- ----------
Restructured loans:
Residential 1-4 .......... 5.8 3.0 -- (5.8) -- 3.0
Multi-family ............. -- 1.5 -- (1.2) -- 0.3
Commercial income
property ................ -- 0.6 -- (0.6) -- --
---------- ---------- ---------- ---------- --------- ----------
5.8 5.1 -- (7.6) -- 3.3
---------- ---------- ---------- ---------- --------- ----------
REO, net:
Residential 1-4 .......... 21.5 -- 70.7 (62.6) (9.6) 20.0
Multi-family ............. 5.1 -- 32.6 (34.5) (1.7) 1.5
Commercial income
property ................ 12.5 -- 4.3 (20.6) 4.5 0.7
---------- ---------- ---------- ---------- --------- ----------
39.1 -- 107.6 (117.7) (6.8) 22.2
---------- ---------- ---------- ---------- --------- ----------
Total NPA's .............. $223.1 $306.6 $ (38.6) $(241.6) $(17.7) $231.8
========== ========== ========== ========== ========= ==========
</TABLE>
- --------------
(A) Represents net activity for the period.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
--------------------------------------------------------------------------------
BULK
PAYOFFS/ SALES
BALANCE NEW FORE- CURES/ CHARGE- BALANCE
12/31/93 NPA'S CLOSURES SALES OFFS(A) OTHER 12/31/94
---------- ----------- ---------- ---------- --------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Non-accrual loans:
Residential 1-4 .......... $214.3 $112.4(B) $(107.2) $(121.8) $ -- $ -- $ 97.7
Multi-family ............. 172.4 158.2 (62.6) (192.4) (17.8) (1.9) 55.9
Commercial income
property ................ 122.8 65.0 (19.5) (122.7) (22.1) (0.8) 22.7
Commercial banking ....... 2.7 -- -- (2.1) -- (0.6) --
Consumer ................. 3.2 -- -- (1.2) -- (0.1) 1.9
---------- ----------- ---------- ---------- --------- --------- ----------
515.4 335.6 (189.3) (440.2) (39.9) (3.4) 178.2
---------- ----------- ---------- ---------- --------- --------- ----------
Restructured loans:
Residential 1-4 .......... 2.9 6.1 -- (3.3) -- 0.1 5.8
Multi-family ............. 13.9 0.6 -- (14.6) -- 0.1 --
Commercial income
property ................ -- 3.4 -- (3.4) -- -- --
---------- ----------- ---------- ---------- --------- --------- ----------
16.8 10.1 -- (21.3) -- 0.2 5.8
---------- ----------- ---------- ---------- --------- --------- ----------
REO, net:
Residential 1-4 .......... 123.2 -- 94.8 (181.1) -- (15.4) 21.5
Multi-family ............. 55.1 -- 54.9 (96.1) -- (8.8) 5.1
Commercial income
property ................ 95.2 -- 26.0 (89.4) -- (19.3) 12.5
---------- ----------- ---------- ---------- --------- --------- ----------
273.5 -- 175.7 (366.6) -- (43.5) 39.1
---------- ----------- ---------- ---------- --------- --------- ----------
Total NPA's ............... $805.7 $345.7 $ (13.6) $(828.1) $(39.9) $(46.7) $223.1
========== =========== ========== ========== ========= ========= ==========
</TABLE>
- --------------
(A) Represents charge-offs of specific allowances on NPA's that were
established prior to designating the associated assets for inclusion in
the 1994 Bulk Sales.
(B) Represents net activity for the period.
107
<PAGE>
PROVISION FOR LOAN LOSSES
Cal Fed's provision for loan losses during the nine months ended September
30, 1996 totaled $30.8 million. Comparatively, provision for loan losses
totaled $24.5 million during the nine months ended September 30, 1995.
Cal Fed's general valuation allowance declined to $155.3 million at
September 30, 1996 from $162.4 million at September 30, 1995. The total
allowance for loan losses has decreased to $170.1 million at September 30,
1996 from $177.6 million at September 30, 1995. Cal Fed has reduced its
general valuation allowance to a level that reflects its current assessment
of the credit risk profile of its loan portfolio. Cal Fed evaluated the
allowance for losses by estimating a range of losses inherent in the
portfolio. Cal Fed then performed an evaluation to determine what level in
the range of inherent losses is most appropriately given: (i) the level of
non-performing and classified loans, (ii) the composition of the loan
portfolio, (iii) prevailing and forecasted economic conditions, (iv) other
credit factors, and (v) Cal Fed's judgment.
Should any of the aforementioned factors vary materially in the near term
Cal Fed could experience the need to increase its allowance for loan losses
which would result in a higher level of provisions for loan losses.
Cal Fed's provision for loan losses during the year ended December 31,
1995 totaled $31.8 million. Comparatively, provisions for loan losses totaled
$74.9 million during 1994 and $163.5 million during 1993. Loan loss
provisions during 1995 were recorded to partially replenish the general
valuation allowance for net charge-offs of $62.4 million. Cal Fed's
charge-offs during 1995 were primarily related to multi-family loans and
residential 1-4 loans.
Cal Fed's general valuation allowance declined to $156.7 million at
December 31, 1995 from $177.1 million at December 31, 1994 and from $196.2
million at December 31, 1993. The total allowance for loan losses has
decreased to $181.0 million at December 31, 1995 from $211.6 million at
December 31, 1994.
During 1994 and 1993, Cal Fed's level of loan loss provisions reflected
the higher levels of nonperforming loans outstanding. The 1994 Bulk Sales
substantially reduced the level of nonperforming loans which has resulted in
a lower level of charge-offs. The decline in the total allowance for loan
losses between December 31, 1995 and December 31, 1993 is due to the
reduction in the level of non-performing loans.
The following table presents the activity in the specific and general
allowances for loan losses for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
------------------------------- -------------------------------
SPECIFIC GENERAL TOTAL SPECIFIC GENERAL TOTAL
---------- --------- -------- ---------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of period ........ $ 24.3 $156.7 $181.0 $ 34.5 $177.1 $211.6
Provision for
losses .......... -- 30.8 30.8 -- 31.8 31.8
Allocations to/
from general
allowances ...... 7.1 (7.1) -- 21.0 (21.0) --
Charge-offs, net (16.6) (25.1) (41.7) (31.2) (31.2) (62.4)
Allowances of
sold subsidiary -- -- -- -- -- --
---------- --------- -------- ---------- --------- --------
Balance, end of
period ........... $ 14.8 $155.3 $170.1 $ 24.3 $156.7 $181.0
========== ========= ======== ========== ========= ========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1994 DECEMBER 31, 1993
-------------------------------- --------------------------------
SPECIFIC GENERAL TOTAL SPECIFIC GENERAL TOTAL
---------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, beginning
of period ........ $ 58.1 $196.2 $ 254.3 $ 71.8 $ 252.2 $ 324.0
Provision for
losses .......... -- 74.9 74.9 -- 163.5 163.5
Allocations to/
from general
allowances ...... 75.5 (75.5) -- 95.1 (95.1) --
Charge-offs, net (99.1) (18.5) (117.6) (108.8) (117.3) (226.1)
Allowances of
sold subsidiary -- -- -- -- (7.1) (7.1)
---------- --------- --------- ---------- --------- ---------
Balance, end of
period ........... $ 34.5 $177.1 $ 211.6 $ 58.1 $ 196.2 $ 254.3
========== ========= ========= ========== ========= =========
</TABLE>
108
<PAGE>
The net charge-offs by loan category for the periods presented are
summarized as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
---------------- ---------------------------------
1996 1995 1995 1994(A) 1993(B)
------- ------- ------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential 1-4 .................... $19.8 $15.6 $21.7 $ 18.6 $ 42.9
Income property
Multi-family ...................... 14.0 29.2 25.0 55.2 60.2
Hotels ............................ -- -- -- 11.6 15.7
Office buildings .................. 2.3 4.5 5.1 14.9 17.1
Shopping centers .................. -- -- 4.8 0.9 15.3
Other ............................. 0.4 5.7 1.6 5.8 3.2
------- ------- ------- -------- --------
Total income property .............. 16.7 39.4 36.5 88.4 111.5
------- ------- ------- -------- --------
Total real estate ................... 36.5 55.0 58.2 107.0 154.4
Commercial banking .................. -- -- -- 4.8 60.7
Consumer ............................ 5.2 3.5 4.2 5.8 11.0
------- ------- ------- -------- --------
$41.7 $58.5 $62.4 $117.6 $226.1
======= ======= ======= ======== ========
As a percentage of average net loans 0.58% 0.88% 0.69% 1.35% 2.21%
======= ======= ======= ======== ========
</TABLE>
- --------------
(A) Includes net charge-offs of $60.4 million on certain assets included in
the 1994 Bulk Sales. These allowances were established prior to the
designation of these assets as "Held for Accelerated Disposition."
(B) Includes net charge-offs of $80.0 million related to the 1993 Bulk Sale.
The table below presents certain key ratios for NPL's and the allowances
for loan losses at the dates presented:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1995 1995 1994 1993
--------------- --------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NPL's as a % of gross loans
receivable .......................... 1.49% 1.95% 2.21% 2.05% 5.42%
Total allowances for loan losses as a
% of NPL's .......................... 111.69 97.48 86.35 115.00 47.78
General allowances as a % of NPL's .. 101.97 89.13 74.76 96.25 36.87
General allowances as a % of gross
loans receivable .................... 1.52 1.73 1.65 1.98 2.00
Total allowances for loan losses as a
% of gross loans receivable ......... 1.66 1.90 1.91 2.36 2.59
Ratio of NPA's to total assets(A) ... 1.16 1.49 1.62 1.57 5.26
</TABLE>
- --------------
(A) NPA's consist of NPL's and REO.
OTHER INCOME
Other Income
For the nine months ended September 30, 1996 and 1995 total other income
was $61.9 million and $50.3 million, respectively. The increase in other
income for the nine months ended September 30, 1996 compared to the same
period of 1995 was primarily due to the $12.0 million gain recorded during
the second quarter of 1996 on the sale of six branches located in San Diego
County with deposits totaling approximately $380 million.
109
<PAGE>
For 1995, total other income decreased to $63.5 million from $201.2
million for 1994 and $70.2 million for 1993. Other income is primarily
comprised of fee income and gains from the sales of assets. The sale of the
Southeast Division accounted for $135.0 million of other income during 1994.
Fee Income
Fee income primarily includes fees charged to depositors for services
rendered, fees from loan servicing and fees earned from the sales of
alternative investment products. Total fee income is affected by the level
and type of savings deposits, the level of loan servicing and the sales of
alternative investment products. The following table presents Cal Fed's
sources of fee income for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
---------------- --------------------------------
SOURCE OF FEES 1996 1995 1995 1994 1993
-------------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Savings deposits ............... $22.3 $18.4 $25.4 $25.2 $26.1
Loan servicing ................. 8.3 9.5 12.4 14.6 18.5
Sales of alternative investment
products ...................... 14.0 10.6 14.4 21.7 21.3
Other .......................... -- 1.8 2.3 0.9 (1.6)
------- ------- ------- ------- -------
$44.6 $40.3 $54.5 $62.4 $64.3
======= ======= ======= ======= =======
</TABLE>
The increase in savings deposit fees for the nine months ended September
30, 1996 compared to the same period of 1995 resulted from increases in rates
charged for depository services and improvements in effectiveness of the fee
collection process.
During 1995, fees from deposits increased slightly as compared to 1994 but
declined slightly from 1993. Fees from deposits result from the volume of
deposits, and the pricing associated with services relating to the deposits.
Cal Fed has increased its number of checking accounts during 1995 as compared
to 1994. Checking accounts typically generate a higher level of fees than
money market accounts and time deposits. Additionally, Cal Fed increased its
rates for services provided to its depositors. These actions mitigated the
impact of the sale of the Southeast Division, which included a $3.9 billion
sale of deposits.
Loans serviced for others totaled $3.5 billion and $3.9 billion at
September 30, 1996 and September 30, 1995, respectively. Loans serviced for
others totaled $3.8 billion, $4.5 billion and $5.3 billion at December 31,
1995, 1994 and 1993, respectively. Loans serviced for others are loans that
have been sold with the servicing thereof retained by Cal Fed. The level of
loans serviced for others is determined by the volume of loan sales and loan
prepayments. The decrease in the portfolio of loans serviced for others since
December 31, 1993 primarily resulted from loan payoffs. Cal Fed limited its
sale of loans during 1995 and 1994 as a result of the low volume of fixed
rate loan originations and its decision to retain more of its originations in
its portfolio of assets. The reduced volume of loans originated for sale and
the level of payoffs contributed to a reduction in the level of loans
serviced for others which has resulted in a decline in servicing fee income.
Cal Fed offers its customers the opportunity to purchase investment
products as an alternative to traditional savings deposits. Cal Fed offers
these products, including annuities, mutual funds and other investments,
through its branch network. Cal Fed earns a fee from the sale of these
products. Sales of alternative investment products totaled $348.9 million for
the nine months ended September 30, 1996 compared to $248.9 million for the
same period of 1995. The increase in the volume of sales has led to an
increased in the level of fees earned by Cal Fed. Sales of alternative
investment products totaled $338.3 million for 1995 compared to $477.8
million and $646.0 million for 1994 and 1993, respectively. The decline in
the volume of sales during these periods led to a reduction in the level of
fees earned by Cal Fed.
Gain (Loss) on Sales of Loans
At September 30, 1996, $32.2 million of loans were held for sale with a
market value of $32.3 million. For the nine months ended September 30, 1996
and 1995 gains/(losses) on sales of loans were $0.7 million and $(0.3)
million, respectively. Loan sales for the nine months ended September 30,
1996 and 1995 were $219.8 million and $149.4 million, respectively.
110
<PAGE>
During the first quarter of 1996 Cal Fed implemented SFAS No. 122,
Accounting for Mortgage Servicing Rights. SFAS No. 122 removes the
distinction in accounting for mortgage servicing rights resulting from
originated and purchased loans. Cal Fed did not experience a material impact
to its results of operations or financial condition from the implementation
of SFAS No. 122.
For the year ended December 31, 1995, losses on sales of loans were $0.3
million compared with gains of $0.5 million for the year ended December 31,
1994 and a gain of $5.4 million for the year ended December 31, 1993. Loan
sales for 1995 totaled $183.6 million. Excluding the 1994 Bulk Sales, loan
sales for 1994 totaled $174.2 million. Loan sales for the year ended December
31, 1993 totaled $1.0 billion. Cal Fed engages in mortgage banking activities
for several reasons, including providing liquidity and managing asset size.
Cal Fed's originations of conforming fixed rate residential 1-4 loans are
generally held for sale. Originations of adjustable rate loans are generally
held for investment. Cal Fed has established desired ranges for loan
portfolio composition and asset growth based upon numerous factors. These
factors include (i) origination volume and mix, (ii) portfolio repayments and
payoffs, (iii) interest rate risk considerations, (iv) desired servicing
portfolio levels, (v) anticipated deposit flows and (vi) regulatory capital
requirements. Collectively, these factors enter into the determination of the
amount of loans originated for sale.
Available for Sale Securities
Cal Fed determines which securities are available for sale by evaluating
whether such securities would be sold in response to liquidity needs,
asset/liability management, regulatory capital requirements and other
factors. Generally accepted accounting principles require the variance
between the market value of available for sale securities and the recorded
investment in such securities to be reflected as an unrealized holding gain
or loss and presented as an adjustment to shareholders' equity. At September
30, 1996, Cal Fed had no adjustment to shareholders' equity. The after tax
unrealized holding loss from available for sale securities totaled $0.7
million at September 30, 1995. All U.S. treasury securities held by Cal Fed
are included as available for sale securities. Securities available for sale
totaled $6.0 million and $150.2 million at September 30, 1996 and 1995,
respectively. At December 31, 1995 the adjustment was less than $0.1 million.
The after tax unrealized holding loss from available for sale securities
totaled $19.2 million at December 31, 1994. Securities available for sale
totaled $200.3 million, $1,731.5 million and $894.7 million at December 31,
1995, 1994 and 1993, respectively.
Cal Fed sold $952.2 million of securities for a net gain of $6.9 million
and $670.2 million of securities for a net gain of $0.2 million during 1995
and 1994, respectively. Cal Fed did not sell securities during 1993, however,
approximately $250.2 million of securities available for sale matured during
1993. Cal Fed utilized the proceeds from the maturity and sale of the
securities to acquire short-term liquid investments and fund the repayment of
certain borrowings.
In November 1995, the FASB issued a Special Report as an aid to
understanding and implementing SFAS No. 115. During the fourth quarter of
1995, Cal Fed, in accordance with the Special Report, redesignated $17.2
million of MBS from "held to maturity" to "available for sale" and, prior to
December 31, 1995, sold the MBS for a loss of less than $0.1 million.
OTHER EXPENSES
Total other expenses are primarily comprised of general and administrative
expenses and operations of real estate held for sale. Other expenses for the
nine months ended September 30, 1996 increased to $242.6 million compared to
$186.5 million for the nine months ended September 30, 1995. The increase in
other expenses for the nine months ended September 30, 1996 compared to the
same period of 1995 is due to an accrual of $58.1 million relating to the
Special SAIF Assessment. The assessment was based on California Federal's
deposits at March 31, 1995 at a rate of 65.7 basis points and was payable
during the fourth quarter of 1996. For the year ended December 31, 1995,
other expenses decreased to $249.9 million compared to $611.0 million and
$457.1 million for the years ended December 31, 1994 and 1993, respectively.
The primary reason for the decrease in other expenses for the year ended
December 31, 1995 compared to the year ended December 31, 1994 was the $274.8
million provision for loss on assets held for accelerated disposition
recorded in 1994.
111
<PAGE>
General and Administrative Expenses
General and administrative expenses are comprised of compensation, office
occupancy, federal deposit insurance premiums and special assessments and
other general and administrative expenses. General and administrative
expenses were $176.5 million for the nine months ended September 30, 1996,
compared to $179.2 million for the nine months ended September 30, 1995. At
September 30, 1996 California Federal had 2,057 employees as compared to
2,212 at September 30, 1995. General and administrative expenses were $241.9
million for the year ended December 31, 1995, compared to $290.3 million and
$323.3 million for the years ended December 31, 1994 and 1993, respectively.
The decrease in general and administrative expenses for the year ended
December 31, 1995 compared to 1994 was primarily due to the sale of the
Southeast Division in the third quarter of 1994. Compensation and office
occupancy expenses of the Southeast Division for 1994 were approximately $11
million. Federal deposit insurance premiums associated with the Southeast
Division were approximately $12 million for the year ended December 31, 1994.
However, the decrease in federal deposit insurance premiums during 1995
compared to 1994 was partially offset by increases in deposits in California
Federal's California operations. General and administrative expenses were
also reduced by staff reductions and other efficiency measures implemented in
California Federal's California operations. During 1995, California Federal
incurred approximately $1 million in expenses related to the formation of Cal
Fed. Effective January 1, 1996, California Federal became a wholly-owned
subsidiary of Cal Fed.
Operations of Real Estate Held for Sale
Operations of real estate held for sale consists of operations of real
estate held for investment ("REI") and operations of REO. Operations of real
estate held for sale include (i) provisions for losses, (ii) the net effect
of rental income and related operating expenses and (iii) gains or losses
resulting from the sale of properties. For the nine months ended September
30, 1996 and September 30, 1995, operations of real estate held for sale
resulted in losses of $8.0 million and $7.3 million, respectively. During
1996, Cal Fed recorded $5.0 million in provisions for losses on REI, in order
to reflect its portfolio at a value that would represent the expected
proceeds from an accelerated disposition of the property. Cal Fed began to
actively market its remaining REI during the second quarter of 1996 and
during the third quarter of 1996 sold its remaining real estate project. Cal
Fed did not record any profit or loss from the sale. Cal Fed's remaining real
estate held for investment consists of several single family residential
properties. Cal Fed has recorded these properties at their current
disposition value.
Operations of real estate held for sale resulted in losses of $8.0
million, $45.9 million and $118.3 million for the years ended December 31,
1995, 1994 and 1993, respectively. The decline in the expense of operations
of real estate held for sale between 1995, 1994 and 1993 is due to lower
levels of provisions for losses on REO and REI. The decline in the level of
those loss provisions is due to a lower volume of REO properties and a
reduced need for allowances for losses on REI. The 1994 and 1993 Bulk Sale
transactions reduced the level of delinquent loans, which has resulted in
lower levels of foreclosures and losses.
During the second quarter of 1995, Cal Fed provided an allowance with
respect to certain litigation involving loans made in 1989 and 1990 to
California Communities Inc. ("CCI"), a currently inactive subsidiary of
California Federal formerly engaged in real estate development activities.
During the second quarter of 1995, an Orange County, California Superior
Court jury rendered a verdict in which it determined that California Federal
was financially liable for two loans made to CCI by the plaintiff. CCI
subsequently defaulted on the loans. The jury awarded the plaintiff $6.5
million in compensatory damages and punitive damages of $20.0 million against
California Federal and $5.0 million against CCI. California Federal has begun
the process of appealing the judgment. While California Federal believes that
its liability from this litigation, if any, will be less than the amount
awarded by the jury, there can be no assurance that the ultimate outcome of
this litigation will result in an amount less than the amount determined by
the jury and it is possible that California Federal and its subsidiary could
ultimately be found liable for an amount in excess of the allowance that has
been established. The provision for this allowance has been included in 1995
real estate operations.
112
<PAGE>
The following table presents the composition of real estate held for sale,
net of allowances, at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
PROPERTY TYPE 1996 1995 1995 1994 1993
------------- --------------- --------------- -------------- -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Residential 1-4 . $13.6 $57.2 $47.3 $58.6 $188.6
Multi-family ..... 1.1 3.0 1.5 5.1 64.3
Office buildings 0.1 0.4 0.3 5.6 35.8
Shopping centers -- -- -- -- 5.0
Hotels ........... -- -- -- 6.1 27.7
Other ............ 0.4 1.4 0.4 2.5 30.2
--------------- --------------- -------------- -------------- --------------
$15.2 $62.0 $49.5 $77.9 $351.6
=============== =============== ============== ============== ==============
REO .............. $12.2 $29.4 $22.2 $39.1 $273.5
REI .............. 3.0 32.6 27.3 38.8 78.1
--------------- --------------- -------------- -------------- --------------
$15.2 $62.0 $49.5 $77.9 $351.6
=============== =============== ============== ============== ==============
</TABLE>
Please see the NPA activity tables in the Non-Performing Assets section
for a comprehensive analysis of the change in REO.
Cal Fed determines its level of allowance for losses on REO by comparing
the net investment in the property to its fair value as determined by a
current appraisal, less cost of disposition. In the event that prices
indicated by the current market for similar REO properties ("market price")
are less than those indicated by appraisals, Cal Fed will utilize the market
price in evaluating the carrying value of its REO. Cal Fed has provided
specific allowances for all known declines in value and has utilized the most
readily available market price for each property in the REO portfolio.
Additionally, Cal Fed maintains general allowances for potential future
losses that have not been specifically identified. However, there can be no
assurance that real estate market values or the market prices for REO will
not decline. In the event such declines occur, further provisions for losses
may be required.
Amortization of Goodwill
During 1994, Cal Fed applied SFAS No. 72 retroactively to acquisitions
initiated prior to September 30, 1982 resulting in the elimination of $273.7
million of California Federal's goodwill effective January 1, 1994. SFAS No.
72 requires, among other things, that to the extent the fair value of
liabilities assumed exceed the fair value of assets resulting from the
acquisition of a banking or thrift institution initiated after September 30,
1982, the resulting goodwill recognized shall be amortized over a period no
longer than the discount that is recognized as interest income on the
acquired long-term interest-earning assets. Cal Fed had been accounting for
acquisitions initiated subsequent to September 30, 1982 in accordance with
SFAS No. 72. SFAS No. 72 allowed retroactive implementation for acquisitions
that were initiated prior to September 30, 1982. Cal Fed's application of
SFAS No. 72 resulted in the acceleration of the amortization of goodwill
arising from California Federal's thrift institution acquisitions initiated
prior to September 30, 1982. As a result of Cal Fed's application of SFAS No.
72, Cal Fed had no goodwill amortization during 1995 or 1994. During 1993,
Cal Fed's amortization of goodwill totalled $15.5 million.
INCOME TAXES
Income tax expense (benefit) is computed upon, and generally varies
proportionately with, earnings (loss) before income tax expense (benefit)
adjusted for nontaxable items of income and expense and certain changes in
the components of its net deferred tax asset and related valuation allowance.
Although Cal Fed had earnings before income tax expense for the nine months
ended September 30, 1996 and for the year ended December 31, 1995, there was
minimal income tax expense because of the availability of unbenefited net
operating loss carryforwards. Cal Fed recorded income tax expense of $6.3
million during 1994 to offset the tax benefit previously recorded on
unrealized losses on securities available for sale, which were reported net
of taxes as an adjustment to shareholders' equity. Because of the uncertainty
regarding the realizability of Cal Fed's net operating loss carryforward and
other deferred tax assets, Cal
113
<PAGE>
Fed has recorded a valuation allowance equal to its net deductible temporary
differences at September 30, 1996 and 1995, and at December 31, 1995 and
1994.
CONTINGENCIES
Cal Fed and California Federal are involved as a defendant in certain
legal proceedings incidental to its business. Cal Fed does not believe that
the legal proceedings to which it is a party, if adversely decided, in the
aggregate would have a material adverse effect upon its financial condition.
Cal Fed has established allowances in connection with these legal proceedings
for its current estimate of the potential related liabilities. It is possible
that Cal Fed could be found liable for an amount in excess of the allowance
Cal Fed has established. Adverse decisions in such matters could have a
material adverse effect upon Cal Fed's results of operations for the relevant
period or periods in which they occur.
LIQUIDITY AND CAPITAL RESOURCES
Cal Fed's cash flows are derived from the results of its investing
activities, financing activities and operating activities. Cal Fed's cash
flows from investing activities include: making and collecting loans and
acquiring and disposing of investment securities. Cal Fed's cash flows from
financing activities include: California Federal's deposit gathering systems,
borrowing money and repaying amounts borrowed, obtaining and paying for other
resources obtained from creditors, obtaining capital from shareholders and
the dividend return of their investment. Cal Fed's cash flows from operating
activities generally involve the cash effects of transactions and other
events that enter into the determination of net earnings.
Operating Activities
Cal Fed's net cash flows from operating activities totaled $218.8 million
for the nine months ended September 30, 1996 compared to $155.1 million for
the same period of 1995. The primary sources of these cash flows include (i)
sales of loans held for sale and (ii) the excess of net interest income and
fee income over general and administrative expenses. California Federal does
not expect the Special SAIF Assessment to have a material adverse impact on
its liquidity. California Federal's cash flows from operating activities
totalled $170.4 million, $1.2 billion and $428.4 million during 1995, 1994
and 1993, respectively.
Investing Activities
Cal Fed's cash flows from investing activities are primarily derived from
the payments, originations and purchases of loans, and the acquisition and
maturity of investment securities.
Payments on loans and mortgage-backed securities represent other
significant sources of funds for Cal Fed. Cal Fed's net cash flows provided
(used) by investing activities totaled $36.9 million for the nine months
ended September 30, 1996 compared to $(157.7) million for the same period of
1995. Principal payments, including payoffs, on loans produced $1.2 billion,
$1.4 billion and $1.9 billion of funds for Cal Fed during 1995, 1994 and
1993, respectively. The reduction in the level of payments from loans
receivable is primarily due to a decline in the level of loan prepayments.
The reduction of loan prepayments has not had a material adverse impact on
Cal Fed's liquidity. Payments from mortgage-backed securities totaled $435.8
million, $533.5 million and $597.4 million during 1995, 1994 and 1993,
respectively. Proceeds from maturities of securities during the years ended
December 31, 1995, 1994 and 1993 were $808.8 million, $1.0 million and $254.5
million respectively.
114
<PAGE>
Cal Fed's principal use of capital resources is to originate residential
1-4 loans. The table below presents the amount and type of loans originated
and purchased by California Federal for the periods presented:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED FOR THE YEARS ENDED
SEPTEMBER 30, 1996 DECEMBER 31,
------------------- ----------------------
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Originations:
Residential 1-4 ................... $1,477.3 $1,646.7 $2,322.4
Multi-family ...................... 11.0 20.6 54.3
Commercial real estate ............ .7 1.8 49.5
------------------- ---------- ----------
Total Real Estate Loans .......... 1,489.0 1,669.1 2,426.2
Commercial banking ................ -- -- 0.5
Business Banking .................. 6.6 -- --
Consumer .......................... 67.1 99.3 118.6
------------------- ---------- ----------
Total Originations ............... 1,562.7 1,768.4 2,545.3
------------------- ---------- ----------
Purchases:
Residential 1-4 ................... $ 622.7 $ 494.5 $ 121.8
Multi-family ...................... 4.6 22.1 61.1
Commercial real estate ............ -- 61.6 46.3
Business Banking .................. 1.2 -- --
------------------- ---------- ----------
Total Purchases .................. 628.5 578.2 229.2
------------------- ---------- ----------
Total Originations and Purchases $2,191.2 $2,346.6 $2,774.5
=================== ========== ==========
</TABLE>
Commercial real estate loans and multi-family loans are originated solely
to facilitate the sales of REO and REI. Cal Fed originates loans through its
loan representatives and its branch offices ("retail lending") primarily
located in California. Additionally, Cal Fed utilizes mortgage brokers who
offer Cal Fed's various loan programs ("wholesale lending"). During 1995, Cal
Fed's wholesale lending generated $1.0 billion, or 63% of total residential
loans. Cal Fed's retail lending produced $621.6 million, or 38% of
residential loans during 1995 as compared to $784.7 million or 34% during
1994. Approximately 75%, or $1.2 billion, of Cal Fed's 1995 residential loan
production was COFI indexed adjustable rate loans. During the second half of
1995 the demand for fixed rate mortgage loans, including those loans that
convert to an adjustable rate after a 3-5 year period, began to rise as the
spread between a fully indexed adjustable rate loan and a 30 year fixed rate
loan decreased substantially. Although Cal Fed only originated $455.5 million
of fixed rate residential loans during 1995, Cal Fed anticipates that fixed
rate loans may represent a more significant portion of its origination volume
during 1996. The decrease in the market demand for adjustable rate loans may
lead to more competitive pricing in the market and may adversely impact the
yield that Cal Fed receives on its lending products. The increase in
commercial real estate loans originated and purchased for 1995 compared to
1994 is primarily the result of loans repurchased in settlement of a
servicing relationship. The decrease in consumer loan originations for 1995
compared to 1994 reflects a decrease in advances on home equity lines of
credit. Cal Fed did not approve additional home equity lines during 1995 or
1994 and originations for 1995 and 1994 consist of fundings of prior
commitments. During 1995, Cal Fed increased its purchases of mortgage loans.
Cal Fed purchases loans as a cost effective means to supplement its
origination process. Typically, when Cal Fed purchases loans, the party that
originated the loan retains the servicing. However, Cal Fed did purchase
$56.2 million of loans and the related servicing during 1995.
Financing Activities
Cal Fed's cash flows from financing activities represent the major source
of funds for Cal Fed consisting of retail deposits, FHLB advances, reverse
repurchase agreements and other borrowings. Cal Fed also has access to
brokered deposits and capital markets as alternative sources of funds. The
mix of
115
<PAGE>
these funding sources is changed from time to time, in light of market
conditions, liquidity needs, capital requirements and interest rate
sensitivity concerns in order to obtain the appropriate balance between
maturities and costs of funds.
Cal Fed's net cash flows (used) by financing activities totaled $(331.5)
million for the nine months ended September 30, 1996 compared to $(48.5)
million for the same period of 1995.
Principal payments, including payoffs, on loans produced $1,026.9 million
and $804.5 million of funds for Cal Fed during the nine months ended
September 30, 1996 and 1995, respectively. The increase in the level of
payments from loans receivable is primarily due to an increase in the level
of loan prepayments. Payments from securities held to maturity totaled $325.1
million and $310.3 million during the nine months ended September 30, 1996
and 1995, respectively, Proceeds from maturities of securities during the
nine months ended September 30, 1996 and 1995 were $156.0 million and $807.8
million, respectively.
Total deposits of Cal Fed were $8.8 billion and $9.4 billion at September
30, 1996 and September 30, 1995, respectively. Total Brokered Deposits of Cal
Fed were $173.6 million at September 30, 1996 and $259.2 million at September
30, 1995.
The following table presents the weighted average interest rates and the
amounts of deposits for Cal Fed at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
----------------------- ----------------------
AVG. RATE BALANCE AVG. RATE BALANCE
----------- ---------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
COMPOSITION OF DEPOSITS:
No minimum term -checking:
Money market checking ........... 1.17% $ 672.0 1.25% $ 774.5
Non-interest bearing commercial -- 285.9 -- 220.7
No minimum term -savings:
Passbook ........................ 2.21 435.3 2.22 530.7
Tiered savings .................. 4.43 343.4 -- --
Money market savings ............ 3.44 945.1 3.48 1,249.4
Term:
Less than 3 months .............. 4.41 102.8 4.05 97.8
3 months to 6 months ............ 4.98 527.2 5.29 644.5
7 months to 1 year .............. 5.32 2,505.7 5.91 2,226.5
13 months to 2 years ............ 6.00 2,410.8 6.11 2,982.7
25 months to 3 years ............ 5.77 64.2 5.43 77.8
37 months to 4 years ............ 5.60 23.5 6.41 69.6
49 months to 5 years ............ 6.19 171.2 6.64 224.0
Over 5 years .................... 7.10 275.9 7.33 339.8
---------- ---------
Total consolidated deposits ..... $8,763.0 $9,438.0
========== =========
</TABLE>
During the second quarter of 1996, Cal Fed sold six branches located in
San Diego County, California with deposits totaling approximately $380
million. The sale of the branches resulted in a net gain of $12.0 million or
approximately $0.24 per share. The sale of the branches did not have a
material impact on the liquidity of Cal Fed.
Total deposits of Cal Fed were $9.5 billion, $8.4 billion and $12.6
billion at December 31, 1995, 1994 and 1993, respectively. Total Brokered
Deposits of Cal Fed were $273.8 million at December 31, 1995. Cal Fed had no
Brokered Deposits at December 31, 1994 and 1993. During 1995, Cal Fed
acquired three branch offices and $138.6 million in deposits of Pacific
Heritage Bank and six branch offices and $359.4 million in deposits of
Continental Savings of America. The acquired branches are located in Los
Angeles County and in the San Francisco Bay area of Northern California. Cal
Fed received cash as consideration for the assumption of the deposits. In
August 1994, Cal Fed completed the sale of the Southeast Division. The
Southeast Division included deposits of approximately $3.9 billion. Cal Fed
funded the sale of the
116
<PAGE>
Southeast Division with (i) FHLB advances, (ii) reverse repurchase
agreements, (iii) liquid funds held by Cal Fed, (iv) the sale of short-term
liquid investments, (v) proceeds from the 1994 Bulk Sales and (vi) proceeds
from equity offerings.
During the third quarter of 1996, Cal Fed accrued $58.1 million for the
Special SAIF Assessment. Cal Fed does not anticipate that the Special SAIF
Assessment will have a material negative impact on its liquidity.
Cal Fed's outstanding balance of FHLB advances at September 30, 1996 and
1995 totaled $3.3 billion and $2.4 billion respectively. The weighted average
remaining maturity of these advances at September 30, 1996 was nine months.
Reverse repurchase agreements had carrying values of $962.7 million and
$801.3 million at September 30, 1996 and 1995, respectively.
Cal Fed's outstanding balance of FHLB advances at December 31, 1995, 1994
and 1993 totaled $2.7 billion, $2.5 billion and $1.0 billion, respectively.
The weighted average remaining maturity of these advances at December 31,
1995 was twelve months. Reverse repurchase agreements had carrying values of
$857.3 million, $1,751.0 million and $249.8 million at December 31, 1995,
1994 and 1993, respectively. During the fourth quarter of 1995, $275.0
million of Student Loan Marketing Association advances ("SLMA advances")
matured. Cal Fed replaced this funding source with FHLB advances. During
1995, Cal Fed repurchased $8.7 million of the Cal Fed 10% Subordinated
Debentures.
During the quarter ended September 30, 1996 California Federal declared
and paid dividends of $4.6 million on its 10 5/8% Bank Preferred Stock,
compared to dividends totaling $6.4 million on its California Federal
Preferred Stock, Series A and 10 5/8% Bank Preferred Stock during the quarter
ended September 30, 1995.
During 1994, California Federal, as part of its strategic initiatives,
raised $183.3 million from the issuance of 21.6 million of additional common
shares and $164.2 million from the issuance of 1.7 million shares of the
10 5/8% Bank Preferred Stock. During each of the quarters ending December 31,
1995 and 1994, California Federal declared and paid quarterly dividends of
$1.8 million on the California Federal Preferred Stock, Series A, and $4.6
million on the 10 5/8% Bank Preferred Stock. During the year ended December
31, 1995 and 1994, California Federal declared and paid dividends totaling
$25.6 million and $16.9 million, respectively, on the California Federal
Preferred Stock, Series A and the 10 5/8% Bank Preferred Stock.
During 1995, California Federal announced its intention to repurchase up
to $50.0 million par value of its preferred stock. California Federal did not
purchase any preferred stock during 1995. The California Federal Preferred
Stock, Series A was callable, at its par value of $25 per share, at the
option of California Federal, on or subsequent to March 31, 1996.
During the second quarter of 1996, California Federal called for
redemption all of the 3,740,000 outstanding shares of its California Federal
Preferred Stock, Series A. Except for the conversion of 18,820 shares into
23,336 shares of Cal Fed's common stock, all shares of the California Federal
Preferred Stock, Series A were redeemed effective June 14, 1996 at a
redemption price of $25.00 per share, plus a dividend of $0.398264 per share.
Cal Fed has pledged certain of its assets as collateral for certain
borrowings, interest rate letters of credit, and other miscellaneous
obligations. By utilizing collateralized funding sources, Cal Fed is able to
access a variety of cost effective sources of funds. The assets pledged
consist of loans, mortgage-backed securities and U.S. treasury securities.
Cal Fed's process for monitoring its liquidity requirements incorporates an
assessment of assets pledged, the level of assets held for sale, additional
borrowing capacity and other factors. Cal Fed does not anticipate any
negative impact to its liquidity from its pledging activities. The total
amount of Cal Fed's assets pledged was $5.5 billion at September 30, 1996 and
$4.9 billion at December 31, 1995 as compared with $6.2 billion at December
31, 1994 and $3.5 billion at December 31, 1993.
117
<PAGE>
The following table presents assets pledged at September 30, 1996 for Cal
Fed:
<TABLE>
<CAPTION>
SUMMARY OF PLEDGED COLLATERAL
-----------------------------------------------------
MORTGAGE-
BACKED TOTAL
MORTGAGES SECURITIES SECURITIES COLLATERAL
----------- ------------ ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Borrowings:
FHLB advances ......................... $4,036.7 $ -- $ 397.2 $4,433.9
Reverse repurchase agreements ......... -- -- 969.2 969.2
Other Obligations:
Interest rate swaps ................... -- -- 5.1 5.1
Revenue bond standby letters of credit -- -- 22.7 22.7
FHLB letters of credit/lines of credit 20.0 -- -- 20.0
Other miscellaneous obligations ...... 6.6 51.5 0.1 58.2
----------- ------------ ------------ ------------
Total pledged collateral .............. $4,063.3 $51.5 $1,394.3 $5,509.1
=========== ============ ============ ============
</TABLE>
Cal Fed also acquires securities for resale. Cal Fed's securities
available for sale consist of U.S. Treasury securities. During 1995, Cal Fed
sold $952.2 million of securities for a gain of $6.9 million. During 1994,
Cal Fed sold $670.2 million of securities. Cal Fed did not sell securities
during 1993, however, approximately $250.2 million of securities available
for sale matured during 1993.
Cal Fed also invested in short-term liquid investments as a means of
maximizing its return on its liquid investments and to comply with the
liquidity requirements of the OTS.
The liquidity of California Federal, as measured by the ratio of cash and
cash equivalents to the sum of withdrawable savings and borrowings payable
within one year, averaged 16.3% for the nine months ended September 30, 1996
and 12.3% for the year ended December 31, 1995, compared to 14.6% and 11.3%
for the years ended December 31, 1994 and 1993, respectively. California
Federal is required by the OTS to maintain its liquidity level in excess of
5.0%.
CAPITAL REQUIREMENTS
As a savings institution regulated by the OTS with deposits insured by
FDIC, California Federal is required to comply with the capital requirements
of the OTS. The regulations of the OTS require savings institutions to
maintain certain minimum levels of regulatory capital. An institution that
fails to comply with its regulatory capital requirements must obtain OTS
approval of a capital plan and can be subject to a capital directive and
certain restrictions on its operations. An institution that fails to obtain
OTS approval of its capital plan is deemed to be in an unsafe and unsound
condition and could be the subject of the appointment of a conservator or a
receiver. The OTS has adopted prompt corrective action requirements ("PCA
requirements") pursuant to FDICIA. At September 30, 1996, the industry-wide
minimum regulatory capital requirements were:
o Tangible capital of 1.50% consisting generally of shareholders' equity,
but excluding intangible assets such as goodwill.
o A leverage ratio requiring core capital (i.e., Tier 1 capital) of 3.00%
consisting of tangible capital plus qualifying supervisory goodwill
(certain goodwill arising as a result of the acquisition of troubled
institutions and regulatory assisted acquisitions).
o Risk-based capital, consisting of core capital plus certain
subordinated debt and other capital instruments and general valuation
allowances on loans receivable, equal to 8.00% of the value of
risk-weighted assets plus off-balance sheet items.
In addition, the PCA requirements provide that, a savings association is
deemed to be "well capitalized" if the savings association has: (i) a total
risk-based capital ratio of 10.00% or greater, (ii) a Tier 1 risk-based
capital ratio (defined as Tier 1 capital as a percentage of risk-weighted
assets) of 6.00% or greater, and (iii) a leverage ratio of 5.00% or greater.
At September 30, 1996, (i) California Federal's total risk-based capital
ratio was 11.18%, $92.5 million in excess of "well-capitalized" requirements,
(ii)
118
<PAGE>
California Federal's Tier 1 risk-based capital ratio was 9.72%, $292.2
million in excess of "well-capitalized" requirements, and (iii) California
Federal's leverage ratio was 5.40%, $57.0 million in excess of
"well-capitalized" requirements. At December 31, 1995, (i) California
Federal's total risk-based capital ratio was 12.36%, $183.3 million in excess
of "well-capitalized" requirements, (ii) California Federal's Tier 1
risk-based capital ratio was 10.90%, $380.1 million in excess of
"well-capitalized" requirements, and (iii) California Federal's leverage
ratio was 5.91%, $130.2 million in excess of "well-capitalized" requirements.
Therefore, at December 31, 1995 and September 30, 1996, California Federal
met and exceeded all of the requirements of a well capitalized institution.
The table below presents California Federal's regulatory capital position
compared to industry-wide capital requirements at September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CAPITAL CORE CAPITAL RISK-BASED CAPITAL
----------------- ----------------- ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Regulatory capital of California Federal $763.0 5.40% $763.0 5.40% $879.7 11.18%
Bank's minimum regulatory capital
requirements ........................... 211.8 1.50 423.6 3.00 630.3 8.00
-------- ------- -------- ------- -------- --------
Excess over minimum regulatory capital
requirements ........................... $551.2 3.90% $339.4 2.40% $249.4 3.18%
======== ======= ======== ======= ======== ========
</TABLE>
Following is a reconciliation of California Federal's shareholder's equity
to regulatory capital as of September 30, 1996:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
---------- --------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Shareholder's Equity of California Federal ...................... $804.1 $804.1 $804.1
Net unrealized holding (gains) losses on securities available
for sale ....................................................... -- -- --
Non-allowable capital:
Intangible assets: ............................................. (26.5) (26.5) (26.5)
Investment in non-permissible subsidiaries ..................... (14.6) (14.6) (14.6)
Tier II capital items:
Allowable subordinated debt ................................... -- -- 18.7
Allowable general valuation allowance on loans receivable
(limited to 1.25% of risk-weighted assets) ................... -- -- 98.0
---------- --------- ------------
Regulatory capital of California Federal ........................ $763.0 $763.0 $879.7
========== ========= ============
</TABLE>
During the third quarter of 1996, federal legislation was enacted, which,
among other things, will fund the SAIF through the Special SAIF Assessment
for SAIF members, such as California Federal. The Special SAIF Assessment is
based on California Federal's deposits as of March 31, 1995 at an assessment
rate of 65.7 basis points. During the third quarter of 1996, California
Federal accrued $58.1 million for the Special SAIF Assessment. The Special
SAIF Assessment was payable during the fourth quarter of 1996.
During the first quarter of 1995, California Federal announced its
intention to repurchase up to $50.0 million par value of its preferred stock,
pursuant to applicable regulatory guidelines, and up to $13.6 million of its
10% Subordinated Debentures. During 1995, California Federal repurchased $8.7
million of the Cal Fed 10% Subordinated Debentures. Subordinated debt,
subject to certain limitations, qualifies as supplementary capital for
risk-based capital purposes. California Federal did not repurchase any
preferred stock during 1995.
During the 1995 fourth quarter, California Federal obtained regulatory and
shareholder approval to reorganize into a holding company structure, designed
to provide greater flexibility for meeting future financial and competitive
needs. As a result of the reorganization, on January 1, 1996, each share of
119
<PAGE>
California Federal's common stock was converted into one share of Cal Fed
common stock. Consequently, California Federal became a wholly-owned
subsidiary of Cal Fed. California Federal's other securities remained
outstanding securities of California Federal. However, during the second
quarter of 1996, California Federal called for redemption all of the
3,740,000 outstanding shares of its California Federal Preferred Stock,
Series A. Except for the conversion of 18,820 shares into 23,336 shares of
Cal Fed's common stock, all shares of the California Federal Preferred Stock,
Series A were redeemed effective June 14, 1996 at a redemption price of
$25.00 per share, plus a dividend of $0.398264 per share.
In December 1995, California Federal contributed approximately $22 million
in capital to Cal Fed as part of the reorganization into a holding company
structure. Although the contribution did not impact California Federal's
consolidated regulatory capital at December 31, 1995, California Federal's
regulatory capital in 1996 was reduced by the amount of the contribution.
GOODWILL LITIGATION
See "Business--Holdings--Other Activities--Cal Fed Contingent Litigation
Recovery Participation Interests."
CURRENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 addresses the
accounting and reporting standards for stock-based employee compensation
plans. Additionally, SFAS No. 123 applies to transactions in which an entity
issues its equity instruments to acquire goods or services from nonemployees.
These transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments. SFAS No.
123 is effective for transactions entered into in fiscal years that begin
after December 1995. Cal Fed does not believe that SFAS No. 123 will have a
material adverse effect on its financial position or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No.
125 addresses the accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. SFAS No.
125 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after December 31, 1996, and is to
be applied prospectively. Cal Fed has not yet adopted SFAS No. 125. Cal Fed
does not believe that SFAS No. 125 will have a material adverse effect on its
financial position or results of operations.
120
<PAGE>
The following table shows Consolidated Average Balance Sheets for Cal Fed
for the periods indicated as well as interest income and expense and average
rates earned and paid on each major category of interest-earning assets and
interest-bearing liabilities. Average balances are predominantly calculated
on a daily basis. When information is not available for calculations to be
made on a daily basis, average balances are calculated on a weekly or monthly
basis from the best available data. The interest rate spread is calculated as
the average rate earned on total interest-earning assets less the average
rate paid on total interest-bearing liabilities.
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ RATE AVERAGE INCOME/ RATE
BALANCE EXPENSE % BALANCE EXPENSE %
--------- ---------- --------- --------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Certificates of deposit ........... $ 65 $ 4 6.15% $ 64 $ 2 3.13%
Federal funds sold ................ 155 9 5.81 470 20 4.26
Investment securities(A) .......... 2,055 119 5.79 2,590 121 4.67
Mortgage-backed securities ....... 2,539 169 6.66 2,390 134 5.61
Loans Receivable: (B)
Real Estate ...................... 8,794 672 7.64 8,599 587 6.83
Equity ........................... 97 8 8.25 309 23 7.44
Commercial banking ............... -- -- -- 23 2 8.70
Consumer ......................... 284 27 9.51 180 19 10.56
--------- ---------- --------- ----------
Total Loans Receivable .......... 9,175 707 7.71 9,111 631 6.92
--------- ---------- --------- ----------
Total Interest-Earning Assets ..... $13,989 $1,008 7.21% $14,625 $908 6.21%
--------- ---------- --------- ----------
All Other Assets ................... 361 605
--------- ---------
Total Assets .................... $14,350 $15,230
========= =========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-Bearing Liabilities:
Deposits:
Passbook ......................... $ 537 $ 11 2.05% $ 694 $ 15 2.16%
Money market and NOW accounts ... 2,290 55 2.40 2,987 60 2.01
6-month certificates ............. 503 26 5.17 802 28 3.49
9-month to 1-year ................
certificates ..................... 2,377 134 5.64 2,690 114 4.24
Other certificates ............... 3,502 211 6.03 3,343 170 5.09
Jumbo certificates ............... 65 5 7.69 100 4 4.00
--------- ---------- --------- ----------
Total Deposits .................. 9,274 442 4.77 10,616 391 3.68
--------- ---------- --------- ----------
Borrowings:
FHLB advances ...................... 2,453 154 6.28 1,644 83 5.05
Securities sold under agreements to
repurchase ........................ 1,099 65 5.91 1,524 69 4.52
Short-term borrowings .............. -- -- -- -- -- --
Long-term borrowings ............... 522 35 6.71 434 24 5.53
--------- ---------- --------- ----------
Total Borrowings ................ 4,074 254 6.24 3,602 176 4.88
--------- ---------- --------- ----------
Total Interest-Bearing
Liabilities ....................... $13,348 $ 696 5.21% $14,218 $567 3.98%
--------- ---------- --------- ----------
All other liabilities .............. 162 203
Shareholders' equity ............... 840 809
--------- ---------
Total Liabilities and
Shareholders' Equity ........... $14,350 $15,230
========= =========
Net Interest Income ................ $ 312 $341
========== ==========
Interest Rate Spread ............... 2.00% 2.23%
Net Margin on Average Interest
Earning Assets .................... 2.23% 2.34%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1993
INTEREST AVERAGE
AVERAGE INCOME/ RATE
BALANCE EXPENSE %
--------- ---------- ---------
<S> <C> <C> <C>
ASSETS
Interest-Earning Assets:
Certificates of deposit $69 $2 2.90%
Federal funds sold ................ 84 2 2.38
Investment securities(A) .......... 2,029 93 4.59
Mortgage-backed securities ....... 2,860 160 5.59
Loans Receivable: (B)
Real Estate ...................... 9,530 676 7.09
Equity ........................... 410 31 7.57
Commercial banking ............... 162 10 6.17
Consumer ......................... 392 40 10.20
--------- ----------
Total Loans Receivable .......... 10,494 757 7.22
--------- ----------
Total Interest-Earning Assets ..... $15,536 $1,014 6.53%
--------- ----------
All Other Assets ................... 1,236
---------
Total Assets .................... $16,772
=========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-Bearing Liabilities:
Deposits:
Passbook ......................... $ 745 $ 19 2.55%
Money market and NOW accounts ... 3,461 83 2.40
6-month certificates ............. 1,186 41 3.46
9-month to 1-year certificates ... 3,750 154 4.11
Other certificates ............... 3,673 207 5.64
Jumbo certificates ............... 309 12 3.88
--------- ----------
Total Deposits .................. 13,124 516 3.94
--------- ----------
Borrowings:
FHLB advances ...................... 1,413 54 3.83
Securities sold under agreements to
repurchase ........................ 726 23 3.17
Short-term borrowings .............. 18 1 5.56
Long-term borrowings ............... 353 18 5.10
--------- ----------
Total Borrowings ................ 2,510 96 3.83
--------- ----------
Total Interest-Bearing
Liabilities ....................... $15,634 $612 3.91%
--------- ----------
All other liabilities .............. 183
Shareholders' equity ............... 955
---------
Total Liabilities and
Shareholders' Equity ........... $16,772
=========
Net Interest Income ................ $402
==========
Interest Rate Spread ............... 2.62%
Net Margin on Average Interest
Earning Assets .................... 2.59%
</TABLE>
- --------------
(A) Includes securities purchased under agreements to resell, securities
available for sale and other securities.
(B) Non-accrual loans, past due loans and restructured loans are included in
the applicable loan categories of this table.
121
<PAGE>
The table below shows the portion of the change in net interest income
between 1995 and 1994 as well as 1994 versus 1993 which is due to changes in
average balances outstanding and to average rates earned and paid on
balances. The amount of the change due to an increase or decrease in average
balances is calculated as the change in average balances multiplied by the
average rate from the preceding year. The amount of the change due to an
increase or decrease in average rates is calculated as the change in average
rates multiplied by the average balance in the preceding year. Any remaining
change is allocated to the above two categories on a pro-rata basis.
<TABLE>
<CAPTION>
1995 VERSUS 1994
-----------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO
CHANGE IN:
-----------------------------
AVERAGE AVERAGE
BALANCE RATE TOTAL
--------- --------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Interest-Earning Assets:
Certificates of deposit ........... $ -- $ 1 $ 1
Federal funds sold ................ (26) 15 (11)
Investment securities(A) .......... (7) 5 (2)
Mortgage-backed securities ....... 9 26 35
Loans receivable:
Real Estate(B) ................... 14 71 85
Equity ........................... (19) 5 (14)
Commercial banking ............... (1) (1) (2)
Consumer ......................... 9 (1) 8
--------- --------- -------
Total Loans Receivable .......... 3 74 77
--------- --------- -------
Total Interest-Earning Assets ..... (21) 121 100
--------- --------- -------
Interest-Bearing Liabilities:
Deposits:
Passbook ......................... (3) (1) (4)
Money market and NOW accounts ... (28) 23 (5)
6-month certificates ............. 5 (6) (1)
9-month to 1-year ................
certificates ..................... (11) 31 20
Other certificates ............... 8 33 41
Jumbo certificates ............... -- -- --
--------- --------- -------
Deposits ........................ (29) 80 51
--------- --------- -------
Borrowings:
FHLB advances .................... 47 24 71
Securities sold under agreements
to repurchase ................... (31) 27 (4)
Short-term borrowings ............ -- -- --
Long-term borrowings ............. 6 6 12
--------- --------- -------
Total Borrowings ................ 22 57 79
--------- --------- -------
Total Interest-Bearing Liabilities (7) 137 130
--------- --------- -------
Change in Net Interest Income ..... $(14) $(16) $(30)
========= ========= =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1994 VERSUS 1993
-----------------------------
AMOUNT OF INCREASE
(DECREASE) DUE TO
CHANGE IN:
-----------------------------
AVERAGE AVERAGE
BALANCE RATE TOTAL
--------- --------- -------
<S> <C> <C> <C>
Interest-Earning Assets:
Certificates of deposit ........... $ -- $ -- $ --
Federal funds sold ................ 16 2 18
Investment securities(A) .......... 26 2 28
Mortgage-backed securities ....... (25) (1) (26)
Loans receivable:
Real Estate(B) ................... (66) (23) (89)
Equity ........................... (7) (1) (8)
Commercial banking ............... (13) 5 (8)
Consumer ......................... (22) 1 (21)
--------- --------- -------
Total Loans Receivable .......... (108) (18) (126)
--------- --------- -------
Total Interest-Earning Assets ..... (91) (15) (106)
--------- --------- -------
Interest-Bearing Liabilities:
Deposits:
Passbook ......................... (1) (3) (4)
Money market and NOW accounts ... (11) (12) (23)
6-month certificates ............. (13) -- (13)
9-month to 1-year ................
certificates ..................... (44) 4 (40)
Other certificates ............... (18) (19) (37)
Jumbo certificates ............... (9) 1 (8)
--------- --------- -------
Deposits ........................ (96) (29) (125)
--------- --------- -------
Borrowings:
FHLB advances .................... 10 19 29
Securities sold under agreements
to repurchase ................... 33 13 46
Short-term borrowings ............ (1) -- (1)
Long-term borrowings ............. 4 2 6
--------- --------- -------
Total Borrowings ................ 46 34 80
--------- --------- -------
Total Interest-Bearing Liabilities (50) 5 (45)
--------- --------- -------
Change in Net Interest Income ..... $ (41) $(20) $ (61)
========= ========= =======
</TABLE>
- --------------
(A) Includes securities purchased under agreements to resell, securities
available for sale and other investment securities.
(B) Includes loans held for sale.
122
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Issuer will accept for exchange Old Notes which are
properly tendered on or prior to the Expiration Date and not withdrawn as
permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on , 1997; provided, however, that if the Issuer,
in its sole discretion, has extended the period of time for which the
Exchange Offer is open, the term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended.
As of the date of this Prospectus, $575,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about , 1997, to all holders of
Old Notes known to the Issuer. The Issuer's obligation to accept Old Notes
for exchange pursuant to the Exchange Offer is subject to certain conditions
as set forth below under "--Certain Conditions to the Exchange Offer."
The Issuer expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the Issuer.
Any Old Notes not accepted for exchange for any reason will be returned
without expense to the tendering holder thereof as promptly as practicable
after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Issuer expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not therefore accepted
for exchange, upon the occurrence of any of the events specified below under
"--Certain Conditions to the Exchange Offer." The Issuer will give oral or
written notice of any extension, amendment, non-acceptance or termination to
the holders of the Old Notes as promptly as practicable, such notice in the
case of any extension to be issued by means of a press release or other
public announcement no later than 9:00 a.m., New York City time, on the next
business day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Issuer of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Issuer will constitute a binding
agreement between the tendering holder and the Issuer upon the terms and
subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal, to The
Bank of New York, as Exchange Agent, at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date. In addition, either
(i) certificates for such Old Notes must be received by the Exchange Agent
along with the Letter of Transmittal, or (ii) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Old Notes, if such
procedure is available, into the Exchange Agent's account at The Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure
for book-entry transfer described below, must be received by the Exchange
Agent prior to the Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD
NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS
RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
ISSUER.
123
<PAGE>
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined herein). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by a firm
which is a member of a registered national securities exchange or a member of
the National Association of Securities Dealers, Inc. or by a commercial bank
or trust company having an office or correspondent in the United States
(collectively, "Eligible Institutions"). If Old Notes are registered in the
name of a person other than a signer of the Letter of Transmittal, the Old
Notes surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory
form as determined by the Issuer in its sole discretion, duly executed by,
the registered Holder with the signature thereon guaranteed by an Eligible
Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Issuer in its sole discretion, which determination shall be final and
binding. The Issuer reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or to not accept any
particular Old Notes which acceptance might, in the judgment of the Issuer or
its counsel, be unlawful. The Issuer also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date
(including the right to waive the ineligibility of any holder who seeks to
tender Old Notes in the Exchange Offer). The interpretation of the terms and
conditions of the Exchange Offer as to any particular Old Notes either before
or after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by the Issuer shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with
tenders of Old Notes for exchange must be cured within such reasonable period
of time as the Issuer shall determine. Neither the Issuer, the Exchange Agent
nor any other person shall be under any duty to give notification of any
defect or irregularity with respect to any tender of Old Notes for exchange,
nor shall any of them incur any liability for failure to give such
notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered holder or holders of Old Notes, such Old Notes must be
endorsed or accompanied by appropriate powers of attorney, in either case
signed exactly as the name or names of the registered holder or holders that
appear on the Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Issuer, proper evidence satisfactory to the Issuer of their authority to
so act must be submitted.
By tendering, each holder will represent to the Issuer that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder, and that neither the holder
nor such other person has any arrangement or understanding with any person to
participate in the distribution of the New Notes. In the case of a holder
that is not a broker-dealer, each such holder, by tendering, will also
represent to the Issuer that such holder is not engaged in, or intends to
engage in, a distribution of the New Notes. If any holder or any such other
person is an "affiliate," as defined under Rule 405 of the Securities Act, of
the Issuer, or is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such New
Notes to be acquired pursuant to the Exchange Offer, such holder or any such
other person (i) could not rely on the applicable interpretations of the
staff of the SEC and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act.
124
<PAGE>
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Issuer will accept, promptly after the Expiration Date, all Old
Notes properly tendered and will issue the New Notes promptly after
acceptance of the Old Notes. See "--Certain Conditions to the Exchange
Offer." For purposes of the Exchange Offer, the Issuer shall be deemed to
have accepted properly tendered Old Notes for exchange when, as and if the
Issuer has given oral or written notice thereof to the Exchange Agent, with
written confirmation of any oral notice to be given promptly thereafter.
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid,
from September 19, 1996. Accordingly, if the relevant record date for
interest payment occurs after the consummation of the Exchange Offer
registered holders of New Notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from September 19, 1996. If, however, the relevant
record date for interest payment occurs prior to the consummation of the
Exchange Offer registered holders of Old Notes on such record date will
receive interest accruing from the most recent date to which interest has
been paid or, if no interest has been paid, from September 19, 1996. Old
Notes accepted for exchange will cease to accrue interest from and after the
date of consummation of the Exchange Offer, except as set forth in the
immediately preceding sentence. Holders of Old Notes whose Old Notes are
accepted for exchange will not receive any payment in respect of accrued
interest on such Old Notes otherwise payable on any interest payment date the
record date for which occurs on or after consummation of the Exchange Offer.
If the Exchange Offer is not consummated by July 2, 1997, the rate per annum
at which the Old Notes bear interest will be 11 1/8% per annum from and
including July 2, 1997 until but excluding the date of consummation of the
Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility, a properly completed and duly executed
Letter of Transmittal and all other required documents. If any tendered Old
Notes are not accepted for any reason set forth in the terms and conditions
of the Exchange Offer or if Old Notes are submitted for a greater principal
amount that the holder desired to exchange, such unaccepted or non-exchanged
Old Notes will be returned without expense to the tendering holder thereof
(or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry procedures described below, such non-exchanged Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility) as
promptly as practicable after the expiration or termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the Book-Entry Transfer Facility for purposes of
the Exchange Offer within two business days after the date of this
Prospectus, and any financial institution that is a participant in the
Book-Entry Transfer Facility's systems may make book-entry delivery of Old
Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility in
accordance with such Book-Entry Transfer Facility's procedures for transfer.
However, although delivery of Old Notes may be effected through book-entry
transfer at the Book-Entry Transfer Facility, the Letter of Transmittal or
facsimile thereof, with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received by the
Exchange Agent at one of the addresses set forth below under "--Exchange
Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with.
125
<PAGE>
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes
and the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot
be completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent received from such Eligible Institution a properly completed
and duly executed Letter of Transmittal (or a facsimile thereof) and Notice
of Guaranteed Delivery, substantially in the form provided by the Issuer (by
telegram, telex, facsimile transmission, mail or hand delivery), setting
forth the name and address of the holder of Old Notes and the amount of Old
Notes tendered, stating that the tender is being made thereby and
guaranteeing that within five New York Stock Exchange ("NYSE") trading days
after the date of execution of the Notice of Guaranteed Delivery, the
certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, and (iii) the certificates for
all physically tendered Old Notes, in proper form for transfer, or a
Book-Entry Confirmation, as the case may be, and all other documents required
by the Letter of Transmittal, are received by the Exchange Agent within five
NYSE trading days after the date of execution of the Notice of Guaranteed
Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of
the person having tendered the Old Notes to be withdrawn, identify the Old
Notes to be withdrawn (including the principal amount of such Old Notes), and
(where certificates for Old Notes have been transmitted) specify the name in
which such Old Notes are registered, if different from that of the
withdrawing holder. If certificates for Old Notes have been delivered or
otherwise identified to the Exchange Agent, then, prior to the release of
such certificates the withdrawing holder must also submit the serial numbers
of the particular certificates to be withdrawn and signed notice of
withdrawal with signatures guaranteed by an Eligible Institution unless such
holder is an Eligible Institution. If Old Notes have been tendered pursuant
to the procedure for book-entry transfer described above, any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Old Notes and otherwise
comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices
will be determined by the Issuer, whose determination shall be final and
binding on all parties. Any Old Notes so withdrawn will be deemed not to have
been validly tendered for exchange for purposes of the Exchange Offer. Any
Old Notes which have been tendered for exchange but which are not exchanged
for any reason will be returned to the holder thereof without cost to such
holder (or, in the case of Old Notes tendered by book-entry transfer into the
Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the
book-entry transfer procedures described above, such Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility for
the Old Notes) as soon as practicable after withdrawal, rejection of tender
or termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described under "--Procedures
for Tendering Old Notes" above at any time on or prior to the Expiration
Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Issuer
shall not be required to accept for exchange, or to issue New Notes in
exchange for, any Old Notes and may terminate or amend the Exchange Offer, if
at any time before the acceptance of such Old Notes for exchange or the
exchange of the New Notes for such Old Notes, any of the following events
shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order of decree shall have been
issued by, any court or governmental agency or other
126
<PAGE>
governmental regulatory or administrative agency or commission, (i)
seeking to restrain or prohibit the making or consummation of the Exchange
Offer or any other transaction contemplated by the Exchange Offer, or
assessing or seeking any damages as a result thereof, or (ii) resulting in
a material delay in the ability of the Issuer to accept for exchange or
exchange some or all of the Old Notes pursuant to the Exchange Offer; or
any statute, rule, regulation, order or injunction shall be sought,
proposed, introduced, enacted, promulgated or deemed applicable to the
Exchange Offer or any of the transactions contemplated by the Exchange
Offer by any government or governmental authority, domestic or foreign, or
any action shall have been taken, proposed or threatened, by any
government, governmental authority, agency or court, domestic or foreign,
that in the sole judgment of the Issuer might directly or indirectly
result in any of the consequences referred to in clauses (i) or (ii) above
or, in the sole judgment of the Issuer, might result in the holders of New
Notes having obligations with respect to resales and transfers of New
Notes which are greater than those described in the interpretation of the
SEC referred to on the cover page of this Prospectus, or would otherwise
make it inadvisable to proceed with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by any governmental agency or authority which may adversely affect the
ability of the Issuer to complete the transactions contemplated by the
Exchange Offer, (iii) a declaration of a banking moratorium or any
suspension of payments in respect of banks in the United States or any
limitation by any governmental agency or authority which adversely affects
the extension of credit or (iv) a commencement of a war, armed hostilities
or other similar international calamity directly or indirectly involving
the United States, or, in the case of any of the foregoing existing at the
time of the commencement of the Exchange Offer, a material acceleration or
worsening thereof; or
(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Issuer and its subsidiaries taken as a whole that, in the
sole judgment of the Issuer, is or may be adverse to the Issuer, or the
Issuer shall have become aware of facts that, in the sole judgment of the
Issuer, have or may have adverse significance with respect to the value of
the Old Notes or the New Notes;
which in the sole judgment of the Issuer in any case, and regardless of the
circumstances (including any action by the Issuer) giving rise to any event
described above, makes it inadvisable to proceed with the Exchange Offer
and/or with such acceptance for exchange or with such exchange.
The foregoing conditions are for the sole benefit of the Issuer and may be
asserted by the Issuer regardless of the circumstances giving rise to any
such condition or may be waived by the Issuer in whole or in part at any time
and from time to time in its sole discretion. The failure by the Issuer at
any time to exercise any of the foregoing rights shall not be deemed a waiver
of any such right and each such right shall be deemed an ongoing right which
may be asserted at any time and from time to time.
In addition, the Issuer will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939 (the
"TIA").
EXCHANGE AGENT
The Bank of New York has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at one of the addresses set forth below. Questions and
requests for assistance, requests for additional copies of this Prospectus or
of the Letter of Transmittal and requests for Notices of Guaranteed Delivery
should be directed to the Exchange Agent addressed as follows:
127
<PAGE>
Delivery To: The Bank of New York, Exchange Agent
By Mail: By Overnight Courier or Hand:
The Bank of New York The Bank of New York
101 Barclay Street--(7 East) 101 Barclay Street--(7 East)
Reorganization Section Reorganization Section
New York, New York 10286 Corporate Trust Services Window
Attention: New York, New York 10286
Attention:
By Facsimile:
(212) 571-3080
Confirm by Telephone:
(212) 815-2742
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET
FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF
TRANSMITTAL.
FEES AND EXPENSES
The Issuer will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Issuer and are estimated in the aggregate to be
$ .
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that holders who
instruct the Issuer to register New Notes in the name of, or request that Old
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
CONSEQUENCES OF EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuer does not
currently anticipate that it will register Old Notes under the Securities
Act. See "Description of the Notes--Registration Rights." Based on
interpretations by the staff of the SEC, as set forth in no-action letters
issued to third parties, the Issuer believes that New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold or otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Issuer within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement or understanding with any person to participate
in the distribution of such New Notes. However, the Issuer does not intend to
request the SEC to consider,
128
<PAGE>
and the SEC has not considered, the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the SEC
would make a similar determination with respect to the Exchange Offer as in
such other circumstances. Each holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of New Notes and has no arrangement or understanding to
participate in a distribution of New Notes. If any holder is an affiliate of
the Issuer, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the New Notes to be
acquired pursuant to the Exchange Offer, such holder (i) could not rely on
the applicable interpretations of the staff of the SEC and (ii) must comply
with the registration and prospectus delivery requirements of the Securities
Act in connection with any resale transaction. Each broker-dealer that
receives New Notes for its own account in exchange for Old Notes, where such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in connection with any resale of such New Notes. See "Plan of
Distribution." In addition, to comply with the state securities laws, the New
Notes may not be offered or sold in any state unless they have been
registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with. The offer
and sale of the New Notes to "qualified institutional buyers" (as such term
is defined under Rule 144A of the Securities Act) is generally exempt from
registration or qualification under the state securities laws. The Issuer
currently does not intend to register or qualify the sale of the New Notes in
any state where an exemption from registration or qualification is required
and not available.
129
<PAGE>
BUSINESS
GENERAL
Holdings
Holdings is a holding company chartered under the laws of the State of
Delaware whose only significant asset is all of the common stock of the Bank.
As such, Holdings' principal business operations are conducted by the Bank
and its subsidiaries.
Holdings is 80% owned indirectly by MacAndrews Holdings, a corporation
wholly owned through Mafco Holdings by Ronald O. Perelman, and is 20% owned
by Hunter's Glen, a limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a director of the Bank.
See "Ownership of the Common Stock."
Holdings' operations are significantly influenced by general economic
conditions in the markets and geographic areas in which the Bank conducts its
business, the monetary and fiscal policies of the federal government and the
regulatory policies of certain governmental agencies. Deposit balances and
the cost of borrowings are influenced by interest rates on competing
investments and general market interest rates. Holdings' loan volume and
yields are also impacted by market interest rates on loans, the supply of and
demand for housing, and the availability of funds.
The Bank
After giving effect to the Cal Fed Acquisition, the Capital Corporation
Offering and the Capital Contribution, at September 30, 1996, the Bank would
have had approximately $31.0 billion in assets, approximately $17.6 billion
in deposits, would have operated approximately 227 branches and would have
ranked at such date as the fourth largest thrift in the United States in
terms of assets, based on published sources. The Bank's principal business
consists of operating retail deposit branches and originating and/or
purchasing one to four family real estate loans and, to a lesser extent,
certain consumer loans, and is conducted primarily in California, Florida,
Nevada and Texas. The Bank also actively manages its portfolio of commercial
real estate loans acquired through acquisitions and is active in mortgage
banking and loan servicing. These operating activities are financed
principally with customer deposits, secured short-term and long-term
borrowings, collections on loans, asset sales and retained earnings. At
September 30, 1996, First Nationwide had approximately $17.0 billion in
assets, approximately $8.8 billion in deposits and operated 116 branches.
According to published sources, First Nationwide was ranked the seventh
largest thrift in the United States, in terms of assets, as of September 30,
1996.
The Bank is chartered as a federal stock savings bank under the HOLA and
regulated by the OTS and the FDIC, which, through the SAIF, insures the
deposit accounts of the Bank. The Bank is also a member of the FHLBS.
Revenues are derived from interest charged on loans, interest and
dividends received on securities and mortgage-backed securities, fees
received in connection with loan servicing, securities brokerage and other
customer service transactions, and asset management fees. Expenses primarily
consist of interest on customer deposit accounts, interest on short-term and
long-term borrowings, general and administrative expenses consisting of
compensation and benefits, data processing, occupancy and equipment,
communications, deposit insurance assessments, advertising and marketing,
professional fees and other general and administrative expenses.
BUSINESS STRATEGY
With the Cal Fed Acquisition, the Bank has substantially completed its
business strategy initiated in 1994 by investing in its California franchise
and divesting most of its non-California branches. In addition, the Bank has
significantly expanded its mortgage servicing operations to gain increased
economies of scale. The key elements of the Bank's business strategy
following the Cal Fed Acquisition are as follows.
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<PAGE>
Concentration and Expansion in California
Beginning with the FN Acquisition in 1994, First Nationwide developed a
strategy to concentrate its retail branch network in California. The
management of the Bank believes that the West Coast region, and California in
particular, offers attractive opportunities to continue to build franchise
value. The Cal Fed Acquisition, the SFFed Acquisition, the Home Federal
Acquisition and the Branch Purchases are consistent with this strategy and,
in the aggregate, have added, or will add, $12.7 billion in deposits. The
SFFed Acquisition, net of the related consolidation of branches, increased
the number of First Nationwide Northern California branches from 37 to 63,
and, based on information as of December 31, 1995, increased the outstanding
balances of First Nationwide's retail deposits in this region by $2.7
billion, from approximately $1.9 billion to approximately $4.6 billion. In
addition, the Branch Purchases added another seven California branches, and
the Home Federal Acquisition increased First Nationwide's number of Northern
California branches by 10 on a net basis so that as of September 30, 1996
First Nationwide had 89 of its 116 branches located in California. The Cal
Fed Acquisition provided the Bank with on a net basis an additional 94
branches located in Southern California and Nevada and will increase the
outstanding balance of the Bank's retail deposits in this region from
approximately $.8 billion as of September 30, 1996 to approximately $8.1
billion. The Cal Fed Acquisition also added, on a net basis, 17 branches and
$1.2 billion in deposits in Northern California. The Bank's retail deposits
in California will have increased from $2.3 billion at the time of the FN
Acquisition in October 1994 to $13.6 billion at September 30, 1996 after
giving effect to the Cal Fed Acquisition. Management believes that these
acquisitions will significantly increase the Bank's presence on the West
Coast, providing additional economies of scale and diversity of operations
within its target California markets.
With the consummation of the Branch Sales, First Nationwide has
consolidated its branch system to California, Texas and Florida. Since the FN
Acquisition in 1994, the Bank's retail deposits outside California will have
decreased from $6.9 billion to $2.2 billion at September 30, 1996 after
giving effect to the Cal Fed Acquisition. As a result of the Branch Sales,
the Bank expects to reduce certain operational costs inherent in its widely
dispersed branch network. The Bank will continue to explore selective
opportunities to expand its California retail branch network.
Mortgage Banking
The Bank, through FNMC, has significantly expanded its mortgage banking
operations and enhanced efficiency. In February 1995, First Nationwide
purchased a larger and more efficient mortgage loan servicing facility
located in Frederick, Maryland as part of the Maryland Acquisition.
Subsequently, all of FNMC's mortgage servicing has been consolidated in
Frederick, Maryland, and the Sacramento, California servicing facility has
been closed. FNMC acquired additional mortgage servicing from LMUSA in the
LMUSA 1995 Purchase during the fourth quarter of 1995 and on January 31, 1996
in the LMUSA 1996 Purchase. The management of First Nationwide estimates that
at September 30, 1996, the existing loan servicing portfolio of FNMC
(excluding loans serviced for First Nationwide) aggregated approximately
$42.7 billion. The Maryland Acquisition and the LMUSA Purchases will provide
the Bank with the opportunity to increase its noninterest income through fees
generated from its mortgage servicing operations. First Nationwide's excess
servicing capacity and existing servicing expertise enabled it to accommodate
the loan servicing portfolios acquired in these transactions without the need
for significant additional investment. Since the FN Acquisition, the Bank's
mortgage servicing portfolio will have increased from $6.7 billion to $46.2
billion at September 30, 1996 after giving effect to the Cal Fed Acquisition.
The Bank intends to increase its origination of residential loans through
enhanced focus on existing distribution channels, principally correspondent
origination and wholesale acquisitions. The LMUSA 1995 Purchase included the
acquisition of a correspondent lending operation of one of the largest
originators of Government National Mortgage Association ("GNMA") loans in the
United States. In order to minimize the exposure to market interest rate
fluctuations typically associated with long-term fixed rate lending, the Bank
intends to continue to retain in its portfolio the majority of its ARMs,
while selling most of its fixed rate mortgage loans.
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<PAGE>
The Bank intends to continue to retain servicing on loans that it sells.
The number of loans serviced by others and the number of participation loans
are expected to be reduced by cancelling contracts or selling assets
following a cost-benefit analysis. In addition, the Bank intends to continue
to evaluate opportunities to increase its servicing portfolio through
purchases.
The Bank intends to make its loan portfolio more liquid and marketable by
consolidating participation loans and modifying some existing loans in order
to create a standard product. In addition, the Bank intends to increase
front-end loan production fees on loans originated through the retail branch
system.
Protecting Credit Quality
The Bank will continue to originate single-family residential loans and
consumer loans in accordance with stringent underwriting standards. The
management of the Bank expects to continue its participation in affordable
housing programs which extend loans to multi-family projects. In addition,
beginning in 1997 management of the Bank intends to purchase and/or originate
a limited volume of loans secured by multi-family and commercial real estate.
When evaluating acquisition opportunities, the Bank considers the quality
of assets to be acquired along with the strategic location of the branches
and characteristics of the deposit base. First Nationwide has declined to bid
on potential acquisitions where its due diligence investigation raised
concerns about asset quality that could not be mitigated.
First Nationwide's sizeable portfolio of multi-family and commercial real
estate loans increased 31% as a result of the SFFed Acquisition. Management
will continue to actively review this portfolio of seasoned commercial real
estate loans to determine when credit action is necessary. Credit action also
included the sale of eligible loans acquired in the FN Acquisition to Granite
under the Put Agreement. See "--Other Activities--Put Agreement."
The Bank continuously manages its credit risk by assessing the current and
estimated future performance of the real estate markets in which it operates.
The Bank continues to place a high degree of emphasis on the management of
its asset portfolio. The Bank has a comprehensive process for classifying
assets, and asset reviews are performed on a periodic basis. The Bank's asset
portfolio is stratified based on geographic and collateral type
concentrations and delinquency trends. The objective of the review process is
to identify significant trends and determine the levels of loss exposure to
the Bank that would require increases to specific and general valuation
allowances.
Operating Efficiency
First Nationwide has implemented programs to expand its customer base,
increase transaction account volumes and generally enhance the efficiency of
its operations. A bank-wide cost reduction project resulted in the
consolidation of certain administrative and managerial functions and other
measures to be implemented by the end of 1996.
First Nationwide has improved its efficiency ratio from approximately
62.2% on an annualized basis during the fourth quarter of 1994 to
approximately 53.8% on an annualized basis (excluding non-recurring gains and
charges and certain incentive plan accruals) during the third quarter of
1996. The efficiency ratio represents the ratio of noninterest expense to net
interest income and noninterest income. Management anticipates that the Cal
Fed Acquisition will enable the Bank to enhance the value of its franchise
and further improve its operating efficiency. By concentrating its operations
in the West Coast region, the Bank has increased its presence and enhanced
its ability to attract and retain retail customers in its largest market. The
Bank expects to achieve increased efficiency in its combined institution
through the consolidation or elimination of duplicative back office
operations and administrative and management functions, a process it began to
implement immediately upon the closing of the SFFed Acquisition. The Bank
presently estimates that it will save approximately $74 million in
noninterest expense during the first twelve months of operations following
the Cal Fed Acquisition as compared to operating Cal Fed on a stand-alone
basis and approximately $40 million in annual noninterest expense as compared
to operating SFFed on a stand-alone basis. Management has developed a
rationalization plan that was put into effect upon closing the Cal Fed
Acquisition. In connection with the SFFed and the Home Federal Acquisitions,
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First Nationwide capitalized acquisition costs of approximately $8.8 million
and $3.5 million, respectively. The Bank expects to capitalize acquisition
costs of approximately $110 million with respect to Cal Fed Acquisition. The
Branch Sales have also improved the efficiencies of First Nationwide's retail
operations by reducing the need for multi-state back office support and by
allowing First Nationwide to concentrate its marketing activities in an area
in which First Nationwide has a larger market presence.
Service to Community
The needs of the communities in which the Bank is located will also be met
through the Bank's Community Reinvestment Act ("CRA") program. The Bank
continues to be committed to the needs of its communities through its CRA
program. First Nationwide received an "outstanding" rating in its most recent
CRA exam completed in 1995.
The implementation of the preceding strategies is subject to numerous
contingencies beyond management's control. These contingencies include
general and regional economic conditions, competition and changes in
regulation and interest rates. Accordingly, no assurance can be given that
any of the Bank's strategies will prove to be effective or that the Bank's
goals will be achieved.
HOLDINGS
BACKGROUND
First Nationwide was organized as First Gibraltar in December 1988 to
acquire substantially all of the assets and certain liabilities of the Texas
Closed Banks in a federally assisted transaction. The Texas Closed Banks were
purchased effective December 28, 1988 pursuant to five substantially similar
acquisition agreements and the Assistance Agreement. In January 1992, certain
provisions of the Assistance Agreement were renegotiated and amended or
modified. In connection with such modification, First Nationwide accrued the
present value of the estimated liability at December 31, 1992 to the FSLIC/RF
for the reimbursement by First Nationwide to the FSLIC/RF in an amount equal
to 10% of the gross amount of assistance received by First Nationwide from
the FSLIC/RF and a fee payable by the FSLIC/RF to First Nationwide for the
disposition of a Covered Asset at a price in excess of 50% of such asset's
original book value ("Shared Gains") over the life of the Assistance
Agreement, resulting in a $60.1 million charge to operations in 1992. See
"--Other Activities--The Assistance Agreement."
On December 31, 1992, First Gibraltar sold or otherwise transferred a
substantial portion of its business operations in Oklahoma, consisting of
approximately $3 million of loans and 27 branches with $809 million in
deposits in the First Gibraltar Oklahoma Sale. A gain of $19 million was
recorded in connection with this sale.
On February 1, 1993, First Gibraltar sold to BankAmerica certain assets,
liabilities and substantially all of the branch operations located in Texas
consisting of approximately $829 million of loans and 130 branches with
approximately $6.9 billion in deposits in the First Gibraltar Texas Sale. A
gain of $141 million was recorded in connection with this sale. In
anticipation of the First Gibraltar Texas Sale, management sold long-term
interest-earning assets, primarily loans and mortgage-backed securities,
based on BankAmerica's intention to acquire primarily shorter-term assets. As
a result, First Gibraltar recognized gains on the sale of interest-earning
assets totalling $203 million during the year ended December 31, 1992.
Concurrently with the First Gibraltar Texas Sale, First Nationwide changed
its name to First Madison.
Following the First Gibraltar Texas Sale, and through September 1994,
First Madison's principal business was the funding of the Covered Assets and
the performance of its obligations under the Assistance Agreement. Subsequent
to the First Gibraltar Texas Sale, First Nationwide also managed four retail
branches in Texas and supplemented its retail deposit base with wholesale
funds from Brokered Deposits and FHLB advances. In June 1995, the FDIC, as
manager for the FSLIC/RF, exercised its right under the Assistance Agreement
to purchase substantially all of the remaining Covered Assets as of June 1,
1995 at the fair market value of such assets and further purchased additional
assets from the remaining Covered Asset portfolio in September 1995. Any
losses sustained by First Nationwide as a result of the
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<PAGE>
FDIC Purchase have been reimbursed under the Capital Loss Coverage provision
of the Assistance Agreement except for $39 million which the FDIC elected to
treat as a Covered Asset. Proceeds from this transaction were reinvested in
the normal course of business. On August 19, 1996, First Nationwide and the
FDIC executed an agreement which resulted in the termination of the
Assistance Agreement. As a result of the agreement, the FDIC paid First
Nationwide the Covered Asset balance of $39 million. See "Other
Activities--The Assistance Agreement."
From August 1991 through March 31, 1993, First Nationwide conducted most
of its mortgage banking operations through FGMH. Effective July 1, 1992, FGMH
acquired all of the outstanding stock of the mortgage banking company Troy
and Nichols, Inc. of Monroe, Louisiana, with a servicing portfolio of 129,000
loans totalling approximately $5.9 billion. This transaction was accounted
for under the purchase method of accounting. On March 31, 1993, the stock of
FGMH was distributed by First Nationwide to its then immediate parent. FGMH
was subsequently sold during 1993 for a gain of approximately $95 million.
On April 14, 1994, First Nationwide entered into the Asset Purchase
Agreement with Old FNB. On October 3, 1994, effective immediately after the
close of business on September 30, 1994, First Nationwide purchased the FNB
Acquired Business in the FN Acquisition for $726.5 million. Effective on
October 1, 1994, First Nationwide changed its name from "First Madison Bank,
FSB" to "First Nationwide Bank, A Federal Savings Bank." On October 7, 1994,
First Nationwide sold the FNB Acquired Business' branch network located in
Illinois consisting of 26 branches with approximately $1.2 billion in
deposits. The $89 million deposit premium received by First Nationwide was
treated as a reduction of intangible assets related to the FN Acquisition.
First Nationwide financed the FN Acquisition and paid related fees and
expenses with: (i) a capital contribution by Holdings funded with the net
proceeds of (a) the issuance of the Holdings Senior Notes and (b) the
issuance of its class C common stock (all of which was redeemed on June 3,
1996), (ii) the net proceeds from the issuance of the 11 1/2% Bank Preferred
Stock and (iii) existing cash and proceeds from securities sold under
agreements to repurchase. See "Certain Transactions."
In December 1994, First Nationwide's wholly owned mortgage bank operating
subsidiary, FNMC, entered into a series of agreements with the Resolution
Trust Corporation as conservator for StanFed to acquire certain of StanFed's
mortgage servicing assets and assume certain of StanFed's mortgage servicing
liabilities for approximately $178 million in the Maryland Acquisition. As a
result of the Maryland Acquisition, FNMC acquired a 1-4 unit residential
mortgage loan servicing portfolio of approximately $11.4 billion (including a
subservicing portfolio of $1.8 billion) and certain other assets and
liabilities. The transaction was consummated on February 28, 1995. In
connection with the Maryland Acquisition, FNMC has moved its mortgage
servicing operations to Maryland from its former location in Sacramento,
California. Costs totalling $5.7 million associated with such consolidation
are included in noninterest expense in Holdings' consolidated statement of
operations for the year ended December 31, 1995.
In April 1995, First Nationwide closed substantially all of its retail
mortgage loan production offices. Costs associated with such closures of
approximately $2.1 million are included in noninterest expense in Holdings'
consolidated statement of operations for the year ended December 31, 1995.
In April 1995, First Nationwide consummated the Tiburon Purchase in which
it acquired approximately $13 million in deposits located in Tiburon,
California from East-West Federal Bank, a federal savings bank. In August
1995, First Nationwide consummated the ITT Purchase in which it acquired
three retail branches located in Orange County, California with deposit
accounts of approximately $356 million from ITT Federal Bank, fsb. On
December 8, 1995, First Nationwide consummated the Sonoma Purchase in which
it acquired four retail branches located in Sonoma County, California with
deposit accounts of approximately $144 million from Citizens Federal Bank, a
Federal Savings Bank. The weighted average deposit premium paid in connection
with the Branch Purchases was 3.78%.
On October 2, 1995, FNMC purchased in the LMUSA 1995 Purchase from LMUSA a
loan servicing portfolio of approximately $11.1 billion (including a
subservicing portfolio of $3.1 billion), a master
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<PAGE>
servicing portfolio of $2.9 billion and other assets, principally existing
loans and loan production operations of LMUSA, for $100 million, payable in
installments, and the assumption of certain indebtedness relating to the
acquired loan portfolio.
On January 31, 1996, FNMC purchased in the LMUSA 1996 Purchase LMUSA's
remaining $14.1 billion loan servicing portfolio (including a subservicing
portfolio of $2.4 billion), a master servicing portfolio of $2.7 billion,
$5.9 million in foreclosed real estate, $46.8 million in net other servicing
receivables, $2.6 million in mortgage loans, and $6.2 million in net other
assets for a purchase price of approximately $160.0 million payable in
installments. The initial installment of $49.8 million was paid with existing
cash.
On February 1, 1996, First Nationwide consummated the SFFed Acquisition
pursuant to which First Nationwide acquired SFFed and its wholly owned
federal savings association subsidiary, San Francisco Federal. The aggregate
consideration paid in the SFFed Acquisition was approximately $264 million.
Following completion of the SFFed Acquisition, SFFed was liquidated and San
Francisco Federal was merged into First Nationwide. See "Strategic
Acquisitions and Dispositions--FN and Other Acquisitions--The SFFed
Acquisition."
On June 1, 1996, First Nationwide consummated the Home Federal Acquisition
pursuant to which First Nationwide acquired HFFC and its wholly owned
federally chartered savings association subsidiary, Home Federal. The
aggregate consideration paid in connection with the Home Federal Acquisition
was approximately $67.8 million. See "Strategic Acquisitions and
Dispositions--FN and Other Acquisitions--The Home Federal Acquisition."
On July 27, 1996, Holdings entered into the Merger Agreement providing for
the acquisition of Cal Fed and its subsidiary, California Federal, which as
of September 30, 1996 had approximately $14.1 billion in assets and $8.8
billion in deposits and operated 118 branches in California and Nevada. See
"Strategic Acquisitions and Disposition--The Cal Fed Acquisition."
From January through June of 1996, First Nationwide consummated the Branch
Sales in the following transactions:
<TABLE>
<CAPTION>
CARRYING VALUE AT
RESPECTIVE SALE DATE
-----------------------
SALE
CONSUMMATION NUMBER OF PRE-TAX
BRANCH LOCATION DATE BRANCHES SOLD DEPOSITS ASSETS GAIN
- --------------- -------------- --------------- ------------ --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New York 1/12/96 7 $ 416,476 $ 5,997 $ 32,991
Ohio 1/19/96 28 1,392,561 20,480 130,660
New York 2/23/96 3 270,046 1,838 17,027
New York 3/15/96 5 615,572 8,083 48,933
New Jersey 3/22/96 4 501,262 6,396 35,938
New York 3/22/96 11 637,045 9,465 41,286
Michigan 6/28/96 21 799,226 15,060 56,177
--------------- ------------ --------- ---------
Total 79 $4,632,188 $67,319 $363,012
=============== ============ ========= =========
</TABLE>
The Branch Sales resulted in gains of approximately $363.0 million on a
pre-tax basis through September 30, 1996, which represented a premium of
7.96% of the approximately $4.6 billion of deposits sold. The gains from the
Branch Sales were used, as necessary, to augment the Bank's regulatory
capital to maintain its "well capitalized" status after the SFFed
Acquisition.
LENDING ACTIVITIES
During the time between the First Gibraltar Texas Sale and the FN
Acquisition, First Nationwide's lending activity was limited. Loan
originations focused on second lien home improvement lending, with a limited
number of residential mortgage loans made. In addition, First Nationwide made
several loans to address special community housing needs through its CRA
program.
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Since the FN Acquisition, First Nationwide's principal lending activity
has been and the Bank's principal lending activity is expected to be the
origination of adjustable and fixed rate mortgage loans secured by
residential properties. To a lesser extent, the Bank also originates consumer
loans consisting principally of adjustable rate home equity lines of credit.
The current commercial lending activity of the Bank has been limited to
restructuring and refinancing existing portfolio loans, and multi-family
loans originated under its affordable housing program. The Bank also
participates in a number of other affordable housing programs and
initiatives.
The Bank's residential loan origination activities are conducted by FNMC.
Throughout this Prospectus, references to the Bank and its residential loan
origination servicing activities relate to functions performed by FNMC. In
April 1995, FNMC concluded that the costs of operating retail offices
outweighed the benefits and, accordingly, closed substantially all of its
retail mortgage production offices. Residential loans continue to be
originated through FNMC's wholesale origination offices (wherein loans are
purchased from independent loan brokers) and the Bank's retail branches. FNMC
originates ARMs on single-family residential properties, which in the case of
ARMs originated prior to September 30, 1995, were generally held for
investment, and fixed rate loans, which are generally held for sale to the
secondary mortgage market. In the fourth quarter of 1995, however, all of the
ARMs originated were sold in the secondary market in anticipation of the
SFFed Acquisition. During the nine months ended September 30, 1996, most of
the fixed and variable rate real estate loans originated were sold in the
secondary market to provide funds for the acquisition and divestiture
activity occurring during the period. On October 2, 1995, FNMC acquired the
correspondent loan purchase operation of LMUSA as well as contracts to
administer various housing bond and other private mortgage lending programs.
The Bank generates consumer loan applications at its retail branches. In
addition, the Bank conducts direct-mail solicitations, principally of its
existing customers, for both secured and, to a much lesser extent, unsecured
revolving loans. All consumer loan processing, servicing and collection
operations are centralized at a facility in Oak Brook, Illinois.
The following table reflects, for the periods indicated, the net change in
the total principal balances of loans receivable outstanding, excluding loans
held for sale, for Holdings and its subsidiaries:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED --------------------------------
SEPTEMBER 30, 1996 1995 1994 1993
------------------ ---------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans originated:
Loans to purchase existing property .............. $ 188 $ 959 $ 419 $ 27
Loans for construction, including loans in process 8 -- -- 2
------------------ ---------- --------- -------
Total real estate loans originated .............. 196 959 419 29
Other loans originated ............................. 151 224 61 26
Loans purchased .................................... 3,875 751 11,753 2
------------------ ---------- --------- -------
Total loans originated and purchased ............ 4,222 1,934 12,233 57
Loans sold, securitized, repaid and foreclosed:
Loans sold (1) ................................... (63) (380) (155) (300)
Loans securitized ................................ -- (376) (1,339) --
Loan repayments and payoffs ...................... (1,740) (1,922) (387) (539)
Loan foreclosures ................................ (124) (93) (25) (32)
------------------ ---------- --------- -------
Total loans sold, securitized, repaid and
foreclosed ..................................... (1,927) (2,771) (1,906) (871)
Other changes in loans receivable .................. (466) (308) (40) (51)
------------------ ---------- --------- -------
Net increase/(decrease) in loans receivable (2) .. $ 1,829 $(1,145) $10,287 $(865)
================== ========== ========= =======
</TABLE>
- ------------
(1) Includes loans sold pursuant to the Put Agreement totalling $41.9
million, $199.5 million and $188.1 million during the nine months ended
September 30, 1996 and during the years ended December 31, 1995 and 1994,
respectively.
(2) Excludes allowance for loan losses, purchase accounting adjustments,
unearned discounts and loan fees, and loans in process.
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Interest Rates, Terms and Fees
The Bank offers a variety of ARM products with the objectives of (i)
matching, as closely as possible, the interest rate sensitivity of its
interest-earning assets with the interest rate sensitivity of its
interest-bearing liabilities and (ii) maintaining a relatively stable net
interest margin in varied interest rate environments. In response to consumer
demand, and in order to diversify its loan portfolio and help to control its
future interest rate risk, the Bank's loan portfolio includes several ARM
products which vary as to (i) the frequency and amount of periodic interest
rate changes and (ii) the minimum and maximum rates applied to a particular
loan. ARMs have the advantage of reducing an institution's sensitivity to
interest rate fluctuations. However, they also present certain risks not
associated with traditional fixed rate mortgages, such as adjustments in
interest rates which could cause payment increases that some borrowers might
be unable to service.
The Bank attempts to mitigate the credit risks associated with mortgage
lending activities by the use of strict underwriting standards. Substantially
all residential loans originated are underwritten to conform with standards
adopted by the Federal National Mortgage Association ("FNMA"), the Federal
Home Loan Mortgage Corporation ("FHLMC"), GNMA, or other secondary market
investors. Accordingly, the Bank's underwriting standards include LTV ratios
and maximum loan amounts for both fixed rate loans and ARMs that closely
mirror secondary market requirements. Generally, where these standards
differ, specific strong compensating factors are required. With respect to
ARMs, the Bank underwrites the borrower's ability to pay at the maximum
second year payment rate, consistent with secondary market requirements.
In addition to the interest earned on its loans, the Bank charges fees for
loan originations, loan prepayments and modifications, late payments, changes
of property ownership and other similar services. The amount of this fee
income varies with the volume of loan originations, prepayments, the general
economic conditions affecting the portfolio and other competitive factors
affecting the mortgage market.
Generally, late charges are assessed when payments are delinquent. On
loans secured by residential properties, these charges are generally limited
to 4% to 6% of the overdue payment of principal and interest and cannot be
imposed until the payment is more than 15 days late, in accordance with the
contractual terms of the loans and regulatory requirements in effect when the
loans were made.
Composition of Loan Portfolio
The composition of Holdings' loan portfolio, excluding Covered Assets and
loans held for sale, is set forth in the following table, at the dates
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
AT SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
--------------------- -------- -------- ------ ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential ........... $ 6,299 $5,423 $ 5,612 $19 $ 40 $1,891
5+ unit residential ............ 2,293 1,854 2,178 -- -- --
Commercial real estate ......... 2,075 1,716 2,015 10 138 96
Land ........................... 11 9 15 -- -- --
Construction ................... 8 -- 8 -- -- --
--------------------- -------- -------- ------ ------ --------
Total real estate loans ....... 10,686 9,002 9,828 29 178 1,987
Equity-line and consumer loans .. 299 171 492 5 631 866
Non real estate commercial loans 19 2 1 -- 90 136
--------------------- -------- -------- ------ ------ --------
Total loans receivable ......... 11,004 9,175 10,321 34 899 2,989
Less:
Unearned discounts and loan fees 2 (19) -- 3 55 376
Loans in process ............... -- -- -- -- 52 49
Allowance for loan losses ...... 244 210 203 2 14 23
Purchase accounting adjustments,
net .......................... 161 153 151 -- 1 --
--------------------- -------- -------- ------ ------ --------
Loans receivable, net ......... $10,597 $8,831 $ 9,967 $29 $777 $2,541
===================== ======== ======== ====== ====== ========
</TABLE>
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The following table presents First Nationwide's real estate loan portfolio
(excluding loans held for sale and loans subject to the Assistance
Agreement), by collateral type, by interest rate type and by state
concentration at December 31, 1995:
<TABLE>
<CAPTION>
1-4 UNIT 5+ UNIT
RESIDENTIAL RESIDENTIAL
------------------- -------------------
STATE VARIABLE FIXED VARIABLE FIXED
- --------------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
California ..... $2,729 $238 $ 798 $ 91
New York ....... 404 73 215 115
Illinois ....... 160 76 41 7
Florida ........ 102 46 39 33
Ohio ........... 93 83 28 8
New Jersey ..... 115 28 62 9
Hawaii ......... 198 19 -- 1
Washington ..... 78 8 52 8
Colorado ....... 97 53 1 4
Texas .......... 75 48 2 18
Other states(1) 517 183 242 80
---------- ------- ---------- -------
Total ......... $4,568 $855 $1,480 $374
========== ======= ========== =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COMMERCIAL
AND OTHER TOTAL REAL
------------------- ESTATE % OF
STATE VARIABLE FIXED LOANS TOTAL
- --------------- ---------- ------- ----------- ---------
<S> <C> <C> <C> <C>
California ..... $1,128 $141 $5,125 56.93%
New York ....... 48 40 895 9.94
Illinois ....... 40 18 342 3.80
Florida ........ 31 12 263 2.92
Ohio ........... 32 3 247 2.74
New Jersey ..... 8 4 226 2.51
Hawaii ......... 4 -- 222 2.47
Washington ..... 25 1 172 1.91
Colorado ....... -- -- 155 1.72
Texas .......... 1 5 149 1.66
Other states(1) 151 33 1,206 13.40
---------- ------- ------------ --------
Total ......... $1,468 $257 $9,002 100.00%
========== ======= ============ ========
</TABLE>
- ------------
(1) Real estate loans involving property located in 39 states, Puerto Rico
and the District of Columbia; not more than 1.5% of the total amount of
such loans are located in any one state.
The following table summarizes First Nationwide's loan portfolio not
subject to the Assistance Agreement, excluding loans held for sale, at
December 31, 1995, based upon various contractually scheduled principal
payments allocated to the indicated maturity categories. This table does not
reflect expected prepayments.
<TABLE>
<CAPTION>
DUE OVER ONE
WITHIN BUT WITHIN OVER
ONE YEAR FIVE YEARS FIVE YEARS TOTAL
---------- ------------ ------------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Real estate loans:
1-4 unit residential:
Fixed rate ................. $ 9 $ 57 $ 789 $ 855
Variable rate .............. 4 25 4,539 4,568
5+ unit residential:
Fixed rate ................. 25 129 220 374
Variable rate .............. 97 515 868 1,480
Commercial and other
Fixed rate ................. 21 81 155 257
Variable rate .............. 121 473 874 1,468
---------- ------------ ------------ -------
Total ..................... 277 1,280 7,445 9,002
Commercial and consumer loans:
Fixed rate ................. 19 10 5 34
Variable rate .............. 40 4 95 139
---------- ------------ ------------ -------
Total ..................... 59 14 100 173
---------- ------------ ------------ -------
Total loans receivable .... $336 $1,294 $7,545 $9,175
========== ============ ============ =======
</TABLE>
Residential Lending
The Bank currently offers three primary residential ARM programs, and a
variety of fixed rate programs with maturities ranging from 15 to 30 years.
Adjustable rate programs include loans which: (i) provide for monthly
interest rate adjustments, after the third or sixth month from inception of
the loan, based on the FHLB 11th District Cost of Funds, (ii) provide for
annual rate adjustments based upon the weekly average yield on U.S. Treasury
Securities adjusted to a constant maturity of one year, or (iii)
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<PAGE>
provide for semi-annual rate adjustments based on the weekly average of the
secondary market rates on six-month negotiable certificates of deposit. Some
ARMs offer an option to convert to a fixed rate after the first year through
the fifth year of the loan term. A variety of features are incorporated into
ARM loans to protect borrowers from unlimited adjustments in interest rates
and payments. All ARMs have lifetime caps which limit the amount of rate
increases over the life of the loan. ARMs whose rates adjust annually have
rate caps which limit the amount that rates can change to two percentage
points per year. Loans which adjust monthly based upon the FHLB 11th District
Cost of Funds limit payment changes to no more than 7.5% of the payment
amount per year. This may lead to monthly payments which are less than the
amount necessary to amortize the loan to maturity at the interest rate in
effect for any particular month. In the event that the monthly payment is not
sufficient to pay interest accruing on the loan during the month, this
deficiency is added to the loan's principal balance (i.e., negative
amortization). The total outstanding principal balance for a particular loan
is not allowed to exceed 110% of the original loan amount as a result of
negative amortization. If the loan reaches 110% of the original loan amount,
the loan payment is recalculated to the payment sufficient to repay the
unpaid principal balance in full at the maturity date. As of September 30,
1996, First Nationwide's capitalized interest relative to such residential
loans was approximately $3.4 million. This amount represents approximately
.16% of the approximately $2.2 billion of residential ARMs that have the
potential to experience negative amortization. The Bank also originates 15
and 30 year fully amortizing fixed rate residential loans under a variety of
fixed rate programs, primarily for resale in the secondary mortgage market.
When loans are sold, FNMC normally retains the servicing of the loan. See
"--Mortgage Banking Operations" for a further discussion of these activities.
Multi-family, Commercial and Other Real Estate Lending
While the Bank currently originates multi-family, commercial and other
real estate loans only as they relate to affordable housing programs, the
Bank's loan portfolio includes loans secured by multi-family residential,
commercial, industrial and unimproved real property. Such loans are
principally acquired through acquisitions. The Bank's variable rate
multi-family and commercial real estate loans have a maximum amortized loan
term of 30 years with some loans having balloon payments due in one to
fifteen years. ARMs primarily adjust with the FHLB 11th District Cost of
Funds or the six-month Treasury Bill indices with a monthly or semi-annual
rate adjustment. The terms and characteristics of the ARMs originated for
multi-family and commercial real estate lending purposes are similar to those
for residential lending. As such, many of the same risks and protections
related to residential borrowers are present in the multi-family and
commercial real estate portfolios, including the potential for negative
amortization. Negative amortization for multi-family and commercial real
estate loans is allowed to increase the outstanding principal balance to 110%
of the original loan amount. If the loan reaches 110% of the original loan
amount, all future interest rate increases will increase the monthly payment
to amortize the loan over the remaining life of the loan. At September 30,
1996, First Nationwide's capitalized interest relative to such loans was
approximately $1.5 million, which represents approximately 0.1% of the $1.7
billion of multi-family and commercial real estate loans that have the
potential to experience negative amortization.
Real estate loans secured by multi-family and commercial property
represent a significant portion of the Bank's portfolio. The management of
the Bank periodically reviews the multi-family and commercial real estate
loan portfolio. At September 30, 1996, First Nationwide's multi-family and
commercial real estate loan portfolio totalled $4.4 billion. Included in
First Nationwide's multi-family and commercial real estate loan portfolio at
September 30, 1996 are $29.9 million of loans with credit enhancement wherein
the lead participant subordinated its minority interest in a pool of loans to
First Nationwide's interest in the corresponding pool of loans. No loans are
subject to be repurchased by the seller in the event such loans become 90
days delinquent.
First Nationwide's potential for loss on the multi-family and commercial
loan portfolio acquired from Old FNB and, to a lesser extent, the residential
mortgage loan portfolio acquired from Old FNB, was mitigated by the Put
Agreement entered into by First Nationwide with Granite, an affiliate of Old
FNB, in connection with the FN Acquisition. At September 30, 1996, $429.5
million had been put to Granite,
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<PAGE>
leaving a remaining balance available under the Put Agreement to be put of
$70.5 million. First Nationwide fully utilized the remaining balance on
December 5, 1996. See "--Other Activities--The Put Agreement" for a
description of the Put Agreement.
In addition to managing its own asset portfolio, at September 30, 1996 and
December 31, 1995 First Nationwide and its wholly owned subsidiary, FGB
Realty, managed non-performing loan (principally multi-family and commercial
real estate) and asset portfolios totalling $1.1 billion and $1.3 billion,
respectively, for investors. Revenues related to such activities are
reflected as management fees in Holdings' consolidated statements of
operations. A portion of this servicing was acquired from Old FNB which had
sold loans with certain recourse provisions. The recourse liability was
assumed by First Nationwide in the FN Acquisition and at September 30, 1996,
the balance of multi-family and commercial real estate loans sold with
recourse totalled $163 million.
Consumer Lending
The Bank's consumer loan originations are primarily concentrated in home
equity lending. At September 30, 1996, First Nationwide's home equity
portfolio totaled $238 million, representing 80% of the total consumer loan
portfolio of $299 million. The portfolio is geographically dispersed and
correlates closely to retail deposit branch distribution.
The Bank offers an adjustable, prime interest rate-based home equity line
of credit on owner-occupied residential properties. In determining the amount
of credit to be extended, all loans secured by the collateral properties are
aggregated and compared to the appraised value of the properties. The Bank's
policy is to extend credit up to a maximum combined LTV ratio of 80%.
Other consumer loan products include: fixed rate home equity installment
loans; adjustable prime rate-based home equity loans, which while secured,
are based on repayment ability and credit history; auto and boat loans;
unsecured lines of credit; overdraft protection; and loans secured by
certificates of deposit.
Loans Held for Sale
The carrying value of First Nationwide loans held for sale portfolio
consisted of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
-------- ------
(IN MILLIONS)
<S> <C> <C>
Single-family residential mortgage loans .. $ 877 $26
Consumer loans, primarily home equity loans 326 --
-------- ------
$1,203 $26
======== ======
</TABLE>
Loans held for sale are carried at the lower of cost or market value. The
significant increase in single family residential mortgage loans held for
sale is attributed to the higher loan production volumes in 1995 compared to
1994. In addition, substantially all ARMs originated in the fourth quarter of
1995 were sold in the secondary market in anticipation of the SFFed
Acquisition. Prior to that time, most ARMs originated were held by First
Nationwide for investment. The consumer loans held for sale generally
represent loans in states where First Nationwide has sold the retail
deposits.
Origination of Residential Loans
The Bank originates residential loans principally through the efforts of
wholesale origination offices where loans are purchased from independent loan
brokers, and, to a lesser degree, staff loan agents. To promote continuity of
customer service, help meet credit needs and to increase opportunities to
sell customer deposit and other financial services offered by the Bank and
its subsidiaries, loan inquiries from retail branch customers and "walk-in"
applicants are encouraged. These inquiries are initially processed by retail
branch office personnel, with support provided by regional lending offices.
The residential loan agents are compensated principally on a commission
basis. Closed mortgage loans are also acquired by FNMC through a
correspondent lending operation acquired from LMUSA on October 2, 1995.
140
<PAGE>
The majority of real estate loans originated by First Nationwide have LTV
ratios of 80% or less in accordance with its underwriting criteria. First
Nationwide has originated loans with LTV ratios of up to 95%, with the
portion of the loan exceeding 80% guaranteed by private mortgage insurance,
the premiums of which are paid monthly by the borrower. Certain exceptions to
this guideline have been made for low and moderate income borrowers. However,
the principal balance of loans subject to such exceptions is not significant
in terms of the Bank's total loan originations. The value of the property
offered as security for a mortgage loan is determined by a professionally
qualified appraiser approved by the Bank, who may or may not be an employee
of the Bank. As further security for its loan, at the time of loan funding,
the Bank requires title insurance and fire and casualty insurance on all
loans secured by liens on real property. The Bank also requires flood
insurance on any loan secured by real property if the property lies within a
U.S. Housing and Urban Development Department ("HUD")-designated flood hazard
area. The Bank does not originate loans secured by properties located in
HUD-designated flood hazard areas in communities that do not participate in
the National Flood Insurance Program.
Mortgage Banking Operations
Mortgage banking operations have been an integral part of the business
activities of First Nationwide since the FN Acquisition. FNMC was
incorporated in June 1994 as a wholly owned operating subsidiary of the Bank.
In the FN Acquisition, First Nationwide acquired certain of Old FNB's
residential mortgage operations, which were transferred to FNMC in exchange
for a combination of debt and equity held by the Bank.
Mortgage banking activities allow the generation of fee income without the
associated capital retention requirements attributable to traditional real
estate lending activities. Generally, the Bank originates fixed rate
residential loans for sale in the secondary mortgage market. ARMs originated
prior to September 30, 1995 were generally held by First Nationwide for
investment. In the fourth quarter of 1995, however, all of the ARMs
originated were sold or held for sale in the secondary market in anticipation
of the SFFed Acquisition. During the nine months ended September 30, 1996,
most of the fixed and variable rate real estate loans originated were sold in
the secondary market to provide funds for the acquisition and divestiture
activity occurring during the period. The Bank employs forward sale hedging
techniques to minimize the interest rate and pricing risks associated with
the origination and sale of fixed rate loans.
At the time of origination, management identifies residential loans that
are expected to be sold in the foreseeable future. At September 30, 1996,
management had identified $710.2 million of single-family residential real
estate loans as held for sale. These loans have been classified as assets
held for sale in the consolidated statement of financial condition at
September 30, 1996 and are recorded at the lower of aggregate amortized cost
or market value. At September 30, 1996, First Nationwide had forward
commitments to sell loans totalling $529 million. In addition, $144.4 million
of the loans held for sale were funded under pre-existing purchase
commitments to various housing bond programs and the California Public
Employees Retirement System.
The servicing portfolio of FNMC (excluding loans serviced for First
Nationwide) approximated $42.7 billion and 718,945 loans as of September 30,
1996. Substantially all of FNMC's loans are serviced in a 230,000 square-foot
facility in Frederick, Maryland acquired from StanFed.
Since the FN Acquisition, First Nationwide has sold fixed rate and
adjustable rate whole loans secured by residential properties to FNMA, FHLMC,
and private investors. Mortgage loan sales totalled $3.8 billion and $1.4
billion during the nine months ended September 30, 1996 and the year ended
December 31, 1995, respectively.
Old FNB occasionally sold loans under recourse provisions; such liability
was assumed by the Bank in the FN Acquisition. As of September 30, 1996, the
balance of loans sold with certain recourse provisions was $367.7 million.
The Bank, through FNMC, has generally retained the right to service the
loans it has sold. FNMC collects from the borrower payments of principal and
interest and, after retaining a servicing fee, remits the balance to the
investors.
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<PAGE>
In accounting for its mortgage loan sales prior to April 1, 1995, a gain
or loss was recognized based on the sum of three components: (i) the
difference between the cash proceeds of the loan sales and First Nationwide's
book value of the loans; (ii) the "excess servicing," if any; less (iii)
provisions for estimated losses to be incurred from limited recourse
obligations, if any. Excess servicing results in a capitalized asset that
reflects the discounted present value of any difference between the interest
rate received from the borrower and the interest rate passed through to the
purchaser of the loan, less a "normal servicing fee" (dependent upon loan
type), which is retained as compensation for future servicing costs. The
amount of excess servicing recognized in any particular loan sale depends
significantly upon three factors upon which estimates or assumptions must be
employed: (i) the estimated life of the loans, (ii) the discount rate used in
calculating discounted present value and (iii) the "normal servicing fee."
The excess servicing asset is amortized as an offset to servicing fee
income using the interest method adjusted for actual prepayment experience
over the estimated remaining servicing lives of the loans sold. The Bank
monitors the prepayments on the loans serviced for investors and reduces the
balance of the asset if the actual prepayments are in excess of the estimated
prepayment trends used to record the original asset. The Bank's assumptions
relative to prepayment speed, discount and servicing fee rates are revised
periodically to reflect current market conditions and regulatory
requirements.
Effective April 1, 1995, Holdings adopted SFAS No. 122. SFAS No. 122
requires that, when a mortgage loan is sold and servicing rights are
retained, a portion of the cost of originating a mortgage loan be allocated
to the mortgage servicing rights based on its fair market value. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General--Accounting Changes" for a description of SFAS No. 122.
At December 31, 1995, FNMC owned rights to service approximately $27.1
billion of whole loans, participation interests and mortgage-backed
securities for others. These loans had an average balance of $52,791, a
weighted average coupon rate of 8.58%, a weighted average maturity of 262
months and a service fee spread of .49%. The greater than 30 day delinquency
rate on these loans at December 31, 1995 was 3.82%. First Nationwide
subserviced for others approximately $3.3 billion of whole loans,
participation interests and mortgage-backed securities. These loans had an
average balance of $60,709, a weighted average coupon rate of 8.36% and a
weighted average remaining maturity of 286 months. The servicing fee
collected on these loans is passed through to the primary servicer with First
Nationwide retaining a flat subservice fee that is netted out of the monthly
remittance. Although First Nationwide has no risk for loans subserviced, the
greater than 30 day delinquency rate on these loans is 7.46%. For the year
ended December 31, 1995, gross revenue for servicing activities totalled
$94.3 million.
In the fourth quarter of 1996, First Nationwide initiated a program to
hedge the reduction in value of its servicing rights in a steeply declining
interest rate environment. The hedge will consist primarily of principal-only
swaps and floors on a 10 year Treasury note rate.
On October 2, 1995, FNMC purchased the stock of Lomas Mortgage Services
Inc. (now known as FNMC Mortgage Services, Inc.), in the LMUSA 1995 Purchase,
which is a 33% owner of Lomas Mortgage Partnership L.P. ("LMP") and its
managing general partner. LMP owns the mortgage servicing rights to
approximately $3.1 billion of loans serviced for FNMA, GNMA, FHLMC and
private investors. LMP's investment in such servicing rights and its other
assets are partially funded by independent bank lines of credit totalling
approximately $27 million. LMP has no employees or physical operations but
discharges its obligations under its servicing contracts under a subservicing
contract with FNMC. See "--General--Background."
NON-PERFORMING ASSETS
First Nationwide's exposure to losses relative to certain assets acquired
in the FN Acquisition that became non-performing or otherwise problematic
prior to November 30, 1996 were mitigated to the extent First Nationwide was
able to put such loans to Granite under the Put Agreement. See "--Other
Activities--The Put Agreement."
Classification of Assets
Savings institutions are required to classify their assets on a regular
basis, establish prudent allowances for loan losses and make quarterly
reports of troubled asset classification to the OTS. Assets
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<PAGE>
must be classified as "pass," "special mention," "substandard," "doubtful" or
"loss." An asset is generally designated as "special mention" if potential
weaknesses are identified that, if left uncorrected, would result in
deterioration of the repayment prospects for the asset. An asset, or a
portion thereof, is generally classified as "substandard" if it possesses a
well-defined weakness which could jeopardize the timely liquidation of the
asset or realization on the collateral at the asset's book value. Thus, these
assets are characterized by the possibility that the institution will sustain
some loss if the deficiencies are not corrected. An asset, or portion
thereof, is classified as "doubtful" if identified weaknesses make
collectibility or liquidation in full highly questionable and improbable. An
asset, or a portion thereof, that is considered to be uncollectible is
classified "loss." It should be noted that the Bank does not maintain assets
in a loss classification category; rather, the carrying value of all troubled
assets is reduced by any amount considered to be uncollectible. The
appropriate OTS Regional Director has the authority to approve, disapprove or
modify any asset classification or any amount established as an allowance
pursuant to such classification. Savings institutions must maintain adequate
general valuation allowances in accordance with generally accepted accounting
principles and federal regulations for assets classified as "substandard" or
"doubtful" and either immediately write off assets classified as "loss" or
establish specific valuation allowances equal to the amounts classified as
"loss."
The Bank has a comprehensive process for classifying assets, and asset
reviews are performed on a periodic basis. Such reviews are prioritized
according to an asset's risk characteristics, such as loan size, collateral
type and/or location, and potential loan performance problems. The objective
of the review process is to identify significant trends and determine the
levels of loss exposure to the Bank that would require increases to specific
and general valuation allowances.
Loan Portfolio Risk Elements
When a borrower fails to make a contractually required payment on a loan,
the loan is characterized as delinquent. In most cases delinquencies are
cured promptly; however, foreclosure proceedings, and, in some cases, workout
proceedings, are generally commenced if the delinquency is not cured. The
procedures for foreclosure actions vary from state to state, but generally if
the loan is not reinstated within certain periods specified by statute, the
property securing the loan can be acquired through foreclosure by the lender.
While deficiency judgments against the borrower are available in some of the
states in which the Bank originates loans, the value of the underlying
collateral property is usually the principal source of recovery available to
satisfy the loan balance.
In general, loans are placed on nonaccrual status after being
contractually delinquent for more than 90 days. When a loan is placed on
nonaccrual status, all interest previously accrued but not received is
reversed. The Bank may modify or restructure a loan as a result of a
borrower's inability to service the obligation under the original terms of
the loan agreement.
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<PAGE>
The following table indicates the carrying value of First Nationwide's
loans, excluding loans subject to the Assistance Agreement, which have been
placed on nonaccrual status, as well as the carrying value of foreclosed real
estate, at the dates indicated:
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
SEPTEMBER 30, ------------------------------------------------
1996 1995 1994 1993 1992 1991
--------------- ------- ------- ----------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Nonaccrual loans:
Real estate:
1-4 unit residential .......... $ 134 $ 136 $ 133 $ 2 $ 7 $ 52
5+ unit residential ........... 19 23 24 9 -- --
Commercial and other .......... 13 9 11 -- -- --
Land .......................... -- -- 7 -- -- --
Construction .................. -- -- 2 -- -- --
--------------- ------- ------- ----------- ------- -------
Total real estate ............ 166 168 177 11 7 52
Equity-line and consumer ...... 3 3 4 -- 4 2
--------------- ------- ------- ----------- ------- -------
Total nonaccrual loans ...... 169 171 181 11 11 54
Foreclosed real estate, net .... 59 49 37 -- -- --
--------------- ------- ------- ----------- ------- -------
Total non-performing assets . $ 228 (a) $ 220 $ 218 $ 11 $ 11 $ 54
=============== ======= ======= =========== ======= =======
Non-performing loans as a
percentage of First
Nationwide's total loans ....... 1.50% 1.71% 1.81% 37.61%(b) 1.42% 2.12%
=============== ======= ======= =========== ======= =======
Non-performing assets as a
percentage of First
Nationwide's total assets ..... 1.36% 1.50% 1.49% .98% .12% .53%
=============== ======= ======= =========== ======= =======
</TABLE>
- ------------
(a) Of the $228 million in total non-performing assets, approximately $17.3
million were eligible to be sold to Granite pursuant to the Put
Agreement at September 30, 1996. Includes $74.5 million of
non-performing assets acquired in the SFFed and Home Federal
Acquisitions and in the LMUSA 1996 Purchase.
(b) The significant increase in the percentage of non-performing loans to
total loans at December 31, 1993 from December 31, 1992 reflects the
decrease in loans receivable from $899 million at December 31, 1992 to
$34 million at December 31, 1993. The level of total non-performing
assets over that time period remained relatively constant.
Interest income of $3.5 million was received and recognized by First
Nationwide for nonaccrual loans during the nine months ended September 30,
1996, instead of $10.6 million which would have been recognized had the loans
performed in accordance with their original terms. First Nationwide has had
no loans contractually past due 90 days or more on accrual status in the past
five years.
The following table indicates loans classified by First Nationwide as
troubled debt restructurings, net of purchase accounting adjustments, and
excluding loans subject to the Assistance Agreement, at the dates indicated:
<TABLE>
<CAPTION>
AT AT DECEMBER 31,
SEPTEMBER 30, --------------------------------------
1996 1995 1994 1993 1992 1991
--------------- ------ ------ ------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Restructured loans:
1-4 unit residential ..... $ 4 $ 8 $ 19 $-- $-- $--
5+ unit residential ....... 66 147 204 -- -- --
Commercial and other ..... 63 79 110 -- -- --
--------------- ------ ------ ------ ------ ------
Total restructured loans $133 $234 $333 $-- $-- $--
=============== ====== ====== ====== ====== ======
</TABLE>
For the nine months ended September 30, 1996, First Nationwide recognized
interest income of $10.9 million on restructured loans instead of the $11.7
million which would have been recognized had the loans been performing in
accordance with their original terms. There were no non-real estate
restructured loans in any of the past five years.
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<PAGE>
Allowance for Loan Losses
Holdings charges current earnings with a provision for estimated credit
losses on loans receivable to bring the total allowance to a level deemed
appropriate by management. The provision considers both specifically
identified problem loans and credit risks not specifically identified in the
loan portfolio. The allowance for loan losses is based on such factors as the
financial condition of the borrowers, the fair value of the loan collateral,
recourse to guarantors, the estimated net cost of holding and maintaining
properties and collateral prior to the anticipated date of sale, analysis of
delinquency trends, geographic and collateral-type concentrations, past loss
experience, regulatory policies, and other factors related to the
collectibility of the Bank's loan portfolio.
The following table summarizes activity in First Nationwide's allowance
for loan losses during the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -----------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
---------------------- -------- -------- -------- -------- -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period ...... $210 $203 $ 2 $ 15 $ 24 $ 15
Purchases -- SFFed Acquisition ..... 40 -- -- -- -- --
Purchases -- Home Federal
Acquisition ........................ 5 -- -- -- -- --
Purchases -- FN Acquisition ......... -- -- 202 -- -- --
Provision for loan losses ........... 30 37 6 1 16 18
Charge-offs:
1-4 unit residential ............... (36) (28) (4) -- (11) (6)
5+ unit residential and
commercial real estate (a) ........ (4) -- (4) -- -- --
Consumer and other ................. (4) (5) (1) (1) (7) (5)
Non real estate commercial ......... -- -- -- (1) (1) --
---------------------- -------- -------- -------- -------- --------
Total charge-offs ................ (44) (33) (9) (2) (19) (11)
Recoveries .......................... 3 3 2 1 2 2
---------------------- -------- -------- -------- -------- --------
Net charge-offs .................... (41) (30) (7) (1) (17) (9)
---------------------- -------- -------- -------- -------- --------
Allowance for losses assigned to
loans sold ......................... -- -- -- (13) (8) --
---------------------- -------- -------- -------- -------- --------
Balance at end of period ............. $244 $210 $203 $ 2 $ 15 $ 24
====================== ======== ======== ======== ======== ========
</TABLE>
- ------------
(a) Lack of activity in the nine months ended September 30, 1996 and the
year ended December 31, 1995 is principally due to the existence of the
Put Agreement.
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<PAGE>
The following table sets forth the allocation of First Nationwide's
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
--------------------- ------- -------- -------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Specific reserves:
Real estate loans:
1-4 unit residential .............. $ -- $ 1 $ 4 $-- $ 2 $ 1
5+ unit residential ............... 3 -- -- -- -- --
Commercial real estate ............ 5 -- -- -- -- --
---------------------- -------- -------- -------- -------- ------
Total specific reserves ......... 8 1 4 -- 2 1
---------------------- -------- -------- -------- -------- ------
General reserves:
Real estate loans:
1-4 unit residential ............. 119 115 105 2 13 23
5+ unit residential and
commercial real estate .......... 108 85 85 -- -- --
---------------------- -------- -------- -------- -------- ------
Total real estate loans ......... 227 200 190 2 13 23
Equity-line and consumer loans ... 9 9 9 -- -- --
---------------------- -------- -------- -------- -------- ------
Total general reserves .......... 236 209 199 2 13 23
---------------------- -------- -------- -------- -------- ------
Total allowance for loan losses ... $244 $210 $203 $ 2 $15 $24
====================== ======== ======== ======== ======== ======
</TABLE>
The table below provides First Nationwide's ratios of net charge-offs to
outstanding average loan balances for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED -------------------------------------------
SEPTEMBER 30, 1996 1995 1994 1993 1992 1991
------------------ ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
1-4 unit residential ..... 0.46% 0.47% 0.06% 1.26% 1.13% 0.38%
5+ unit residential and
commercial real estate .. .08 -- 0.10 0.19 0.01 --
Consumer and other ......... 1.08 1.00 0.23 0.24 0.94 0.57
Non real estate commercial -- -- -- 1.29 1.06 --
</TABLE>
Impaired Loans
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Holdings--General--Accounting Changes" for a discussion
of SFAS No. 114 and First Nationwide's impaired loans as of September 30, 1996
and December 31, 1995.
INVESTMENT ACTIVITIES
The Bank is required by OTS regulations to maintain a specified minimum
amount of liquid assets which may be invested in specified securities. The
Bank is also permitted to invest in certain other types of securities.
Securities balances (including cash equivalent securities) exceeding minimum
federal requirements are subject to change over time based on the Bank's
asset/liability funding needs and interest rate risk management objectives.
The Bank's liquidity levels take into consideration anticipated future cash
flows and all available sources of credit. Liquidity is maintained at levels
management believes are appropriate to assure future flexibility in meeting
anticipated funding needs including deposit withdrawal requests, loan funding
commitments, and other investment or restructuring requirements.
During 1993 to 1996 the OTS required members of the FHLBS to maintain
eligible liquid assets as defined by federal regulations in an amount equal
to or greater than 5% of average deposits and
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<PAGE>
borrowings due within one year. Under applicable law, this liquidity
requirement may be changed from time to time by the OTS to any amount within
the range of 4% to 10%, and the OTS has the authority to prescribe liquidity
requirements for different classes of savings institutions, which classes may
be determined in accordance with criteria selected by the OTS. First
Nationwide was in compliance with this regulation throughout 1996.
Cash Equivalents
The Bank invests in federal funds sold, securities purchased under
agreements to resell and interest-bearing deposits in other banks from time
to time to help meet the Bank's regulatory liquidity requirements and as
temporary holdings until the funds can be otherwise deployed or invested.
Securities Available for Sale
Holdings adopted SFAS No. 115 effective January 1, 1994. On November 15,
1995, the FASB issued the Special Report which provided all entities an
opportunity to reassess their ability and intent to hold securities to
maturity and allowed a one-time reclassification of securities from
held-to-maturity to available-for-sale without "tainting" the remaining
held-to-maturity securities. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--General--Accounting Changes."
On December 29, 1995, Holdings reclassified $1.5 billion and $231.8 million
in carrying value of mortgage-backed securities and U.S. government and
agency securities, respectively, from the respective held-to-maturity
categories to securities available for sale, resulting in a net after-tax
increase of $22.5 million in stockholders' equity.
The following summarizes the amortized cost and estimated fair value of
First Nationwide's securities available for sale at the dates indicated (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN (LOSS) VALUE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ....... $ 27,034 $34,172 $ -- $34,172 $ 61,206
Mortgage-backed securities:
GNMA ............................... 70,252 539 (442) 97 70,349
FNMA ............................... 542,543 3,629 (7,275) (3,646) 538,897
FHLMC .............................. 658,511 12,998 (540) 12,458 670,969
Collateralized mortgage obligations 382,406 428 (3,050) (2,622) 379,784
Other ............................... 137 4 -- 4 141
U.S. government and agency
obligations ........................ 508,204 1,105 (2,582) (1,477) 506,727
------------ ------------ ------------ ------------ ------------
Total ............................. $2,189,087 $52,875 $(13,889) 38,986 $2,228,073
============ ============ ============ ============
Estimated tax effect ................ (3,899)
------------
Net unrealized holding gain in
stockholders' equity ............. $35,087
============
</TABLE>
147
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN (LOSS) VALUE
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Marketable equity securities ....... $ 34,000 $ 80,068 $ -- $ 80,068 $ 114,068
Mortgage-backed securities:
GNMA ............................... 14,018 906 -- 906 14,924
FNMA ............................... 294,070 5,643 -- 5,643 299,713
FHLMC .............................. 801,393 19,671 (1) 19,670 821,063
Collateralized mortgage obligations 345,699 793 (4,678) (3,885) 341,814
U.S. government and agency
obligations ........................ 231,794 2,768 (69) 2,699 234,493
------------ ------------ ------------ ------------ ------------
Total ............................. $1,720,974 $109,849 $(4,748) 105,101 $1,826,075
============ ============ ============ ============
FDIC portion of unrealized gain on
marketable equity securities ...... (34,534)
Estimated tax effect ................ (7,055)
------------
Net unrealized holding gain in
stockholders' equity ............. $ 63,512
============
DECEMBER 31, 1994
--------------------------------------------------------------------
GROSS GROSS NET
AMORTIZED UNREALIZED UNREALIZED UNREALIZED CARRYING
COST GAINS LOSSES GAIN VALUE
------------ ------------ ------------ ------------ ------------
Marketable equity securities ....... $ 34,000 $ 11,000 $ -- $ 11,000 $ 45,000
============ ============ ============ ============ ============
</TABLE>
At September 30, 1996 and December 31, 1995, mortgage-backed securities
available for sale included securities totalling $53.1 million and $63.4
million, respectively, which resulted from the securitization of certain
qualifying mortgage loans from First Nationwide's loan portfolio. There were
no such securities classified as available for sale at December 31, 1994 or
1993.
At September 30, 1996 and December 31, 1995, First Nationwide's
mortgage-backed securities available for sale included $1.1 billion and $1.0
billion, respectively, of variable-rate securities. No variable-rate
securities were classified as available for sale at December 31, 1994 or
1993.
At December 31, 1995, First Nationwide's marketable equity securities
available for sale represents approximately 25% of the outstanding common
stock of ACS, representing 5% of the voting power, with an original cost
basis of $34 million. Pursuant to the terms of a settlement agreement dated
June 17, 1991 between First Nationwide, ACS, and the FDIC, the FDIC is
entitled to share in a defined portion of the proceeds from the sale of the
stock, which at December 31, 1995, approximated $34.5 million and which was
recorded in other liabilities. On June 28, 1996, First Nationwide sold
2,000,000 shares of ACS stock for gross proceeds totalling $92.3 million from
which it satisfied its full obligation to the FDIC and recognized a pre-tax
gain totalling $40.4 million. The net unrealized gain on the ACS stock, net
of income taxes, reported as a separate component of stockholders' equity at
September 30, 1996 is $30.7 million. At September 30, 1996, ACS stock closed
at $58.75 per share on The Nasdaq Stock Market, resulting in a total value of
$61.2 million for the ACS shares held by First Nationwide. The ACS stock
represented the only marketable equity security classified as available for
sale at September 30, 1996.
The Bank maintains a significant portfolio of mortgage-backed securities
as a means of investing in housing-related mortgage instruments without the
costs associated with originating mortgage loans for portfolio retention and
the credit risk of default which arises in holding a portfolio of loans to
maturity. By investing in mortgage-backed securities, management seeks to
achieve a positive spread over the cost of funds used to purchase these
securities. Mortgage-backed securities available for sale are carried at fair
value, with unrealized gains and losses excluded from earnings and reported
in a separate component of stockholders' equity. Premiums and discounts on
the purchase of mortgage-backed securities are
148
<PAGE>
amortized or accreted as a yield adjustment over the life of the securities
using the interest method, with the amortization or accretion effect of
prepayment being adjusted based on revised estimates of future repayments.
Mortgage-backed securities generally yield less than the loans which
underlie such securities because of their payment guarantees or credit
enhancements which reduce credit risk. In addition, mortgage-backed
securities are more liquid than individual mortgage loans and may be used to
collateralize borrowings. Mortgage-backed securities issued or guaranteed by
FNMA or FHLMC (except interest-only securities or the residual interests in
CMOs) are weighted at no more than 20% for risk-based capital purposes,
compared to a weight of 50% to 100% for residential loans. See
"Regulation--Regulation of Federal Savings Banks."
The following represents the largest privately issued CMOs held by
Holdings at September 30, 1996 (in millions):
AGGREGATE AGGREGATE
CARRYING VALUE MARKET VALUE
-------------- --------------
RESIDENTIAL FUNDING MORTGAGE SECURITIES $69 $68
First Nationwide held privately issued CMOs with an aggregate carrying
value of $240.6 million at September 30, 1996.
At September 30, 1996, the mortgage-backed securities acquired by Holdings
have the highest credit rating from one or more of the national securities
rating agencies. Such credit rating, however, may be subject to revision or
withdrawal at any time by such rating agencies. The mortgage-backed
securities which Holdings purchases and maintains in its portfolio include
certain CMOs. A CMO is a special type of pay-through debt obligation in which
the stream of principal and interest payments on the underlying mortgages or
mortgage-backed securities is used to create classes with different
maturities and, in some cases, amortization schedules and a residual class of
the CMO security being sold, with each such class possessing different risk
characteristics. The residual interest sold represents any residual cash
flows which result from the excess of the monthly receipts generated by
principal and interest payments on the underlying mortgage collateral and any
reinvestment earnings thereon, less the cash payments to the CMO holders and
any administrative expenses. As a matter of policy, due to the risk
associated with residual interests, the Bank does not invest in the residual
interests of CMOs.
Securities Held to Maturity
Substantially all of First Nationwide's securities classified as held to
maturity were reclassified to available for sale at December 29, 1995.
The following summarizes the amortized cost and estimated fair value of
First Nationwide's securities held to maturity at the dates indicated:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
(IN MILLIONS)
<S> <C> <C>
U.S. government and
agency obligations $ 4 $ 4
Municipal and other
securities ........ -- --
----------- -----------
Total ............ $ 4 $ 4
=========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
U.S. government and
agency obligations $-- $-- $410 $407 $15 $15
Municipal and other
securities ........ 1 1 2 2 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total ............ $ 1 $ 1 $412 $409 $15 $15
=========== =========== =========== =========== =========== ===========
</TABLE>
The weighted average stated interest rate on First Nationwide's securities
held to maturity was 6.83%, 8.25%, 5.79% and 3.66% at September 30, 1996 and
December 31, 1995, 1994 and 1993, respectively.
Securities held to maturity at September 30, 1996 mature within one year.
149
<PAGE>
Mortgage-backed Securities Held to Maturity
Substantially all of the Bank's mortgage-backed securities, except for
mortgage-backed securities resulting from the securitization of certain of
First Nationwide's loans, were reclassified from the held-to-maturity
portfolio to the available-for-sale portfolio on December 29, 1995.
A summary of First Nationwide's mortgage-backed securities held to
maturity at the dates indicated is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
ESTIMATED
AMORTIZED FAIR
COST VALUE
----------- -----------
(IN MILLIONS)
<S> <C> <C>
GNMA ..... $ -- $ --
FNMA ..... 1,270 1,283
FHLMC .... 428 442
CMOs ..... -- --
Other .... 2 2
----------- -----------
Total ... $1,700 $1,727
=========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------
1995 1994 1993
------------------------ ------------------------ ------------------------
ESTIMATED ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE COST VALUE
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
GNMA ..... $ -- $ -- $ 16 $ 16 $ -- $ --
FNMA ..... 533 548 1,078 1,060 -- --
FHLMC .... 988 1,016 1,660 1,647 -- --
CMOs ..... -- -- 397 370 341 340
Other .... 3 3 3 3 -- --
----------- ----------- ----------- ----------- ----------- -----------
Total ... $1,524 $1,567 $3,154 $3,096 $ 341 $ 340
=========== =========== =========== =========== =========== ===========
</TABLE>
The weighted average stated interest rate on First Nationwide's
mortgage-backed securities held to maturity was 7.11%, 7.46%, 6.30%, and
6.75% at September 30, 1996, December 31, 1995, 1994 and 1993, respectively.
At September 30, 1996 and December 31, 1995, First Nationwide's
mortgage-backed securities held to maturity included securities totalling
$1.7 billion and $1.5 billion, respectively, which resulted from the
securitization with FNMA and FHLMC of certain qualifying mortgage loans from
First Nationwide's or San Francisco Federal's loan portfolios with full
recourse to First Nationwide. There were $1.4 billion of such securities held
at December 31, 1994. At September 30, 1996, December 31, 1995 and December
31, 1994, respectively, First Nationwide had $1.7 billion, $1.5 billion and
$2.5 billion of variable rate mortgage-backed securities held to maturity. No
variable rate mortgage-backed securities were held at December 31, 1993.
For the years ended December 31, 1995, 1994 and 1993 and the nine months
ended September 30, 1996, First Nationwide did not sell any of its
mortgage-backed securities held to maturity.
Mortgage-backed securities held to maturity are carried at amortized cost
rather than the lower of cost or market, unless there is evidence of a
decline other than a temporary decline in value. Anything other than
temporary declines in value are charged to income in the periods in which the
declines are determined. Premiums and discounts on the purchase of
mortgage-backed securities are amortized or accreted as a yield adjustment
over the life of the securities using the interest method, with the
amortization or accretion effect of prepayment being adjusted based on
revised estimates of future repayments.
The following table summarizes the First Nationwide's mortgage-backed
securities held-to-maturity portfolio and the related weighted average coupon
rate at September 30, 1996, based upon contractual scheduled maturities
allocated to the appropriate maturity categories. This table does not reflect
the scheduled amortization or any anticipated prepayment of the underlying
loans collateralizing such securities in the portfolio.
<PAGE>
<TABLE>
<CAPTION>
OVER ZERO OVER THREE OVER FIVE
BUT WITHIN WAC BUT WITHIN WAC BUT WITHIN
THREE YEARS (1) FIVE YEARS (1) TEN YEARS
------------- ----- ------------ ----- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
FNMA ... $-- --% $-- --% $--
FHLMC . -- -- -- -- --
Other . -- -- -- -- --
------------- ----- ------------ ----- ------------
$-- $-- $--
============= ============ ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OVER TEN
WAC BUT WITHIN WAC OVER WAC
(1) FIFTEEN YEARS (1) FIFTEEN YEARS (1) TOTAL
----- --------------- ------- --------------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
FNMA ... --% $-- --% $1,270 6.97% $1,270
FHLMC . -- -- -- 428 7.99 428
Other . -- 1 10.00 1 7.72 2
----- --------------- ------- --------------- ------- --------
$ 1 $1,699 $1,700
----- =============== =============== ========
</TABLE>
- ------------
(1) Weighted average coupon rate.
150
<PAGE>
SOURCES OF FUNDS
General
Deposits, sales of securities under agreements to repurchase, advances
from the FHLBs of Dallas and San Francisco, and sales, maturities and
principal repayments on loans and mortgage-backed securities have been the
major sources of funds for use in the Bank's lending and investment
activities and other general business purposes. The management of the Bank
closely monitors rates and terms of competing sources of funds on a daily
basis and utilizes the source which is most cost-effective. The availability
of funds from sales of loans and securities is influenced by the levels of
general interest rates and other market conditions. For additional
information regarding Holdings' sources of funds, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Holdings" and Holdings' Consolidated Statements of Cash Flows set
forth in the Consolidated Financial Statements of Holdings contained
elsewhere in this Prospectus.
Loan principal and interest payments are a relatively stable source of
funds, while customer deposit inflows and outflows and loan repayments and
prepayments are influenced significantly by the levels of general interest
rates and money market conditions, and may fluctuate widely. Borrowings may
be used to compensate for reductions in normal sources of funds such as
customer deposits.
Deposits
The Bank offers a variety of deposit accounts designed to attract both
short-term and long-term deposits. There are no rate limitations on any type
of deposit account presently offered by the Bank. The ability of the Bank to
retain and attract new deposits is dependent upon the variety and
effectiveness of its customer account products, customer service and
convenience, and prevailing market conditions. The following table shows
First Nationwide's distribution of deposits by type of account at the dates
indicated:
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
1996
-----------------------
PERCENT
AMOUNT OF DEPOSITS
-------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Transaction accounts:
Passbook accounts ....... $ 857 9.8%
Demand deposits:
Interest-bearing ....... 481 5.5
Noninterest-bearing ... 828 9.5
Money market deposit
accounts ............... 809 9.2
-------- -------------
Total transaction
accounts ............. 2,975 34.0
Term accounts ............ 5,784 66.0
-------- -------------
8,759 100.0%
=============
Accrued interest payable 32
Purchase accounting
adjustments, net ........ 9
--------
Total ................. $8,800
========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------------------------------------
1995 1994 1993
------------------------ ----------------------- -----------------------
PERCENT PERCENT PERCENT
AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS AMOUNT OF DEPOSITS
--------- ------------- -------- ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ....... $ 664 6.5% $ 685 7.5% $ 3 0.7%
Demand deposits:
Interest-bearing ....... 684 6.7 667 7.3 5 1.2
Noninterest-bearing ... 697 6.8 352 3.8 4 0.9
Money market deposit
accounts ............... 1,443 14.2 1,927 21.1 48 11.2
--------- ------------- -------- ------------- -------- -------------
Total transaction
accounts ............. 3,488 34.2 3,631 39.7 60 14.0
Term accounts ............ 6,696 65.8 5,519 60.3 370 86.0
--------- ------------- -------- ------------- -------- -------------
10,184 100.0% 9,150 100.0% 430 100.0%
--------- ============= ============= =============
Accrued interest payable 51 26 2
Purchase accounting
adjustments, net ........ 7 21 --
--------- -------- --------
Total ................. $10,242 $9,197 $432
========= ======== ========
</TABLE>
Deposit balances, excluding purchase accounting adjustments, averaged $9.4
billion during the nine months ended September 30, 1996, with an average
stated interest rate of 4.68%. The weighted average stated interest rate on
deposits at September 30, 1996 was 4.55%.
Deposit balances averaged $9.9 billion, $2.6 billion and $1.2 billion
during 1995, 1994 and 1993, respectively, with average stated interest rates
of 4.67%, 3.86% and 4.64%, respectively. The weighted average stated interest
rates on deposits at December 31, 1995, 1994 and 1993 were 4.67%, 4.19% and
4.41%, respectively.
151
<PAGE>
The following table presents the average balance and weighted average rate
paid on each deposit type of First Nationwide for the dates indicated,
excluding the impact of purchase accounting adjustments.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
1996
----------------------
AVERAGE AVERAGE
BALANCE RATE PAID
--------- -----------
<S> <C> <C>
Transaction accounts:
Passbook accounts ... $ 872 3.61%
Demand deposits:
Interest-bearing ... 530 1.03
Noninterest-bearing 893 --
Money market deposit
accounts ............ 993 3.38
Term accounts ......... 6,160 6.03
--------- -----------
Total ............... $9,448 4.68%
========= ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ----------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
--------- ----------- --------- ----------- --------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts ... $ 666 2.20% $ 179 2.14% $ 192 2.67%
Demand deposits:
Interest-bearing ... 699 1.00 184 .97 42 2.02
Noninterest-bearing 583 -- 93 -- 11 --
Money market deposit
accounts ............ 1,581 3.22 547 2.98 32 2.79
Term accounts ......... 6,398 6.10 1,611 4.91 918 5.24
--------- ----------- --------- ----------- --------- -----------
Total ............... $9,927 4.67% $2,614 3.86% $1,195 4.64%
========= =========== ========= =========== ========= ===========
</TABLE>
The following table sets forth the scheduled maturities of First
Nationwide's term accounts by stated interest rate at September 30, 1996.
<TABLE>
<CAPTION>
SCHEDULED MATURITIES DURING THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1999 AND
1996 1997 1998 THEREAFTER TOTAL
---------- ---------- -------- -------------- ----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
3.00% or less ............. $ -- $ -- $ -- $ -- $ --
3.01 -- 4.00% ............. 4 3 -- -- 7
4.01 -- 5.00% ............. 254 195 14 6 469
5.01 -- 6.00% ............. 821 2,444 418 179 3,862
6.01 -- 7.00% ............. 154 484 50 137 825
7.01 -- 8.00% ............. 60 242 42 74 418
8.01 -- 9.00% ............. 55 41 3 3 102
9.01 -- 10.00% ............ 99 -- 2 -- 101
10.01 -- 11.00% ........... -- -- -- -- --
11.01 -- 12.00% ........... -- -- -- -- --
12.01 -- 13.00% ........... -- -- -- -- --
---------- ---------- -------- -------------- ----------
Total term accounts .... $1,447 $3,409 $529 $399 $5,784
========== ========== ======== ============== ==========
</TABLE>
<PAGE>
The following table sets forth remaining maturities for First Nationwide's
term deposits in amounts of $100,000 or more at September 30, 1996 (in
millions):
<TABLE>
<CAPTION>
<S> <C>
3 months or less ................... $193
Over 3 months but within 6 months . 206
Over 6 months but within 12 months 277
Over 12 months ..................... 186
------
Total ............................ $862
======
</TABLE>
At September 30, 1996, the aggregate amount outstanding of certificates of
deposit of $100,000 or larger at First Nationwide was $862 million, compared
with $690 million at December 31, 1995. Deposits held by foreign investors at
First Nationwide totalled $57 million and $63 million at September 30, 1996
and December 31, 1995, respectively.
152
<PAGE>
The Bank's deposit accounts are held primarily by individuals residing in
the vicinity of its retail branch offices located throughout the country. The
Bank has emphasized, and will continue to emphasize, a retail branch network
for attracting deposits. Key market areas, particularly the West Coast
region, will continue to be targeted for expansion of retail deposits and the
cross-selling of additional consumer products.
When cost-effective relative to other sources of funding, the Bank issues
certificates of deposit through direct placement programs and national
investment banking firms ("Brokered Deposits"). These deposits are usually in
amounts less than $100,000 and are obtained from a diverse customer base.
While these funds are generally more costly than traditional passbook and
money market deposits and more volatile as a source of funds because of their
sensitivity to the rates offered, they supplement retail customer deposits in
raising funds for financing and liquidity purposes. At September 30, 1996,
First Nationwide had approximately $751 million of Brokered Deposits
outstanding, representing 8.58% of total deposits.
The following table presents the scheduled maturity of First Nationwide's
Brokered Deposits and all other retail term deposits at September 30, 1996.
<TABLE>
<CAPTION>
1999 AND
1996 1997 1998 THEREAFTER TOTAL
-------- -------- ------ ------------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Brokered Deposits .... $ 287 $ 390 $ 5 $ 69 $ 751
Retail term deposits . 1,160 3,019 524 330 5,033
-------- -------- ------ ------------ --------
Total term deposits $1,447 $3,409 $529 $399 $5,784
======== ======== ====== ============ ========
</TABLE>
In April 1995, First Nationwide acquired approximately $13 million in
deposits located in Tiburon, California in the Tiburon Purchase. In August
1995, First Nationwide acquired three retail branches and associated deposit
accounts totalling approximately $356 million located in Orange County,
California in the ITT Purchase. On December 8, 1995, First Nationwide
acquired four retail branches located in Sonoma County, California with
associated deposit accounts of approximately $144 million as of December 7,
1995 in the Sonoma Purchase.
Borrowings
Holdings and the Bank utilize various borrowings as alternative sources of
funds for their business needs. These sources have included securities sold
under agreements to repurchase, FHLB advances and subordinated debentures.
First Nationwide relied primarily on FHLB advances and securities sold under
agreements to repurchase to replace funding from deposits sold in the Branch
Sales.
153
<PAGE>
Short-term Borrowings
The following table sets forth for First Nationwide each category of
borrowings due within one year: (i) for the periods presented, the average
amount outstanding, the maximum amount outstanding at any month end and the
average interest rate paid, and (ii) at period end, the amount outstanding
and average interest rate paid. Amounts and rates reflected in the table
exclude accrued interest payable and purchase accounting adjustments.
<TABLE>
<CAPTION>
AT OR FOR
AT OR FOR THE YEAR ENDED
THE NINE MONTHS DECEMBER 31,
ENDED SEPTEMBER 30, ---------------------------
1996 1995 1994 1993
------------------- -------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FHLB advances:
Average balance outstanding .................... $2,494 $ 862 $ 434 $ 369
Maximum amount outstanding at any month end
during the period ............................... 3,141 1,487 1,909 441
Balance outstanding at end of period ........... 2,533 1,487 1,049 441
Average interest rate during the period ....... 5.84% 7.19% 6.56% 4.26%
Average interest rate at end of period ........ 5.72% 6.12% 7.34% 4.54%
Securities sold under agreements to repurchase:
Average balance outstanding .................... $1,890 $1,351 $ 499 $ 21
Maximum amount outstanding at any month end
during the period ............................... 2,424 1,965 1,880 139
Balance outstanding at end of period ........... 2,055 698 1,880 119
Average interest rate during the period ....... 5.59% 6.53% 3.78% 3.83%
Average interest rate at end of period ........ 5.69% 6.06% 6.51% 3.45%
Real estate notes payable and revolving warehouse
line:
Average balance outstanding .................... $ -- $ -- $ -- $ 3
Maximum amount outstanding at any month end
during the period ............................... -- -- -- 6
Balance outstanding at end of period ........... -- -- -- --
Average interest rate during the period ....... -- -- -- 12.50%
Average interest rate at end of the period .... -- -- -- --
</TABLE>
At September 30, 1996, First Nationwide had additional secured borrowing
capacity of $2.8 billion with the FHLB and other sources. These
collateralized funding sources may also be used to satisfy other funding
requirements.
Securities Sold Under Agreements to Repurchase
The Bank enters into reverse repurchase agreements whereby it sells
marketable U.S. government and mortgage-backed securities and CMOs with a
commitment to repurchase the securities at a specified price and on a
specified date. These agreements are recorded as financings, and the
obligation to repurchase assets sold is reflected as a liability on the
consolidated statement of financial condition. The dollar amount of assets
underlying the agreements remains in the asset accounts. The securities
underlying the agreements are delivered to the dealers who arranged the
transactions. The counterparty to the repurchase agreement may have loaned
the securities to other parties in the normal course of their operations;
however, all agreements require that the identical securities be resold to
the Bank at the maturity of the agreements. In order to reduce possible risks
associated with these borrowing transactions, the reverse repurchase
agreements are generally entered into with national investment banking firms
and major commercial banks which are primary dealers in these securities.
During 1995, First Nationwide reduced the level of funds borrowed under
reverse repurchase agreements from $1.9 billion at December 31, 1994 to $1.0
billion at December 31, 1995 to take advantage of favorable rates offered on
short-term FHLB advances throughout the year and to assume additional
deposits in the Branch Purchases.
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FHLB Advances
The FHLB functions in a credit capacity for savings institutions and
certain other home financing institutions. A thrift institution may generally
borrow from its district FHLB through advances secured by its home mortgages
and other assets (principally securities which are obligations of, or
guaranteed by, the U.S. government). A thrift is required to hold a minimum
amount of capital stock of the FHLB based upon a percentage of its
outstanding home mortgage loans and similar obligations, a percentage of its
outstanding advances from the FHLB or a certain percentage of total assets.
Such advances may be made pursuant to several different credit programs made
available from time to time by the FHLB to meet seasonal and other
withdrawals of deposit accounts and to expand lending, each of which has its
own interest rate and range of maturities. The FHLB prescribes the acceptable
uses, as well as limitations on the size of such advances. Depending on the
program, such limitations are based either on a fixed percentage of the
institution's net worth or on the FHLB's assessment of the institution's
creditworthiness.
During 1995, First Nationwide prepaid $250 million in FHLB advances
resulting in a $2 million extraordinary gain on the early extinguishment of
debt, net of tax. During 1994, First Nationwide prepaid $95.2 million in FHLB
advances resulting in an extraordinary gain on the early extinguishment of
debt, net of tax, of approximately $1.4 million.
Interest Rate Swap Agreements
The Bank has used interest rate swap agreements to reduce its interest
rate risk exposure on fixed rate FHLB advances. First Nationwide had interest
rate swap agreements with a notional principal amount of $400 million
outstanding at September 30, 1996. The notional amount does not represent
amounts exchanged by the parties and thus, is not a measure of the Bank's
exposure. The Bank pays the variable rate and receives the fixed rate based
on LIBOR under these agreements. The differential between these two amounts
may change significantly in the future due to fluctuations in market interest
rates.
In order to reduce possible counterparty nonperformance risk, the Bank has
entered into interest rate swap agreements only with national investment
banking firms and the FHLB of San Francisco.
Old FNB Debentures
As part of the FN Acquisition, First Nationwide assumed subordinated
debentures, which bear interest at 10% per annum and mature on October 1,
2006 (the "Old FNB Debentures"). At September 30, 1996, the aggregate
principal amount of the Old FNB Debentures outstanding was $92.1 million.
Events of Default under the indenture governing the Old FNB Debentures
(the "Old FNB Indenture") include, among other things: (i) a default in the
payment of interest when due and such default continues for 30 days, (ii) a
default in the payment any principal when due, (iii) the failure to comply
with covenants in the Old FNB Indenture, provided that the trustee or holders
of at least 25% in principal amount of the outstanding Old FNB Debentures
notify the Bank of the default and the Bank does not cure the default within
60 days after receipt of such notice, (iv) certain events of bankruptcy,
insolvency or reorganization of the Bank, (v) the FSLIC/RF (or a comparable
entity) is appointed to act as conservator, liquidator, receiver or other
legal custodian for the Bank and (vi) a default under other indebtedness of
the Bank in excess of $10 million resulting in such indebtedness becoming due
and payable, and such default or acceleration has not been rescinded or
annulled within 60 days after the date on which written notice of such
failure has been given by the trustee to the Bank or by holders of at least
25% in principal amount of the outstanding Old FNB Debentures to the Bank and
the trustee.
SFFed Notes
As part of the SFFed Acquisition, First Nationwide assumed the SFFed
Notes, which bear interest at 11.20% per annum and mature on September 1,
2004. In connection with the assumption of the SFFed Notes, First Nationwide
and all of the holders of the SFFed Notes entered into an agreement amending
certain provisions of the note purchase pursuant to which the SFFed Notes
were sold (as amended, the "Note Purchase Agreement"). On September 12, 1996,
First Nationwide repurchased $44.0 million
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aggregate principal amount of the SFFed Notes at a price of approximately
116.45% of the principal amount, plus the accrued interest thereon. At
September 30, 1996, the aggregate principal amount of the SFFed Notes
outstanding was $6.0 million. First Nationwide recorded an extraordinary
loss, net of tax, of $1.6 million in connection with such repurchase.
Events of Default under the Note Purchase Agreement include, among other
things: (i) failure to make any payment of principal when due; (ii) any
failure to make any payment of interest when due and such payment is not made
within 15 days after the date such payment was due; (iii) failure to comply
with certain covenants in the Note Purchase Agreement, provided that such
failure continues for more than 60 days; (iv) failure to deliver to holders a
notice of default, notice of event of default, or notice of claimed default
as provided in the Note Purchase Agreement; (v) failure to comply with any
provision of the Note Purchase Agreement, provided that such failure
continues for more than 60 days after notice is delivered to the Bank; (vi) a
default under other indebtedness provided that the aggregate amount of all
obligations in respect of such indebtedness exceeds $15 million; (vii) one or
more final, non-appealable judgements outstanding against the Bank or its
subsidiaries for the payment of money aggregating in excess of $15 million,
any one of which has been outstanding for 45 days and shall not have been
discharged in full or stayed; (viii) any warranty, representation or other
statement contained in the Note Purchase Agreement by the Bank or any of its
subsidiaries being false or misleading in any material respect when made; or
(ix) certain events of bankruptcy, insolvency or reorganization of the Bank
or its subsidiaries.
Consummation of the Cal Fed Acquisition constituted a "Change of Control"
under the Note Purchase Agreement. Accordingly, holders of the SFFed Notes
have the right to compel the Bank to redeem the SFFed Notes held by any such
holder at a redemption price of 100% of the principal amount thereof.
11 1/2% Bank Preferred Stock
In connection with the FN Acquisition, First Nationwide issued 3,007,300
shares of 11 1/2% Bank Preferred Stock. The 11 1/2% Bank Preferred Stock has
a stated liquidation value of $100 per share, plus declared and unpaid
dividends, if any. Cash dividends are noncumulative and are payable at an
annual rate of 11 1/2% per share if, when and as declared by the Board of
Directors of the Bank.
The 11 1/2% Bank Preferred Stock ranks prior to the common stock of the
Bank and to all other classes and series of equity securities subsequently
issued, other than any class or series expressly designated as being on a
parity with or senior to the 11 1/2% Bank Preferred Stock as to dividends and
liquidating distributions. The 10 5/8% Bank Preferred Stock ranks on a parity
with the 11 1/2% Bank Preferred Stock as to dividends and liquidating
distributions. See "--Cal Fed--Sources of Funds--Borrowings--10 5/8% Bank
Preferred Stock."
The terms of the 11 1/2% Bank Preferred Stock provide that the Bank may
not declare or pay any full dividends with respect to any parity stock, such
as the 10 5/8% Bank Preferred Stock, unless and until the Bank has paid full
dividends on the 11 1/2% Bank Preferred Stock for the immediately preceeding
dividend period. The Bank is currently in compliance with such requirement.
The terms of the 11 1/2% 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 11 1/2% Bank Preferred Stock (the "Bank Junior Stock"))
with respect to any Bank Junior Stock or repurchase, redeem or otherwise
acquire, or set apart funds for the repurchase, redemption or other
acquisition of, any Bank Junior Stock (including the Common Stock held by
Holdings) through a sinking fund or otherwise, unless and until: (i) the Bank
has paid full dividends on the 11 1/2% 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 11 1/2% 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.
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Holders of the 11 1/2% Bank Preferred Stock have no voting rights, except
as required by law or in certain limited circumstances.
Except in the event of a change of control, or upon certain tax events,
the Capital Corporation Preferred Stock is not redeemable prior to January
31, 2002. The Capital Corporation Preferred Stock is redeemable solely at the
option of Capital Corporation or its successor or any acquiring or resulting
entity with respect to Capital Corporation (including by any parent or
subsidiary of Capital Corporation, any such successor, or any such acquiring
or resulting entity), as applicable, at any time on and after January 31,
2002, in whole or in part, at $26.14 per share on or after January 31, 2002
and prior to January 31, 2003, and at prices decreasing pro rata annually
thereafter to the stated liquidation value of $25 per share on or after
January 31, 2007, plus declared and unpaid dividends, if any, without
interest. Upon a change of control, the 11 1/2% Bank Preferred Stock is
redeemable on or prior to January 31, 2002 at the option of Capital
Corporation or its successor or any acquiring or resulting entity with
respect to the Bank (including by any parent or subsidiary of Capital
Corporation, any such successor, or any such acquiring or resulting entity),
as applicable, in whole, but not in part, at a price per share equal to: (i)
$25, plus (ii) an amount equal to declared and unpaid dividends, if any, to
the date fixed for redemption, without interest, and without duplication, an
additional amount equal to the amount of dividends that would be payable on
the Capital Corporation Preferred Stock in respect of the period from the
first day of the dividend period in which the date fixed for redemption
occurs to the date fixed for redemption (assuming all such dividends were to
be declared), plus (iii) a specified make whole premium.
Capital Corporation Preferred Stock
On January 31, 1997, Capital Corporation issued 20,000,000 shares of
Capital Corporation Preferred Stock. The Capital Corporation Preferred Stock
has a stated liquidation value of $25 per share, plus declared and unpaid
dividends, if any. Cash dividends are noncumulative and are payable at an
annual rate of 9 1/8% per share if, when and as declared by the Board of
Directors of the Bank.
The Capital Corporation Preferred Stock ranks prior to the common stock of
Capital Corporation and to all other classes and series of equity securities
subsequently issued, other than any class or series expressly designated as
being on a parity with or senior to the Capital Corporation Preferred Stock
as to dividends and liquidating distributions.
The terms of the Capital Corporation Preferred Stock provide that Capital
Corporation may not declare or pay any full dividends with respect to any
parity stock unless and until Capital Corporation has paid full dividends on
the Capital Corporation Preferred Stock for the immediately preceding
dividend period.
The terms of the Capital Corporation Preferred Stock provide that Capital
Corporation may not declare or pay any dividends or other distributions
(other than in shares of common stock of Capital Corporation or other classes
of equity securities of Capital Corporation ranking junior to the Capital
Corporation Preferred Stock (the "Capital Corporation Junior Stock")) with
respect to any Capital Corporation Junior Stock or repurchase, redeem or
otherwise acquire, or set apart funds for the repurchase, redemption or other
acquisition of, any Capital Corporation Junior Stock (including the common
stock held by the Bank) through a sinking fund or otherwise, unless and
until: (i) Capital Corporation has paid full dividends on the Capital
Corporation Preferred Stock for the four most recent dividend periods (or
such lesser number of dividend periods during which shares of Capital
Corporation Preferred Stock have been outstanding), or funds have been paid
over to the dividend disbursing agent of Capital Corporation for payment of
such dividends, and (ii) Capital Corporation has declared a cash dividend on
the Capital Corporation 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 Capital Corporation for the payment of a cash
dividend for such current dividend period. The initial dividend payment date
is March 31, 1997.
Holders of the Capital Corporation Preferred Stock have no voting rights,
except as required by law or in certain limited circumstances.
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Except in the event of a change of control or upon certain tax events, the
Capital Corporation Preferred Stock is not redeemable prior to January 31,
2002. The Capital Corporation Preferred Stock is redeemable solely at the
option of Capital Corporation or its successor or any acquiring or resulting
entity with respect to Capital Corporation (including by any parent or
subsidiary of Capital Corporation, any such successor, or any such acquiring
or resulting entity), as applicable, at any time on and after January 31,
2002, in whole or in part, at $26.14 per share on or after January 31, 2002
and prior to January 31, 2003, and at prices decreasing pro rata annually
thereafter to the stated liquidation value of $25 per share on or after
January 31, 2007, plus declared and unpaid dividends, if any, without
interest. Upon a change of control, the Capital Corporation Preferred Stock
is redeemable on or prior to January 31, 2002 at the option of Capital
Corporation or its successor or any acquiring or resulting entity with
respect to the Bank (including by any parent or subsidiary of Capital
Corporation, any such successor, or any such acquiring or resulting entity),
as applicable, in whole, but not in part, at a price per share equal to: (i)
$25, plus (ii) an amount equal to declared and unpaid dividends, if any, to
the date fixed for redemption, without interest, and without duplication, an
additional amount equal to the amount of dividends that would be payable on
the Capital Corporation Preferred Stock in respect of the period from the
first day of the dividend period in which the date fixed for redemption
occurs to the date fixed for redemption (assuming all such dividends were to
be declared), plus (iii) a specified make whole premium.
Each share of Capital Corporation Preferred Stock will be exchanged
automatically for one newly issued share of preferred stock of the Bank
having substantially the same terms as the Capital Corporation Preferred
Stock if the appropriate federal regulatory agency directs in writing such
exchange because (i) the Bank becomes "undercapitalized" under prompt
corrective action regulations, (ii) the Bank is placed into conservatorship
or receivership or (iii) the appropriate federal regulatory agency, in its
sole discretion, anticipates the Bank becoming "undercapitalized" in the near
term. If issued, such preferred stock of the Bank will rank on a parity with
the 11 1/2% Bank Preferred Stock and the 10 5/8% Bank Preferred Stock.
OTHER ACTIVITIES
Cal Fed Contingent Litigation Recovery Participation Interests. In July
1995, California Federal distributed to its common shareholders its
Contingent Litigation Recovery Participation Interests (the "Litigation
Interests"), each entitling the holder thereof to receive an amount (the
aggregate of such payments being referred to as the "Recovery Payment") equal
to five millionths of one percent (0.000005%) of the cash payment (the "Cash
Payment"), if any, actually received by the Bank pursuant to a final,
nonappealable judgment in or final settlement of its claim against the United
States in the lawsuit, California Federal Bank v. United States, Civil Action
No. 92-138C (the "California Federal Litigation"), after deduction of (i) the
aggregate expenses incurred by California Federal in prosecuting the
California Federal Litigation and obtaining such Cash Payment, (ii) any
income tax liability of the Bank, computed on a pro forma basis, as a result
of the Bank's receipt of such Cash Payment (net of any income tax benefit to
California Federal from making the Recovery Payment, and disregarding for
purposes of this clause (ii) the effect of any net operating loss
carryforwards or other tax attributes held by the Bank or any of its
subsidiaries or affiliated entities) and (iii) the expenses incurred by the
Bank in connection with the creation, issuance and trading of the Litigation
Interests, including without limitation, legal and accounting fees and the
fees and expenses of the certificate agent.
In the California Federal Litigation, California Federal alleges, among
other things, that the United States breached certain contractual commitments
regarding the computation of its regulatory capital for which California
Federal seeks damages and restitution. California Federal's claims arose from
changes, mandated by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA"), with respect to the rules for computing
California Federal's regulatory capital. The California Federal Litigation
was stayed pending the resolution on appeal of the Winstar Cases (defined
below), which present issues similar to those presented by the California
Federal Litigation.
On July 1, 1996, the Unites States Supreme Court issued its opinion for
United States v. Winstar Corporation, No. 95-865, which affirmed the
decisions of the United States Court of Appeals for the Federal Circuit and
the United States Court of Federal Claims in various consolidated cases (the
"Winstar
158
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Cases") granting summary judgment to the plaintiff thrift institutions on the
liability portion of their breach of contract claims against the United
States. The Supreme Court held that the government breached certain express
contracts when Congress enacted FIRREA, and the Supreme Court remanded the
proceedings for a determination of the appropriate measure and amount of
damages, which as of the date of this Offering Circular have not been
awarded.
The California Federal Litigation is currently stayed, pending the
resolution of a motion by the United States to impose "case management"
measures upon the 122 other cases involving the treatment of regulatory
capital that have been filed in the Claims Court. Accordingly, the United
States has not yet filed an answer to California Federal's complaint in the
California Federal Litigation. However, on October 30, 1996, California
Federal filed a motion for partial summary judgment as to the Federal
government's liability to California Federal for breach of contract. Although
the decision of the Supreme Court has been rendered, a court may still
determine that California Federal's claims involve sufficiently different
facts and/or legal issues as to render the Winstar Cases inapplicable to the
California Federal Litigation and thereby compel a different conclusion from
that of the Winstar Cases.
Pursuant to the Merger Agreement, Cal Fed distributed to common
shareholders entitled to receive the merger consideration one-tenth of a
Secondary Contingent Litigation Recovery Participation Interest (each a
"Secondary Litigation Interest") for each share of Cal Fed common stock held.
Each Secondary Litigation Interest will entitle the holder thereof to receive
an amount equal to twenty millionths of one percent (0.000020%) of the
"Secondary Recovery Payment," if any, as defined below. "Secondary Recovery
Payment" means sixty percent (60%) of the amount obtained from the following
equation: (A) the Cash Payment, if any, actually received by California
Federal in respect of a final, nonappealable judgment in or final settlement
of the the Bank Litigation, minus (B) the sum of the following: (i) the
aggregate expenses incurred by the Bank in prosecuting the the Bank
Litigation and obtaining such Cash Payment, (ii) any income tax liability of
the Bank, computed on a pro forma basis, as a result of the Bank's receipt of
such Cash Payment (net of any income tax benefit to the Bank, computed on a
pro forma basis, from the payment of a portion of the Secondary Recovery
Payment to the holders of Secondary Litigation Interests), (iii) the expenses
incurred by the Bank in connection with the creation, issuance and trading of
the Litigation Interests and the Secondary Litigation Interests, including
without limitation, legal and accounting fees and the fees and expenses of
the interest agent, (iv) the payment due to the holders of the Litigation
Interests and (v) one hundred twenty-five million dollars ($125,000,000).
"Income tax liability of the Bank computed on a pro forma basis" means the
aggregate amount of any and all relevant items of income, gain, loss, or
deduction associated with the receipt by the Bank of the Cash Payment
multiplied by the highest, combined marginal rate of federal, state and local
income taxes in the relevant year and disregarding for purposes of such
computation the effect of any net operating loss carryforwards or other tax
attributes of the Bank or any of its subsidiaries or affiliated entities.
"Income tax benefit to the Bank computed on a pro forma basis" means the
aggregate amount of any and all relevant items of income, gain, loss, or
deduction associated with the payment by the Bank of the Secondary Recovery
Payment multiplied by the highest, combined marginal rate of federal, state
and local income taxes in the relevant year and disregarding for purposes of
such computation the effect of any net operating loss carryforwards or other
tax attributes of the Bank or any or its subsidiaries or affiliated entities.
Any distribution with respect to the Litigation Interests will be subject to
the OTS capital distribution regulations.
In connection with the Cal Fed Acquisition, the Bank intends to record as
an asset the estimated after-tax cash recovery, if any, from the California
Federal Litigation that may inure to the Bank, net of amounts payable to
holders of the Litigation Interests and the Secondary Litigation Interests
(the "Goodwill Litigation Asset").
The Goodwill Litigation Asset will be recorded at its estimated fair value
as of the date of consummation of the Cal Fed Acquisition. The quoted market
price of the Litigation Interests and the Secondary Litigation Interests as
of the date of consummation of the Cal Fed Acquisition will be used to
determine the fair value of the Goodwill Litigation Asset. The following
represents the components of the Goodwill Litigation Asset that would have
been recorded had the Cal Fed Acquisition occurred on September 30, 1996 (in
millions):
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<TABLE>
<CAPTION>
TOTAL TAX LIABILITY NET
------- --------------- ------
<S> <C> <C> <C>
Gross Asset .................... $323 $(130) $193
Payable to holders of:
Litigation Interests .......... (82) 33 (49)
Secondary Litigation Interests (19) 8 (11)
------- --------------- ------
Goodwill Litigation Asset ..... $222 $ (89) $133
======= =============== ======
</TABLE>
See "Unaudited Pro Forma Financial Data."
The Bank will account for the Goodwill Litigation Asset at the lower of
cost or market. In the event of a cash or other settlement of California
Federal Litigation, the recorded asset and related valuation allowance (if
any), tax liabilities and liabilities recorded for obligations to holders of
the Secondary Litigation Interests and Litigation Interests will be
eliminated, with any difference being reflected in earnings of the
then-current period.
The initial allocation of the purchase price of the Goodwill Litigation
Asset will have no impact on stockholders' equity or regulatory capital. To
the extent that the actual recovery of the Goodwill Litigation Asset exceeds
the carrying value of the Goodwill Litigation Asset, such excess would (i)
increase the liability for income taxes and the liabilities to holders of the
Litigation Interests and the Secondary Litigation Interests, and (ii)
increase the net earnings, stockholders' equity and regulatory capital of the
Bank; and to the extent that the actual recovery of the Goodwill Litigation
Asset is less than the carrying value of the Goodwill Litigation Asset, such
deficit would (x) decrease the liability for income taxes and the liabilities
to holders of the Litigation Interests and the Secondary Litigation Interests
and (y) decrease the net earnings, stockholders' equity and regulatory
capital of the Bank.
The Put Agreement
In connection with the FN Acquisition, Granite and First Nationwide
entered into the Put Agreement. Pursuant to the Put Agreement, First
Nationwide has the right, on a quarterly basis (the "Put Option"), to require
Granite to purchase certain commercial real estate loans, commercial real
estate loans serviced by others and residential mortgage loans with an
original principal balance greater than $250,000, and to take certain actions
to protect First Nationwide from losses with respect to certain Letters of
Credit ("LOC") transactions, in each case, only if such asset was purchased
by the Bank from Old FNB pursuant to the Asset Purchase Agreement. The Put
Option expired on November 30, 1996, when the sum of (x) the total amount
paid by Granite to First Nationwide in connection with all purchases or other
payments made by Granite pursuant to the Put Agreement and (y) the aggregate
purchase price paid by Granite to Old FNB in connection with purchases made
prior to the closing date ("Closing Date") pursuant to the Mortgage Loan Sale
Agreement dated as of November 30, 1993 (the "Mortgage Loan Sale Agreement"),
between Granite and Old FNB, less the total amount paid by First Nationwide
to Granite in connection with purchases made by First Nationwide through
exercise of certain buyback rights, equalled $500 million (the "Maximum
Amount"). First Nationwide could not require Granite to purchase more than
$100 million of residential mortgage loans. Granite's obligations under the
Put Agreement were guaranteed by Ford Motor.
The Put Option was generally triggered in the event that any of the assets
subject to the Put Agreement become non-performing assets (i.e., payments of
interest or principal become 90 days or more contractually past due) at any
time prior to the expiration of the Put Option.
The purchase price paid by Granite for each mortgage loan purchased
pursuant to the Put Agreement was the sum of: (i) the outstanding principal
balance of the loan, (ii) any accrued but unpaid interest on the loan shown
on First Nationwide's books (not to exceed 90 days accrued but unpaid
interest), (iii) amounts owed to First Nationwide for real property taxes,
insurance premiums and similar charges and (iv) reasonable amounts (including
reasonable attorneys' fees and protective advances) expended by First
Nationwide in protecting its security interest or enforcing its rights with
respect to such loan. The amount to be paid by Granite to First Nationwide
with respect to each non-performing LOC for which First Nationwide required
such payment was the amount of any protective advances (the
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"Protective Advances") made by First Nationwide in connection with such LOC
(but in no event did the Protective Advances include an amount greater than
90 days accrued but unpaid interest). In addition, with respect to any such
LOC which had been included in the FNMA Pool (as defined in the Put
Agreement), Granite was required, if so requested by First Nationwide, to
take all necessary or appropriate steps to cause such LOC to be removed from
the FNMA Pool and thereafter Granite would bear all economic risk associated
with such LOC (or, if all required consents for such removal could not be
obtained, Granite was required to take such actions as are necessary to place
First Nationwide in the same economic position as it would have been in had
the LOC been so removed). With respect to certain other non-performing LOCs
(including LOCs that were originally part of the FNMA Pool but were required
by FNMA to be removed from such pool prior to the time such LOCs became
non-performing), Granite was required, when requested by the Bank, to post
substitute collateral for the benefit of First Nationwide, in the form of
cash or cash equivalents with a value not less than the face amount of the
LOC, or in any other form deemed reasonably acceptable by the Bank, in the
place of any existing LOC collateral. The total amount charged against the
Maximum Amount with respect to any LOC was the amount of Protective Advances
reimbursed by Granite, together with (x) in the case of LOCs removed from the
FNMA Pool, to the extent not included as part of the reimbursed Protective
Advances, the amounts set forth in clauses (i)-(iv) of the first sentence of
this paragraph with respect to the mortgage loan underlying the LOC, or (y)
in the case of LOCs for which a substitution of collateral was made, the face
amount of the LOC.
If First Nationwide declined on any quarterly put date to sell an eligible
non-performing mortgage loan or to demand the removal or substitution of
collateral, as appropriate, in connection with an eligible LOC, its right to
put such asset or demand such removal or substitution, as the case may be,
were extinguished, except that put rights with respect to: (i) jumbo
residential loans, First Nationwide's interest in certain commercial mortgage
loans serviced by others and certain other loans formerly owned by FNMA were
extended for one additional quarter, and (ii) loans which had matured as of
the Closing Date for which monthly principal and interest payments were being
made as of the Closing Date were extended until the end of the second quarter
following the Closing Date. In the event that, as of November 30, 1996,
Granite had not been required to purchase $500 million of non-performing
assets, First Nationwide had the right to require Granite to purchase any
Putable Assets of First Nationwide, other than assets which previously became
non-performing and which First Nationwide did not require Granite to
purchase, up to the Maximum Amount. At September 30, 1996, First Nationwide
had a remaining available balance under the Put Agreement of $70.5 million,
which First Nationwide fully utilized on December 5, 1996.
The Assistance Agreement
On August 19, 1996, First Nationwide and the FSLIC's successor, the
FSLIC/RF, executed an agreement which resulted in the termination of the
Assistance Agreement. As a result of the agreement, the FSLIC/RF paid First
Nationwide the Covered Asset balance of $39 million and, among other things,
assumed the responsibility for the disposition of several litigation matters
involving Covered Assets which had been retained by First Nationwide
following the FDIC Purchase. First Nationwide recorded income of $25.6
million as a result of this settlement.
Under the terms of the Assistance Agreement, the FSLIC/RF provided capital
loss coverage and a guaranteed yield on the Covered Assets, as well as
indemnification in connection with certain claims.
In 1995, the FSLIC/RF purchased substantially all of the remaining Covered
Assets at the fair market value of such assets in the FDIC Purchase. Under
the terms of the Capital Loss Coverage (as defined herein) provisions of the
Assistance Agreement, losses sustained by First Nationwide from the FDIC
Purchase were reimbursed by the FSLIC/RF. There was no material impact on the
Consolidated Financial Statements of the First Nationwide as a result of the
FDIC Purchase.
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First Nationwide's Covered Assets at the dates indicated are summarized by
type as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1995 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Loans ....................................... $-- $210
Investments in and advances to subsidiaries -- 7
Real estate owned ........................... -- 129
Other ....................................... 39 4
------ ------
Total Covered Assets ...................... 39 350
FSLIC rebate reserve ........................ -- (38)
------ ------
Covered Assets, net ....................... $39 $312
====== ======
</TABLE>
The tax-exempt assistance received by First Nationwide from the FSLIC/RF
included the following provisions:
Guaranteed Yield. The guaranteed yield for a Covered Asset for any quarter
represented the product of the Covered Asset's average book value for such
quarter and a yield which is based on the TCOF, the annualized quarterly
average cost of funds for Texas-based SAIF-insured savings institutions as
reported by the OTS plus a specified basis point spread ("Guaranteed Yield").
Capital Loss Coverage. The FSLIC/RF mitigated the First Nationwide's
exposure to capital losses on Covered Assets by providing for the
reimbursement of capital losses resulting from the liquidation of Covered
Assets at less than their book value ("Capital Loss Coverage").
Covered Asset Recovery. When the liquidation of a Covered Asset resulted
in a recovery in excess of the asset's original book value, the Assistance
Agreement required that 90% of such recovery be remitted to the FSLIC/RF, or
offset against payments due to First Nationwide from the FSLIC/RF ("Covered
Asset Recovery").
Shared Gain. First Nationwide was entitled to a disposition fee on any
Covered Asset liquidated prior to the termination of coverage for net
proceeds in excess of 50% of its original book value.
Indemnification. The Assistance Agreement provided for indemnification of
losses suffered on specific assets acquired by First Nationwide that were not
Covered Assets under the Assistance Agreement. Items payable to First
Nationwide consisted primarily of indemnification of amounts paid in
settlement of certain litigation and reimbursement of specific types of legal
costs and expenses.
FSLIC/RF Reimbursement. First Nationwide agreed to make a payment to the
FSLIC/RF over the ten-year term of the Assistance Agreement in lieu of a
tax-sharing agreement. Such tax benefit payment was implemented on a current
basis, without regard to the actual amount or timing of any such tax benefits
received, through a credit to the FSLIC/RF of 10% of the gross assistance the
FSLIC/RF paid to First Nationwide. This amount, net of 10% of all Covered
Asset Recoveries and Shared Gains, was known as the "FSLIC/RF Reimbursement."
In addition, the FSLIC/RF was entitled to a 10% share of tax benefits
attributable to the use of net operating loss carryovers of the Texas Closed
Banks in reducing the regular tax liability of the affiliated group of which
the Bank is a member. The sharing of tax benefits attributable to the use of
these net operating loss carryovers, however, occurred only when the net
operating loss carryovers were actually used.
In connection with a modification to the Assistance Agreement in January
1992, First Nationwide was paid $45 million. Of such $45 million payment, $41
million, the amount net of certain claims, was included in First Nationwide's
income. Also, in connection with the modification, First Nationwide accrued
the present value of the estimated liability at December 31, 1992 to the
FSLIC/RF for FSLIC/RF Reimbursement over the life of the Assistance
Agreement, resulting in a $60 million charge to operations in 1992. This
liability was fully utilized in 1995 as a result of the FDIC Purchase.
FNMA Letters of Credit
On September 28, 1994, First Nationwide entered into an agreement with
FNMA pursuant to which FNMA provided credit enhancements for certain
bond-financed real estate projects originated by Old
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<PAGE>
FNB. The agreement requires that the Bank pledge to FNMA collateral in the
form of certain eligible securities which are held by a third party trustee.
The collateral requirement varies based on the balance of the bonds
outstanding, losses incurred (if any), as well as other factors. At September
30, 1996, First Nationwide had pledged as collateral certain securities
available for sale and short-term investment securities with a carrying value
of $97.2 million.
FGB Realty Advisors, Inc.
FGB Realty, a wholly owned subsidiary of the Bank, provides asset
management, disposition and advisory services to institutional owners of real
estate. FGB Realty has performed asset management and disposition services
for a variety of properties which range in product type from single family
homes to complex mixed use developments. Since its formation in 1991, FGB
Realty has become one of the largest full service asset management and
disposition firms in the United States, having managed portfolios in excess
of $7.5 billion. Fee revenues from unaffiliated parties were $14.0 million,
$14.1 million and $8.0 million for the years ended December 31, 1995, 1994
and 1993, respectively. These revenues are included in management fees in
Holdings' respective consolidated statements of operations. At September 30,
1996 and December 31, 1995, First Nationwide and FGB Realty managed
non-performing loan (principally multi-family and commercial real estate) and
asset portfolios totalling $1.1 billion and $1.3 billion, respectively, for
investors.
At December 31, 1995, FGB Realty was responsible for the asset management
and disposition of over 4,500 assets, representing $862 million in commercial
and residential real estate loans located in markets throughout the nation.
FGB Realty has full service offices in Dallas, New York, Tulsa, Phoenix, San
Francisco and Los Angeles.
FN Investment Center
FN Investment Center ("FNIC"), an indirect wholly owned subsidiary of the
Bank which was acquired as part of the FN Acquisition, offers securities and
insurance products to both existing and prospective customers of First
Nationwide. FNIC is subject to the guidelines established by the OTS for
broker-dealer subsidiaries of savings associations, and is a member of the
National Association of Securities Dealers. In addition, FNIC is registered
as a broker-dealer with the SEC and the Securities Investor Protection
Corporation. FNIC receives commission revenue for acting as a broker-dealer
on behalf of its customers, but FNIC does not maintain customer accounts or
take possession of customer securities. Commission revenues of $8.5 million
and $2.0 million for the years ended December 31, 1995 and 1994,
respectively, are included in fees and service charges in Holdings'
consolidated statements of operations for such years.
DIVIDEND POLICY OF THE BANK
The dividend policy of the Bank complies with applicable legal and
regulatory restrictions. Before declaring any dividend, the directors of the
Bank consider the following factors: (i) the quality and stability of the
Bank's net income, (ii) the availability of liquid assets to make dividend
payments, (iii) the level of earnings retention as it impacts the Bank's
capital needs and projected growth and funding levels, both internal and
external, and (iv) the adequacy of capital after the payment of a dividend.
Under the Bank's dividend policy, a dividend will not be declared or paid
which would: (i) cause the capital level of the Bank to be reduced below
"well capitalized" levels, or (ii), together with any other dividends
declared during the same calendar year, exceed 100% of the net income to the
date for that calendar year plus 50% of the Bank's surplus capital at the
beginning of that calendar year, so long as the Bank is a Tier 1 association
(as defined herein).
Holdings expects that a substantial portion of any net earnings generated
by the Bank, including net earnings generated as a result of sales of assets
or deposits, that are not needed in its operations or to expand its business
will, subject to the regulatory limitations and the terms of the Bank
Preferred Stock, be distributed to Holdings, its parent company.
EMPLOYEES
At September 30, 1996 First Nationwide and its subsidiaries had
approximately 3,466 employees, compared to approximately 3,221 employees at
September 30, 1995. None of the Bank's employees is
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<PAGE>
represented by any collective bargaining group and management considers its
relations with its employees to be good. The Bank maintains a comprehensive
employee benefits program providing, among other benefits, health and welfare
benefits, long and short-term disability insurance, and life insurance.
Additionally, the Bank offers employees a defined contribution investment
plan which is a qualified plan under Section 401(a) of the Internal Revenue
Code.
During 1995, First Nationwide undertook a project to identify
opportunities for reducing operating costs and enhancing the efficiency of
its operations. Management identified certain employees whose positions were
to be eliminated over the next twelve months. These positions spanned all
areas and business units of First Nationwide. An initial liability for
termination benefits totalling $4 million was established in connection with
this plan, and is included in Holdings' consolidated statement of operations
for the year ended December 31, 1995.
Holdings has no employees.
COMPETITION
The Bank experiences significant competition in both attracting and
retaining deposits and in originating real estate and consumer loans.
The Bank competes with other thrift institutions, commercial banks,
insurance companies, credit unions, thrift and loan associations, money
market mutual funds and brokerage firms in attracting and retaining deposits.
Competition for deposits from large commercial banks is particularly strong.
Many of the nation's thrift institutions and many large commercial banks have
a significant number of branch offices in the areas in which the Bank
operates.
In addition, there is strong competition in originating and purchasing
real estate and consumer loans, principally from other savings and loan
associations, commercial banks, mortgage banking companies, insurance
companies, consumer finance companies, pension funds and commercial finance
companies. The primary factors in competing for loans are the quality and
extent of service to borrowers and brokers, economic factors such as interest
rates, interest rate caps, rate adjustment provisions, loan maturities, LTV
ratios, loan fees, and the amount of time it takes to process a loan from
receipt of the loan application to date of funding. The Bank's future
performance will depend on its ability to originate a sufficient volume of
mortgage loans in its local market areas and through its wholesale network
and, if it is unable to originate a sufficient volume of mortgage loans, to
purchase a sufficient quantity of high-quality mortgage-backed securities
with adequate yields.
PROPERTIES
Holdings neither owns nor leases any properties directly. The executive
offices of the Bank are located at 135 Main Street, San Francisco,
California, 94105, and its telephone number is (415) 904-0100. The Bank
leases the building in which its executive office space is located,
consisting of approximately 99,000 square feet, under a ten-year lease
expiring in 2001. In addition, the Bank leases approximately 288,000 square
feet in a multiple-building administrative facility in West Sacramento,
California under a ten-year lease expiring in 2001. The Bank leases
additional administrative office space in Dallas which includes approximately
41,000 square feet of space under a lease expiring in 1999. In connection
with the move of FNMC's servicing operation to Maryland, one of these four
Sacramento buildings containing approximately 72,000 square feet was vacated.
Since September 30, 1996, management has negotiated with Ford Motor Company
regarding the early termination of the Bank's lease on this building. The
Bank leases space in an office building located at 5700 Wilshire Boulevard,
Los Angeles, California 90036. In addition, in connection with the Cal Fed
Acquisition, the Bank assumed the lease on an approximately 225,000 square
foot facility located in Rosemead, California which it expects to vacate
during the first half of 1997. The lease expires in 2008.
At September 30, 1996, First Nationwide operated a total of 116 retail
branches, and maintained 13 vacant branch facilities which were consolidated
as a result of the Sonoma Purchase and the SFFed and
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<PAGE>
Home Federal Acquisitions. Of those, 39 were owned and 90 were leased. Some
of these retail branches are multi-purpose facilities, housing loan
production and administrative facilities as well. In addition to the branch
locations, at September 30, 1996 there are 21 separate loan production
offices, all of which are leased and seven of which were vacant, and 25
separate administrative facilities (two owned and 23 leased). The
administrative facilities include a 230,000 square foot building owned in
Frederick, Maryland, which houses FNMC's mortgage loan servicing operation. A
state-by-state breakdown of all retail branches, administrative facilities
and loan production offices of First Nationwide at September 30, 1996 is
shown in the following table.
<TABLE>
<CAPTION>
ADMINISTRATIVE LOAN PRODUCTION
BRANCHES FACILITIES FACILITIES
--------------------- --------------------- ---------------------
OWNED LEASED OWNED LEASED OWNED LEASED
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Arizona ......... -- -- -- 1 -- 2
California ...... 30 72 1 11 -- 9
Florida ......... 6 18 -- 3 -- 1
Georgia ......... -- -- -- -- -- 1
Illinois ........ -- -- -- 2 -- 1
Maryland ........ -- -- 1 2 -- 1
Minnesota ....... -- -- -- -- -- 1
Montana ......... -- -- -- 1 -- --
New York ........ -- -- -- 1 -- --
Oklahoma ........ -- -- -- 1 -- --
Pennsylvania ... -- -- -- -- -- 1
Texas ........... 3 -- -- 1 -- 2
Washington ...... -- -- -- -- -- 2
--------- ---------- --------- ---------- --------- ----------
Total ......... 39 90 2 23 -- 21
========= ========== ========= ========== ========= ==========
</TABLE>
In April 1995, FNMC closed substantially all of its retail mortgage loan
production offices. Costs associated with such closure approximated $2
million and are included in noninterest expense in First Nationwide's 1995
consolidated statement of operations. On a continuing basis, the Bank
evaluates the adequacy of its office premises. As a result, surplus office
facilities may be sold or subleased to maintain cost-effective operations and
minimize vacant facilities. The 21 loan production offices at September 30,
1996 include seven offices housing operations acquired in the LMUSA 1995
Purchase, seven offices housing wholesale lending operations, and seven
vacant facilities. Of the seven vacant loan production offices, two have been
subleased and management is currently screening tenants for the remaining
five.
LEGAL PROCEEDINGS
The Bank is involved in legal proceedings incidental to the normal conduct
of its business. See "Other Activities--Cal Fed Contingent Litigation
Recovery Participation Interests." Although it is impossible to predict the
outcome of any outstanding legal proceedings, management believes that such
legal proceedings and claims, individually or in the aggregate, will not have
a material effect on the financial condition or results of operations of
Holdings or the Bank.
CAL FED
CAL FED
Cal Fed is a holding company whose only significant asset is all of the
common stock of California Federal. As such, Cal Fed's principal business
operations are conducted by California Federal and its subsidiaries.
CALIFORNIA FEDERAL
California Federal maintained 118 full service branches in California and
Nevada at September 30, 1996, offering a broad range of consumer financial
services including demand and term deposits and
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<PAGE>
mortgage and consumer loans. Subsidiaries of California Federal sell
insurance and investment products to California Federal's customers, and have
previously engaged in the real estate investment and development business.
California Federal's executive offices were located at 5700 Wilshire
Boulevard, Los Angeles, California 90036.
GENERAL
During 1995, California Federal obtained regulatory and shareholder
approval to reorganize into a holding company structure. The reorganization
will provide greater flexibility for meeting future financial and competitive
needs. As a result of the reorganization, which occurred on January 1, 1996,
each share of California Federal's common stock was converted into one share
of Cal Fed common stock. Consequently, California Federal became a
wholly-owned subsidiary of Cal Fed.
California Federal's principal operating activity consists of originating
or purchasing loans secured by residential property of one to four units.
California Federal's primary funding source is savings deposits, which are
insured by the FDIC through the SAIF. California Federal's net earnings are
principally generated by the excess of interest earned over the interest paid
on interest-bearing liabilities less general and administrative expenses.
California Federal's lending and savings operations are currently centered in
California and Nevada. California Federal previously had operations in
Florida and Georgia.
During 1995, California Federal made a nontaxable distribution of
Litigation Interests to its common shareholders. The Litigation Interests
represent a right to receive a portion of the net cash proceeds, if any,
resulting from California Federal's pending goodwill lawsuit against the
Federal government. See "Business--First Nationwide--Cal Fed Contingent
Litigation Recovery Participation Interests."
California Federal recorded net earnings of $93.6 million or $1.36 per
common share during 1995. During 1994 and 1993, California Federal recorded
net losses of $423.1 million or $10.10 per share and $145.5 million or $5.98
per share, respectively.
California Federal's return to profitability for the year ended December
31, 1995 reflects the results of its restructuring in prior years to meet the
new capital requirements of the FIRREA and to respond to the collapse of the
real estate markets during the early 1990's.
In early 1994, California Federal adopted a plan designed to improve
California Federal's capital position, improve its profitability and maximize
shareholder value (the "Strategic Plan"). The primary components of the
Strategic Plan included: (i) the raising of additional equity capital by
means of common and preferred stock offerings, (ii) 1994 Bulk Sales and (iii)
the sale of 44 depository branches located in the Southeast Division.
California Federal successfully completed all aspects of the Strategic Plan
during 1994.
During 1994, California Federal, (i) raised $164.2 million, net of
issuance costs, in new capital from the issuance of 1.7 million shares of
California Federal's preferred stock, Series B, (ii) raised $183.3 million,
net of issuance costs, in new capital from the issuance of 21.6 million
shares of California Federal's common stock through a rights offering, (iii)
completed the sale of the Southeast Division and (iv) completed the
accelerated disposition of $1.3 billion of high-risk performing and NPA's.
The 1994 Bulk Sales included $1.3 billion of high-risk performing loans,
NPL's and real estate held for sale acquired in settlement of loans ("REO").
The sale of these assets resulted in a substantial reduction in NPA's and
classified loans. California Federal recorded a $274.8 million loss on the
1994 Bulk Sales.
California Federal completed the sale of the Southeast Division during the
third quarter of 1994. The sale of the Southeast Division resulted in a $3.9
billion reduction in deposits. However, California Federal received a 4.10%
deposit premium which contributed to California Federal recording a $135.0
million net gain from the sale. See "Management's Discussion and Analysis of
Results of Operating and Financial Condition--Cal Fed."
INTEREST RATE RISK MANAGEMENT
California Federal's earnings are primarily determined by its net interest
income. Net interest income is affected by the interest rate spread, which is
the difference between the rates earned on its interest-
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<PAGE>
earning assets and rates paid on its interest-bearing liabilities, as well as
the relative amounts of its interest-earning assets and interest-bearing
liabilities. When interest-earning assets exceed interest-bearing
liabilities, any positive interest rate spread will generate net interest
income. California Federal's average interest rate spread for the years ended
December 31, 1995, 1994 and 1993 was 2.00%, 2.23% and 2.62%, respectively.
During 1995, average performing interest-earning assets exceeded average
interest-bearing liabilities by $457.7 million, or 3.32% of average
performing interest-earning assets and $19.4 million or 0.14% during 1994.
Average interest-bearing liabilities exceeded average performing
interest-earning assets by $773.6 million or 4.95% of average
interest-bearing liabilities during 1993.
California Federal is subject to interest rate risk to the degree that its
interest-bearing liabilities mature or reprice more rapidly, or on a
different basis, than its interest-earning assets. While having liabilities
that mature or reprice more frequently than assets may be beneficial in times
of declining interest rates, such an asset and liability structure may be
detrimental to operations during periods of rising interest rates. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--California Federal."
In order to reduce interest rate risk, California Federal has emphasized
the origination of adjustable rate mortgage loans that reprice more closely
with its interest-bearing liabilities. California Federal originates fixed
rate loans primarily for resale. At December 31, 1995, 88.1% of California
Federal's portfolio of loans and mortgage-backed securities consisted of
adjustable rate instruments as compared to 88.9% at December 31, 1994 and
84.3% at December 31, 1993. During 1995, 79.1% of real estate loans
originated bore adjustable rates compared to 91.4% in 1994 and 69.2% in 1993.
LENDING ACTIVITIES
Since 1990, California Federal has focused its lending operations
primarily on the origination of residential 1-4 loans. During the last
several years, California Federal generally has originated fixed rate
residential 1-4 loans that conform to the underwriting criteria of FNMA,
formerly known as the FHLMC, formerly known as the Federal Home Loan Mortgage
Corporation, primarily for sale, and adjustable rate residential 1-4 loans
primarily to be held in its portfolio of interest earning assets. Prior to
1990, California Federal was active in originating loans secured by income
producing property ("income property loans") but has significantly curtailed
this activity. During 1993, California Federal discontinued its origination
of income property loans including multi-family loans, except in conjunction
with sales of real estate held for sale. Prior to 1994, California Federal
originated loans secured by automobiles as well as secured and unsecured
personal loans ("consumer loans"), through California Thrift and Loan
("CTL"), a former subsidiary of California Federal. During 1995, California
Federal originated consumer loans primarily on an agent basis, and received a
fee for originating the loan from a third party. Prior to 1991, California
Federal was active in originating secured and unsecured loans to corporate
customers ("commercial banking loans"). During 1995, California Federal
initiated a new lending program designed to provide credit to small
businesses located in California ("Business Banking Loans"). The Business
Banking Loan program consists of several products, which include an unsecured
line of credit for a term of up to twelve months, and a loan secured by a
certificate of deposit for a term of no greater than five years. The maximum
amount of the line of credit that California Federal offered during 1995 was
$100,000 and these loans bore an interest rate based upon the prime rate plus
3%. The maximum loan amount for a loan secured by a certificate of deposit
was $250,000. At December 31, 1995, California Federal's outstanding Business
Banking Loan commitments totaled $3.1 million and are included with consumer
loans at December 31, 1995.
California Federal conducts its loan origination functions through its
offices in California and Nevada. Although California Federal has nationwide
lending authority, a substantial portion of California Federal's mortgage
loans are secured by real estate located in California. At December 31, 1995,
$8.1 billion or 87.6% of California Federal's portfolio of real estate loans
was secured by real estate located in California. California Federal has not
originated any loans outside of the United States.
California Federal offers a variety of residential 1-4 fixed rate and
adjustable rate loan programs, including loan programs which begin with a
three year or five year fixed rate period and convert to an adjustable rate
for the remainder of the loan. The adjustable rate residential loan programs
offered by
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<PAGE>
California Federal provide for interest rates that adjust periodically,
commencing within three to six months from the loan's inception, based on
changes in the monthly weighted average cost of funds for savings
institutions in the Eleventh Federal Home Loan Bank District, as computed
monthly by the FHLB or indices that fluctuate with U.S. Treasury rates.
Adjustments to the monthly payment of principal and interest occur either
semi-annually or annually depending on the loan program selected by the
borrower. However, to protect borrowers from unlimited interest rate and
payment increases, the majority of California Federal's adjustable rate loans
have a maximum interest rate change ("interest rate cap") from the initial
reduced interest rate period and/or over the life of the loan. Additionally,
the interest rate may change within a range of a two to six percentage point
increase or decrease in any given period. In certain loan programs, these
protections for borrowers can result in monthly payments which are greater or
less than the amount required to amortize the loan by its maturity at the
interest rate in effect in any particular month. In the event that the
monthly payment is not sufficient to pay the interest accruing during the
month, the deficiency is added to the loan's principal balance ("negative
amortization"). In the event that a loan incurs significant negative
amortization, there is an increased risk that the market value of the
underlying collateral on the loan may be insufficient to fully satisfy the
outstanding principal and interest. In the event that the monthly payment
exceeds the amount necessary to pay the interest accruing during the month,
the excess is applied to reduce the loan's principal balance, which would
result in an earlier payoff of the loan.
Negative amortization may result in an increased risk that the value of
the collateral securing the loan may be insufficient to fully satisfy the
outstanding principal and interest in the case of a default by the borrower.
However, negative amortization also serves to reduce the amount of payment
increase during periods of rising rates. In periods of rapidly rising
interest rates, monthly payments on adjustable rate loans may increase
sharply, resulting in a hardship for borrowers. Negative amortization reduces
the increase in the payments for borrowers. While the outstanding balance of
the loan may increase because of negative amortization, the risk of default
may be decreased as borrowers have a lower debt service burden or a debt
service requirement that increases more slowly than fully amortizing loans.
California Federal also originates certain 15 and 30 year fully amortizing
fixed rate residential 1-4 loans, that conform to the underwriting
requirements of FNMA, primarily for resale in the secondary market. When
loans are sold, California Federal normally retains the right to service the
loan. Substantially all fixed rate loans in California Federal's loan
portfolio contain a "due-on-sale" clause which provides that California
Federal may, subject to certain regulatory restrictions, declare the unpaid
principal amount due and payable upon the resale of the mortgaged property.
Although adjustable rate loans in California Federal's loan portfolio contain
a due-on-sale clause, by their terms they are transferable to a purchaser of
the property if the purchaser meets California Federal's credit standards.
California Federal originates or purchases loans through several
distribution channels, including: (i) through its lending offices located in
California and Nevada ("retail loan production"), (ii) through a network of
brokers who direct their clients to California Federal ("wholesale loan
production"), (iii) through correspondent mortgage banking organizations,
which originate loans, using California Federal's underwriting requirements,
and then sell the loan to California Federal and (iv) purchases of loan
pools.
California Federal utilizes several distribution channels for loan
production in order to maximize its production efforts in a cost effective
manner and to mitigate its dependence upon a single origination source.
Wholesale loan production became a significantly greater source of loan
production during 1995 and 1994, as compared to retail sources. During 1995,
wholesale production of loans totaled $1.0 billion as compared to $1.5
billion during 1994. Retail loan production totalled $621.6 million and
$784.7 million during 1995 and 1994, respectively. Additionally, during 1995
California Federal purchased a greater percentage of its loan production than
in prior years. During 1995, California Federal purchased $578.2 million of
loans, all but $139.9 million of which continued to be serviced by other
financial institutions. California Federal utilized wholesale production and
loan purchases to supplement its loan production.
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<PAGE>
The table below shows California Federal's total loan originations and
purchases for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate
Residential 1-4:
Fixed rate(A) ...................... $ 456.1 $ 186.2 $ 824.3 $1,211.5 $1,212.2
Adjustable rate .................... 1,674.6 2,235.5 1,404.7 1,178.4 1,249.8
Multi-Family:
Fixed rate ......................... 0.8 3.0 5.7 18.1 9.0
Adjustable rate .................... 41.9 112.4 285.1 185.5 134.6
Commercial Real Estate:
Fixed rate ......................... 1.2 16.3 35.5 47.7 19.8
Adjustable rate .................... 62.2 79.5 45.6 69.3 19.3
Equity ................................ 10.5 22.5 210.5 259.2 257.9
---------- ---------- ---------- ---------- ----------
Total real estate ...................... 2,247.3 2,655.4 2,811.4 2,969.7 2,902.6
Commercial banking .................... -- 0.5 1.9 56.5 96.2
Consumer .............................. 99.3 118.6 129.2 332.2 330.3
---------- ---------- ---------- ---------- ----------
Total loans originated and purchased(B) 2,346.6 2,774.5 2,942.5 3,358.4 3,329.1
Loans refinanced ....................... (100.5) (155.2) (204.5) (298.8) (140.3)
---------- ---------- ---------- ---------- ----------
Net loans booked ....................... $2,246.1 $2,619.3 $2,738.0 $3,059.6 $3,188.8
========== ========== ========== ========== ==========
</TABLE>
- ------------
(A) Includes certain loans that will convert to an adjustable rate after an
initial fixed rate period of 3 or 5 years.
(B) Includes purchases of $578.2 million, $229.2 million, $115.0 million,
$99.7 million and $241.5 million for 1995, 1994, 1993, 1992 and 1991,
respectively.
The table below shows the number and dollar amount of loans originated and
purchased by California Federal. Adjustable rate loan originations and
purchases are presented by rate adjustment index.
169
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1995
-----------------------------------------
NUMBER OF AVERAGE LOAN
LOANS AMOUNTS AMOUNT
----------- ------------ --------------
(DOLLARS IN (DOLLARS IN
MILLIONS) THOUSANDS)
<S> <C> <C> <C>
Loans Originated:
Residential 1-4:
Wholesale:
Fixed .................. 60 $ 11.1 $185.0
3 or 5 year
fixed-- Treasury ....... 757 226.7 299.5
1 year Treasury ........ 39 13.5 346.2
11th District COFI .... 2,692 773.8 287.4
----------- ------------
Residential
1-4--Wholesale ......... 3,548 1,025.1 288.9
Retail:
Fixed .................. 1,588 142.4 89.7
3 or 5 year
fixed-- Treasury ....... 366 85.8 234.4
1 year Treasury ........ 35 7.1 202.9
11th District COFI .... 1,897 386.3 203.6
----------- ------------
Residential 1-4--Retail 3,886 621.6 160.0
----------- ------------
Total Residential 1-4 ... 7,434 1,646.7 221.5
Multi-family ............. 57 20.6 361.4
Commercial real estate .. 5 1.8 360.0
Commercial banking ....... -- -- --
Consumer ................. 3,038 99.3 32.7
----------- ------------
Total loans originated ... 10,534 $1,768.4 $167.9
=========== ============
Loans Purchased:
Residential 1-4:
Fixed ................... 25 $ 0.6 $ 24.0
1 year Treasury ......... 1,313 382.8 291.5
11th District COFI ..... 522 100.7 192.9
Other ................... 38 10.4 273.7
----------- ------------
Residential 1-4--Retail . 1,898 494.5 260.5
Multi-family ............. 87 22.1 254.0
Commercial real estate .. 130 61.6 473.8
----------- ------------
Total loans purchased .... 2,115 578.2 273.4
=========== ============
Total loans originated and
purchased ................ 12,649 $2,346.6 $185.5
=========== ============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1994
-----------------------------------------
NUMBER OF AVERAGE LOAN
LOANS AMOUNT AMOUNT
----------- ------------ --------------
(DOLLARS IN (DOLLARS IN
MILLIONS) THOUSANDS)
<S> <C> <C> <C>
Loans Originated:
Residential 1-4:
Wholesale:
Fixed .................. 43 $ 5.2 $ 120.9
3 or 5 year
fixed-- Treasury ....... 342 84.7 247.7
1 year Treasury ........ 915 278.9 304.8
11th District COFI .... 3,951 1,168.9 295.8
----------- ------------
Residential
1-4--Wholesale ......... 5,251 1,537.7 292.8
Retail:
Fixed .................. 2,005 145.8 72.7
3 or 5 year
fixed-- Treasury ....... 149 18.5 124.2
1 year Treasury ........ 1,652 276.1 167.1
11th District COFI .... 1,778 344.3 193.6
----------- ------------
Residential 1-4--Retail 5,584 784.7 140.5
----------- ------------
Total Residential 1-4 ... 10,835 2,322.4 214.3
Multi-family ............. 100 54.3 543.0
Commercial real estate .. 25 49.5 1,980.0
Commercial banking ....... 1 0.5 500.0
Consumer ................. 4,838 118.6 24.5
----------- ------------
Total loans originated ... 15,799 $2,545.3 $ 161.1
=========== ============
Loans Purchased:
Residential 1-4:
Fixed ................... 36 $ 0.9 $ 25.0
1 year Treasury ......... 283 73.4 259.4
11th District COFI ..... 195 35.6 182.6
Other ................... 73 11.9 163.0
----------- ------------
Residential 1-4--Retail . 587 121.8 207.5
Multi-family ............. 71 61.1 860.6
Commercial real estate .. 12 46.3 3,858.3
----------- ------------
Total loans purchased .... 670 229.2 342.1
=========== ============
Total loans originated and
purchased ................ 16,469 $2,774.5 $ 168.5
=========== ============
</TABLE>
170
<PAGE>
The composition of California Federal's loan portfolio is set forth in the
following table at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real estate:
Residential 1-4:
Fixed rate ......................... $ 965.4 $ 686.5 $ 871.1 $ 1,242.5 $ 1,669.2
Adjustable rate .................... 6,312.2 5,856.8 5,189.9 5,416.2 6,808.0
---------- ---------- ---------- ----------- ----------
7,277.6 6,543.3 6,061.0 6,658.7 8,477.2
Multi-Family:
Fixed rate ......................... 67.7 97.5 246.0 321.6 373.3
Adjustable rate .................... 1,278.5 1,360.6 2,019.6 2,099.1 2,293.7
---------- ---------- ---------- ----------- ----------
1,346.2 1,458.1 2,265.6 2,420.7 2,667.0
Commercial Real Estate:
Fixed rate ......................... 53.6 74.8 216.4 224.8 241.4
Adjustable rate .................... 488.4 490.3 740.3 877.8 1,002.4
---------- ---------- ---------- ----------- ----------
542.0 565.1 956.7 1,102.6 1,243.8
Equity .............................. 64.1 79.3 84.5 186.7 337.8
---------- ---------- ---------- ----------- ----------
Total real estate .................. 9,229.9 8,645.8 9,367.8 10,368.7 12,725.8
Commercial banking ................... -- -- 85.2 280.9 403.7
Consumer ............................. 249.6 322.6 433.7 925.5 978.2
---------- ---------- ---------- ----------- ----------
9,479.5 8,968.4 9,886.7 11,575.1 14,107.7
Less:
Undisbursed loan funds .............. 0.1 -- 1.3 4.9 31.4
Deferred loan (costs) fees .......... (13.9) (4.3) 23.8 42.0 52.6
Allowance for loan losses ........... 181.0 211.6 254.3 324.0 332.4
Unearned interest on equity/consumer
loans .............................. 1.3 4.1 10.6 56.9 66.9
Discount on acquired loans .......... 7.4 9.7 13.4 18.0 24.0
Other deferrals ..................... -- -- 11.4 27.2 23.7
---------- ---------- ---------- ----------- ----------
Total loans receivable ............... 9,303.6 8,747.3 9,571.9 11,102.1 13,576.7
Less: Loans held for sale(A) ......... 13.6 1.3 44.3 497.7 209.7
---------- ---------- ---------- ----------- ----------
Loans receivable held for investment $9,290.0 $8,746.0 $9,527.6 $10,604.4 $13,367.0
========== ========== ========== =========== ==========
</TABLE>
- ------------
(A) See the Notes to the consolidated financial statements of Cal Fed for
further details.
The reduction in California Federal's loan portfolio since 1991 is due
primarily to (i) reduced levels of originations, (ii) a high level of loan
repayments, (iii) the sale of CTL, a subsidiary that specialized in the
origination of consumer loans, (iv) the sale or securitization of loans, (v)
bulk sale transactions and (vi) California Federal's need to comply with the
capital requirements of FIRREA. During 1994, California Federal sold $1.3
billion of loans through a series of Bulk Sale transactions. The 1994 Bulk
Sale transactions were designed to reduce California Federal's credit risk
and concentrations of non-performing and income property loans.
171
<PAGE>
The table below shows the geographic distribution of California Federal's
gross real estate loan portfolio at December 31, 1995, 1994 and 1993,
respectively:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993
------------------ -------------------- ------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
California .... $8,085.7 87.6% $7,467.9 86.4% $7,770.3 83.0%
Florida ....... 514.0 5.6 630.3 7.3 756.5 8.1
Nevada ........ 234.3 2.5 240.8 2.8 288.7 3.1
Georgia ....... 89.6 1.0 103.6 1.2 159.6 1.7
New York ...... 34.5 0.4 30.5 0.3 36.9 0.4
Arizona ....... 33.1 0.4 24.2 0.3 48.2 0.5
New Jersey .... 32.5 0.4 27.9 0.3 38.7 0.4
Texas ......... 27.9 0.3 25.0 0.3 98.0 1.0
Connecticut .. 21.0 0.2 23.0 0.3 27.6 0.3
Washington .... 18.4 0.2 9.5 0.1 39.7 0.4
Colorado ...... 18.0 0.2 5.7 0.1 10.2 0.1
Illinois ...... 12.5 0.1 2.6 -- 3.9 --
Other ......... 108.4 1.1 54.8 0.6 89.5 1.0
---------- -------- ---------- -------- ---------- -------
$9,229.9 100.0% $8,645.8 100.0% $9,367.8 100.0%
========== ======== ========== ======== ========== =======
</TABLE>
The following table presents the composition of California Federal's gross
real estate loan portfolio by state and property type at December 31, 1995:
<TABLE>
<CAPTION>
RESIDENTIAL MULTI- SHOPPING
1-4 UNITS FAMILY CENTERS
------------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
California .... $6,338.4 $1,234.6 $73.1
Florida ....... 467.7 31.5 3.4
Nevada ........ 186.3 41.7 3.2
Georgia ....... 79.7 7.9 0.2
New York ...... 34.4 0.1 --
Arizona ....... 16.2 15.3 0.9
New Jersey .... 32.5 -- --
Texas ......... 24.8 2.5 0.6
Connecticut .. 21.0 -- --
Washington .... 13.5 4.9 --
Colorado ...... 16.4 -- --
Illinois ...... 11.4 1.1 --
Other(A) ...... 99.4 6.6 0.4
------------- ---------- ----------
Total ....... $7,341.7 $1,346.2 $81.8
============= ========== ==========
% of Total .... 79.6% 14.6% 0.9%
============= ========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OTHER
OFFICE COMMERCIAL/ INCOME % OF
BUILDINGS INDUSTRIAL PROPERTY TOTAL TOTAL
----------- ------------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
California .... $157.4 $265.4 $16.8 $8,085.7 87.6%
Florida ....... 4.7 5.0 1.7 514.0 5.6
Nevada ........ 2.3 0.2 0.6 234.3 2.5
Georgia ....... 1.2 -- 0.6 89.6 1.0
New York ...... -- -- -- 34.5 0.4
Arizona ....... 0.5 -- 0.2 33.1 0.4
New Jersey .... -- -- -- 32.5 0.4
Texas ......... -- -- -- 27.9 0.3
Connecticut .. -- -- -- 21.0 0.2
Washington .... -- -- -- 18.4 0.2
Colorado ...... 1.6 -- -- 18.0 0.2
Illinois ...... -- -- -- 12.5 0.1
Other(A) ...... 1.2 -- 0.8 108.4 1.1
----------- ------------- ---------- ---------- --------
Total ....... $168.9 $270.6 $20.7 $9,229.9 100.0%
=========== ============= ========== ========== ========
% of Total .... 1.8% 2.9% 0.2% 100.0%
=========== ============= ========== ==========
</TABLE>
- ------------
(A) Includes states with aggregate gross real estate loans that are less
than $11.0 million.
172
<PAGE>
The following table presents California Federal's mortgage and residential
1-4 equity loan portfolio secured by collateral located in California at
December 31, 1995:
<TABLE>
<CAPTION>
RESIDENTIAL 1-4 MULTI- COMMERCIAL TOTAL
UNITS FAMILY REAL ESTATE REAL ESTATE % OF TOTAL
--------------- ---------- ------------- ------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
County: Los Angeles
- --------------------------
Los Angeles ............... $ 509.4 $ 217.0 $ 22.7 $ 749.1 9.3%
Beverly Hills ............. 184.5 14.4 7.3 206.2 2.5
Long Beach ................ 87.6 103.1 3.7 194.4 2.4
Palos Verdes .............. 134.3 0.7 0.4 135.4 1.7
West Hollywood ............ 83.6 32.0 0.9 116.5 1.4
Santa Monica .............. 79.2 24.7 4.4 108.3 1.3
Pacific Palisades ......... 91.7 1.7 -- 93.4 1.2
Glendale .................. 42.0 39.0 3.1 84.1 1.0
Calabasas ................. 68.8 1.2 -- 70.0 0.9
Pasadena .................. 41.4 11.9 8.8 62.1 0.8
Malibu .................... 56.6 1.8 2.8 61.2 0.8
Torrance .................. 34.1 14.4 10.5 59.0 0.7
Redondo Beach ............. 48.4 7.4 2.0 57.8 0.7
Manhattan Beach ........... 54.3 1.3 0.6 56.2 0.7
Canoga Park ............... 42.8 10.1 2.1 55.0 0.7
Sherman Oaks .............. 32.1 22.4 -- 54.5 0.7
Northridge ................ 49.2 1.1 2.2 52.5 0.6
Van Nuys .................. 23.2 26.3 1.7 51.2 0.6
Encino .................... 45.2 1.6 -- 46.8 0.6
Woodland Hills ............ 44.2 1.4 1.1 46.7 0.6
Rosemead .................. 3.8 1.7 40.2 45.7 0.6
Burbank ................... 28.2 12.0 5.0 45.2 0.5
North Hollywood ........... 20.9 20.8 0.7 42.4 0.5
All Other ................. 767.0 220.2 54.8 1,042.0 12.9
--------------- ---------- ------------- ------------- ------------
Total Los Angeles County 2,572.5 788.2 175.0 3,535.7 43.7
=============== ========== ============= ============= ============
County: Orange
- --------------------------
Huntington Beach .......... 97.2 16.8 17.3 131.3 1.6
Newport Beach ............. 100.1 0.3 3.4 103.8 1.3
Anaheim ................... 42.7 13.0 27.4 83.1 1.0
Santa Ana ................. 37.6 13.6 18.7 69.9 0.9
Mission Viejo ............. 55.9 0.3 2.5 58.7 0.7
South Laguna .............. 58.1 -- -- 58.1 0.7
Orange .................... 34.6 3.6 19.4 57.6 0.7
Irvine .................... 37.9 -- 17.8 55.7 0.7
Costa Mesa ................ 26.6 8.3 2.8 37.7 0.5
All Other ................. 328.9 43.5 58.8 431.2 5.4
--------------- ---------- ------------- ------------- ------------
Total Orange County ..... 819.6 99.4 168.1 1,087.1 13.5
--------------- ---------- ------------- ------------- ------------
Other Counties
- --------------------------
San Mateo ................. 490.0 16.0 5.5 511.5 6.3
San Diego ................. 340.6 148.0 20.5 509.1 6.3
Santa Clara ............... 389.1 21.8 38.3 449.2 5.6
San Francisco ............. 267.4 21.4 12.5 301.3 3.7
Marin ..................... 284.4 7.3 1.4 293.1 3.6
Ventura ................... 260.1 11.0 8.2 279.3 3.5
All Other ................. 914.7 121.5 83.2 1,119.4 13.8
--------------- ---------- ------------- ------------- ------------
Total Other Counties .... 2,946.3 347.0 169.6 3,462.9 42.8
--------------- ---------- ------------- ------------- ------------
Total California ......... $6,338.4 $1,234.6 $512.7 $8,085.7 100.0%
=============== ========== ============= ============= ============
Percentage of Total ..... 78.4% 15.3% 6.3% 100.0%
=============== ========== ============= =============
</TABLE>
173
<PAGE>
The table below shows the composition of the residential 1-4 loan and the
residential 1-4 equity portfolio by year of origination and size of
outstanding balance at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF RESIDENTIAL
1-4 AND EQUITY LOANS
------------------------------------------------------
YEAR OF 100K- 200K- 300K- 400K-
ORIGINATION 0-99K 199K 299K 399K 499K
- -------------- ---------- ---------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 65.2 $ 371.2 $ 545.6 $335.1 $225.2
1994 .......... 100.3 389.6 433.7 252.2 148.4
1993 .......... 80.3 167.0 191.2 112.3 63.4
1992 .......... 30.6 68.3 52.7 30.8 22.8
1991 .......... 31.8 84.2 65.8 42.5 29.7
1990 .......... 63.8 150.6 112.1 63.9 41.7
1989 .......... 68.0 86.2 63.3 24.5 12.8
1988 .......... 124.7 204.9 130.5 48.6 24.4
1987 .......... 102.0 62.7 29.6 6.8 7.4
1986 .......... 63.0 43.0 19.6 11.2 5.2
1985 .......... 60.2 45.0 15.8 3.1 2.6
1984 .......... 73.7 35.7 6.6 0.7 0.8
1983 .......... 46.7 16.4 1.8 0.4 0.4
1982 .......... 7.9 1.4 0.2 -- --
1981 .......... 2.6 1.0 -- -- --
Prior to 1981 90.5 3.9 1.0 -- --
---------- ---------- ---------- -------- --------
Total ....... $1,011.3 $1,731.1 $1,669.5 $932.1 $584.8
========== ========== ========== ======== ========
% of Total .... 13.8% 23.6% 22.7% 12.7% 8.0%
========== ========== ========== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 500K- 600K- % OF
ORIGINATION 599K 999K 1,000K+ TOTAL TOTAL
- -------------- -------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
1995 .......... $108.7 $207.4 $ 41.9 $1,900.3 25.9 %
1994 .......... 91.5 239.9 67.9 1,723.5 23.5 %
1993 .......... 27.7 113.6 26.0 781.5 10.6 %
1992 .......... 7.8 67.2 16.5 296.7 4.0 %
1991 .......... 16.3 62.0 20.1 352.4 4.8 %
1990 .......... 26.2 70.0 44.2 572.5 7.8 %
1989 .......... 6.5 18.5 17.0 296.8 4.0 %
1988 .......... 11.3 50.0 17.1 611.5 8.3 %
1987 .......... 2.8 19.0 8.5 238.8 3.3 %
1986 .......... 1.1 -- -- 143.1 2.0 %
1985 .......... 2.3 2.8 1.1 132.9 1.8 %
1984 .......... -- -- -- 117.5 1.6 %
1983 .......... -- -- -- 65.7 0.9 %
1982 .......... -- -- -- 9.5 0.1 %
1981 .......... -- -- -- 3.6 0.1 %
Prior to 1981 -- -- -- 95.4 1.3 %
-------- -------- --------- ---------- --------
Total ....... $302.2 $850.4 $260.3 $7,341.7 100.0%
======== ======== ========= ========== ========
% of Total .... 4.1% 11.6% 3.5 % 100.0%
======== ======== ========= ==========
</TABLE>
The table below shows the composition of the residential 1-4 loan and the
residential 1-4 equity portfolio by year of origination and by the original
LTV as of December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 COMPOSITION OF
RESIDENTIAL 1-4 LOAN PORTFOLIO BY YEAR OF
ORIGINATION
AND ORIGINAL LTV
------------------------------------------
YEAR OF
ORIGINATION 0-50% 51-60% 61-70% 71-80%
- -------------- -------- -------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1995 .......... $132.8 $163.2 $ 300.8 $ 958.3
1994 .......... 143.3 144.5 328.9 843.6
1993 .......... 94.6 89.2 177.8 332.4
1992 .......... 31.4 22.8 82.3 140.0
1991 .......... 23.0 28.3 86.1 185.8
1990 .......... 21.0 38.3 89.3 357.8
1989 .......... 11.3 12.1 32.9 171.0
1988 .......... 15.0 26.5 68.5 361.8
1987 .......... 9.6 13.2 43.5 130.6
1986 .......... 6.9 7.8 18.6 88.1
1985 .......... 7.8 7.0 18.6 83.4
1984 .......... 8.5 6.8 15.6 67.4
1983 .......... 3.6 3.5 8.5 36.7
1982 .......... 1.0 0.8 1.1 3.8
1981 .......... 0.6 0.2 0.4 2.0
Prior to 1981 1.6 2.5 9.1 50.4
-------- -------- ---------- ----------
Total ....... $512.0 $566.7 $1,282.0 $3,813.1
======== ======== ========== ==========
% of Total .... 7.0% 7.7 % 17.5% 51.9%
======== ======== ========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
GREATER
YEAR OF THAN
ORIGINATION 81-90% 91-95% 95% TOTAL % OF TOTAL
- -------------- -------- -------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C>
1995 .......... $208.9 $135.4 $0.9 $1,900.3 25.9 %
1994 .......... 173.1 89.7 0.4 1,723.5 23.5 %
1993 .......... 66.7 17.3 3.5 781.5 10.6 %
1992 .......... 17.5 2.7 -- 296.7 4.0 %
1991 .......... 27.4 0.5 1.3 352.4 4.8 %
1990 .......... 63.5 2.4 0.2 572.5 7.8 %
1989 .......... 65.0 3.8 0.7 296.8 4.0 %
1988 .......... 134.6 3.8 1.3 611.5 8.3 %
1987 .......... 33.8 5.8 2.3 238.8 3.3 %
1986 .......... 16.7 4.2 0.8 143.1 2.0 %
1985 .......... 9.5 6.3 0.3 132.9 1.8 %
1984 .......... 12.5 6.2 0.5 117.5 1.6 %
1983 .......... 9.1 3.6 0.7 65.7 0.9 %
1982 .......... 1.6 1.1 0.1 9.5 0.1 %
1981 .......... 0.3 0.1 -- 3.6 0.1 %
Prior to 1981 11.9 3.4 16.5 95.4 1.3 %
-------- -------- ------- ---------- ------------
Total ....... $852.1 $286.3 $29.5 $7,341.7 100.0%
======== ======== ======= ========== ============
% of Total .... 11.6% 3.9% 0.4% 100.0%
======== ======== ======= ==========
</TABLE>
174
<PAGE>
The table below shows the composition of the delinquent residential 1-4
loan and the delinquent residential 1-4 equity loan portfolio by year of
origination and size of outstanding balance at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF
DELINQUENT RESIDENTIAL 1-4 AND
DELINQUENT EQUITY LOANS
----------------------------------------------
YEAR OF 100K- 200K- 300K- 400K-
ORIGINATION 0-99K 199K 299K 399K 499K
- -------------- -------- -------- -------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 0.2 $ 1.7 $ 1.7 $ -- $ --
1994 .......... 0.2 2.8 1.4 0.6 --
1993 .......... 0.7 1.3 3.2 0.7 2.3
1992 .......... 0.9 1.0 0.7 0.7 1.0
1991 .......... 0.8 2.7 3.8 4.1 1.8
1990 .......... 1.4 6.2 4.7 3.6 2.6
1989 .......... 2.4 4.4 3.1 0.3 0.4
1988 .......... 3.0 6.5 3.7 1.3 1.4
1987 .......... 1.7 1.0 1.2 -- 0.4
1986 .......... 1.1 0.7 0.5 -- 0.5
1985 .......... 1.0 0.3 -- -- --
1984 .......... 1.2 0.9 0.2 -- --
1983 .......... 1.6 0.4 -- -- --
1982 .......... 0.5 -- -- -- --
1981 .......... 0.1 -- -- -- --
Prior to 1981 1.4 0.2 -- -- --
-------- -------- -------- ------- -------
Total ....... $18.2 $30.1 $24.2 $11.3 $10.4
======== ======== ======== ======= =======
% of Total .... 14.3 % 23.7 % 19.0 % 8.9 % 8.2 %
======== ======== ======== ======= =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 500K- 600K- % OF
ORIGINATION 599K 999K 1,000K+ TOTAL TOTAL
- -------------- ------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
1995 .......... $ -- $ 0.6 $ -- $ 4.2 3.3%
1994 .......... -- -- 2.2 7.2 5.7%
1993 .......... 0.5 2.3 1.2 12.2 9.6%
1992 .......... 0.6 3.4 -- 8.3 6.5%
1991 .......... -- 3.1 1.1 17.4 13.7%
1990 .......... 2.9 5.5 5.7 32.6 25.6%
1989 .......... -- -- -- 10.6 8.3%
1988 .......... 0.5 1.3 -- 17.7 13.9%
1987 .......... 0.6 0.9 -- 5.8 4.5%
1986 .......... -- -- -- 2.8 2.2%
1985 .......... -- 0.6 -- 1.9 1.5%
1984 .......... -- -- -- 2.3 1.8%
1983 .......... -- -- -- 2.0 1.6%
1982 .......... -- -- -- 0.5 0.4%
1981 .......... -- -- -- 0.1 0.1%
Prior to 1981 -- -- -- 1.6 1.3%
------- -------- --------- -------- --------
Total ....... $5.1 $17.7 $10.2 $127.2 100.0%
======= ======== ========= ======== ========
% of Total .... 4.0 % 13.9 % 8.0% 100.0%
======= ======== ========= ========
</TABLE>
California Federal's residential 1-4 portfolio at December 31, 1995 is
primarily composed of loans originated during 1995, 1994 and 1993 (60.0%) and
loans with an outstanding balance less than $300,000 (60.1%). California
Federal's delinquencies and resulting 1995 residential 1-4 charge-offs have
primarily resulted from loans originated between 1988 and 1991. Additionally,
larger balance loans (those in excess of $300,000), comprised a substantial
amount of loans in which charge-offs have been recorded.
175
<PAGE>
The table below shows the composition of the multi-family loan portfolio
by year of origination and size of outstanding balance at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF
MULTI-FAMILY LOANS
---------------------------------------------------
YEAR OF 750K- 1,000K- 2,000K- 3,000K-
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K
- -------------- -------- -------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 17.1 $ 2.6 $ 4.9 $ -- $ --
1994 .......... 28.3 1.7 10.7 2.1 3.7
1993 .......... 69.2 24.5 26.9 4.7 --
1992 .......... 21.4 7.1 18.3 8.8 7.2
1991 .......... 15.5 8.9 12.4 -- --
1990 .......... 41.1 16.4 12.2 7.3 3.7
1989 .......... 17.8 3.4 4.5 -- 7.0
1988 .......... 140.5 15.2 22.4 6.7 7.2
1987 .......... 155.9 16.7 24.8 2.3 6.9
1986 .......... 177.6 15.3 12.9 11.3 10.6
1985 .......... 104.4 4.1 13.8 6.6 3.7
1984 .......... 41.8 1.0 1.9 -- --
1983 .......... 25.3 0.9 -- -- --
1982 .......... 1.1 0.9 -- -- --
1981 .......... 0.6 -- -- -- --
Prior to 1981 43.0 2.5 5.4 -- --
-------- -------- --------- --------- ---------
Total ....... $900.6 $121.2 $171.1 $49.8 $50.0
======== ======== ========= ========= =========
% of Total .... 66.9 % 9.0% 12.7 % 3.7% 3.7%
======== ======== ========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 4,000K- 5,000K- % OF
ORIGINATION 4,999K 5,999K 6,000K+ TOTAL TOTAL
- -------------- --------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
1995 .......... $ -- $ -- $ -- $ 24.6 1.8%
1994 .......... -- -- -- 46.5 3.5%
1993 .......... -- -- -- 125.3 9.3%
1992 .......... -- -- -- 62.8 4.7%
1991 .......... -- -- -- 36.8 2.7%
1990 .......... 4.7 -- 6.4 91.8 6.8%
1989 .......... 4.9 -- -- 37.6 2.8%
1988 .......... 4.6 5.3 -- 201.9 15.0%
1987 .......... 14.1 -- -- 220.7 16.4%
1986 .......... 8.1 5.4 -- 241.2 17.9%
1985 .......... -- -- -- 132.6 9.9%
1984 .......... -- -- -- 44.7 3.3%
1983 .......... -- -- -- 26.2 2.0%
1982 .......... -- -- -- 2.0 0.1%
1981 .......... -- -- -- 0.6 --%
Prior to 1981 -- -- -- 50.9 3.8%
--------- --------- --------- ---------- --------
Total ....... $36.4 $10.7 $6.4 $1,346.2 100.0%
========= ========= ========= ========== ========
% of Total .... 2.7% 0.8% 0.5% 100.0%
========= ========= ========= ==========
</TABLE>
The table below shows the composition of the multi-family loan portfolio
by year of origination and by original LTV:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 COMPOSITION OF
MULTI-FAMILY LOAN PORTFOLIO BY
YEAR OF ORIGINATION AND ORIGINAL LTV
-------------------------------------
YEAR OF
ORIGINATION 0-50% 51-60% 61-70% 71-80%
- -------------- ------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
1995 .......... $ 2.2 $ 2.1 $ 5.3 $ 9.3
1994 .......... 4.1 7.1 15.7 11.9
1993 .......... 18.1 23.3 42.0 40.3
1992 .......... 2.1 2.2 26.6 31.8
1991 .......... 4.9 2.5 16.3 12.7
1990 .......... 1.9 5.8 37.1 47.0
1989 .......... 0.5 0.9 11.8 23.8
1988 .......... 7.3 11.7 39.9 141.3
1987 .......... 7.7 8.0 52.2 150.9
1986 .......... 5.8 9.0 47.7 175.3
1985 .......... 6.3 8.4 27.8 89.7
1984 .......... 2.6 2.4 18.5 20.9
1983 .......... 1.8 2.8 11.2 10.4
1982 .......... 0.5 1.2 0.2 0.1
1981 .......... -- -- -- 0.6
Prior to 1981 1.0 1.6 12.5 35.8
------- -------- -------- --------
Total ....... $66.8 $89.0 $364.8 $801.8
======= ======== ======== ========
% of Total .... 5.0 % 6.6 % 27.1 % 59.6 %
======= ======== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
GREATER
YEAR OF THAN % OF
ORIGINATION 81-90% 91-95% 95% TOTAL TOTAL
- -------------- -------- -------- ------- ---------- --------
<S> <C> <C> <C> <C> <C>
1995 .......... $5.7 $ -- $ -- $ 24.6 1.8%
1994 .......... 7.5 0.2 -- 46.5 3.5%
1993 .......... 1.3 0.3 -- 125.3 9.3%
1992 .......... -- 0.1 -- 62.8 4.7%
1991 .......... 0.2 0.2 -- 36.8 2.7%
1990 .......... -- -- -- 91.8 6.8%
1989 .......... 0.6 -- -- 37.6 2.8%
1988 .......... 1.7 -- -- 201.9 15.0%
1987 .......... 0.8 -- 1.1 220.7 16.4%
1986 .......... 2.4 1.0 -- 241.2 17.9%
1985 .......... 0.4 -- -- 132.6 9.9%
1984 .......... 0.2 0.1 -- 44.7 3.3%
1983 .......... -- -- -- 26.2 2.0%
1982 .......... -- -- -- 2.0 0.1%
1981 .......... -- -- -- 0.6 --%
Prior to 1981 -- -- -- 50.9 3.8%
-------- -------- ------- ---------- --------
Total ....... $20.8 $1.9 $1.1 $1,346.2 100.0%
======== ======== ======= ========== ========
% of Total .... 1.5% 0.1% 0.1% 100.0%
======== ======== ======= ==========
</TABLE>
176
<PAGE>
The table below shows the composition of the delinquent multi-family loan
portfolio by year of origination and size of outstanding balance at December
31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF DELINQUENT
MULTI-FAMILY LOANS
---------------------------------------------------
YEAR OF 750K- 1,000K- 2,000K- 3,000K-
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K
- -------------- -------- -------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ -- $ -- $ -- $-- $--
1994 .......... 0.2 -- -- -- --
1993 .......... 0.3 -- -- -- --
1992 .......... 0.6 -- 1.6 -- --
1991 .......... 2.0 -- -- -- --
1990 .......... 1.5 0.8 -- -- --
1989 .......... -- -- -- -- --
1988 .......... 1.9 -- -- -- --
1987 .......... 1.4 0.9 -- -- --
1986 .......... 2.1 0.8 1.1 -- --
1985 .......... 2.0 0.8 -- -- --
1984 .......... 0.3 -- -- -- --
1983 .......... 0.2 -- -- -- --
1982 .......... -- -- -- -- --
1981 .......... -- -- -- -- --
Prior to 1981 0.4 -- -- -- --
-------- -------- --------- --------- ---------
Total ....... $12.9 $ 3.3 $ 2.7 $-- $--
======== ======== ========= ========= =========
% of Total .... 68.2 % 17.5 % 14.3% --% --%
======== ======== ========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 4,000K- 5,000K- % OF
ORIGINATION 4,999K 5,999K 6,000K+ TOTAL TOTAL
- -------------- --------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
1995 .......... $-- $-- $-- $ -- --%
1994 .......... -- -- -- 0.2 1.0 %
1993 .......... -- -- -- 0.3 1.6 %
1992 .......... -- -- -- 2.2 11.6 %
1991 .......... -- -- -- 2.0 10.6 %
1990 .......... -- -- -- 2.3 12.2 %
1989 .......... -- -- -- -- --%
1988 .......... -- -- -- 1.9 10.1 %
1987 .......... -- -- -- 2.3 12.2 %
1986 .......... -- -- -- 4.0 21.2 %
1985 .......... -- -- -- 2.8 14.8 %
1984 .......... -- -- -- 0.3 1.6 %
1983 .......... -- -- -- 0.2 1.0 %
1982 .......... -- -- -- -- -- %
1981 .......... -- -- -- -- -- %
Prior to 1981 -- -- -- 0.4 2.1 %
--------- --------- --------- ------- ---------
Total ....... $-- $-- $-- $ 18.9 100.0 %
========= ========= ========= ======= =========
% of Total .... --% --% --% 100.0%
========= ========= ========= =======
</TABLE>
California Federal's multi-family portfolio at December 31, 1995 was
primarily composed of loans originated during the period of 1985 through 1988
(59.2%) and loans less than $750,000 (66.9%). Correspondingly, 98.3% of
California Federal's multi-family loans had an original loan to value ratio
of 80% or less. California Federal's delinquent multi-family loans primarily
consist of lower balance loans, originated between 1984 through 1992. The
1994 Bulk Sales transactions contributed to a reduction in the amount of
delinquent loans and larger balance performing loans.
177
<PAGE>
The table below shows the composition of the commercial real estate loan
portfolio by year of origination and size of outstanding balance at December
31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF COMMERCIAL
REAL ESTATE LOANS
---------------------------------------------------
YEAR OF 750K- 1,000K- 2,000K- 3,000K-
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K
- -------------- -------- -------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 2.4 $ -- $ -- $ -- $ --
1994 .......... 3.8 1.8 5.2 -- --
1993 .......... 3.2 0.9 -- -- --
1992 .......... 1.5 1.0 1.3 -- 6.7
1991 .......... 0.8 -- -- -- --
1990 .......... 0.9 -- -- -- --
1989 .......... 17.1 -- 1.0 4.2 --
1988 .......... 65.3 18.8 26.5 2.2 7.1
1987 .......... 59.7 14.9 33.6 7.4 13.3
1986 .......... 52.6 9.2 16.2 5.1 --
1985 .......... 25.9 9.4 12.8 4.7 --
1984 .......... 4.7 -- 1.2 2.8 --
1983 .......... 0.1 0.8 -- -- --
1982 .......... -- -- -- -- --
1981 .......... -- -- -- -- --
Prior to 1981 15.8 0.8 -- -- --
-------- -------- --------- --------- ---------
Total ....... $253.8 $57.6 $97.8 $26.4 $27.1
======== ======== ========= ========= =========
% of Total .... 46.8% 10.6% 18.0% 4.9% 5.0%
======== ======== ========= ========= =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 4,000K- 5,000K- % OF
ORIGINATION 4,999K 5,999K 6,000K+ TOTAL TOTAL
- -------------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C>
1995 .......... $ -- $ -- $ -- $ 2.4 0.4%
1994 .......... 5.0 -- 29.0 44.8 8.3%
1993 .......... -- -- -- 4.1 0.8%
1992 .......... -- -- 7.6 18.1 3.3%
1991 .......... -- -- -- 0.8 0.1%
1990 .......... -- -- -- 0.9 0.2%
1989 .......... -- -- 7.8 30.1 5.5%
1988 .......... 9.1 -- -- 129.0 23.8%
1987 .......... -- 5.3 -- 134.2 24.8%
1986 .......... 4.7 -- -- 87.8 16.2%
1985 .......... -- -- -- 52.8 9.7%
1984 .......... -- -- -- 8.7 1.6%
1983 .......... -- -- 10.8 11.7 2.2%
1982 .......... -- -- -- -- --%
1981 .......... -- -- -- -- --%
Prior to 1981 -- -- -- 16.6 3.1%
--------- --------- --------- -------- ---------
Total ....... $18.8 $5.3 $55.2 $542.0 100.0%
========= ========= ========= ======== =========
% of Total .... 3.5% 1.0% 10.2% 100.0%
========= ========= ========= ========
</TABLE>
The table below shows the composition of the commercial real estate loan
portfolio by year of origination and by original LTV:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 COMPOSITION OF COMMERCIAL
REAL ESTATE LOAN PORTFOLIO
BY YEAR OF ORIGINATION AND ORIGINAL LTV
-----------------------------------------------
YEAR OF
ORIGINATION 0-50% 51-60% 61-70% 71-80% 81-90%
- -------------- ------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .......... $ 0.5 $ -- $ 0.4 $ 0.9 $0.6
1994 .......... 1.1 2.9 2.6 36.4 --
1993 .......... 1.2 1.6 -- 0.9 --
1992 .......... 4.7 9.0 0.4 1.0 3.0
1991 .......... -- -- -- 0.1 0.5
1990 .......... 0.1 -- -- 0.6 0.2
1989 .......... 1.5 3.8 10.0 14.8 --
1988 .......... 5.0 11.1 22.1 88.0 2.8
1987 .......... 4.7 10.3 29.8 88.4 0.5
1986 .......... 2.6 6.4 16.3 61.7 0.2
1985 .......... 4.5 2.3 10.3 35.7 --
1984 .......... 0.1 0.5 3.1 4.9 --
1983 .......... 10.9 -- 0.8 -- --
1982 .......... -- -- -- -- --
1981 .......... -- -- -- -- --
Prior to 1981 0.3 0.8 5.4 10.0 0.1
------- -------- -------- -------- --------
Total ....... $37.2 $48.7 $101.2 $343.4 $7.9
======= ======== ======== ======== ========
% of Total .... 6.9% 9.0% 18.6% 63.3% 1.5%
======= ======== ======== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
GREATER
YEAR OF THAN % OF
ORIGINATION 91-95% 95% TOTAL TOTAL
- -------------- -------- ------- -------- --------
<S> <C> <C> <C> <C>
1995 .......... $ -- $ -- $ 2.4 0.4%
1994 .......... 1.5 0.3 44.8 8.3%
1993 .......... 0.4 -- 4.1 0.8%
1992 .......... -- -- 18.1 3.3%
1991 .......... 0.2 -- 0.8 0.1%
1990 .......... -- -- 0.9 0.2%
1989 .......... -- -- 30.1 5.5%
1988 .......... -- -- 129.0 23.8%
1987 .......... -- 0.5 134.2 24.8%
1986 .......... -- 0.6 87.8 16.2%
1985 .......... -- -- 52.8 9.7%
1984 .......... 0.1 -- 8.7 1.6%
1983 .......... -- -- 11.7 2.2%
1982 .......... -- -- -- --%
1981 .......... -- -- -- --%
Prior to 1981 -- -- 16.6 3.1%
-------- ------- -------- --------
Total ....... $2.2 $1.4 $542.0 100.0%
======== ======= ======== ========
% of Total .... 0.4% 0.3% 100.0%
======== ======= ========
</TABLE>
178
<PAGE>
The table below shows the composition of the delinquent commercial real
estate loan portfolio by year of origination and size of outstanding balance
at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 OUTSTANDING BALANCE OF DELINQUENT
COMMERCIAL REAL ESTATE LOANS
-------------------------------------------------------------
YEAR OF 750K- 1,000K- 2,000K- 3,000K-
ORIGINATION 0-749K 999K 1,999K 2,999K 3,999K
- ------------------ ----------- --------- ----------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
1995 .............. $ -- $-- $ -- $-- $--
1994 .............. -- -- -- -- --
1993 .............. -- -- -- -- --
1992 .............. -- -- -- -- --
1991 .............. 0.2 -- -- -- --
1990 .............. -- -- -- -- --
1989 .............. 0.7 -- 1.3 -- --
1988 .............. 0.4 -- -- -- --
1987 .............. -- -- -- -- --
1986 .............. 0.1 -- -- -- --
1985 .............. -- -- -- -- --
1984 .............. -- -- -- -- --
1983 .............. -- -- -- -- --
1982 .............. -- -- -- -- --
1981 .............. -- -- -- -- --
Prior to 1981 ..... 0.1 -- -- -- --
----------- --------- ----------- ----------- -----------
Total ........... $ 1.5 $-- $ 1.3 $-- $--
=========== ========= =========== =========== ===========
% of Total ........ 53.6 % --% 46.4% --% --%
=========== ========= =========== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
YEAR OF 4,000K- 5,000K- % OF
ORIGINATION 4,999K 5,999K 6,000K+ TOTAL TOTAL
- ------------------ ----------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
1995 .............. $-- $-- $-- $ -- --%
1994 .............. -- -- -- -- --%
1993 .............. -- -- -- -- --%
1992 .............. -- -- -- -- --%
1991 .............. -- -- -- 0.2 7.1%
1990 .............. -- -- -- -- --%
1989 .............. -- -- -- 2.0 71.4%
1988 .............. -- -- -- 0.4 14.3%
1987 .............. -- -- -- -- --%
1986 .............. -- -- -- 0.1 3.6%
1985 .............. -- -- -- -- --%
1984 .............. -- -- -- -- --%
1983 .............. -- -- -- -- --%
1982 .............. -- -- -- -- --%
1981 .............. -- -- -- -- --%
Prior to 1981 ..... -- -- -- 0.1 3.6%
----------- ----------- ----------- --------- ----------
Total ........... $-- $-- $-- $ 2.8 100.0%
=========== =========== =========== ========= ==========
% of Total ........ --% --% --% 100.0%
=========== =========== =========== =========
</TABLE>
Since 1990, California Federal has not been active in the origination of
commercial real estate loans, except to finance the sale of real estate. At
December 31, 1995 $403.8 million, or 74.5% of California Federal's commercial
real estate loan portfolio was comprised of loans originated between 1985
through 1988. The 1994 Bulk Sales included a substantial amount of delinquent
commercial real estate loans and large performing loans. At December 31,
1995, 53.7% of California Federal's commercial real estate loan portfolio was
concentrated in commercial warehouses and industrial buildings. Many of these
loans are occupied by owner users with balances that are typically $1.0
million or lower.
<PAGE>
The composition of California Federal's gross consumer loan portfolio is
set forth in the following table at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Consumer loans:
Mobile homes ............. $ 66.3 $ 79.6 $ 95.6
Vehicles ................. 21.5 49.4 98.2
Equity credit line ....... 137.8 168.7 203.9
Unsecured ................ 14.6 16.1 20.5
Loans secured by deposits 9.4 8.8 15.5
-------- -------- -------
Total consumer loans .. $249.6 $322.6 $433.7
======== ======== =======
</TABLE>
Since 1993, California Federal has ceased actively originating consumer
loans for its own portfolio. California Federal has continued to originate
consumer loans on an agency basis for other financial institutions.
Additionally, in 1993, California Federal sold CTL, a subsidiary of
California Federal that had specialized in the origination of automobile
loans, further reducing the level of California Federal's consumer loan
portfolio.
179
<PAGE>
At December 31, 1995, $1.1 billion of fixed rate loans and approximately
$8.3 billion of adjustable rate loans were contractually due after one year.
The following table presents the remaining contractual maturities of
California Federal's gross loan portfolio at December 31, 1995:
<TABLE>
<CAPTION>
REMAINING CONTRACTUAL MATURITY
------------------------------------------------------------------------------------------
OVER ONE OVER THREE OVER FIVE OVER TEN
WITHIN BUT WITHIN BUT WITHIN BUT WITHIN BUT WITHIN OVER
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS 15 YEARS 15 YEARS TOTAL
---------- ------------- ------------ ------------ ------------ ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
Residential 1-4:
Fixed rate ...... $ 6.0 $11.6 $ 26.1 $ 74.9 $ 71.5 $ 775.3 $ 965.4
Adjustable rate 1.4 1.2 4.1 16.8 35.9 6,252.8 6,312.2
Income property:
Fixed rate ...... 20.4 11.9 24.4 35.1 26.9 2.6 121.3
Adjustable rate 24.0 20.9 153.3 334.3 53.2 1,181.2 1,766.9
Equity ........... 0.7 5.0 4.4 12.4 30.5 11.1 64.1
---------- ------------- ------------ ------------ ------------ ---------- ---------
Total real estate 52.5 50.6 212.3 473.5 218.0 8,223.0 9,229.9
Consumer .......... 36.2 37.4 47.0 68.1 41.7 19.2 249.6
---------- ------------- ------------ ------------ ------------ ---------- ---------
$88.7 $88.0 $259.3 $541.6 $259.7 $8,242.2 $9,479.5
========== ============= ============ ============ ============ ========== =========
</TABLE>
Sales of Loans and Loan Servicing Activities.
From time to time, California Federal sells loans in order to manage the
growth of its loan portfolio, to aid in managing its capital position, to
provide additional sources of cash flow, to enable California Federal to
refine the composition and interest rate sensitivity of its loan portfolio
and for other reasons. California Federal's loans held for sale were $13.6
million and $1.3 million at December 31, 1995 and 1994, respectively.
California Federal continually reviews the composition and level of its loan
origination activity in order to determine the level of loans originated for
sale. Fixed rate residential 1-4 loans that conform to the underwriting
criteria of FHLMC and FNMA, are generally originated for sale, while
originations of adjustable rate mortgage loans and non-conforming fixed rate
loans have been primarily for investment. California Federal has established
desired ranges for portfolio and asset growth based upon numerous factors,
including origination volume and mix, portfolio repayments and payoffs,
desired servicing portfolio levels and regulatory capital requirements. These
factors collectively enter into the determination of the amount of fixed rate
loans originated for sale. California Federal typically does not hold such
loans in its long-term portfolio because of asset/liability management
considerations.
California Federal records gains or losses from the sale of loans that it
continues to service for others by computing the present value of the
difference between the yield on the loans sold and the yield to be paid to
the buyer, reduced by normal servicing fees ("excess servicing"), over the
estimated remaining life of the loans. The present value gain or loss is
based upon market prepayment, default and discount rate assumptions. An asset
(i.e., the present value of excess servicing) equal to the present value gain
is recorded at the time a loan is sold and is amortized over the estimated
remaining life of the loan. California Federal monitors actual prepayments on
the related loans and reduces the balance of the recorded amount of excess
servicing by a charge to earnings if actual prepayments exceed California
Federal's estimate. At December 31, 1995, the amount of capitalized excess
servicing recorded by California Federal was $3.9 million.
In most cases, when loans are sold, California Federal retains the
servicing of the loans for the purchaser. California Federal receives an
annual servicing fee, in the range of 25 to 40 basis points, for servicing
loans for others. California Federal received $12.4 million, $14.6 million,
$18.5 million, $24.8 million and $26.0 million in loan servicing fees for the
years ended December 31, 1995, 1994, 1993, 1992 and 1991, respectively. Fees
generated from servicing loans for others are included in fee income in the
consolidated financial statements. The following table summarizes loans
serviced for others at the dates indicated:
180
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
INVESTOR 1995 1994 1993 1992 1991
- ---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
FNMA ...... $2,323.2 $2,379.0 $2,720.4 $2,764.8 $3,817.4
FHLMC ..... 117.7 137.0 168.8 225.0 243.8
Other ..... 1,341.4 1,943.3 2,446.1 3,261.2 4,504.2
---------- ---------- ---------- ---------- ----------
$3,782.3 $4,459.3 $5,335.3 $6,251.0 $8,565.4
========== ========== ========== ========== ==========
</TABLE>
LOAN PORTFOLIO RISK ELEMENTS
California Federal originates loans with the expectation that borrowers
will honor their repayment obligations. To reduce credit risk, California
Federal maintains underwriting criteria for each of its loan programs. As is
the case with all other lenders, however, certain of California Federal's
borrowers will become unable or unwilling to pay interest or principal when
due. Among the reasons for such defaults may be adverse conditions in the
regional or national economy, unemployment, an oversupply of space for lease
and an increase in vacancies, a decline in real estate values, and other
factors. In such cases, and following efforts to encourage borrowers to cure
their defaults, California Federal normally commences proceedings to
foreclose upon the property securing the loan. Such proceedings may be
delayed by litigation or bankruptcy initiated by the borrower. California
Federal's risk of loss relates both to the frequency of such defaults and to
the severity of loss. The loss is primarily composed of the excess, if any,
of the outstanding principal balance of the loan plus accrued interest over
the value of the collateral at the time of foreclosure. In some instances,
California Federal may be able to recover any loss it incurs from other
assets of the borrower but, generally, this has not been possible. California
Federal also is exposed to loss if the value of the collateral declines
between the time of foreclosure and the time of resale and for the associated
costs of acquiring and disposing of the collateral. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--Cal
Fed."
Loans on which California Federal has ceased the accrual of interest and
loans on which various concessions have been made due to the inability of the
borrower to service the obligation under the original terms of the agreement
constitute the primary components of the portfolio of non-performing loans.
Under certain limited circumstances, prior to 1993, California Federal
continued to accrue interest on loans that were delinquent 90 days or more
("past due loans"). At December 31, 1995, all loans more than 90 days
delinquent were on non-accrual status. California Federal may place a
performing loan on non-accrual status, and/or designate a loan as impaired,
if California Federal believes that a default is probable or the full
collection of principal and interest is doubtful.
Non-accrual loans.
California Federal generally places a loan on non-accrual status whenever
the payment of interest is 90 days or more delinquent, or earlier if the
timely collection of interest and/or principal appears doubtful. Loans on
non-accrual status can be resolved by: (i) the borrower bringing the loan
current, (ii) California Federal and the borrower agreeing to modify the
terms of the loan, or (iii) by foreclosure upon the collateral securing the
loan. The following table presents California Federal's gross non-accrual
loans by state at the dates indicated:
181
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California ..... $188.7 $162.8 $414.0 $575.9 $450.9
Florida ........ 8.5 9.7 33.8 70.9 92.2
Alabama ........ -- -- -- 20.8 22.5
North Carolina -- -- -- 13.2 17.1
Nevada ......... 3.5 1.5 6.2 11.7 32.0
Georgia ........ 1.2 0.9 14.3 8.0 38.3
Other .......... 4.4 3.3 47.1 24.6 59.0
-------- -------- -------- -------- --------
$206.3 $178.2 $515.4 $725.1 $712.0
======== ======== ======== ======== ========
</TABLE>
The following table shows California Federal's portfolio of gross
non-accrual loans by state and type at December 31, 1995:
<TABLE>
<CAPTION>
RESIDENTIAL MULTI- SHOPPING
STATE 1-4 UNITS FAMILY CENTERS OFFICE
- ------------ ------------- -------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
California . $86.6 $82.9 $1.3 $8.8
Florida ..... 7.3 0.4 -- --
Nevada ...... 1.5 1.8 -- --
New York .... 1.2 -- -- --
Georgia ..... 1.0 0.2 -- --
Other(A) .... 2.0 1.0 -- --
------------- -------- ---------- --------
Total ....... $99.6 $86.3 $1.3 $8.8
============= ======== ========== ========
% of Total . 48.3% 41.8% 0.6% 4.3%
============= ======== ========== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OTHER
COMMERCIAL INCOME % OF
STATE INDUSTRIAL PROPERTY CONSUMER TOTAL TOTAL
- ------------ ------------ ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
California . $5.8 $1.0 $2.3 $188.7 91.5%
Florida ..... -- -- 0.8 8.5 4.1
Nevada ...... -- -- 0.2 3.5 1.7
New York .... -- -- -- 1.2 0.6
Georgia ..... -- -- -- 1.2 0.6
Other(A) .... -- -- 0.2 3.2 1.5
------------ ---------- ---------- -------- --------
Total ....... $5.8 $1.0 $3.5 $206.3 100.0%
============ ========== ========== ======== ========
% of Total . 2.8% 0.5% 1.7% 100.0%
============ ========== ========== ========
</TABLE>
- ------------
(A) Includes states with totals less than $1 million.
Restructured Loans. California Federal, in an effort to maximize the value
of its loans that are not performing under their contractual terms, may
modify such loans at terms that are less favorable than the current market.
Restructured loans have interest rates that may be less than current market
rates or may contain other concessions. Since 1990, California Federal has
generally declined to restructure loans except in special situations where a
recovery seems likely. This policy reflected a determination that in most
cases property values were unlikely to recover during the real estate
downturn. The following table presents gross restructured loans by state at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------
1995 1994 1993 1992 1991
------ ------ ------- ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California ..... $3.1 $5.8 $14.5 $52.8 $ 5.0
Alaska ......... -- -- -- -- 26.2
Texas .......... -- -- -- 0.8 14.1
Florida ........ -- -- -- 5.9 --
North Carolina -- -- -- 2.5 --
Other .......... 0.2 -- 2.3 2.2 --
------ ------ ------- ------- ------
$3.3 $5.8 $16.8 $64.2 $45.3
====== ====== ======= ======= ======
</TABLE>
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Cal Fed."
Potential Problem Loans.
California Federal monitors its loan portfolio in an effort to identify
potential problem loans on a timely basis. Additionally, California Federal's
primary regulator, the OTS, has promulgated a regulation
182
<PAGE>
that requires savings institutions to utilize an internal asset
classification system as a means of reporting problem and potential problem
assets for regulatory supervision purposes. California Federal has
incorporated the OTS' internal asset classifications as a part of its credit
monitoring system. California Federal currently classifies its assets as
Pass, Special Mention, Substandard, Doubtful or Loss.
A Pass asset is considered of sufficient quality to preclude designation
as Special Mention or an adverse classification. Pass assets are generally
protected by the current net worth and paying capacity of the obligor or by
the value of the asset or underlying collateral.
Assets classified as Special Mention have potential weaknesses that
deserve management's close attention. These potential weaknesses, if left
uncorrected, may result in deterioration of the repayment prospects for these
assets or in the institution's credit position at some future date. Special
Mention assets are not considered as adversely classified and do not expose
an institution to sufficient risk to warrant adverse classification.
Assets classified as Substandard are inadequately protected by the current
net worth and paying capacity of the obligor or by the collateral pledged, if
any. Assets so classified have a well-defined weakness or weaknesses. They
are characterized by the distinct possibility that the insured institution
will sustain some loss if the deficiencies are not corrected.
Assets classified as Doubtful have the weaknesses of those classified as
Substandard, with the added characteristics that the weaknesses make
collection or liquidation in full, on the basis of currently existing facts,
conditions, and values, highly questionable and improbable. California
Federal views the Doubtful classification as a temporary category. California
Federal will generally classify assets as Doubtful when inadequate data is
available or when such uncertainty exists as to preclude a Substandard
classification. Therefore, California Federal will normally tend to have a
minimal amount of assets classified in this category.
Assets classified as Loss are considered uncollectible and of such little
value that their continuance as assets without establishment of a specific
allowance or charge-off is not warranted. A Loss classification does not
imply that an asset has absolutely no recovery or salvage value. Rather, it
indicates that it is not practical or desirable to defer establishing a
specific allowance for the worthless portion of such asset even though
partial recovery may be effected in the future. California Federal will
generally classify as Loss the portion of assets with a specific allowance.
Therefore, the amount of an asset classified as Loss includes the total
specific valuation allowance established for the particular asset.
183
<PAGE>
CREDIT LOSS EXPERIENCE
Credit losses are inherent in the business of originating and retaining
real estate, consumer and commercial loans. As previously discussed,
California Federal, in an effort to identify and mitigate the risk of credit
losses in a timely manner, performs periodic reviews of any asset that has
been identified as having potential excess credit risk. California Federal
maintains special departments with responsibility for resolving problem loans
and selling real estate acquired through foreclosure in order to facilitate
this process. Valuation allowances for estimated potential future losses are
established on a specific and general basis. Specific allowances for real
estate secured loans are determined by the excess of the recorded investment
in the loan over the fair market value of the collateral. General valuation
allowances are provided for losses inherent in the loan portfolio which have
yet to be specifically identified. The general valuation allowance is based
upon a number of factors, including: (i) historical loss experience, (ii)
composition of the loan portfolio, (iii) loan classifications, (iv)
prevailing and forecasted economic conditions and (v) management's judgment.
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Cal Fed--Provision for Losses" and Notes to the
consolidated financial statements of Cal Fed.
The table below shows California Federal's specific and general allowances
for loan losses by loan type at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Specific Allowance:
Real Estate:
Residential 1-4 ............... $ -- $ 4.1 $ 3.5 $ -- $ --
Income property ............... 24.3 30.4 54.4 55.5 58.0
Total real estate .............. 24.3 34.5 57.9 55.5 58.0
Commercial banking ............. -- -- 0.2 16.3 26.1
-------- -------- -------- -------- -------
Total specific allowance ........ $ 24.3 $ 34.5 $ 58.1 $ 71.8 $ 84.1
-------- -------- -------- -------- -------
General Allowance:
Real Estate:
Residential 1-4 ............... $ 45.0 $ 44.0 $ 49.0 $ 20.0 $ 16.0
Income property ............... 90.0 112.0 121.1 141.9 146.2
-------- -------- -------- -------- -------
Total real estate .............. 135.0 156.0 170.1 161.9 162.2
Commercial banking ............. -- -- 5.0 55.0 54.5
Consumer ....................... 11.7 11.1 11.1 25.3 21.6
Unallocated .................... 10.0 10.0 10.0 10.0 10.0
-------- -------- -------- -------- -------
Total general allowance ......... 156.7 177.1 196.2 252.2 248.3
-------- -------- -------- -------- -------
Total allowance for loan losses $181.0 $211.6 $254.3 $324.0 $332.4
======== ======== ======== ======== =======
</TABLE>
184
<PAGE>
The following table shows the allocation of California Federal's allowance
for loan losses to the various loan types for the periods indicated:
<TABLE>
<CAPTION>
AMOUNT OF ALLOWANCE
------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Real Estate:
Residential 1-4 ................ $ 45.0 $ 48.1 $ 52.5 $ 20.0 $ 16.0
Income property ................ 114.3 142.4 175.5 197.4 204.2
-------- -------- -------- -------- --------
Total real estate .............. 159.3 190.5 228.0 217.4 220.2
Commercial banking .............. -- -- 5.2 71.3 80.6
Consumer ........................ 11.7 11.1 11.1 25.3 21.6
Unallocated ..................... 10.0 10.0 10.0 10.0 10.0
-------- -------- -------- -------- --------
Total allowance for loan losses $181.0 $211.6 $254.3 $324.0 $332.4
======== ======== ======== ======== ========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PERCENT OF LOANS IN
CATEGORY TO TOTAL LOANS
-----------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Real Estate:
Residential 1-4 ................ 77.5% 73.8% 62.2% 59.2% 62.5%
Income property ................ 19.9 22.6 32.6 30.4 27.7
-------- -------- -------- -------- -------
Total real estate .............. 97.4 96.4 94.8 89.6 90.2
Commercial banking .............. -- -- 0.9 2.4 2.9
Consumer ........................ 2.6 3.6 4.3 8.0 6.9
Unallocated ..................... -- -- -- -- --
-------- -------- -------- -------- -------
Total allowance for loan losses 100.0% 100.0% 100.0% 100.0% 100.0%
======== ======== ======== ======== =======
</TABLE>
The table below shows the activity in the allowance for loan losses for
the years indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1995 1994 1993 1992 1991
-------- --------- --------- --------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Balance, January 1, ................ $211.6 $ 254.3 $ 324.0 $ 332.4 $246.6
Provision for loan losses .......... 31.8 74.9 (B) 163.5 126.4 175.0
Charge-offs(A) ..................... (72.4) (123.3) (240.5) (141.6) (92.6)
Recoveries ......................... 10.0 5.7 14.4 6.8 3.4
-------- --------- --------- --------- --------
Net charge-offs .................... (62.4) (117.6) (226.1) (134.8) (89.2)
Allowances of sold subsidiary (CTL) -- -- (7.1) -- --
-------- --------- --------- --------- --------
Balance, December 31, .............. $181.0 $ 211.6 $ 254.3 $ 324.0 $332.4
======== ========= ========= ========= ========
Ratio of net charge-offs during the
period to average loans
outstanding during the period .... 0.69% 1.35% 2.21% 1.13% 0.62%
======== ========= ========= ========= ========
</TABLE>
- ------------
(A) Includes 1994 net charge-offs of $60.4 million that were established
prior to designating the associated assets for inclusion in the 1994
Bulk Sales and 1993 net charge-offs of $80.0 million related to the
1993 Bulk Sale. Exclusive of the 1994 and 1993 Bulk Sale charge-offs,
the ratio of net charge-offs to average loans outstanding was 0.66% and
1.46%, respectively.
(B) The $274.8 million loss on assets held for accelerated disposition is
reported as a separate line item on the Consolidated Statements of
Operations of Cal Fed and is excluded from provision for loan losses.
185
<PAGE>
The table below presents the components of charge-offs and recoveries by
category for the years indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
--------- ---------- ---------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Charge-offs:
Real estate loans:
Residential 1-4 ....... $(24.8) $ (19.5) $ (44.1) $ (9.3) $ (4.1)
Income property
Multi-family ......... (30.2) (56.1) (64.9) (39.9) (13.0)
Hotels ............... -- (11.6) (16.0) (14.5) (7.6)
Shopping centers .... (4.9) (0.9) (17.3) (2.0) (2.3)
Office buildings .... (5.5) (15.2) (20.4) (18.5) (33.4)
Other ................ (1.6) (6.2) (4.1) (22.9) (1.7)
--------- ---------- ---------- ---------- ---------
Total income property (42.2) (90.0) (122.7) (97.8) (58.0)
--------- ---------- ---------- ---------- ---------
Total real estate loans (67.0) (109.5) (166.8) (107.1) (62.1)
Commercial banking .... -- (6.8) (61.0) (20.2) (15.4)
Consumer ............... (5.4) (7.0) (12.7) (14.3) (15.1)
--------- ---------- ---------- ---------- ---------
Total charge-offs .. $(72.4) $(123.3) $(240.5) $(141.6) $(92.6)
--------- ---------- ---------- ---------- ---------
Recoveries:
Real estate loans:
Residential 1-4 ....... $ 3.1 $ 0.9 $ 1.2 $ 0.1 $ 0.1
Income property .......
Multi-family ......... 5.2 0.9 4.7 3.3 0.1
Hotels ............... -- -- 0.3 -- --
Shopping centers .... 0.1 -- 2.0 -- --
Office buildings .... 0.4 0.3 3.3 0.5 0.4
Other ................ -- 0.4 0.9 -- --
--------- ---------- ---------- ---------- ---------
Total income property 5.7 1.6 11.2 3.8 0.5
--------- ---------- ---------- ---------- ---------
Total real estate loans 8.8 2.5 12.4 3.9 0.6
Commercial banking .... -- 2.1 0.3 0.1 0.7
Consumer ............... 1.2 1.1 1.7 2.8 2.1
--------- ---------- ---------- ---------- ---------
Total recoveries .... 10.0 5.7 14.4 6.8 3.4
--------- ---------- ---------- ---------- ---------
Total net charge-offs $(62.4) $(117.6) $(226.1) $(134.8) $(89.2)
========= ========== ========== ========== =========
</TABLE>
REAL ESTATE HELD FOR SALE
REO results when property collateralizing a loan is foreclosed upon, or
otherwise acquired in satisfaction of the loan. California Federal records
its investment in REO at the lower of (i) appraised value less disposition
cost, (ii) market price or (iii) the historical cost of the REO. California
Federal also maintains a general valuation allowance against its portfolio of
REO.
FIRREA placed severe capital requirements on direct investments in real
estate by savings institutions. In 1990, California Federal determined that
the capital requirements for investing in real estate under FIRREA were such
that the anticipated return on capital from investing in real estate
development would be below its investment requirements. As a result,
California Federal initiated in 1990 and implemented in 1991 a program to
cease its real estate investment activities and to phase-out its real estate
investments over several years. At December 31, 1995, California Federal's
principal real estate investment was a 97 unit, luxury high-rise condominium
project located near the Westwood area of Los Angeles, California (the
"condominium project"). The condominium project had 31 unsold units at
December 31, 1995 and a net book value of $27.3 million. The condominium
project was sold during the third quarter of 1996. California Federal did not
record any profit or loss from the sale.
186
<PAGE>
The following table presents the composition of real estate held for sale,
net of allowances, at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
PROPERTY TYPE 1995 1994 1993
- ----------------- -------------- -------------- --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Residential 1-4 . $47.3 $58.6 $188.6
Multi-family ..... 1.5 5.1 64.3
Office buildings 0.3 5.6 35.8
Shopping centers -- -- 5.0
Hotels ........... -- 6.1 27.7
Other ............ 0.4 2.5 30.2
-------------- -------------- --------------
$49.5 $77.9 $351.6
============== ============== ==============
REO .............. $22.2 $39.1 $273.5
REI .............. 27.3 38.8 78.1
-------------- -------------- --------------
$49.5 $77.9 $351.6
============== ============== ==============
</TABLE>
The following table shows the detail of California Federal's net real
estate held for sale by state at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994 1993
------- ------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
California ..... $47.7 $70.9 $293.5
Alabama ........ 0.1 6.1 15.0
Florida ........ 1.2 0.7 19.4
Washington ..... -- -- 9.2
Arizona ........ -- -- 3.0
North Carolina -- -- 6.8
Other .......... 0.5 0.2 4.7
------- ------- --------
$49.5 $77.9 $351.6
======= ======= ========
</TABLE>
The decline in the level of REO was due to the 1994 Bulk Sales which
eliminated $419.2 million of non-performing loans and $822.1 million of
performing loans with high risk characteristics. The sale of these loans has
resulted in a decline in delinquencies and foreclosures and consequently a
lower level of REO. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Cal Fed--Operations."
SECURITIES
California Federal's securities are comprised of: (i) short-term liquid
investments, which principally consist of federal funds sold and certificates
of deposit, (ii) securities purchased under agreements to resell, (iii)
securities available for sale, which consists primarily of U.S. Treasury
securities, and (iv) securities held to maturity, which principally consist
of mortgage-backed securities. These securities provide flexibility and risk
diversification beyond real estate secured assets. Additionally, California
Federal is required by federal regulations to maintain a specified minimum
amount of liquid assets which may be invested in certain securities.
California Federal maintains liquidity at a level to assure adequate funds,
taking into account anticipated cash flows and available sources of credit,
to afford future flexibility to meet deposit withdrawal requests and loan
commitments or to make other investments. California Federal has consistently
maintained its liquidity ratio above that required by federal regulations.
187
<PAGE>
SHORT-TERM LIQUID INVESTMENTS
Federal Funds Sold
Federal funds sold are invested with various members of the Federal
Reserve System to maintain short-term liquidity needs. The amount of
short-term liquid assets held by California Federal at any point in time is a
function of many factors, including liquidity requirements, projected cash
requirements and actual cash flows.
The following table presents California Federal's investment in short-term
liquid investments at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
----------------- ----------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
-------- ------- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Fed funds sold and commercial paper $70.0 5.80% $330.0 6.28% $302.2 3.19%
Certificates of deposit ............. 4.1 5.19 3.8 3.18 4.6 3.21
-------- ------- -------- ------- -------- -------
$74.1 5.77% $333.8 6.25% $306.8 3.19%
======== ======= ======== ======= ======== =======
</TABLE>
Please see the Notes to the Consolidated Financial Statements of Cal Fed
liquid investments.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
California Federal invests in repurchase agreements to maximize its yield
on liquid assets. California Federal obtains collateral for repurchase
agreements, which normally consists of U.S. Treasury securities or
mortgage-backed securities guaranteed by agencies of the U.S. government. The
duration of repurchase agreements is typically 30 days or less during which
the collateral consisting of U.S. Treasury securities or mortgage-backed
securities is held by a third party trustee for California Federal. At
December 31, 1995, California Federal held $1.7 billion of repurchase
agreements as compared to $48.2 million at December 31, 1994 and $30.2
million at December 31, 1993. The yield on such securities was 6.01%, 5.70%
and 3.15% at December 31, 1995, 1994 and 1993.
The following table presents California Federal's repurchase agreements at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1994 1993
------------------- ----------------- -----------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- ------- -------- ------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Investment period:
7 days or less .. $1,097.5 6.04% $48.2 5.70% $30.2 3.15%
8-30 days ........ 577.1 5.95 -- -- -- --
---------- ------- -------- ------- -------- -------
$1,674.6 6.01% $48.2 5.70% $30.2 3.15%
========== ======= ======== ======= ======== =======
</TABLE>
The following table presents California Federal's recorded investment in
assets pledged as collateral for repurchase agreements at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994 1993
---------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
U.S. Treasury securities .. $ -- $48.3 $30.4
Mortgage-backed securities 1,704.4 -- --
========== ======= =======
$1,704.4 $48.3 $30.4
========== ======= =======
</TABLE>
See the Notes to the Consolidated Financial Statements of Cal Fed.
188
<PAGE>
SECURITIES AVAILABLE FOR SALE
California Federal's securities available for sale consist of U.S.
Treasury securities.
The carrying values and market values of securities available for sale at
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
HISTORICAL CARRYING MARKET AVERAGE
COST VALUE VALUE RATE
------------ ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year ........... $150.0 $149.9 $149.9 4.00%
Maturing after 1 year but within
5 years ......................... 50.3 50.4 50.4 7.46
------------ ---------- --------
$200.3 $200.3 $200.3 4.87%
============ ========== ========
</TABLE>
California Federal did not hold marketable equity securities at December
31, 1995.
The carrying values and market values of securities available for sale at
December 31, 1994 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
HISTORICAL CARRYING MARKET AVERAGE
COST VALUE VALUE RATE
------------ ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year ........... $1,001.2 $ 997.5 $ 997.5 4.64%
Maturing after 1 year but within
5 years ......................... 749.5 734.0 734.0 6.19
------------ ---------- ----------
$1,750.7 $1,731.5 $1,731.5 5.30%
============ ========== ==========
</TABLE>
California Federal did not hold marketable equity securities at December
31, 1994.
The carrying values and market values of securities available for sale at
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
WEIGHTED
HISTORICAL CARRYING MARKET AVERAGE
COST VALUE VALUE RATE
------------ ---------- -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year ........... $242.3 $243.3 $243.3 4.86%
Maturing after 1 year but within
5 years ......................... 636.9 651.1 651.1 5.51
Maturing after 10 years .......... 0.1 0.1 0.1 7.35
------------ ---------- -------- ----------
879.3 894.5 894.5 5.33
Marketable equity securities .... 0.8 0.2 0.2 --
------------ ---------- --------
$880.1 $894.7 $894.7 5.33%
============ ========== ========
</TABLE>
See the Notes to the Consolidated Financial Statements of Cal Fed.
SECURITIES HELD TO MATURITY
California Federal invests only in mortgage-backed securities and
corporate debt securities which are rated investment grade by nationally
recognized rating organizations. These securities may be used as collateral
for California Federal's borrowing requirements.
189
<PAGE>
The following table presents California Federal's portfolio of securities
held to maturity at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
---------- -------- ---------- -------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities $2,366.7 6.93 % $2,513.7 6.08 % $2,622.0 5.41 %
Corporate obligations ..... -- -- 11.4 9.37 11.5 9.29
---------- ---------- ----------
$2,366.7 6.93 % $2,525.1 6.09 % $2,633.5 5.43 %
========== ========== ==========
</TABLE>
California Federal invests primarily in mortgage-backed securities issued
by agencies of the United States, such as Fannie Mae. These investments are
made by either purchasing such securities or obtaining them by exchanging
pools of mortgage loans originated or purchased by California Federal for the
securities ("securitized loans"). California Federal invests in
mortgage-backed securities primarily to provide a source of collateral in
support of California Federal's funding activities and to strengthen
California Federal's regulatory capital position.
Summarized below are the carrying values of mortgage-backed securities,
net of discounts at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FNMA ............................................. $1,192.7 $1,359.5 $1,348.1
California Federal AA-rated mortgage pass-through
securities ...................................... 802.3 787.1 839.5
Other ............................................ 371.7 367.1 434.4
---------- ---------- ----------
Total Mortgage-backed securities ................. $2,366.7 $2,513.7 $2,622.0
========== ========== ==========
</TABLE>
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition-- Cal Fed."
SOURCES OF FUNDS
In addition to funds generated from loan payments and payoffs and from the
sale of loans and securities available for sale, California Federal derives
funds from deposits, FHLB advances, securities sold under agreements to
repurchase, and other short-term and long-term borrowings. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition--Cal
Fed."
190
<PAGE>
Deposits
The largest source of funds for California Federal is retail deposits.
California Federal primarily obtains its deposits through a network of its
full service branches located in California and Nevada. Deposits are a cost
effective source of funds and provide a customer base for other products and
services offered by California Federal. California Federal has several types
of deposit accounts designed to attract both short-term and long-term
deposits. The following table sets forth the weighted average interest rates
and the amounts of deposits for California Federal at the dates indicated:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE RATE
AT DECEMBER 31, BALANCE AT DECEMBER 31,
------------------------- ----------------------------------
1995 1994 1993 1995 1994 1993
------- ------- ------- ---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
No minimum term-checking:
NOW ............................. --% --% 1.14% $ -- $ -- $ 169.5
Money market .................... 1.24 1.24 1.26 764.2 850.1 972.8
Non-interest bearing commercial -- -- -- 216.9 184.9 243.2
No minimum term-savings:
Passbook Accounts ............... 2.22 2.22 2.20 509.7 578.2 767.1
Money market savings ............ 3.52 3.15 2.55 1,244.2 1,271.0 2,164.5
Certificate Accounts
Original term:
Less than 3 months ............. 4.18 3.10 2.64 150.0 108.3 191.6
3 months to 6 months ........... 5.23 4.03 3.24 812.4 562.7 1,034.5
7 months to 12 months .......... 5.70 4.97 3.92 1,882.9 2,559.6 3,536.3
13 months to 24 months ......... 6.22 4.67 4.74 3,263.6 1,550.6 2,191.7
25 months to 36 months ......... 5.52 5.37 6.08 72.3 76.4 151.3
37 months to 48 months ......... 6.16 6.60 7.02 51.5 82.1 180.2
49 months to 60 months ......... 6.37 6.78 7.32 197.6 221.5 405.1
Over 60 months ................. 7.24 7.33 7.31 311.4 315.5 593.0
---------- ---------- ----------
4.87% 4.02% 3.67% $9,476.7 $8,360.9 $12,600.8
========== ========== ==========
</TABLE>
The following table provides additional deposit information at December
31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Passbook Accounts ........................ $ 509.7 $ 578.2 $ 767.1
Money Market and NOW Accounts ............ 2,008.4 2,121.1 3,306.8
Non-Interest Bearing Commercial Accounts 216.9 184.9 243.2
---------- ---------- ----------
2,735.0 2,884.2 4,317.1
---------- ---------- ----------
Certificate Accounts:
2.00% to 2.99% .......................... 16.5 28.9 201.8
3.00% to 3.99% .......................... 22.5 861.0 3,627.7
4.00% to 4.99% .......................... 208.2 2,352.4 2,875.9
5.00% to 5.99% .......................... 2,545.3 1,605.3 367.6
6.00% to 6.99% .......................... 3,630.4 296.9 344.0
7.00% to 7.99% .......................... 293.0 322.9 848.3
8.00% to 8.99% .......................... 23.3 3.4 5.8
9.00% to 9.99% .......................... 2.5 4.6 6.9
10.00% to 11.99% ........................ -- 1.3 5.7
---------- ---------- ----------
Total Certificate Accounts ............. 6,741.7 5,476.7 8,283.7
---------- ---------- ----------
$9,476.7 $8,360.9 $12,600.8
========== ========== ==========
</TABLE>
191
<PAGE>
At December 31, 1995, deposits of California Federal had the following
remaining contractual maturities:
<TABLE>
<CAPTION>
OVER 3 OVER 6 OVER 12
MONTHS MONTHS MONTHS
BUT BUT BUT
3 MONTHS WITHIN 6 WITHIN 12 WITHIN 24
OR LESS MONTHS MONTHS MONTHS
---------- ---------- ----------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Passbook Accounts .............. $ 509.7 $ -- $ -- $ --
Money Market, NOW and
Non-interest Bearing
Commercial Accounts ........... 2,225.3 -- -- --
Certificate Accounts:
2.00% to 2.99% ................ 16.4 0.1 -- --
3.00% to 3.99% ................ 22.4 0.1 -- --
4.00% to 4.99% ................ 110.9 69.7 5.5 8.1
5.00% to 5.99% ................ 903.4 835.2 595.9 121.3
6.00% to 6.99% ................ 238.8 629.8 1,822.1 761.4
7.00% to 7.99% ................ 28.9 51.8 135.7 50.7
8.00% to 8.99% ................ 7.7 2.2 3.6 4.6
9.00% to 9.99% ................ 0.8 0.2 0.4 0.5
---------- ---------- ----------- -----------
Total Certificate Accounts .. 1,329.3 1,589.1 2,563.2 946.6
---------- ---------- ----------- -----------
$4,064.3 $1,589.1 $2,563.2 $946.6
========== ========== =========== ===========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
OVER 24
MONTHS
BUT
WITHIN 36 OVER 36
MONTHS MONTHS TOTAL
----------- --------- ---------
<S> <C> <C> <C>
Passbook Accounts .............. $ -- $ -- $ 509.7
Money Market, NOW and
Non-interest Bearing
Commercial Accounts ........... -- -- 2,225.3
Certificate Accounts:
2.00% to 2.99% ................ -- -- 16.5
3.00% to 3.99% ................ -- -- 22.5
4.00% to 4.99% ................ 5.8 8.2 208.2
5.00% to 5.99% ................ 39.9 49.6 2,545.3
6.00% to 6.99% ................ 128.7 49.6 3,630.4
7.00% to 7.99% ................ 18.4 7.5 293.0
8.00% to 8.99% ................ 3.1 2.1 23.3
9.00% to 9.99% ................ 0.3 0.3 2.5
----------- --------- ---------
Total Certificate Accounts .. 196.2 117.3 6,741.7
----------- --------- ---------
$196.2 $117.3 $9,476.7
=========== ========= =========
</TABLE>
Jumbo certificates and other deposit accounts with balances of $100,000 or
greater included in the above table had the following remaining contractual
maturities:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1995 1994 1993
---------- ---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
3 months or less ................... $ 789.5 $ 681.1 $ 953.4
Over 3 months but within 6 months . 247.2 132.6 312.8
Over 6 months but within 12 months 369.9 249.3 190.3
Over 12 months ..................... 112.2 70.1 152.5
---------- ---------- ---------
$1,518.8 $1,133.1 $1,609.0
========== ========== =========
</TABLE>
<PAGE>
The decline in California Federal's deposits from December 31, 1993 to
1994 was due to the sale of the Southeast Division, which resulted in the
sale of $3.9 billion of deposits. The increase in deposits during 1995 was
due to (i) an increase in term deposits offered through California Federal's
retail branches, (ii) the acquisition of three branches and $138.6 million of
deposits from Pacific Heritage Bank and six branches and $359.4 million of
deposits from Continental Savings of America and (iii) the use of brokers to
obtain deposits. Subject to certain regulatory limitations, deposits can be
gathered through brokers, generally the nation's largest investment banking
firms. California Federal had $273.8 million of Brokered Deposits at December
31, 1995. At December 31, 1995 all Brokered Deposits were from individual
investors. Total Brokered Deposits constituted 2.9% of total deposits at
December 31, 1995. California Federal had no Brokered Deposits at December
31, 1994 and 1993.
192
<PAGE>
Borrowings
The borrowings of California Federal, which borrowings are of the Bank
following the consummation of the Cal Fed Acquisition, consisted of the
following at September 30, 1996 (in millions):
<TABLE>
<CAPTION>
<S> <C>
Securities sold under agreements to repurchase ........ $ 962.7
FHLB advances .......................................... 3,261.0
Student Loan Marketing Association advances ........... --
Cal Fed 6 1/2% Convertible Subordinated Debentures Due
2001 .................................................. 2.7
Cal Fed 10% Subordinated Debentures Due 2003 .......... 4.3
Cal Fed 10.668% Subordinated Note Due 1998 ............. 50.0
---------
$4,280.7
=========
</TABLE>
The weighted average rate on such borrowings as of September 30, 1996 was
5.64%.
California Federal utilizes a variety of borrowing sources as an
alternative source of funds. These sources have included FHLB advances,
securities sold under reverse repurchase agreements, federal funds purchased,
convertible subordinated debentures and various other sources.
Federal Home Loan Bank Advances. California Federal borrows funds from the
FHLB from time to time, pledging as security mortgage-backed securities, the
capital stock of the FHLB and certain of its mortgage loans and treasury
notes. Such borrowings may be obtained pursuant to several different credit
programs, and each credit program has its own rate and range of maturities up
to a maximum of 10 years for both fixed and variable rate advances.
Prepayment fees are charged on advances if paid prior to maturity. During
1994, FHLB advances were utilized as a primary source of funds for the sale
of the Southeast Division.
The following table presents California Federal's FHLB advances at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994 DECEMBER 31, 1993
------------------- ------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ------- ---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Maturing in one year ... $ 880.0 6.16% $2,015.0 6.21% $ 200.0 3.66%
Maturing in two years .. 1,780.0 5.98 500.0 6.36 405.0 3.67
Maturing in three years -- -- -- -- 400.0 3.90
Maturing in four years . 11.0 9.71 -- -- -- --
Maturing in five years . -- -- 11.0 9.71 -- --
Thereafter .............. -- -- -- -- 11.0 9.71
---------- ------- ---------- ------- ---------- -------
$2,671.0 6.06% $2,526.0 6.25% $1,016.0 3.82%
========== ======= ========== ======= ========== =======
</TABLE>
California Federal's FHLB advances were collateralized by loans and
mortgage-backed securities totalling $3.6 billion, $3.7 billion and $2.5
billion at December 31, 1995, 1994 and 1993, respectively.
Securities Sold under Agreements to Repurchase. California Federal enters
into reverse repurchase agreements whereby it sells marketable U.S.
government securities, federal agency securities, or mortgage-backed
securities with a simultaneous commitment to repurchase the same securities
at a specified price at a specified later date. Reverse repurchase agreements
are typically short-term (1 day to 30 days) at a fixed-rate and long-term (up
to 3 years) at a variable rate. Securities sold under agreements to
repurchase are subject to risks relating to the financial strength of the
counterparty to the transaction, the nature of the lien against the
securities subject to the transaction and the disparity between the book
value of the securities sold and the amount of funds obtained. California
Federal deals only with national investment banking firms and major
commercial banks which are primary dealers in U.S. government securities and
has set limits on the amounts and terms of borrowings from any single
institution.
193
<PAGE>
The following table presents California Federal's reverse repurchase
agreements at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
DECEMBER 31, 1995 DECEMBER 31, 1994 1993
----------------- ------------------- ----------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
-------- ------- ---------- ------- -------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
1 day to 30 days ............. $ -- --% $1,026.2 5.67% $ -- --%
Over 30 days to one year .... 857.3 5.56 724.8 6.15 -- --
Over one year to two years .. -- -- -- -- -- --
Over two years to three year -- -- -- -- 249.8 3.40
-------- ------- ---------- ------- -------- ------
$857.3 5.56% $1,751.0 5.87% $249.8 3.40%
======== ======= ========== ======= ======== ======
</TABLE>
The following table presents the recorded amount of the collateral pledged
to secure California Federal's reverse repurchase agreements at the dates
indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1995 1994 1993
-------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Securities ..................... $ -- $ 692.6 $ --
Mortgage-backed securities .... 908.9 1,080.3 252.6
-------- ---------- --------
$908.9 $1,772.9 $252.6
======== ========== ========
Market value of the collateral $907.5 $1,783.5 $258.6
======== ========== ========
</TABLE>
Student Loan Marketing Association Advances. California Federal has a SLMA
advance outstanding for a total of $200.0 million at December 31, 1995 which
matured on September 18, 1996. The SLMA advance bears interest based upon the
three month LIBOR and reprices quarterly. The advance is secured by
mortgage-backed securities and government securities.
Cal Fed 6 1/2% Convertible Subordinated Debentures Due 2001. The Cal Fed 6
1/2% Convertible Subordinated Debentures bear interest at 6 1/2% per annum
and mature at February 20, 2001. Events of Default under the indenture
governing the Cal Fed 6 1/2% Convertible Subordinated Debentures include,
among other things: (i) any failure to make any payment of interest when due
and such payment is not made within 30 days after the date such payment was
due; (ii) failure to make any payment of principal when due; (iii) default in
the performance, or breach, of any covenant or warranty in the indenture,
provided that such default or breach continues for more than 60 days after
notice is delivered to the Bank; or (iv) certain events of bankruptcy,
insolvency or reorganization of the Bank or its subsidiaries.
Cal Fed 10% Subordinated Debentures Due 2003. The Cal Fed 10% Subordinated
Debentures bear interest at 10% per annum and mature at January 3, 2003.
Events of Default under the indenture governing the Cal Fed 10% Subordinated
Debentures include, among other things: (i) failure to make any payment of
principal when due; (ii) any failure to make any payment of interest when due
and such payment is not made within 30 days after the date such payment was
due; (iii) failure to comply with certain covenants in the indenture; (iv)
failure to comply with certain covenants in the indenture provided that such
failure continues for more than 60 days after notice is delivered to the
Bank; (v) certain events of bankruptcy, insolvency or reorganization of the
Bank; or (vi) the default or any event which, with the giving of notice or
lapse of time or both, would constitute a default under any indebtedness of
the Bank and cause such indebtedness with an aggregate principal amount
exceeding $15 million to accelerate.
Cal Fed 10.668% Subordinated Notes Due 1998. The Cal Fed 10.668%
Subordinated Notes Due 1998 bear interest at 10.668% per annum and mature at
December 22, 1998. Events of Default under the note agreement governing the
Cal Fed 10.668% Subordinated Notes Due 1998 include, among other things, (i)
failure to make any payment of principal when due; (ii) any failure to make
any payment of interest when due and such payment is not made within 10
business days after the date such payment was due; (iii) failure to comply
with certain covenants in the note agreement provided that such failure
continues for more than 60 days after notice is delivered to the Bank; (iv)
the default or any event which,
194
<PAGE>
with the giving of notice or the lapse of time or both, would constitute a
default under any indebtedness of the Bank and cause such indebtedness with
an aggregate principal amount exceeding $15 million to accelerate; and (v)
certain events of bankruptcy, insolvency or reorganization of the Bank.
10 5/8% Bank Preferred Stock. The Bank has outstanding 1,725,000 shares of
the 10 5/8% Bank Preferred Stock. The 10 5/8% Bank Preferred Stock has a
stated liquidation value of $100 per share, plus declared and unpaid
dividends, if any, without interest. Cash dividends are noncumulative and are
payable at an annual rate of 10 5/8% per share if, when and as declared by
the Board of Directors of the Bank.
The 10 5/8% Bank Preferred Stock will rank prior to the Common Stock,
including the Common Stock held by Holdings, and to all other classes and
series of equity securities subsequently issued, other than any class or
series expressly designated as being in a parity with or senior to the 10
5/8% Bank Preferred Stock as to dividends and liquidating distributions. The
10 5/8% Bank Preferred Stock ranks on a parity with the 11 1/2% Bank
Preferred Stock as to dividends and liquidating distributions.
The terms of the 10 5/8% Bank Preferred Stock provide that the Bank may
not declare or pay any full dividends with respect to any parity stock, such
as the 11 1/2% Bank Preferred Stock, unless and until the Bank has paid full
dividends on the 10 5/8% Bank Preferred Stock for the most recent dividend
period.
The terms of the 10 5/8% 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 Junior Stock (as defined therein)) with
respect to any Junior Stock (as defined therein) or repurchase, redeem or
otherwise acquire, or set apart funds for the repurchase, redemption or other
acquisition of, any Junior Stock (as defined therein) through a sinking fund
or otherwise, unless and until: (i) the Bank has paid full dividends on the
10 5/8% 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 10 5/8% 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 period.
Holders of the 10 5/8% Bank Preferred Stock have no voting rights, except
as required by law or in certain limited circumstances.
Except in the event of a change of control, the 10 5/8% Bank Preferred
Stock is not redeemable prior to April 1, 1999. The 10 5/8% Bank Preferred
Stock is redeemable solely at the option of the Bank or its successor or any
acquiring or resulting entity with respect to the Bank (including by any
parent or subsidiary of the Bank, any such successor or any such acquiring or
resulting entity), as applicable, at any time on or after April 1, 1999, in
whole or in part, at $105.313 per share on or after April 1, 1999 and prior
to April 1, 2000, and at prices decreasing pro rata annually thereafter to a
stated liquidation value of $100 per share on or after April 1, 2003, plus
declared and unpaid dividends, if any, without interest. Upon a change of
control, the 10 5/8% Bank Preferred Stock is redeemable on or prior to April
1, 1999 at the option of the Bank or its successor or any acquiring or
resulting entity with respect to the Bank (including by any parent or
subsidiary of the Bank, any such successor, or any such acquiring or
resulting entity), as applicable, in whole, but not in part, at a price per
share equal to $114.50, plus an amount equal to declared and unpaid dividends
(whether or not declared) from the date of consummation of the change of
control to the date fixed for redemption, without interest.
Other Borrowings. Other borrowings include medium-term notes and other
miscellaneous borrowings, some of which are collateralized by mortgage-backed
securities, mortgage loans and real estate held for investment.
195
<PAGE>
The following table provides additional information on all significant
borrowed funds. For additional information on California Federal borrowings,
see the Consolidated Financial Statements of Cal Fed.
<TABLE>
<CAPTION>
1995 1994 1993
---------- ---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
FHLB Advances:
Balance at year-end ....................... $2,671.0 $2,526.0 $1,016.0
Average amount outstanding ................ 2,452.9 1,654.6 1,428.1
Maximum amount outstanding at any
month-end ................................ 2,671.0 2,576.0 1,789.7
Average interest rate for the year ....... 6.28% 5.05% 3.83%
Average interest rate on year-end balance 6.06% 6.25% 3.82%
Securities Sold under Agreements to Repurchase:
Balance at year-end ....................... $ 857.3 $1,751.0 $ 249.8
Average amount outstanding ................ 1,098.9 1,493.0 695.8
Maximum amount outstanding at any
month-end ................................ 1,336.8 1,751.0 435.1
Average interest rate for the year ....... 5.91% 4.52% 3.17%
Average interest rate on year-end balance 5.56% 5.87% 3.40%
SLMA Advances:
Balance at year-end ....................... $ 200.0 $ 475.0 $ 275.0
Average amount outstanding ................ 462.1 357.8 275.0
Maximum amount outstanding at any
month-end ................................ 475.0 475.0 275.0
Average interest rate for the year ....... 6.27% 4.62% 3.47%
Average interest rate on year-end balance 5.86% 6.43% 3.44%
Subordinated Debentures:
Balance at year-end ....................... $ 57.6 $ 66.5 $ 66.7
Average amount outstanding ................ 60.0 66.6 66.7
Maximum amount outstanding at any
month-end ................................ 66.5 66.6 66.8
Average interest rate for the year ....... 10.41% 10.36% 10.35%
Average interest rate on year-end balance 10.43% 10.36% 10.35%
</TABLE>
COMPETITION
California Federal experiences intense competition in both attracting and
retaining deposits and in originating real estate and consumer loans. The
competition for deposits comes from other savings institutions, commercial
banks, credit unions, thrift and loan associations, issuers of corporate
securities, money market mutual funds and the U.S. Treasury. Competition for
deposits from large savings institutions and commercial banks is particularly
strong. Most of the nation's largest savings institutions and many large
commercial banks are headquartered or have a significant number of offices in
the same areas in which California Federal operates. In addition to offering
competitive interest rates, the principal methods used to attract deposits
include the variety of services offered, the quality of service rendered, the
perceived level of financial strength of the institution, the convenience of
office locations and the hours of service that offices are open to the
public.
Competition in originating real estate and consumer loans comes
principally from other savings institutions, commercial banks, mortgage
banking companies, insurance companies, consumer finance companies and
commercial finance companies. The primary factors in competing for loans are
interest rates, interest rate caps, rate adjustment provisions, loan
maturities, loan fees and the quality and extent of service to borrowers and
brokers.
SUBSIDIARIES
At December 31, 1995, California Federal was permitted by applicable OTS
regulations to invest up to approximately $768 million of its assets in
subsidiary corporations. As of that date, California Federal
196
<PAGE>
had invested approximately $328 million (primarily equity and loans) in
subsidiaries. The principal business activities of California Federal
conducted through such subsidiaries include real estate and financial
activities.
Real Estate Activities
California Federal, principally through its subsidiaries, Cal Fed
Enterprises ("CFE") currently and previously had investments in residential
developments and commercial and industrial developments. CCI is an inactive
single-family residential developer and currently does not own any real
estate investments. CFE is involved in completing the sale of its existing
single family developments. Similarly, CF Management Corp. ("CFMC"), a
subsidiary of California Federal, was the general partner of CF Income
Partners L.P. ("CFIP"), a master limited partnership, engaged in the business
of investing in income-producing residential, commercial and industrial real
properties and real estate development projects. During the first quarter of
1994, CFIP completed the sale of its assets and subsequently liquidated,
settled its indebtedness to California Federal and deeded to California
Federal four properties valued at $6.2 million. That transaction terminated
California Federal's lending relationship with CFIP, settled certain
outstanding litigation surrounding CFIP to which California Federal and CFMC
were a party, and resulted in no additional material loss. During 1995,
California Federal sold the last of the four properties deeded to it by CFIP.
Other Subsidiaries
In addition to subsidiaries engaged in real estate activities, California
Federal also has subsidiaries that are or have been engaged in financial
activities. XCF Acceptance Corporation holds loans which it acquired through
the 1992 merger with CalFed Inc. Prior to the first quarter of 1993, Cal Fed
Credit Inc., ("Cal Fed Credit") was actively involved in the purchase of
loans secured by automobiles and other consumer loans. Since the first
quarter of 1993, Cal Fed Credit has not been engaged in acquiring or
originating new loans. The loans of Cal Fed Credit are serviced by a former
wholly-owned subsidiary of XCF Acceptance Corporation. California Federal
also has a subsidiary that offers alternative investment products to
California Federal's customers on behalf of independent third parties and a
subsidiary which functions as an insurance agency offering a variety of
insurance products.
EMPLOYEES
At December 31, 1995, California Federal had approximately 2,100
employees. None of its employees are represented by any collective bargaining
group. California Federal maintains a comprehensive employee benefits program
providing, among other benefits, hospitalization and major medical insurance,
long and short-term disability insurance, life insurance and reduced loan
rates for qualifying employees. Additionally, California Federal has a
defined benefit plan ("retirement income plan"). Effective May 31, 1993 the
retirement income plan was frozen and all accrued benefits were automatically
100% vested. California Federal also offers qualifying employees the
opportunity to participate in a qualified plan under Section 401(k) of the
Code.
TAXATION
California Federal files a consolidated federal income tax return and a
combined California franchise tax report with its subsidiaries.
In connection with the 1992 corporate restructuring (the "Restructuring"),
California Federal and its affiliates underwent a change in ownership within
the meaning of Section 382 of the Internal Revenue Code for both federal
income and California franchise tax purposes. As a consequence, the
post-Restructuring use of pre-Restructuring net operating loss and other
carryforwards to absorb taxable income and reduce tax liability may be
restricted. In addition, such restrictions may also apply to certain losses
recognized and deductions incurred during the five year period following the
Restructuring that were economically accrued as of the Restructuring date.
California Federal does not expect that these restrictions, if applicable,
will have a material adverse effect on the financial condition of California
Federal and its affiliates.
197
<PAGE>
Savings institutions are generally subject to federal income taxation in
the same manner as other types of corporations. However, under applicable
provisions of the Internal Revenue Code, a savings institution that meets
certain definitional and other tests ("qualifying institution") can, unlike
most other corporations, use the reserve (versus specific charge-off) method
to compute its deduction for bad debt losses.
Under the reserve method, qualifying institutions are generally allowed to
deduct an amount up to the greater of two alternative computations. Under the
"percentage of taxable income method" computation, a qualifying institution
can claim a bad debt deduction computed as a percentage of taxable income
before such deduction. Alternatively, a qualifying institution may utilize
its bad debt loss experience to compute its annual addition to its bad debt
reserves (the "experience method").
Prior to the enactment of the Tax Reform Act of 1986 ("1986 Act"), many
qualifying institutions, including California Federal, used the percentage of
taxable income method which generally resulted in a lower effective federal
income tax rate than that applicable to other types of corporations. However,
the 1986 Act reduced the maximum percent that could be deducted under the
percentage of taxable income method from 40% to 8% for tax years beginning
after December 31, 1986; thus, many qualifying institutions, including
California Federal, began to use the experience method beginning in 1987. The
amount by which a qualifying institution's actual tax bad debt reserves
exceed an allowable offset computed under the experience method ("excess tax
bad debt reserves") may be subject to recapture and includable in taxable
income.
If amounts appropriated to excess tax bad debt reserves are used for the
payment of nontaxable dividends or other distributions (including
distributions in dissolution, liquidation or redemption of stock), an amount
equal to the distribution plus the tax attributable thereto, but not
exceeding the aggregate amount of excess tax bad debt reserves, will
generally be includable in taxable income. In addition, if an association
fails to meet the definitional or other tests of a qualifying institution,
its total tax bad debt reserves must be recaptured and included in taxable
income.
As a result of the Small Business Job Protection Act of 1996, which
provided for the repeal of the Section 593 reserve method of accounting for
bad debts by thrift institutions which are treated as large banks, Calfornia
Federal will generally be required to take into income the balance of its
post-1987 bad debt reserves over a six year period beginning in 1996 subject
to a two year deferral if certain residential loan tests are satisfied. As of
December 31, 1995, California Federal had tax bad debt reserves totaling $196
million, of which $73 million is subject to recapture into income. California
Federal does not expect to generate substantial amounts of federal taxable
income (after taking into account its net operating loss carryovers) from any
recapture of California Federal's bad debt reserve. Accordingly, the repeal
of the section 593 reserve method of accounting for bad debts by thrift
institutions is not expected to have a material adverse effect on California
Federal.
For California franchise tax purposes, savings institutions are taxed as
"financial corporations." Financial corporations are taxed at the general
corporate franchise tax rate plus an "in lieu" rate based on their statutory
exemption from local business and personal property taxes. California Federal
is also subject to taxation in certain other states in which it operates,
primarily as a result of California Federal's 1982 and subsequent
acquisitions.
See the Notes to the Consolidated Financial Statements of Cal Fed.
198
<PAGE>
PROPERTIES
California Federal maintains executive offices in an office building
leased by California Federal and located at 5700 Wilshire Boulevard, Los
Angeles, California 90036. At December 31, 1995, California Federal operated
full service branches at 31 owned locations and at 94 leased locations. In
addition, California Federal has certain operating and administrative
departments in an approximately 225,000 square foot leased facility located
in Rosemead, California. The lease expires in 2008. The net book value of all
facilities at December 31, 1995 was $51.4 million. Expiration dates of
California Federal's leased full service branches ranged from January 1996 to
January 2055. California Federal's full service branches are located
principally in California. The following table shows the location of
California Federal's full service branches by state at December 31, 1995:
<TABLE>
<CAPTION>
LOCATION NUMBER OF OFFICES
- ---------- -----------------
<S> <C>
California:
Los Angeles County .. 57
San Francisco County 20
Orange County ........ 18
San Diego County .... 6
Ventura County ....... 6
Other Counties ....... 12
-----------------
Total California .. 119
Nevada ................ 6
-----------------
125
=================
</TABLE>
199
<PAGE>
REGULATION
GENERAL
Holdings is a savings and loan holding company within the meaning of HOLA
and, as such, is registered with the OTS and is subject to comprehensive OTS
regulation.
The Bank is a federally chartered and insured stock savings bank subject
to extensive regulation and supervision by the OTS, as the primary federal
regulator of savings associations, and the FDIC, as the administrator of the
SAIF.
The federal banking laws contain numerous provisions affecting various
aspects of the business and operations of savings associations and savings
and loan holding companies. The following description of statutory and
regulatory provisions and proposals, which is not intended to be a complete
description of these provisions or their effects on Holdings or the Bank, is
qualified in its entirety by reference to the particular statutory or
regulatory provisions or proposals.
REGULATION OF SAVINGS AND LOAN HOLDING COMPANIES
Holding Company Acquisitions
Holdings is a registered savings and loan holding company. The HOLA and
OTS regulations generally prohibit a savings and loan holding company,
without prior OTS approval, from acquiring, directly or indirectly, the
ownership or control of any other savings association or savings and loan
holding company, or all, or substantially all, of the assets or more than 5%
of the voting shares thereof. These provisions also prohibit, among other
things, any director or officer of a savings and loan holding company, or any
individual who owns or controls more than 25% of the voting shares of such
holding company, from acquiring control of any savings association not a
subsidiary of such savings and loan holding company, unless the acquisition
is approved by the OTS.
Holding Company Activities
Holdings currently operates as a unitary savings and loan holding company.
Generally, there are limited restrictions on the activities of a unitary
savings and loan holding company and its non-savings association
subsidiaries. If Holdings ceases to be a unitary savings and loan holding
company, the activities of Holdings and its non-savings association
subsidiaries would thereafter be subject to substantial restrictions.
The HOLA requires every savings association subsidiary of a savings and
loan holding company to give the OTS at least 30 days' advance notice of any
proposed dividends to be made on its guarantee, permanent or other
non-withdrawable stock, or else such dividend will be invalid. See
"--Regulation of Federal Savings Banks--Capital Distribution Regulation."
Affiliate Restrictions
Transactions between a savings association and its "affiliates" are
subject to quantitative and qualitative restrictions under Sections 23A and
23B of the Federal Reserve Act. Affiliates of a savings association include,
among other entities, the savings association's holding company and companies
that are under common control with the savings association.
In general, Sections 23A and 23B and OTS regulations issued in connection
therewith limit the extent to which a savings association or its subsidiaries
may engage in certain "covered transactions" with affiliates to an amount
equal to 10% of the association's capital and surplus, in the case of covered
transactions with any one affiliate, and to an amount equal to 20% of such
capital and surplus, in the case of covered transactions with all affiliates.
In addition, a savings association and its subsidiaries may engage in covered
transactions and certain other transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to
the savings association or its subsidiary, as those prevailing at the time
for comparable transactions with nonaffiliated companies. A "covered
transaction" is defined to include a loan or extension of credit to an
affiliate; a purchase of investment securities issued
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by affiliate; a purchase of assets from an affiliate, with certain
exceptions; the acceptance of securities issued by an affiliate as collateral
for a loan or extension of credit to any party; or the issuance of a
guarantee, acceptance or letter of credit on behalf of an affiliate.
In addition, under the OTS regulations, a savings association may not make
a loan or extension of credit to an affiliate unless the affiliate is engaged
only in activities permissible for bank holding companies; a savings
association may not purchase or invest in securities of an affiliate other
than shares of a subsidiary; a savings association and its subsidiaries may
not purchase a low-quality asset from an affiliate; and covered transactions
and certain other transactions between a savings association or its
subsidiaries and an affiliate must be on terms and conditions that are
consistent with safe and sound banking practices. With certain exceptions,
each loan or extension of credit by a savings association to an affiliate
must be secured by collateral with a market value ranging from 100% to 130%
(depending on the type of collateral) of the amount of the loan or extension
of credit.
The OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as
affiliates, except to the extent that the OTS or the Board of Governors of
the Federal Reserve System (the "FRB") decides to treat such subsidiaries as
affiliates. The regulation also requires savings associations to make and
retain records that reflect affiliate transactions in reasonable detail, and
provides that certain classes of savings associations may be required to give
the OTS prior notice of affiliate transactions.
REGULATION OF FEDERAL SAVINGS BANKS
Regulatory System
As a federally insured savings bank, lending activities and other
investments of the Bank must comply with various statutory and regulatory
requirements. The Bank is regularly examined by the OTS and must file
periodic reports concerning its activities and financial condition.
Although the OTS is the Bank's primary regulator, the FDIC has "backup
enforcement authority" over the Bank. The Bank's eligible deposit accounts
are insured by the FDIC under the SAIF, up to applicable limits.
Federal Home Loan Banks
The Bank is a member of the FHLBS. Among other benefits, FHLB membership
provides the Bank with a central credit facility. The Bank is required to own
capital stock in an FHLB in an amount equal to the greater of: (i) 1% of its
aggregate outstanding principal amount of its residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each
calendar year, (ii) .3% of total assets, or (iii) 5% of its FHLB advances
(borrowings).
Liquid Assets
Under OTS regulations, for each calendar month, a savings bank is required
to maintain an average daily balance of liquid assets (including cash,
certain time deposits and savings accounts, bankers' acceptances, certain
government obligations and certain other investments) not less than a
specified percentage of the average daily balance of its net withdrawable
accounts plus short-term borrowings (its liquidity base) during the preceding
calendar month. This liquidity requirement, which is currently at 5.0%, may
be changed from time to time by the OTS to any amount between 4.0% to 10.0%,
depending upon certain factors. OTS regulations also require each savings
association to maintain an average daily balance of short-term liquid assets
equal to not less than 1.0% of the average daily balance of its net
withdrawable accounts and short-term borrowings during the preceding calendar
month. The Bank maintains liquid assets in compliance with these regulations.
Regulatory Capital Requirements
OTS capital regulations require savings banks to satisfy minimum capital
standards: risk-based capital requirements, a leverage requirement and a
tangible capital requirement. Savings banks must meet
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each of these standards in order to be deemed in compliance with OTS capital
requirements. In addition, the OTS may require a savings association to
maintain capital above the minimum capital levels. See "--REIT Subsidiary
Preferred Stock."
All savings banks are required to meet a minimum risk-based capital
requirement of total capital (core capital plus supplementary capital) equal
to 8% of risk-weighted assets (which includes the credit risk equivalents of
certain off-balance sheet items). In calculating total capital for purposes
of the risk-based requirement, supplementary capital may not exceed 100% of
core capital. Under the leverage requirement, a savings bank is required to
maintain core capital equal to a minimum of 3% of adjusted total assets. (In
addition, under the prompt corrective action provisions of the OTS
regulations, all but the most highly-rated institutions must maintain a
minimum leverage ratio of 4% in order to be adequately capitalized. See
"--Prompt Corrective Action.") A savings bank is also required to maintain
tangible capital in an amount at least equal to 1.5% of its adjusted total
assets.
Under OTS regulations, a savings bank with a greater than "normal" level
of interest rate exposure must deduct an interest rate risk ("IRR") component
in calculating its total capital for purposes of determining whether it meets
its risk-based capital requirement. Interest rate exposure is measured,
generally, as the decline in an institution's net portfolio value that would
result from a 200 basis point increase or decrease in market interest rates
(whichever would result in lower net portfolio value), divided by the
estimated economic value of the savings association's assets. The interest
rate risk component to be deducted from total capital is equal to one-half of
the difference between an institution's measured exposure and "normal" IRR
exposure (which is defined as 2%), multiplied by the estimated economic value
of the institution's assets. In August 1995, the OTS indefinitely delayed
implementation of its IRR regulation. Based on internal measures of interest
rate risk at December 31, 1995, First Nationwide would not have been required
to deduct an IRR component in calculating total risk-based capital had the
IRR component of the capital regulations been in effect.
These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. In addition, the OTS regulations provide that minimum capital levels
higher than those provided in the regulations may be established by the OTS
for individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its
circumstances. The OTS regulations provide that higher individual minimum
regulatory capital requirements may be appropriate in circumstances where,
among others: (1) a savings association has a high degree of exposure to
interest rate risk, prepayment risk, credit risk, concentration of credit
risk, certain risks arising from nontraditional activities, or similar risks
or a high proportion of off-balance sheet risk; (2) a savings association is
growing, either internally or through acquisitions, at such a rate that
supervisory problems are presented that are not dealt with adequately by OTS
regulations; and (3) a savings association may be adversely affected by
activities or condition of its holding company, affiliates, subsidiaries or
other persons or savings associations with which it has significant business
relationships. The Bank is not subject to any such individual minimum
regulatory capital requirement.
First Nationwide's total capital to risk-based assets ratio was 12.93%,
its core capital to risk-based assets ratio was 10.81%, its leverage capital
ratio was 6.71% and its tangible capital ratio was 6.71% at September 30,
1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Holdings--Capital Resources."
Certain Consequences of Failure to Comply with Regulatory Capital
Requirements
A savings bank's failure to maintain capital at or above the minimum
capital requirements may be deemed an unsafe and unsound practice and may
subject the savings bank to enforcement actions and other proceedings. Any
savings bank not in compliance with all of its capital requirements is
required to submit a capital plan that addresses the bank's need for
additional capital and meets certain additional requirements. While the
capital plan is being reviewed by the OTS, the savings bank must certify,
among other things, that it will not, without the approval of its appropriate
OTS Regional Director, grow beyond net interest credited or make capital
distributions. If a savings bank's capital plan is not approved, the bank
will become subject to additional growth and other restrictions. In addition,
the OTS, through a
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capital directive or otherwise, may restrict the ability of a savings bank
not in compliance with the capital requirements to pay dividends and
compensation, and may require such a bank to take one or more of certain
corrective actions, including, without limitation: (i) increasing its capital
to specified levels, (ii) reducing the rate of interest that may be paid on
savings accounts, (iii) limiting receipt of deposits to those made to
existing accounts, (iv) ceasing issuance of new accounts of any or all
classes or categories except in exchange for existing accounts, (v) ceasing
or limiting the purchase of loans or the making of other specified
investments, and (vi) limiting operational expenditures to specified levels.
The HOLA permits savings banks not in compliance with the OTS capital
standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict
requirements are met, and must be denied under certain circumstances. If an
exemption is granted by the OTS, the savings bank still may be subject to
enforcement actions for other violations of law or unsafe or unsound
practices or conditions.
Prompt Corrective Action
The prompt corrective action regulation of the OTS, promulgated under
FDICIA, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings bank that
falls within certain undercapitalized capital categories specified in the
regulation.
The regulation establishes five categories of capital classification:
"well capitalized," "adequately capitalized," "undercapitalized,"
"significantly undercapitalized," and "critically undercapitalized." Under
the regulation, the ratio of total capital to risk-weighted assets, core
capital to risk-weighted assets and the leverage ratio are used to determine
an institution's capital classification. At September 30, 1996, First
Nationwide met the capital requirements of a "well capitalized" institution
under applicable OTS regulations.
In general, the prompt corrective action regulation prohibits an insured
depository institution from declaring any dividends, making any other capital
distribution, or paying a management fee to a controlling person if,
following the distribution or payment, the institution would be within any of
the three undercapitalized categories. In addition, adequately capitalized
institutions may accept Brokered Deposits only with a waiver from the FDIC
and are subject to restrictions on the interest rates that can be paid on
such deposits. Undercapitalized institutions may not accept, renew or
roll-over Brokered Deposits.
Institutions that are classified as undercapitalized are subject to
certain mandatory supervisory actions, including: (i) increased monitoring by
the appropriate federal banking agency for the institution and periodic
review of the institution's efforts to restore its capital, (ii) a
requirement that the institution submit a capital restoration plan acceptable
to the appropriate federal banking agency and implement that plan, and that
each company having control of the institution guarantee compliance with the
capital restoration plan in an amount not exceeding the lesser of 5% of the
institution's total assets at the time it received notice of being
undercapitalized, or the amount necessary to bring the institution into
compliance with applicable capital standards at the time it fails to comply
with the plan, and (iii) a limitation on the institution's ability to make
any acquisition, open any new branch offices, or engage in any new line of
business without the prior approval of the appropriate federal banking agency
for the institution or the FDIC.
The regulation also provides that the OTS may take any of certain
additional supervisory actions against an undercapitalized institution if the
agency determines that such actions are necessary to resolve the problems of
the institution at the least possible long-term cost to the deposit insurance
fund. These supervisory actions include: (i) requiring the institution to
raise additional capital or be acquired by another institution or holding
company if certain grounds exist, (ii) restricting transactions between the
institution and its affiliates, (iii) restricting interest rates paid by the
institution on deposits, (iv) restricting the institution's asset growth or
requiring the institution to reduce its assets, (v) requiring replacement of
senior executive officers and directors, (vi) requiring the institution to
alter or terminate any activity deemed to pose excessive risk to the
institution, (vii) prohibiting capital distributions by bank holding
companies without prior approval by the FRB, (viii) requiring the institution
to divest certain subsidiaries,
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or requiring the institution's holding company to divest the institution or
certain affiliates of the institution, and (ix) taking any other supervisory
action that the agency believes would better carry out the purposes of the
prompt corrective action provisions of FDICIA.
Institutions classified as undercapitalized that fail to submit a timely,
acceptable capital restoration plan or fail to implement such a plan are
subject to the same supervisory actions as significantly undercapitalized
institutions. Significantly undercapitalized institutions are subject to the
mandatory provisions applicable to undercapitalized institutions. The
regulation also makes mandatory for significantly undercapitalized
institutions certain of the supervisory actions that are discretionary for
institutions classified as undercapitalized, creates a presumption in favor
of certain discretionary supervisory actions, and subjects significantly
undercapitalized institutions to additional restrictions, including a
prohibition on paying bonuses or raises to senior executive officers without
the prior written approval of the appropriate federal bank regulatory agency.
In addition, significantly undercapitalized institutions may be subjected to
certain of the restrictions applicable to critically undercapitalized
institutions.
The regulation requires that an institution be placed into conservatorship
or receivership within 90 days after it becomes critically undercapitalized,
unless the OTS, with concurrence of the FDIC, determines that other action
would better achieve the purposes of the prompt corrective action provisions
of FDICIA. Any such determination must be renewed every 90 days. A depository
institution also must be placed into receivership if the institution
continues to be critically undercapitalized on average during the fourth
quarter after the institution initially became critically undercapitalized,
unless the institution's federal bank regulatory agency, with concurrence of
the FDIC, makes certain positive determinations with respect to the
institution.
Critically undercapitalized institutions are also subject to the
restrictions generally applicable to significantly undercapitalized
institutions and to a number of other severe restrictions. For example,
beginning 60 days after becoming critically undercapitalized, such
institutions may not pay principal or interest on subordinated debt without
the prior approval of the FDIC. (However, the regulation does not prevent
unpaid interest from accruing on subordinated debt under the terms of the
debt instrument, to the extent otherwise permitted by law.) In addition,
critically undercapitalized institutions may be prohibited from engaging in a
number of activities, including entering into certain transactions or paying
interest above a certain rate on new or renewed liabilities.
If the OTS determines that an institution is in an unsafe or unsound
condition, or if the institution is deemed to be engaging in an unsafe and
unsound practice, the OTS may, if the institution is well capitalized,
reclassify it as adequately capitalized; if the institution is adequately
capitalized but not well capitalized, require it to comply with restrictions
applicable to undercapitalized institutions; and, if the institution is
undercapitalized, require it to comply with certain restrictions applicable
to significantly undercapitalized institutions.
Conservatorship/Receivership
In addition to the grounds discussed under "--Prompt Corrective Action,"
the OTS (and, under certain circumstances, the FDIC) may appoint a
conservator or receiver for a savings association if any one or more of a
number of circumstances exist, including, without limitation, the following:
(i) the institution's assets are less than its obligations to creditors and
others, (ii) a substantial dissipation of assets or earnings due to any
violation of law or any unsafe or unsound practice, (iii) an unsafe or
unsound condition to transact business, (iv) a willful violation of a final
cease-and-desist order, (v) the concealment of the institution's books,
papers, records or assets or refusal to submit such items for inspection to
any examiner or lawful agent of the appropriate federal banking agency or
state bank or savings association supervisor, (vi) the institution is likely
to be unable to pay its obligations or meet its depositors' demands in the
normal course of business, (vii) the institution has incurred, or is likely
to incur, losses that will deplete all or substantially all of its capital,
and there is no reasonable prospect for the institution to become adequately
capitalized without federal assistance, (viii) any violation of law or unsafe
or unsound practice that is likely to cause insolvency or substantial
dissipation of assets or earnings, weaken the institution's condition, or
otherwise seriously prejudice the interests of the institution's depositors
or the federal deposit insurance fund, (ix) the institution is
undercapitalized and the institution has no
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reasonable prospect of becoming adequately capitalized, fails to become
adequately capitalized when required to do so, fails to submit a timely and
acceptable capital restoration plan, or materially fails to implement an
accepted capital restoration plan, (x) the institution is critically
undercapitalized or otherwise has substantially insufficient capital, or (xi)
the institution is found guilty of certain criminal offenses related to money
laundering.
Liability of Commonly Controlled Depository Institutions
In general, savings associations and other depository institutions can be
held liable for any loss which the FDIC incurs or reasonably anticipates
incurring in connection with either the default of a commonly controlled
depository institution or any assistance provided by the FDIC to a commonly
controlled institution in danger of default. A depository institution is
required to pay the amount of such liability upon receipt of written notice
from the FDIC unless such written notice is received more than two years from
the date the FDIC incurred the loss. Liability for the losses of commonly
controlled institutions can lead to the failure of all depository
institutions in a holding company structure if the remaining institutions are
unable to pay the liability assessed by the FDIC.
In general, for purposes of this provision, depository institutions are
deemed to be "commonly controlled" if they are controlled by the same holding
company or if one depository institution is controlled by another; "default"
of a depository institution occurs when there is an official determination
pursuant to which a conservator, receiver or other legal custodian is
appointed for the institution; and a depository institution is deemed to be
"in danger of default" where its federal or state supervisory agency
determines that the institution is not likely to be able to meet the demands
of its depositors or pay its obligations in the normal course of business and
there is no reasonable prospect that it will be able to do so, or determines
that the institution has incurred or is likely to incur losses that will
deplete substantially all of its capital and there is no reasonable prospect
that the institution's capital can be replenished without federal assistance.
The Bank is not currently under common control with any other depository
institution.
Enforcement Powers
The OTS and, under certain circumstances, the FDIC, have substantial
enforcement authority with respect to savings associations, including
authority to bring various enforcement actions against a savings association
and any of its "institution-affiliated parties" (a term defined to include,
among other persons, directors, officers, employees, controlling
stockholders, agents and shareholders who participate in the conduct of the
affairs of the institution). This enforcement authority includes, without
limitation: (i) the ability to terminate a savings association's deposit
insurance, (ii) institute cease-and-desist proceedings, (iii) bring
suspension, removal, prohibition and criminal proceedings against
institution-affiliated parties, and (iv) assess substantial civil money
penalties. As part of a cease-and-desist order, the agencies may require a
savings association or an institution-affiliated party to take affirmative
action to correct conditions resulting from that party's actions, including
to make restitution or provide reimbursement, indemnification or guarantee
against loss; restrict the growth of the institution; and rescind agreements
and contracts.
Capital Distribution Regulation
In addition to the prompt corrective action restriction on paying
dividends, OTS regulations limit certain "capital distributions" by
OTS-regulated savings associations. Capital distributions are defined to
include, in part, dividends and payments for stock repurchases and cash-out
mergers.
Under the regulation, an association that meets its fully phased-in
capital requirements both before and after a proposed distribution and has
not been notified by the OTS that it is in need of more than normal
supervision (a "Tier 1 association") may, after prior notice to but without
the approval of the OTS, make capital distributions during a calendar year up
to the higher of: (i) 100% of its net income to date during the calendar year
plus the amount that would reduce by one-half its surplus capital ratio at
the beginning of the calendar year, or (ii) 75% of its net income over the
most recent four-quarter period. A Tier 1 association may make capital
distributions in excess of the above amount if it gives notice to the OTS and
the OTS does not object to the distribution. A savings association that meets
its regulatory
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capital requirements both before and after a proposed distribution but does
not meet its fully phased-in capital requirement (a "Tier 2 association") is
authorized, after prior notice to the OTS but without OTS approval, to make
capital distributions in an amount up to 75% of its net income over the most
recent four-quarter period, taking into account all prior distributions
during the same period. Any distribution in excess of this amount must be
approved in advance by the OTS. A savings association that does not meet its
current regulatory capital requirements (a "Tier 3 association") cannot make
any capital distribution without prior approval from the OTS, unless the
capital distribution is consistent with the terms of a capital plan approved
by the OTS.
At September 30, 1996, First Nationwide qualified as a Tier 1 association
for purposes of the capital distribution rule. The OTS may prohibit a
proposed capital distribution that would otherwise be permitted if the OTS
determines that the distribution would constitute an unsafe or unsound
practice. The requirements of the capital distribution regulation supersede
less stringent capital distribution restrictions in earlier agreements or
conditions.
The OTS has proposed to amend its capital distribution regulation to
conform its requirements to the OTS prompt corrective action regulation.
Under the proposed regulation, an institution that would remain at least
adequately capitalized after making a capital distribution, and that was
owned by a holding company, would be required to provide notice to the OTS
prior to making a capital distribution. "Troubled" associations and
undercapitalized associations would be allowed to make capital distributions
only by filing an application and receiving OTS approval, and such
applications would be approved under certain limited circumstances.
Qualified Thrift Lender Test
In general, savings associations are required to maintain at least 65% of
their portfolio assets in certain qualified thrift investments (which consist
primarily of loans and other investments related to residential real estate
and certain other assets). A savings association that fails the qualified
thrift lender test is subject to substantial restrictions on activities and
to other significant penalties.
Recent legislation permits a savings association to qualify as a qualified
thrift lender not only by maintaining 65% of portfolio assets in qualified
thrift investments (the "QTL test") but also, in the alternative, by
qualifying under the the Internal Revenue Code as a "domestic building and
loan association." The Bank is a domestic building and loan association as
defined in the Internal Revenue Code.
Recent legislation also expands the QTL test to provide savings
associations with greater authority to lend and diversify their portfolios.
In particular, credit card and educational loans may now be made by savings
associations without regard to any percentage-of-assets limit, and commercial
loans may be made in an amount up to 10 percent of total assets, plus an
additional 10 percent for small business loans. Loans for personal, family,
and household purposes (other than credit card, small business, and
educational loans) are now included without limit with other assets that, in
the aggregate, may account for up to 20% of total assets. At September 30,
1996, under the expanded QTL test, approximately 89.02% of First Nationwide's
portfolio assets were qualified thrift investments.
FDIC Assessments
The deposits of the Bank are insured by the SAIF of the FDIC, up to
applicable limits, and are subject to deposit premium assessments by the
SAIF. Under the FDIC's risk-based insurance system, SAIF-assessed deposits
have been subject to premiums of between 23 and 31 basis points, depending
upon the institution's capital position and other supervisory factors. The
rate applicable to First Nationwide Bank at September 30, 1996 was 23 basis
points.
Under recent legislation, SAIF-assessable deposits held as of March 31,
1995 are subject to a tax-deductible one-time special assessment at a rate
sufficient to achieve the 1.25% designated reserve ratio of the SAIF as of
October 1, 1996. This Special SAIF Assessment generally was payable no later
than November 29, 1996. The special assessment was 65.7 cents per $100 of
SAIF-assessable deposits and was collected on November 27, 1996. At the 65.7
basis point rate, the cost of the special assessment to the Bank was
approximately $118.2 million on a pre-tax basis and $106.4 million on an
after-tax basis.
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Under the new legislation, beginning in January 1997 institutions with
Bank Insurance Fund ("BIF") deposits will be required to share the cost of
funding debt obligations issued by the Financing Corporation ("FICO"), a
corporation established by the federal government in 1987 to finance the
recapitalization of FSLIC. However, until the earlier of December 31, 1999 or
the date of elimination of the thrift charter, the FICO assessment rate for
BIF deposits is only 1/5 of the rate applicable to SAIF deposits.
Consequently, the annual FICO assessments to be added to deposit insurance
premiums are expected to equal approximately 6.4 basis points for SAIF
deposits and 1.3 basis points for BIF deposits from January 1, 1997 through
December 31, 1999, and approximately 2.4 basis points for both BIF and SAIF
deposits thereafter. From January 1, 1997, FICO payments will be paid
directly by SAIF and BIF institutions in addition to deposit insurance
assessments.
On October 16, 1996, the FDIC proposed to lower the rates on
SAIF-assessable deposits. The proposed rule would establish SAIF rates
ranging from 0 to 27 basis points as of October 1, 1996. A special interim
schedule of rates ranging from 18 to 27 basis points would apply from October
1, 1996 through December 31, 1996 for those institutions, such as the Bank,
that continue to be subject to FICO assessments until the new FICO funding
mechanism goes into effect on January 1, 1997. Excess assessments collected
under the prior assessment schedule would be refunded or credited with
interest. Following the special assessment and the new FICO funding mechanism
effective January 1, 1997, future SAIF assessment rates are expected to
depend primarily on the rate of any new losses from the SAIF insurance fund.
Under the recent legislation, however, the FDIC is not permitted to establish
SAIF assessment rates that are lower than comparable BIF assessment rates.
Leaving aside the special assessment and the new FICO assessments beginning
January 1, 1997, the Bank paid the minimum SAIF assessment rate of 18 basis
points from October 1, 1996 to December 31, 1996 and expects to pay 0 basis
points from January 1, 1997.
Thrift Charter
Congress has been considering legislation in various forms that would
require federal thrifts, such as the Bank, to convert their charters to
national or state bank charters. Recent legislation requires the Treasury
Department to prepare for Congress by March 31, 1997 a comprehensive study on
development of a common charter for federal savings associations and
commercial banks; and, in the event that the thrift charter was eliminated by
January 1, 1999, would require the merger of the BIF and the SAIF into a
single Deposit Insurance Fund on that date. In the absence of appropriate
"grandfather" provisions, legislation eliminating the thrift charter could
have a material adverse effect on the Bank and its parent holding companies
because, among other things, these holding companies engage in activities
that are not permissible for bank holding companies and the regulatory
capital and accounting treatment for banks and thrifts differs in certain
significant respects. The Bank cannot determine whether, or in what form,
such legislation may eventually be enacted and there can be no assurance that
any legislation that is enacted would contain adequate grandfather rights for
the Bank and its parent holding companies.
Non-Investment Grade Debt Securities
Savings associations and their subsidiaries are prohibited from acquiring
or retaining any corporate debt security that, at the time of acquisition, is
not rated in one of the four highest rating categories by at least one
nationally recognized statistical rating organization. The Bank does not own
any non-investment grade debt securities.
Community Reinvestment Act and the Fair Lending Laws
Savings associations have a responsibility under CRA and related
regulations of the OTS to help meet the credit needs of their communities,
including low-and moderate-income neighborhoods. In addition, the Equal
Credit Opportunity Act and the Fair Housing Act (together, the "Fair Lending
Laws") prohibit lenders from discriminating in their lending practices on the
basis of characteristics specified in those statutes. An institution's
failure to comply with the provisions of CRA could, as a minimum, result in
regulatory restrictions on its activities, and failure to comply with the
Fair Lending Laws could result in enforcement actions by the OTS, as well as
other federal regulatory agencies and the Department of Justice.
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New Safety and Soundness Guidelines
The OTS and the other federal banking agencies have established guidelines
for safety and soundness, addressing operational and managerial, as well as
compensation matters for insured financial institutions. Institutions failing
to meet these standards are required to submit compliance plans to their
appropriate federal regulators. The OTS and the other agencies have also
established guidelines regarding asset quality and earnings standards for
insured institutions.
Change of Control
Subject to certain limited exceptions, no company can acquire control of a
savings association without the prior approval of the OTS, and no individual
may acquire control of a savings association if the OTS objects. Any company
that acquires control of a savings association becomes a savings and loan
holding company subject to extensive registration, examination and regulation
by the OTS. Conclusive control exists, among other ways, when an acquiring
party acquires more than 25% of any class of voting stock of a savings
association or savings and loan holding company, or controls in any manner
the election of a majority of the directors of the company. In addition, a
rebuttable presumption of control exists if, among other things, a person
acquires more than 10% of any class of a savings association or savings and
loan holding company's voting stock (or 25% of any class of stock) and, in
either case, any of certain additional control factors exist.
Under recent legislation, companies subject to the Bank Holding Company
Act that acquire or own savings associations are no longer defined as savings
and loan holding companies under the HOLA and, therefore, are not generally
subject to supervision and regulation by the OTS. OTS approval is no longer
required for a bank holding company to acquire control of a savings
association, although the OTS has a consultative role with the FRB in
examination, enforcement and acquisition matters.
Reduction Act
On September 30, 1996, President Clinton signed into law the Reduction
Act. The Reduction Act's principal provisions relate to recapitalization of
the SAIF, but it also contains numerous regulatory relief measures, some of
which are directly applicable to the Bank. Specific provisions of the
Reduction Act are discussed above in "--Qualified Thrift Lender Test,"
"--FDIC Assessments," "--Thrift Charter," and "--Change of Control." The
Reduction Act also contains other provisions to reduce regulatory burdens
associated with compliance with various consumer and other laws applicable to
the Bank, including, for example, provisions designed to coordinate the
disclosure and other requirements under the Truth-in-Lending Act and the Real
Estate Settlement Procedures Act, modify certain insider lending
restrictions, permit OTS to allow exemptions to anti-tying prohibitions and
exempt certain transactions and simplify certain disclosures under the
Truth-in-Lending Act.
Capital Corporation Preferred Stock
The Bank filed a 30-day notice on November 29, 1996 with the OTS regarding
the establishment of the Capital Corporation as an operating subsidiary of
the Bank. The OTS issued a letter dated December 29, 1996 expressing that it
will not object to such establishment.
In conjunction with the operating subsidiary notice, the OTS reviewed
among other things the appropriateness of including the minority interest
represented by the Capital Corporation Preferred Stock in the regulatory
capital of the Bank. See "--Regulatory Capital Requirements." In general, as
a minority interest in a consolidated subsidiary, the Capital Corporation
Preferred Stock is eligible to be treated as core capital of the Bank, but
the OTS may have the authority to exclude such REIT subsidiary preferred
stock from core capital. The OTS has indicated that it will not exclude REIT
subsidiary preferred stock from the core capital of the parent savings
association if the following prudential standards are met: (i) the REIT
subsidiary preferred stock meets all of the same terms and conditions that
preferred stock issued by the parent savings association must meet in order
to be included in core capital; (ii) the REIT subsidiary preferred stock
cannot be redeemed without the prior written consent of the OTS; (iii) the
REIT subsidiary preferred stock must be converted into or exchanged for a
core capital instrument of the parent savings association if the OTS directs,
in writing, that such a conversion or
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<PAGE>
exchange should occur because (a) the parent savings association becomes
undercapitalized under prompt corrective action regulations, (b) the parent
savings association is placed in bankruptcy, reorganization, conservatorship,
or receivership, or (c) the OTS, in its sole discretion, directs in writing
such conversion or exchange in anticipation of the parent savings association
becoming undercapitalized in the near term; (iv) the amount of the parent
savings association's core capital that is composed of REIT subsidiary
preferred stock does not exceed 25% of core capital including such REIT
subsidiary preferred stock (33 1/3% of core capital excluding REIT subsidiary
preferred stock); and (v) the OTS may exclude REIT subsidiary preferred stock
from core capital if it ceases to provide meaningful capital support and a
realistic ability to absorb losses or otherwise raises supervisory concerns,
including OTS concerns about the capital mix or asset structure of the REIT
subsidiary or the parent savings association. Holdings expects a significant
portion of the Capital Corporation Preferred Stock to be included in the core
capital of the Bank.
TAXATION OF THE BANK
For a discussion of recently enacted tax legislation that changes the
Bank's method of accounting for bad debts, see "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Holdings--Provision for Federal and State Income Taxes."
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Holdings
The following table sets forth certain information (ages as of January 1,
1997) concerning the directors and executive officers of Holdings. All
directors serve terms of one year or until the election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------ --- --------
<S> <C> <C>
Ronald O. Perelman 54 Chairman of the Board, Chief
Executive Officer and Director
Howard Gittis ...... 62 Vice Chairman and Director
Irwin Engelman ..... 62 Executive Vice President and Chief
Financial Officer
Barry F. Schwartz . 47 Executive Vice President and General
Counsel
Laurence Winoker .. 40 Vice President and Controller
</TABLE>
The following table sets forth certain information (ages as of January 1,
1997) concerning the directors and executive officers of the Bank. All
directors serve terms of one year or until election of their respective
successors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------ --- --------
<S> <C> <C>
Ronald O. Perelman ....... 54 Director
Gerald J. Ford ........... 52 Chairman of the Board, Chief Executive
Officer and Director
Carl B. Webb ............. 46 President, Chief Operating Officer and
Director
Edward G. Harshfield .... 60 Vice Chairman of the Board and Director
Paul M. Bass, Jr. ........ 61 Director
George W. Bramblett, Jr. 56 Director
Bob Bullock .............. 67 Director
Irwin Engelman ........... 61 Director
Howard Gittis ............ 62 Director
Gabrielle K. McDonald ... 54 Director
Lynn Schenk .............. 54 Director
Robert Setrakian ......... 72 Director
Christie S. Flanagan .... 58 Executive Vice President and General
Counsel
Kendall M. Fugate ........ 59 Executive Vice President and Information
and Technology Services Director
Roger L. Gordon .......... 54 Executive Vice President
Richard P. Hodge ......... 41 Executive Vice President and Corporate
Tax Director
Walter C. Klein, Jr. .... 53 Executive Vice President; President, FNMC
Lacy G. Newman, Jr. ..... 46 Executive Vice President and Chief Credit
Officer
James R. Staff ........... 49 Executive Vice President and Chief
Financial Advisor
Richard H. Terzian ....... 59 Executive Vice President and Chief
Financial Officer
Peter K. Thomsen ......... 54 Executive Vice President and Retail
Banking Director
Michael R. Walker ........ 51 Executive Vice President--Commercial Real
Estate
Renee Nichols Tucei ..... 40 Senior Vice President and Controller
</TABLE>
210
<PAGE>
Mr. Perelman has been a Director of First Nationwide or the Bank since
1994 and Chairman of the Board of Holdings since its formation in 1994. Mr.
Perelman has been Chairman of the Board and Chief Executive Officer of
MacAndrews & Forbes and various of its affiliates since 1980. Mr. Perelman
also is Chairman of the Board of Andrews Group Incorporated ("Andrews
Group"), Consolidated Cigar Corporation ("Consolidated Cigar"), Consolidated
Cigar Holdings Inc. ("Consolidated Cigar Holdings"), Mafco Consolidated Group
Inc. ("Mafco Consolidated"), Meridian Sports Incorporated ("Meridian
Sports"), Power Control Technologies Inc. ("PCT") and Toy Biz, Inc. ("Toy
Biz") and is the Chairman of the Executive Committee of the Board of
Directors of Marvel Entertainment Group, Inc. ("Marvel"), Revlon Consumer
Products Corporation ("Revlon Products") and Revlon, Inc. ("Revlon"). Mr.
Perelman is a Director of the following corporations which file reports
pursuant to the Exchange Act: Andrews Group, The Coleman Company, Inc.
("Coleman"), Coleman Holdings Inc., Coleman Worldwide Corporation ("Coleman
Worldwide"), Consolidated Cigar, Consolidated Cigar Holdings, First
Nationwide, Holdings, Mafco Consolidated, Marvel, Marvel Holdings Inc.
("Marvel Holdings"), Marvel (Parent) Holdings Inc., ("Marvel Parent"), Marvel
III Holdings Inc. ("Marvel III"), Meridian Sports, Parent Holdings, PCT,
Pneumo Abex Corporation, successor by merger to Mafco Worldwide Corporation
("Pneumo Abex"), Revlon, Revlon Products, Revlon Worldwide Corporation
("Revlon Worldwide") and Toy Biz. (On December 27, 1996, Marvel Holdings,
Marvel Parent, Marvel III and Marvel and several of its subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code.)
Mr. Gittis has been a Director of First Nationwide or the Bank and a Vice
Chairman and a Director of Holdings since 1994. Mr. Gittis has been Vice
Chairman and Director of MacAndrews & Forbes and various of its affiliates
since 1985. Mr. Gittis is a Director of the following corporations which file
reports pursuant to the Exchange Act: Andrews Group, Consolidated Cigar,
Consolidated Cigar Holdings, Jones Apparel Group, Inc., Loral Space &
Communications Ltd., Mafco Consolidated,, Parent Holdings, PCT, Pneumo Abex,
Revlon, Revlon Products, Revlon Worldwide and Rutherford-Moran Oil
Corporation.
Mr. Engelman has been a Director of First Nationwide or the Bank since
1992 and the Executive Vice President and Chief Financial Officer of Holdings
since its formation in 1994. He has been Executive Vice President and Chief
Financial Officer of MacAndrews & Forbes, Marvel Holdings, Marvel Parent,
Marvel III and various other affiliates of MacAndrews & Forbes since February
1992. (On December 27, 1996, Marvel Holdings, Marvel Parent, Marvel III and
several of the subsidiaries of Marvel Holdings filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code.) He was
Executive Vice President and Chief Financial Officer of GAF Corporation from
1990 to 1991; Director, President and Chief Operating Officer of Citytrust
Bancorp Inc. from 1988 to 1990; Executive Vice President of the Blackstone
Group LP from 1987 to 1988; and Director and Executive Vice President of
General Foods Corporation for more than five years prior to 1987. Mr.
Engelman is a Director of the following corporation which files reports
pursuant to the Exchange Act: Revlon Products.
Mr. Schwartz has been Executive Vice President and General Counsel of
Holdings since January 1996. He has been Executive Vice President and General
Counsel of MacAndrews & Forbes and various of its affiliates since 1993. Mr.
Schwartz was Senior Vice President of MacAndrews & Forbes from 1989 to 1993.
(On December 27, 1996, Marvel Holdings, Marvel Parent, Marvel III and Marvel
and several of its subsidiaries filed voluntary petitions for reorganization
under Chapter 11 of the United States Bankruptcy Code.)
Mr. Winoker has been Vice President and Controller of Holdings since 1994.
He has been Vice President and Controller of MacAndrews & Forbes and various
of its affiliates since September 1992. Mr. Winoker was Assistant Vice
President and Assistant Controller of MacAndrews & Forbes and various of its
affiliates for more than five years prior to September 1992. (On December 27,
1996, Marvel Holdings, Marvel Parent, Marvel III and Marvel and several of
its subsidiaries filed voluntary petitions for reorganization under Chapter
11 of the United States Bankruptcy Code.)
Mr. Ford has been Chairman of the Board, Chief Executive Officer and a
Director of First Nationwide or the Bank since consummation of the FN
Acquisition and of Capital Corporation since its formation in November 1996.
Mr. Ford was Chairman of the Board and a Director of First Madison from
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<PAGE>
1993 to 1994. Mr. Ford previously served as Chairman of the Board, Chief
Executive Officer and a Director of First Gibraltar from 1988 through 1993.
Mr. Ford served as the Chairman of the Board, Chief Executive Officer and a
Director of First United Bank Group, Inc. ("First United Bank Group"), from
1993 through 1994. Mr. Ford is Chairman of the Board and a Director of FNMC,
a wholly owned subsidiary of First Nationwide. Mr. Ford is Chairman of the
Board and a Director of FGB Services, Inc. and Madison Realty Advisors, Inc.
("Madison Realty"). Mr. Ford has also served in the following capacities over
the past five years: Chairman of the Board, Chief Executive Officer and
Director, Ford Bank Group, Inc. ("Ford Bank Group"); Chairman of the Board,
Chief Executive Officer and Director, United New Mexico Financial
Corporation. Mr. Ford is also Chairman of the Board and Chief Executive
Officer of Liberte Investors Inc., President and a Director of Parent
Holdings and a Director of Norwest Corporation and ACS.
Mr. Webb has been the President, Chief Operating Officer and a Director of
First Nationwide or the Bank since the consummation of the FN Acquisition and
of Capital Corporation since its formation in November 1996. Mr. Webb served
as President, Chief Executive Officer and Director of First Madison from 1993
through 1994. Mr. Webb previously served as President, Chief Operating
Officer and a Director of First Gibraltar from 1988 through 1993. Mr. Webb
also serves as a Director of FNMC.
Mr. Harshfield has been Vice Chairman of the Board and a Director of the
Bank since January 1997. Mr. Harshfield was President, Chief Executive
Officer and a Director of Cal Fed from January 1996 to January 1997 and of
California Federal from October 1993 to January 1997. From October 1992 to
March 1993, Mr. Harshfield served as Chief Executive Officer and a Director
of First City Texas National Bank. From February 1991 to December 1992, he
served as President, Chief Executive Officer and a Director of Federal
Capital Bank, a private investment bank. Since 1988, Mr. Harshfield has been
the principal, Chairman and Chief Executive Officer of EH Thrift Management
Inc., a special purpose management company, and general partner of U.S.
Thrift Opportunity Partners, L.P., a Merrill Lynch sponsored limited
partnership that invests in undercapitalized thrift institutions.
Mr. Bass has been a Director of First Nationwide or the Bank since May,
1993. Mr. Bass is currently the Vice Chairman and Director of First Southwest
Company. Mr. Bass is a Director and Chairman of the Audit Committee of
Keystone Consolidated Industries, and is a Director of Source Services, Inc.
Mr. Bass has served in the following capacities during the past five years:
Director, Endevco, Inc.; Director, Ford Bank Group; and Chairman of the Board
and Director, Pizza Inn, Inc.
Mr. Bramblett has been a Director of First Nationwide or the Bank since
May, 1993. Mr. Bramblett has been associated with the law firm of Haynes &
Boone since 1973 and is currently a Partner and a member of the Executive
Committee of that firm. Mr. Bramblett has served in the following capacities
during the past five years: Member of the Texas Higher Education Coordinating
Board of the Texas College and University System and Trustee of the Baylor
College of Dentistry.
Mr. Bullock has served as a Director of First Nationwide or the Bank since
1994. Mr. Bullock has been Lieutenant Governor of the State of Texas since
1990. Mr. Bullock is Chairman of the Board, Director and President of
JFB-RDB, Inc. Mr. Bullock served as a Director of the Ford Bank Group from
1992 to 1993, and as Director of the First United Bank Group from 1992 to
1993. Prior to 1990, Mr. Bullock served as the State of Texas Comptroller of
Public Accounts. Mr. Bullock has been Of Counsel to the law firm of Scott,
Douglass, Luton and McConnico, L.L.P. since 1992.
Ms. McDonald has served as a Director of First Nationwide or the Bank
since January, 1990. Ms. McDonald also served as a Director of FGB-San
Antonio in 1992. Ms. McDonald currently serves as a Judge on the
International Criminal Tribunal for the former Yugoslavia. Ms. McDonald is
also currently a Professor of Law at the Thurgood Marshall School of Law of
Texas Southern University. Ms. McDonald currently serves as a director of
Freeport McMoRan Inc., McMoRan Oil & Gas Co. and Freeport McMoRan Copper &
Gold Inc. Ms. McDonald was Of Counsel to the Walker & Satterthwaite firm from
1991 to 1993. She was a partner in the law firm of Matthews & Branscomb from
1988 through 1991. Prior to that time, Ms. McDonald served as a United States
District Court Judge for the Southern District of Texas.
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<PAGE>
Ms. Schenk has been a Director of First Nationwide or the Bank since
November, 1996. Ms. Schenk has been a Senior Consultant to Baker & McKenzie,
San Diego, California since 1995. From January, 1993 to January, 1995 Ms.
Schenk served in the U.S. House of Representatives as Congresswoman
representing the 49th Congressional District in the State of California.
During her term in the House of Representatives, Ms. Schenk served on the
Energy and Commerce Committee and the Merchant Marine and Fisheries
Committee. Ms. Schenk served as the State of California Secretary of
Business, Transportation and Housing prior to 1983. From 1983 until her
election to Congress, Ms. Schenk was in private law practice in California
and served as an independent consultant to various public and private
businesses with respect to government relations. From 1985 to 1993, Ms.
Schenk served as a director of Long Beach Bank, F.S.B. She is currently a
director of IDEC Pharmaceuticals, Inc.
Mr. Setrakian has been a Director of First Nationwide or the Bank since
November 1994. Mr. Setrakian previously served as a Director of Old FNB for
more than 10 years. Mr. Setrakian is presently the Chairman and President of
the William Saroyan Foundation and the Chairman and President of Mid-State
Horticultural Company. He is also a former Chairman and member of the Board
of Governors of the United States Postal Service; former Commissioner of the
Federal Maritime Commission; former Chairman and Chief Executive Officer of
the California Growers Winery, Inc.; and former Chairman and founder of the
National Bank of Agriculture.
Mr. Flanagan has been the Executive Vice President and General Counsel of
First Nationwide or the Bank since the consummation of the FN Acquisition.
Mr. Flanagan has been the Executive Vice President, General Counsel and a
Director of Capital Corporation since its formation in November 1996. He also
serves as a Director of FNMC. Mr. Flanagan has been associated with the law
firm of Jenkens & Gilchrist, P.C. and its predecessors since 1968 in various
capacities, including Managing Partner, and he is currently Of Counsel to
that firm.
Mr. Fugate has been an Executive Vice President of First Nationwide or the
Bank since the consummation of the FN Acquisition. Mr. Fugate previously
served as Executive Vice President of Old FNB from 1991 to 1994, and held
various executive positions with Citibank, N.A. and Citibank California, FSB
from 1982 to 1991.
Mr. Gordon has been an Executive Vice President of First Nationwide or the
Bank since February 1996. Mr. Gordon previously was associated with SFFed for
more than five years prior to February 1996, including most recently as
Chairman, President and Chief Executive Officer.
Mr. Hodge has been an Executive Vice President of First Nationwide or the
Bank since January 1996 and has been employed by First Nationwide since
November 1995. Mr. Hodge previously was associated with the public accounting
firm of KPMG Peat Marwick LLP and its predecessors since 1981, including most
recently as a tax partner since 1986.
Mr. Klein has been an Executive Vice President of First Nationwide or the
Bank and the President of FNMC since January 1996. He also serves as a
Director of FNMC. Mr. Klein previously was associated with PNC Mortgage Corp.
of America and its predecessor, Sears Mortgage Corporation, since 1986,
including most recently as Chairman and Chief Executive Officer.
Mr. Newman has been Executive Vice President and Chief Credit Officer of
First Nationwide or the Bank since the consummation of the FN Acquisition.
Mr. Newman has also served as President and a Director of FGB Realty and
Madison Realty since 1992. During 1991, Mr. Newman was a Senior Vice
President of J.E. Robert Companies. He served as a Senior Vice President of
Bank of New England Corporation from 1990 to 1991, and served as the
President, Chief Executive Officer and Director of the Seamen's Bank for
Savings from 1989 to 1990.
Mr. Staff has been an Executive Vice President of First Nationwide or the
Bank since October 17, 1994. He also serves as a Director of Capital
Corporation and FNMC and as Chairman and Director of FGB Realty. Mr. Staff
previously was associated with the public accounting firm of KPMG Peat
Marwick LLP and its predecessors since 1979, including most recently as
Partner-in-charge of Financial Services for the Southwest-Dallas area.
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<PAGE>
Mr. Terzian has served as Executive Vice President and Chief Financial
Officer of First Nationwide or the Bank since April 1, 1995. Mr. Terzian has
been the Executive Vice President, Chief Financial Officer and a Director of
Capital Corporation since its formation in November 1996. For the five years
prior to that date, Mr. Terzian served as Chief Financial Officer of Dime
Bancorp, Inc. (The Dime Savings Bank of New York, FSB).
Mr. Thomsen has been an Executive Vice President of First Nationwide or
the Bank since the consummation of the FN Acquisition. Mr. Thomsen previously
served as Senior Executive Vice President of Old FNB and a Director from 1992
to 1994. Mr. Thomsen was an Executive Vice President of Old FNB from 1991 to
1992. Mr. Thomsen had been Executive Vice President of Michigan National
Corporation from 1986 to 1991 and a Director from 1989 to 1991, and the
President of Michigan National Bank from 1988 to 1991 and a Director from
1989 to 1991. Mr. Thomsen was Chairman of Independence One Mortgage
Corporation, a subsidiary of Michigan National Bank, from 1986 to 1990.
Mr. Walker has been an Executive Vice President of First Nationwide or the
Bank since the consummation of the FN Acquisition. Mr. Walker served as
Senior Vice President of First Madison from 1993 to 1994. Mr. Walker
previously served as Senior Vice President of First Gibraltar from 1988 to
1993.
Ms. Tucei has been a Senior Vice President and the Controller of First
Nationwide or the Bank since the consummation of the FN Acquisition. Ms.
Tucei previously served as Senior Vice President and Controller of First
Madison from 1993 to 1994. Ms. Tucei was Senior Vice President and Director
of Regulatory Assistance Compliance for First Gibraltar from 1991 to 1993,
and served as Senior Vice President and Manager of Regulatory Assistance
Operations for First Gibraltar from 1989 to 1991.
COMPENSATION OF DIRECTORS
Any directors of Holdings who are not officers or employees of Holdings or
any of its affiliates receive $25,000 per year plus an additional $1,000 per
meeting.
Directors of the Bank who do not receive compensation as officers or
employees of the Bank or any of its affiliates are paid a fee of $3,500 for
each meeting of the Board of Directors they attend and each director who
attends 67% or more of the regular meetings of the Board of Directors during
a fiscal year will receive an additional fee of $9,000. Members of the Audit
Committee of the Board of Directors of the Bank who do not receive
compensation as officers or employees of the Bank or any of its affiliates
are paid a fee of $1,500 for each meeting of the Audit Committee they attend.
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EXECUTIVE COMPENSATION
Holdings is a holding company with no business operations of its own and,
accordingly, engages in its business through the Bank and its subsidiaries.
The officers of Holdings receive no compensation for their services to
Holdings. Accordingly, the following table sets forth certain compensation
awarded to, earned by or paid to the Chief Executive Officer of First
Nationwide, and the four most highly paid executive officers of First
Nationwide, other than the Chief Executive Officer, who served as executive
officers of First Nationwide at December 31, 1995 for services rendered in
all capacities to Holdings, First Nationwide and its subsidiaries during the
years ended December 31, 1995, 1994 and 1993.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------------
OTHER ANNUAL ALL OTHER
COMPENSATION COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (1) (2)
- --------------------------- ------ ------------ -------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Gerald J. Ford (3) 1995 $1,500,000 $ 0 $ 7,644 $49,511
Chairman & Chief 1994 317,358 0 912 4,500
Executive Officer
Carl B. Webb 1995 900,000 0 274,351 66,707
President & Chief 1994 361,724 0 154,496 9,000
Operating Officer 1993 269,551 80,000 8,493 12,658
Christie S. Flanagan (3) 1995 700,000 20,000 10,892 44,854
Executive Vice President & 1994 116,669 0 0 0
General Counsel
Lacy G. Newman, Jr. 1995 475,000 0 178,457 36,166
Executive Vice President & 1994 345,334 0 124,916 9,000
Chief Credit Officer 1993 300,000 77,200 6,289 11,572
James R. Staff (3) 1995 450,000 0 17,348 27,001
Executive Vice President & 1994 65,627 0 0 0
Chief Financial Advisor
</TABLE>
- ------------
(1) Includes: (i) the value of group term life insurance, (ii) amounts paid
under relocation programs for Messrs. Webb and Newman, (iii) the value
of the use of Bank-owned automobiles for Messrs. Webb, Flanagan, Newman
and Staff, (iv) club dues, (v) personal financial planning services
paid by the Bank for Messrs. Ford, Webb, Newman and Staff, and (vi)
security expenses paid by the Bank for Messrs. Newman and Staff.
(2) Includes: (i) the Bank's contributions to the 401(k) plan for Messrs.
Ford, Webb, Flanagan and Newman, (ii) the Bank's contribution to the
Supplemental Employees' Investment Plan, and (iii) premiums on
supplemental life insurance paid by the Bank for Messrs. Ford, Webb and
Flanagan.
(3) Mr. Ford became Chief Executive Officer of the Bank upon the
consummation of the FN Acquisition on October 3, 1994. Messrs. Flanagan
and Staff became Executive Vice Presidents on October 3 and October 17,
1994, respectively.
Certain executive officers of the Bank have entered into employment
agreements with First Nationwide. See "Certain Transactions--Executive
Employment Agreements." Also, Gerald J. Ford has been and is presently a
party to certain consulting, and similar agreements with the certain
affiliates of the Issuer, as more fully described in "Certain
Transactions--Transactions with Mr. Ford."
Effective October 1, 1995, Holdings adopted a management incentive plan
(the "Incentive Plan") with respect to certain executive officers of the Bank
(the "Participants"). Awards under the Incentive Plan are made in the form of
performance units. Each performance unit entitles the Participants to receive
cash and/or stock options ("Bonuses") based on the Participant's vested
interest in a bonus pool.
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<PAGE>
Generally, the Incentive Plan provides for the payment of Bonuses, on a
quarterly basis, to the Participants upon the occurrence of certain events.
Bonuses vest at 20% per year beginning October 1, 1995. The aggregate amount
of Bonuses payable under the Incentive Plan is subject to a cap of $50
million. During 1995, expense of $2 million was recorded relative to the
Incentive Plan. Additional expense of $30.5 million was recorded relative to
the Incentive Plan during the six months ended June 30, 1996.
The following table sets forth information concerning awards made during
1995 to each of the executive officers named in the preceding table under all
long-term incentive plans. There were no long-term incentive plan awards in
1994 or 1993.
LONG-TERM INCENTIVE PLAN AWARDS (1)
<TABLE>
<CAPTION>
ESTIMATED FUTURE PAYOUTS
UNDER NON-STOCK-PRICE-BASED PLANS
-------------------------------------------
NUMBER OF
SHARES, PERFORMANCE OR
UNITS OR OTHER PERIOD UNTIL
OTHER MATURATION OR THRESHOLD TARGET MAXIMUM
NAME RIGHTS PAYOUT (2) ($) (3) ($) (3) ($) (3)
- -------------------- ----------- ------------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Carl B. Webb ........ 500 Ten years $10,127,500 $10,127,500 $25,000,000
Christie S. Flanagan 80 Ten years 1,620,400 1,620,400 4,000,000
Lacy G. Newman, Jr. 80 Ten years 1,620,400 1,620,400 4,000,000
James R. Staff ...... 80 Ten years 1,620,400 1,620,400 4,000,000
</TABLE>
- ------------
(1) The table above represents awards of performance units pursuant to the
Incentive Plan. Any payout with respect to the performance units would
only be made by Holdings. Units vest at 20% per year beginning on
October 1, 1995.
(2) Payouts of cash awards would be made only if earned and only (i) upon
achievement of a target "Excess Value" prior to December 31, 2004, (ii)
upon an occurrence of a change in control of Holdings or the Bank,
(iii) upon an occurrence of a public offering of common stock of
Holdings or the Bank or (iv) on December 31, 2004. "Excess Value" is a
measure of Holdings' performance tied to the aggregate earnings of
Holdings and the aggregate distributions made to the shareholders of
Holdings.
(3) Generally, the cash payout with respect to a performance unit equals
.0084% of the Excess Value. Upon achievement of the target Excess
Value, the cash payout with respect to each performance unit would be
$20,255. If a payout is triggered otherwise than by achievement of the
target Excess Value, no cash payouts would be made unless the Excess
Value at the time of the event triggering payment exceeds or equals the
amount resulting in a payout of at least $20,255 with respect to each
performance unit. In certain circumstances, in case of a public
offering of common stock of Holdings or the Bank, the payout would be
made, in whole or in part, in options to acquire common stock of
Holdings or the Bank. The number of shares of stock that would be
subject to such options is not determinable at this time.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Holdings has no Compensation Committee. The following directors serve on
the Compensation Committee of the Board of the Bank: Gerald J. Ford, Howard
Gittis, Paul Bass and George Bramblett. During the 1995 and 1994 fiscal
years, Mr. Ford was Chairman of the Board of First Nationwide. In addition,
Mr. Ford controls Hunter's Glen, which owns 100% of the class B common stock
of Holdings representing 20% of the voting common stock (representing
approximately 15% of the voting power of its common stock) of Holdings. Mr.
Gittis is a director of Holdings and of the Bank.
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<PAGE>
OWNERSHIP OF THE COMMON STOCK
Ronald O. Perelman, a director of the Bank and Chairman of the Board,
Chief Executive Officer and a director of Holdings, 35 East 62nd Street, New
York, New York 10021, through MacAndrews & Forbes, beneficially owns 100% of
the class A common stock of Holdings representing 80% of its voting common
stock (representing approximately 85% of the voting power of its common
stock). Hunter's Glen, a limited partnership controlled by Gerald J. Ford,
Chairman of the Board, Chief Executive Officer and a director of the Bank,
200 Crescent Court, Suite 1350, Dallas, Texas 75201, owns 100% of the class B
common stock of Holdings, representing 20% of its voting common stock
(representing approximately 15% of the voting power of its common stock). See
"Certain Transactions."
CERTAIN TRANSACTIONS
RELATIONSHIP WITH MACANDREWS & FORBES
Holdings is an 80% owned indirect subsidiary of MacAndrews & Forbes. As a
result, MacAndrews & Forbes is able to direct and control the policies of the
Issuer and its subsidiaries, including with respect to mergers, sales of
assets and similar transactions.
MacAndrews & Forbes is a diversified holding company with interests in
several industries. Through its 83% ownership of Revlon, MacAndrews & Forbes
is engaged in the cosmetics and skin care, fragrance and personal care
products business. MacAndrews & Forbes owns 83% of Coleman, which is engaged
in the manufacture and marketing of recreational outdoor products, portable
generators, power-washing equipment, spas and hot tubs and 65% of Meridian
Sports, a manufacturer and marketer of specialized boats and water sports
equipment. Marvel, a youth entertainment company, is 80% owned by MacAndrews
& Forbes. MacAndrews & Forbes also is engaged through its 85% ownership of
Mafco Consolidated, in the processing of licorice and other flavors, and in
the manufacture and distribution of cigars and pipe tobacco. MacAndrews &
Forbes is also in the financial services business through the Bank. The
principal executive offices of MacAndrews & Forbes are located at 35 East
62nd Street, New York, New York 10021.
TAX SHARING AGREEMENT
For federal income tax purposes, Holdings and the Bank are included in the
Mafco Group, and accordingly their federal taxable income and loss will be
included in the consolidated federal income tax return filed by Mafco
Holdings. Holdings and the Bank also may be included in certain state and
local tax returns of Mafco Holdings or its subsidiaries. The Bank, Holdings
and Mafco Holdings are parties to the Tax Sharing Agreement, effective as of
January 1, 1994, pursuant to which: (i) the Bank will pay to Holdings amounts
equal to the taxes that the Bank would be required to pay if it were to file
a return separately from the Mafco Group, and (ii) Holdings will pay to Mafco
Holdings amounts equal to the taxes that Holdings would be required to pay if
it were to file a consolidated return on behalf of itself and the Bank
separately from the Mafco Group. The Tax Sharing Agreement allows the Bank to
take into account, in determining its liability to Holdings, any net
operating loss carryovers that it would have been entitled to utilize if it
had filed separate returns for each year since the formation of First
Nationwide. The Tax Sharing Agreement also allows Holdings to take into
account, in determining its liability to Mafco Holdings, any net operating
losses that it would have been entitled to utilize if it had filed a
consolidated return on behalf of itself and the Bank for each year since the
formation of First Nationwide.
First Nationwide generated significant federal income tax net operating
losses since its formation. This was due, in part, to the fact that under
applicable federal income tax law, the financial assistance received by First
Nationwide pursuant to the Assistance Agreement was excluded from the taxable
income of First Nationwide. In addition to such tax-free financial
assistance, First Nationwide had been entitled to its normal operating
deductions, including interest expense and certain losses relating to its
loan portfolio. As a result, First Nationwide generated significant net
operating losses for federal income tax purposes even though its operations
were profitable. Furthermore, under the reorganization provisions of the
Code, First Nationwide succeeded to certain net operating loss carryovers of
the Texas Closed Banks.
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At December 31, 1995, if Holdings had filed a consolidated tax return on
behalf of itself (as common parent) and First Nationwide for each year since
the formation of First Nationwide, it would have had approximately $2.6
billion of regular net operating losses and approximately $992 million of AMT
net operating losses, both of which Holdings 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 Holdings will be able to eliminate through 1997 a
significant portion of the amounts they otherwise would be required to pay to
Holdings and Mafco Holdings, respectively, under the Tax Sharing Agreement in
respect of federal income tax and, accordingly, it is not expected that the
Bank or Holdings will record a significant amount of federal income tax
expense through 1997 as members of the Mafco Group. Payments made by Holdings
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.
During 1998, the Bank and Holdings anticipate that the AMT net operating
losses will be fully utilized and the Bank and Holdings will begin providing
federal income tax expense at a rate of 20 percent. Prior to 1998, the Bank
and Holdings provided federal income tax expense at a 2 percent rate because
90 percent of AMT net operating losses were available to offset AMT income.
Under federal tax law, Holdings and the Bank will be subject to several
liability with respect to the consolidated federal income tax liabilities of
the Mafco Group for any taxable period during which Holdings or the Bank are,
as the case may be, a member of such group. Mafco Holdings has agreed,
however, to indemnify Holdings and the Bank for any such federal income tax
liability (and certain state and local tax liabilities) of Mafco Holdings or
any of its subsidiaries (other than Holdings and the Bank) that Holdings or
the Bank is actually required to pay. Therefore, the Tax Sharing Agreement
will not increase the amounts payable by Holdings or the Bank over the
amounts that they would have had to pay if they were not members of the Mafco
Group.
LOANS TO AFFILIATES
Holdings loaned approximately $46.8 million to an affiliate on March 1,
1996. Such loan bears interest at the rate of 10.5% over the prevailing yield
to maturity of the five year United States treasury note, and is an unsecured
subordinated obligation of the borrower guaranteed by certain other
affiliates of Holdings, which obligation to Holdings was evidenced by a
promissory note (the "Promissory Note"). Management believes that the terms
and conditions of such loan were at least as favorable to Holdings as might
have been obtained in a similar transaction with an unaffiliated party. On
May 15, 1996, Holdings distributed the Promissory Note to Parent Holdings.
On September 27, 1996, Holdings issued $150 million aggregate liquidation
value of the Holdings Preferred Stock to Special Purpose Corp. and loaned to
an affiliate approximately $19 million of the proceeds therefrom. Such loan
accrued interest at the rate of 14%, and was an unsecured subordinated
obligation of the borrower, which obligation to Holdings was evidenced by a
promissory note. Management believes that the terms and conditions of such
loan were at least as favorable to Holdings as might have been obtained in a
similar transaction with an unaffiliated party. Such loan, together with the
accrued interest thereon, was repaid to Holdings on January 3, 1997.
FN ESCROW MERGER AND ISSUANCE OF FN ESCROW PREFERRED STOCK
Simultaneously with the consummation of the Offering, FN Escrow issued
approximately $36 million aggregate liquidation value of cumulative perpetual
preferred stock (the "FN Escrow Preferred Stock") to TNIS. The FN Escrow
Preferred Stock had a stated liquidation value of $100,000 per share, plus
accrued and unpaid dividends, if any. Cash dividends on the FN Escrow
Preferred Stock were cumulative and accrued at an annual rate of
approximately 7.3% of the stated liquidation value.
On January 3, 1997 and prior to the consummation of the Cal Fed
Acquisition, FN Escrow was merged with and into Holdings in the FN Escrow
Merger and Holdings assumed FN Escrow's obligations under the Notes and the
Indenture. In connection with the FN Escrow Merger, each share of FN Escrow
Preferred Stock was converted into and became one share of cumulative
perpetual preferred stock of
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Holdings (the "Holdings/FN Escrow Preferred Stock"), which stock had the same
relative rights, terms and preferences as the FN Escrow Preferred Stock.
Immediately after issuance, Holdings redeemed the Holdings/FN Escrow
Preferred Stock at a redemption price equal to its stated liquidation value
plus accrued and unpaid dividends to January 3, 1997.
TRANSACTIONS WITH MR. FORD
Madison Financial, Inc. ("Madison Financial"), a corporation formerly
owned by Gerald J. Ford, the Chairman of the Board, Chief Executive Officer
and a director of the Bank, was a party to a Consulting Agreement (the
"Consulting Agreement"), effective as of February 1, 1993, between Madison
Financial and TNIS pursuant to which Madison Financial provided consulting
services to TNIS for a term ending on December 31, 1998. The Consulting
Agreement was terminated in July 1994 in connection with the Exchange
Agreement (as defined herein). Certain costs related to the Consulting
Agreement were charged to Holdings.
The Bank is an indirect subsidiary of First Gibraltar Holdings. In
connection with the offering of the Holdings Senior Notes, First Gibraltar
Holdings incorporated Parent Holdings and a wholly owned subsidiary of Parent
Holdings, Holdings, to hold 100% of the common stock of First Nationwide.
First Gibraltar Holdings contributed all of its shares of capital stock of
First Nationwide to Parent Holdings, which contributed such shares to
Holdings in exchange for 1,000 shares of common stock of Holdings. Holdings
amended its certificate of incorporation to create 800 shares of class A
common stock having one vote per share, 200 shares of class B common stock
having .75 votes per share and 230.3 shares of nonvoting class C common
stock, and Parent Holdings exchanged its 1,000 shares of common stock for 800
shares of class A common stock. Pursuant to the terms of an Exchange
Agreement entered into between Holdings, Mr. Ford and Parent Holdings (the
"Exchange Agreement"), and in connection with the consummation of the FN
Acquisition, Parent Holdings acquired 100% of the class C common stock of
Holdings (all of which was redeemed on June 3, 1996), in exchange for $210
million and Mr. Ford acquired 100% of the class B common stock of Holdings in
exchange for his 6.25% of the class A common stock of First Gibraltar
Holdings and all of the shares of Madison Financial, the sole asset of which
was the Consulting Agreement. In addition, Holdings also assumed indebtedness
of Mr. Ford in the amount of approximately $11.9 million to TNIS (the "Ford
Obligation"), which obligation has been forgiven by TNIS. As a result of the
consummation of the transactions contemplated by the Exchange Agreement, Mr.
Ford owns 100% of the class B common stock of Holdings, representing 20% of
its voting common stock (representing approximately 15% of the voting power
of its voting common stock) and Parent Holdings owns 100% of the class A
common stock of Holdings, representing 80% of its voting common stock
(representing approximately 85% of the voting power of its voting common
stock). Holdings, Parent Holdings and Mr. Ford have entered into a
stockholders agreement (the "Stockholders Agreement") pursuant to which,
among other things, Mr. Ford and Holdings have the right to transfer their
respective shares to certain affiliates. In addition, the Stockholders
Agreement contains other customary provisions regarding restrictions on
transfer and registration rights. On December 29, 1995, Mr. Ford transferred
his shares of class B common stock to Hunter's Glen, which assumed the
obligations under, and will receive the benefits of, the Stockholders
Agreement.
Mr. Ford has entered into a loan agreement with NationsBank of Texas, N.A.
("NationsBank"), whereby NationsBank has loaned Mr. Ford $5 million. Such
loan has a maturity of up to one year and bears interest at a floating
interest rate based on LIBOR. The loan is secured by Mr. Ford's Holdings
Senior Notes. The terms of the loan provide that, in the event of default by
Mr. Ford under such loan or in the event of certain rapid and material
declines in the value of the Holdings Senior Notes pledged as collateral,
NationsBank or any successor or assignee thereof will have the right to
foreclose on the pledged Holdings Senior Notes and sell, or direct Mr. Ford
to sell, such Holdings Senior Notes, to certain Qualified Institutional
Buyers ("QIBs") (as such term is defined in Rule 144A under the Securities
Act) pursuant to Rule 144A under the Securities Act, pursuant to Regulation S
under the Securities Act, to Holdings or pursuant to a shelf registration
statement.
Mr. Ford has entered into an employment agreement with the Bank calling
for his continued employment by the Bank in his current executive capacity
with an annual base salary of $750,000. The
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term of this agreement extends through December 31, 1997, and provides for,
among other things, a life insurance policy on the life of Mr. Ford in an
amount equal to three times his base salary.
Mr. Ford has also entered into a consulting agreement with First
Nationwide Management Corp. ("First Nationwide Management"), an affiliate of
Holdings, providing for the payment to him of annual consulting fees of
$750,000 for 1995 and in increasing amounts through 1997, and certain other
related expenses. Pursuant to an arrangement between First Nationwide
Management and Holdings, such consulting fees and other related expenses paid
by First Nationwide Management are charged to Holdings. Such charges amounted
to approximately $964,000 and $155,000 in 1995 and 1994, respectively.
Special Purpose Corp. invested $150 million in cash in Holdings in
exchange for $150 million aggregate liquidation value of Holdings Preferred
Stock. See "Description of Other Indebtedness and Preferred Stock--Holdings
Preferred Stock." Such investment was funded through borrowings by First
Gibraltar Holdings under a credit facility, which borrowings were loaned by
First Gibraltar Holdings to Special Purpose Corp. Special Purpose Corp.
pledged its shares of Holdings Preferred Stock to secure the borrowings by
First Gibraltar Holdings under such credit facility.
EXECUTIVE EMPLOYMENT AGREEMENTS
In addition to the employment agreement between Mr. Ford and the Bank (see
"--Transactions with Mr. Ford"), Messrs. Webb, Flanagan, Staff, Newman and
Hodge have entered into employment agreements with the Bank calling for their
continued employment by the Bank in their current executive capacities. All
five agreements are substantially similar in their terms except that Messrs.
Webb, Staff and Newman's employment agreements terminate on January 31, 1998,
Mr. Hodge's terminates on December 31, 1998 and Mr. Flanagan's terminates May
31, 1999 and except that Mr. Flanagan's agreement provides for a $20,000
"substitution" bonus which was paid in 1996. Additionally, each employment
agreement provides for a life insurance policy on the life of the insured in
an amount double the base salary payable by the Bank to such individual.
Pursuant to such employment agreements, the annual base salaries payable by
First Nationwide to Messrs. Webb, Flanagan, Staff, Newman and Hodge are
$900,000, $700,000, $550,000, $475,000 and $250,000, respectively.
Pursuant to an Agreement for Provision of Services between First
Nationwide and First Nationwide Management, dated December 1, 1994 (the
"Services Agreement"), a portion of the salaries payable by the Bank to
Messrs. Webb, Flanagan and Staff is charged to First Nationwide Management so
that the annual net base compensation payable by the Bank will be $600,000,
$350,000 and $275,000 for Messrs. Webb, Flanagan and Staff, respectively. All
of such fees paid by First Nationwide Management are charged to Holdings for
services performed by these executives. The total amounts of such fees were
approximately $945,000 and $214,000 in 1995 and 1994, respectively, including
$945,000 and $78,000 in 1995 and 1994, respectively received by the Bank
pursuant to the Services Agreement, which fees are included in the amounts
allocated by First Nationwide Management to Holdings as described in the
first paragraph under "--Services Agreement."
The Bank has also entered into an employment agreement with Mr. Gordon,
effective as of the consummation of the SFFed Acquisition, for a term ending
on January 30, 1999. Pursuant to such employment agreement, the annual base
salary payable by the Bank to Mr. Gordon is $400,000. Mr. Gordon's agreement
also provides for life insurance in an amount on the life of the insured
equal to $714,000.
In January 1997, the Bank entered into a Consulting Agreement with Mr.
Harshfield whereby he agreed to assist the Bank in its pursuit of the
California Federal Litigation. Mr. Harshfield will receive $100,000 per year
for each of the two years of the agreement.
Effective January 8, 1996, FNMC entered into an employment agreement with
Mr. Klein, for a term ending January 7, 1999. Pursuant to this employment
agreement, Mr. Klein receives a base salary of $300,000 per year. The
agreement also provides for life insurance on the life of the insured in the
amount of $450,000.
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SERVICES AGREEMENTS
Effective December 1, 1994, First Nationwide entered into the Services
Agreement with First Nationwide Management whereby selected Bank employees
(including Messrs. Webb, Flanagan, and Staff) provided services for First
Nationwide Management and certain of its subsidiaries. Fees are paid to First
Nationwide under the Services Agreement at the rate of approximately $107,000
per month based on actual services provided and approximated $1,092,000 and
$86,000 for the years ended December 31, 1995 and 1994, respectively.
Effective on June 1, 1995, First Nationwide entered into an agreement
whereby it provides marketing and other support services to TNIS in
connection with the insurance agency business it purchased from a First
Nationwide subsidiary on the same date. Service charges under this agreement
during 1995 were approximately $43,000 per month and during 1996 are
approximately $13,300 per month. Management believes that the terms and
conditions of these arrangements are at least as favorable to the Bank as
those which could be obtained from similar arrangements with an unaffiliated
party.
SALE OF BUSINESS TO TNIS
Effective on June 1, 1995, FNC Insurance Agency, Inc., a wholly owned
subsidiary of First Nationwide, sold that portion of its insurance agency
business related to marketing insurance products to First Nationwide's retail
deposit and consumer loan customers to TNIS for approximately $0.7 million.
Management believes that the terms and conditions of this transaction are at
least as favorable to First Nationwide as might have been obtained in a
similar transaction with an unaffiliated party.
LOANS TO EXECUTIVE OFFICERS AND DIRECTORS
Some of the Bank's executive officers, directors, and members of their
immediate families have engaged in loan transactions with the Bank. Such
loans were made: (i) in the ordinary course of the Bank's business, (ii) on
substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions between the Bank and
other persons, and (iii) did not involve more than the normal risk of
collectibility or present other unfavorable features.
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DESCRIPTION OF THE NOTES
The New Notes offered hereby will be issued under the Indenture, 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 for purposes of this section under "--Certain
Definitions." The New Notes are identical in all material respects to the
terms of the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes and except that, if the
Exchange Offer is not consummated by July 2, 1997, the rate per annum at
which the Old Notes bear interest will be 11 1/8% from and including July 2,
1997 until but excluding the date of consummation of the Exchange Offer. See
"--Registration Rights" below.
GENERAL
The Notes will mature on October 1, 2003. The Notes will bear interest at
10 5/8% per annum, payable semiannually in arrears on April 1 and October 1
of each year, commencing April 1, 1997, to the persons who are registered
holders thereof at the close of business on the March 15 or September 15 next
preceding such interest payment date. The rate per annum at which the Notes
will bear interest may increase under certain circumstances described below
under "Exchange Offer; Registration Rights."
Interest on the Notes is computed on the basis of a 360-day year of twelve
30-day months. Principal and interest will be payable initially 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.
The Notes rank pari passu with the Holdings 9 1/8% Senior Subordinated
Notes as to payments of principal and interest. In addition, the Notes are,
to the extent provided in the Indenture, subordinate and subject in right of
payment to the prior payment in full of all Senior Indebtedness, as described
herein under "--Subordination."
For each Old Note accepted for exchange, the holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
All Old Notes and New Notes will be treated as a single class of
securities under the Indenture.
OPTIONAL REDEMPTION
Except as set forth in the next paragraph, the Notes may not be redeemed
prior to January 1, 2001. On and after such date, the Notes may be redeemed
at the option of Holdings, 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 on January 1, 2001, at 105.313%, during the
12-month period beginning on January 1, 2002, at 102.656%, and thereafter at
100%.
In addition, upon a Change of Control Call Event occurring on or prior to
December 31, 2000 Holdings may, at its option, redeem all, but not less than
all, of the Notes 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 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 Holdings, whether as a result of issuance of
securities of Holdings, any merger, consolidation, liquidation or
dissolution of Holdings, any direct or indirect transfer of securities by
a Permitted Holder or otherwise; or
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(ii) a sale, transfer, conveyance or other disposition (other than to
Holdings or any Affiliate of Holdings) 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 Holdings 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) 5.313% and (y) the
outstanding principal amount of such Note on such date of 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 of the Issuer 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.
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 in cash equal to 101% of the principal amount thereof plus accrued and
unpaid interest 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 Holdings, whether as a result of issuance of
securities of Holdings, any merger, consolidation, liquidation or
dissolution of Holdings, any direct or indirect transfer of securities by
a Permitted Holder or otherwise;
(ii) a sale, transfer, conveyance or other disposition (other than to
Holdings or any of its Subsidiaries) in a single transaction or in a
series of related transactions, in either case occurring
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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 Holdings 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
(iii) a transaction or series of related transactions as a result of
which 20% or more of the Voting Stock or common stock (or Capital Stock
convertible or exchangeable into 20% of the Voting Stock or common stock)
of the Bank is held by one or more Persons other than Holdings or its
Wholly Owned Subsidiaries.
Within (x) 45 days following any Change of Control Put Event described in
clauses (i) or (ii) above (except as provided in the succeeding clause (y))
or (y) 125 days following (A) any Change of Control Put Event resulting from
a sale, transfer, conveyance or other disposition described above in clause
(ii) to any Affiliate of Holdings other than a Subsidiary of Holdings or (B)
any Change of Control Put Event described above in clause (iii), the Issuer
will mail a notice to each holder of Notes with a copy to the Trustee
stating: (a) 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 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); (b) the
circumstances and relevant facts regarding such Change of Control Put Event;
(c) the repurchase date (which will be no earlier than 30 days nor later than
60 days from the date such notice is mailed); and (d) 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."
In addition, the ability of the Issuer to repurchase the Notes as a result
of the occurrence of a Change of Control Put Event will be subject to the
ability of the Issuer to make restricted payments at that time under
agreements governing Senior Indebtedness of the Issuer. Accordingly, the
repurchase of the Notes, if not permitted by such agreements, could create an
event of default under such agreements as a result of which any repurchase
would, absent a waiver, be blocked by the subordination provisions of the
Indenture. See "--Subordination." Failure of the Issuer to repurchase the
Notes when required could result in an Event of Default with respect to the
Notes whether or not such repurchase is permitted by the subordination
provisions of the Indenture.
The Issuer will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other applicable securities laws or
regulations in connection with the repurchase of 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 the foregoing provisions, 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.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
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CERTAIN COVENANTS
Set forth below are certain covenants contained in the Indenture:
Limitation on Debt. Holdings will not issue any Debt and Holdings will not
permit any Subsidiary of Holdings to issue any Debt; provided, however, that
the foregoing shall not prohibit the issuance of the following Debt:
(a) the Notes and Debt of Holdings issued by Holdings in exchange for, or
the proceeds of which are used to Refinance, the Senior Notes, the
Holdings 9 1/8% Senior Subordinated Notes or any Debt permitted by this
clause (a) or clause (b) below; provided, however, that in the case of any
Debt (other than any Notes) issued in connection with such 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 Debt being Refinanced, not exceed the sum of (i) 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 Debt being Refinanced and (ii) any premium
actually paid and reasonable costs and expenses, including underwriting
discounts, in connection with such Refinancing ("Refinancing Costs") or,
if such Debt is issued at a discount, the accreted value of the portion of
such Debt used to pay the Refinancing Costs as of the date of the Stated
Maturity of the Debt being Refinanced, (y) in the case of a Refinancing of
the Notes, the Debt so issued shall not provide for the payment of
principal in cash prior to the Stated Maturity of the Debt being
Refinanced and (z) in the case of a Refinancing of the Holdings 9 1/8%
Senior Subordinated Notes, the Debt so issued shall not have a Stated
Maturity prior to the Stated Maturity of the Debt so Refinanced and such
Debt must be either Subordinated Obligations or Parity Obligations;
(b) Subordinated Obligations of Holdings and Parity Obligations of
Holdings if, immediately after giving effect to any such issuance
(including the Refinancing of any Debt from the proceeds of such
Subordinated or Parity Obligations), the aggregate principal amount of
such Subordinated and/or Parity Obligations, the Holdings 9 1/8% Senior
Subordinated Notes, the Senior Notes and Debt outstanding pursuant to
clause (a) above would not exceed an amount equal to the Consolidated Net
Worth of Holdings as of the end of the most recent fiscal quarter ending
at least 45 days prior to such issuance; provided, however, that the
Subordinated or Parity 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 of Holdings that is a Depository
Institution or a Subsidiary of such Depository Institution; or
(d) if any Mortgage Bank is not a Subsidiary of a Depository Institution,
any Debt issued by such 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) Holdings 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 of Holdings that is a Depository Institution does not
qualify as "well capitalized" under Section 28 of the FDIA (or any
successor provision) and the regulations of the OTS thereunder; or
(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 declared or made from and after January 1, 1996 would
exceed the sum of:
(i) 75% of Holdings' aggregate Consolidated Net Income (or, if such
aggregate Consolidated Net Income is a deficit, minus 100% of such
deficit) since January 1, 1996 to the end of the most recent fiscal
quarter ending at least 45 days prior to the date of such Restricted
Payment;
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(ii) the aggregate Net Cash Proceeds from sales of Capital Stock of
Holdings (other than (a) Redeemable Stock or Exchangeable Stock or (b)
the Holdings Preferred Stock) or cash capital contributions made to
Holdings 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 Issue Date (other than an issuance or sale to
a Subsidiary of Holdings);
(iii) the amount by which Debt of Holdings is or has been reduced on
Holdings' balance sheet on or after the Issue Date upon the conversion
or exchange (other than by a Subsidiary of Holdings) of Debt of
Holdings into Capital Stock (other than Redeemable Stock or
Exchangeable Stock) of Holdings (less the amount of any cash or other
property distributed by Holdings or any Subsidiary of Holdings upon
such conversion or exchange);
(iv) the aggregate Net Cash Proceeds from the sale of the Holdings
Preferred Stock; and
(v) $44,000,000.
(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 or Qualified Preferred Stock;
(iii) any purchase or redemption of Capital Stock or Subordinated
Obligations or Parity 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 or
Parity Obligations, shall be excluded from clause (a)(4)(ii) above; or
(iv) any purchase or redemption of Subordinated Obligations or Parity
Obligations by exchange for or out of the proceeds from the substantially
concurrent sale of Subordinated Obligations or Parity Obligations;
provided, however, that (A) such Subordinated Obligations shall be
subordinated to the Notes to at least the same extent as the Subordinated
Obligations so exchanged, purchased or redeemed, (B) such Subordinated or
Parity Obligations shall have a Stated Maturity later than the Stated
Maturity of the Notes and (C) such Subordinated or Parity Obligations
shall have an Average Life to their Stated Maturity greater than the
remaining Average Life to the Stated Maturity of the Notes.
(c) Holdings 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) Holdings 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 Holdings or any legal or beneficial owner of
10% or more of the Voting Stock of Holdings 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 Holdings 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
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(ii) to the extent that such business, transaction or series of
transactions is known by the Board of Directors of Holdings or such
Subsidiary to involve an Affiliate of Holdings or a legal or beneficial
owner of 10% or more of the Voting Stock of Holdings 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 Holdings 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
Holdings 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 Holdings or such Subsidiary.
(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
Holdings and any of its Subsidiaries or between Subsidiaries of Holdings 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
Holdings (other than the Bank, a Wholly Owned Subsidiary of Holdings, an
Unrestricted Affiliate or a Permitted Affiliate) or (y) any legal or
beneficial owner of 10% or more of the Voting Stock of Holdings or any
Affiliate of such owner (other than Holdings, the Bank, any Wholly Owned
Subsidiary of Holdings or an Unrestricted Affiliate), (iii) transactions
pursuant to which Mafco Holdings will provide Holdings and its Subsidiaries
at the request of Holdings with certain allocated services to be purchased
from 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 Holdings 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 Holdings and (v) any transactions pursuant to
the Tax Sharing Agreement.
Limitation on Other Business Activities. Holdings 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. Holdings
shall not, and shall not permit any Subsidiary of Holdings to, suffer to
exist any consensual encumbrance or restriction on the ability of any
Subsidiary of Holdings: (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 Holdings, (ii) to make loans or advances to
Holdings, or (iii) to transfer any of its property or assets to Holdings,
except, in any such case, any encumbrance or restrictions:
(a) pursuant to any agreement in effect or entered into on the Issue
Date.
(b) pursuant to an agreement in effect or entered into by such Subsidiary
prior to the date on which such Subsidiary was acquired by Holdings (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 Holdings and other than any agreement
entered into in anticipation of the acquisition of such Subsidiary by
Holdings) and outstanding on such date;
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(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 Holdings
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 Holdings 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 Holdings or any Subsidiary in any manner material to Holdings 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;
(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 Holdings; and
(h) pursuant to the terms of any Qualified Preferred Stock issued after
the Issue Date.
Limitation on Issuance of Other Subordinated Debt. So long as any of the
Notes are Outstanding, Holdings will not issue, assume, guarantee, incur or
otherwise become liable for, directly or indirectly, any Debt (other than the
Notes) subordinate or junior in ranking in any respect to any Senior
Indebtedness unless such Debt is a Parity Obligation or is expressly
subordinated in right of payment to the Notes.
Limitation on Liens. Holdings will not create or permit to exist any Lien
(other than a Lien in favor of the trustee under the Senior Notes Indenture
to secure certain of Holdings' obligations to such trustee) 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 Holdings,
other than (i) Liens securing Senior Indebtedness or (ii) Liens securing any
Parity Obligation, provided that, contemporaneously therewith, effective
provision shall be made to secure the Notes equally and ratably with such
Parity Obligation with a Lien on the assets securing such Parity Obligation
for so long as such Parity Obligation is secured by such Lien.
Amendment of Tax Sharing Agreement. (a) Holdings 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 Holdings.
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
Holdings 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
Holdings and the Bank and the amendment of the Tax Sharing Agreement to
reflect such replacement.
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Maintenance of Status of Subsidiaries as Insured Depository Institutions;
Capital Maintenance. (a) Holdings 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) Holdings shall cause the Bank to maintain or exceed the status of an
"adequately capitalized" institution as defined in the FDIA 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, Holdings 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 COMPANY
Holdings 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 Holdings) is
organized and existing under the laws of the United States of America, any
State thereof or the District of Columbia and, in the case of any transaction
covered by this paragraph in which Holdings is not the resulting, surviving
or transferee person, such person expressly assumes by a supplemental
indenture, executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of Holdings 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 Holdings 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. In the case of
any transaction covered by this paragraph, the resulting, surviving or
transferee person will be the successor company and will succeed to, and be
substituted for, and may exercise every right and power of, the Issuer under
the Indenture, 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.
DEFAULTS
An Event of Default is defined in the Indenture as: (i) (1) a default by
the Issuer in the payment of principal of any Note when due and payable at
its Stated Maturity, upon redemption, upon required purchase, upon
declaration or otherwise, or (2) a default by the Issuer 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 by the Issuer to purchase or redeem
Notes when required pursuant to the Indenture or the Notes, (ii) the failure
by the Issuer to comply with its obligations described under "Successor
Company" above, (iii) the failure by the Issuer, Holdings or Holdings'
Subsidiaries to comply for 30 days after notice with any of their respective
obligations under the covenant described under "Change of Control Put Event"
or "Escrow of Proceeds; Special Mandatory Redemption" (in each case, 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 Issuance of Other Subordinated Debt," "Limitations on Liens," "Amendment
of Tax Sharing Agreement," "Maintenance
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of Status of Subsidiaries as Insured Depository Institutions; Capital
Maintenance" or "SEC Reports," as applicable, above, (iv) the failure by the
Issuer, Holdings or Holdings' Subsidiaries 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, Holdings or any of Holdings' Significant Subsidiaries 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,
Holdings or any of Holdings' Significant Subsidiaries (the "bankruptcy
provisions"), or (vii) any judgment or decree for the payment of money in
excess of $25 million is entered against the Issuer, Holdings or any of
Holdings' Significant Subsidiaries 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 such default is not cured 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.
Notwithstanding the foregoing, if an Event of Default shall have occurred
and be continuing, the Trustee or the holders of the Notes electing to
accelerate the Notes pursuant to the Indenture shall give the Designated
Senior Indebtedness Representatives five Business Days' prior written notice
before accelerating the Notes, which notice shall state that it is a "Notice
of Intent to Accelerate;" provided, however, that the Trustee or such holders
may so accelerate the Notes without such notice if at such time payment of
any Designated Senior Indebtedness shall have been accelerated. See
"--Subordination."
Subject to the provisions of the Indenture relating to the duties of the
Trustee, 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 (whether an Event of Default has occurred and is
continuing, or otherwise) 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 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, subject to the provisions of the Indenture relating to
Duties of Trustee, 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.
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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.
SUBORDINATION
As set forth in the Indenture, the Notes will be subordinated in right of
payment to the prior payment in full of all Senior Indebtedness. In the event
of (i) any insolvency, bankruptcy or similar proceeding relative to Holdings,
or (ii) any liquidation, dissolution, reorganization or other winding up of
Holdings, or (iii) any assignment for the benefit of creditors or any other
marshalling of assets and liabilities of Holdings, the holders of the Senior
Indebtedness will be entitled to receive payment in full of all amounts due
or to become due on or in respect of such Senior Indebtedness before the
holders of the Notes will be entitled to receive any payment of principal of
or interest on the Notes. The Notes are pari passu with, and are not superior
in right of payment to, the Holdings 9 1/8% Senior Subordinated Notes.
In the event that, notwithstanding the foregoing, the Trustee or any
holder of Notes receives any Securities Payment before all Senior
Indebtedness is paid in full, and if such fact was, at or prior to the time
of such payment or distribution, known to the Trustee or, as the case may be,
the holder, such payment or distribution will be required to be paid over
forthwith to the trustee in bankruptcy, receiver or other person making
payment or distribution of assets of Holdings for application to the payment
of all Senior Indebtedness remaining unpaid.
In the event of a Senior Payment Default or Acceleration, unless and until
such event of default is cured or waived or shall have ceased to exist and
any such acceleration shall have been rescinded or annulled, or such Senior
Indebtedness has been discharged, no Securities Payment will be made;
provided, however, Holdings may make Securities Payments without regard to
the foregoing if Holdings receives written notice approving such payment from
the Designated Senior Indebtedness Representatives for all issues of
Designated Senior Indebtedness then outstanding.
In the event of any Senior Nonmonetary Default, upon the earlier to occur
of (a) receipt by Holdings and the Trustee of written notice of such Senior
Nonmonetary Default from the Designated Senior Indebtedness Representative
with respect to the Designated Senior Indebtedness to which such Senior
Nonmonetary Default relates, and (b) if such Senior Nonmonetary Default
results from the acceleration of the Notes, the date of such acceleration, no
Securities Payment will be made during the period (the "Payment Blockage
Period") commencing on the date of such receipt of such written notice or the
date of such acceleration, as the case may be, and ending on the earliest of
(i) the date on which such Senior Nonmonetary Default is cured or waived or
has ceased to exist and any acceleration of Designated Senior Indebtedness
has been rescinded or annulled or the Designated Senior Indebtedness to which
such Senior Nonmonetary Default relates has been discharged, (ii) the 179th
day after the date of such receipt of such written notice or the date of such
acceleration, as the case may be, and (iii) such date as such Payment
Blockage Period has been terminated by written notice to Holdings or the
Trustee from the Designated Senior Indebtedness Representative initiating
such Payment Blockage Period, after which, in the case of clause (i), (ii) or
(iii), Holdings will resume making any and all required payments in respect
of the Notes, including any missed payments. No more than one Payment
Blockage Period may be commenced with respect to the Notes during any 365-day
period and there will be a period of at least 186 consecutive days in each
365-day period when no Payment Blockage Period is in effect. For all purposes
of this paragraph, no Senior Nonmonetary Default that existed or was
continuing on the date of commencement of any Payment Blockage Period will
be, or be made, the basis for the commencement of a subsequent Payment
Blockage Period by holders of Senior Indebtedness or their representatives
unless such Senior Nonmonetary Default has been cured or waived for a period
of not less than 90 consecutive days.
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In the event that, notwithstanding the foregoing, Holdings makes any
payment to the Trustee or the holder of any Note prohibited by the foregoing
provisions, and if such fact is at or prior to the time of such payment,
known to the Trustee or, as the case may be, such holder, then and in such
event such payment must be paid over and delivered forthwith to the holders
of Senior Indebtedness as their interests may appear.
Nothing in the Indenture or in any of the Notes prevents (a) Holdings, at
any time except during the pendency of any case, proceeding, dissolution,
liquidation or other winding up, assignment for the benefit of creditors or
other marshalling of assets and liabilities of Holdings or under the
conditions described above in the preceding four paragraphs, from making
payments at any time of principal of or interest on the Notes, or (b) the
application by the Trustee of any money deposited with it hereunder to the
payment of or on account of the principal of or interest on the Notes or the
retention of such payment by the holders, if, at the time of such application
by the Trustee, it did not have knowledge that such payment would have been
prohibited by the subordination provisions of the Indenture.
By reason of such subordination, in the event of insolvency, creditors of
Holdings who are not holders of Senior Indebtedness, including holders of
Notes, may recover less, ratably, than holders of Senior Indebtedness. The
Notes will be the sole obligations of Holdings, and will not be guaranteed by
any other Person. No other Person will be obligated to make funds available
for Holdings to pay any amounts due pursuant to the Notes.
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 premium
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 definitions of Change of Control Put Event or Change of Control
Call Event 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
Put Event or Change of Control Call Event, (vii) make any changes in the
provisions relating to waiver of past defaults or the provisions relating to
the rights of Holders to receive payment, or (viii) make any change in the
amendment provisions of the Indenture which require each holder's consent.
Without the consent of or notice to any holder of the Notes, the Issuer
and the Trustee may amend the Indenture (i) to cure any ambiguity, omission,
defect or inconsistency, (ii) 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 Company" above,
(iii) 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), (iv) to add guarantees with respect to the Notes or to secure (or
provide additional security for) the Notes, (v) to add to the covenants of
the Issuer or Holdings for the benefit of the holders of the Notes or to
surrender any right or power conferred upon the Issuer, (vi) to provide for
issuance of the New Notes, which will have terms substantially identical in
all material respects to the Old Notes (except that the interest rate and
transfer restrictions contained in the Old Notes will be modified or
eliminated, as appropriate), and which will be treated, together with any
outstanding Old Notes, as a single issue of securities, or (vii) 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.
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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.
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 Company" 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) or (vii) under
"Defaults" above, or because of the failure of the Issuer or Holdings to
comply with clause (a) (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
The Bank of New York 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.
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CERTAIN DEFINITIONS
The following are certain definitions used in the Indenture and applicable
to the description of the Indenture set forth 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 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 Perpetual Preferred
Stock issued by the Bank or, at Holdings' election, 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 Issue Date 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.
"Cal Fed Preferred Stock" means the 10 5/8% Noncumulative Perpetual
Preferred Stock issued by California Federal Bank, a Federal Savings Bank,
or, at Holdings' election, 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 Cal Fed Preferred Stock on the Issue
Date plus reasonable fees and expenses incurred in connection with such
Refinancing and accrued dividends and premium, if any.
"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 (i) any amounts included therein attributable to, without
duplication, (x) Redeemable Stock, (y) Exchangeable Stock and (z) Preferred
Stock, (ii) the amount of the capital contribution made by Holdings to the
Bank, which amount represented the net proceeds to Holdings from the issuance
of the Holdings 9 1/8% Senior Subordinated Notes, and (iii) the amount of the
net proceeds to Holdings from the issuance of the Old Notes.
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"Consolidated Net Income" of Holdings means for any period the
consolidated net income (or loss) of Holdings and its consolidated
Subsidiaries for such period determined in accordance with GAAP, less,
without duplication, the amount of dividends declared in respect of the Bank
Preferred Stock and any Qualified Preferred Stock during such period (to the
extent not deducted from Consolidated Net Income in accordance with GAAP);
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) Holdings' 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 Holdings 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)
Holdings' equity in a net loss of any such Person for such period shall be
included in determining such Consolidated Net Income;
(b) any net income (but not loss) of any Person acquired by Holdings 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 Holdings
(other than restrictions contained in any Qualified Preferred Stock),
except that (A) Holdings' 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 Holdings 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) Holdings' 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 Holdings 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 Holdings 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);
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(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
(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)(1) of the FDIA, 12 U.S.C. Section 1813(c)(1), or a similar
definition under any successor statute.
"Designated Senior Indebtedness" means, as of any date of determination,
(i) the Senior Notes and any Refinancing thereof and (ii) any other Senior
Indebtedness, provided that for purposes of this clause (ii) the Senior
Indebtedness issued or incurred in any single transaction shall not be
Designated Senior Indebtedness unless the Senior Indebtedness issued or
incurred in such transaction (including any commitments to lend), at the time
of issuance, had an aggregate principal amount outstanding (including any
commitments to lend) exceeding $25,000,000 and was specifically designated by
the Issuer in the instrument evidencing such Senior Indebtedness as
"Designated Senior Indebtedness."
"Designated Senior Indebtedness Representative" means any trustee, agent
or representative (if any) for an issue of Designated Senior Indebtedness.
"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).
"FN Escrow" means First Nationwide Escrow Corp. not including Holdings or
any other successors thereof.
"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 Holdings 9 1/8% Senior Subordinated Notes
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
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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.
"Holdings" means First Nationwide Holdings Inc. and its successors.
"Holdings 9 1/8% Senior Subordinated Notes" means Holdings' 9 1/8% Senior
Subordinated Notes Due 2003 and the Holdings 9 1/8% Senior Subordinated
Exchange Notes Due 2003, issued by Holdings pursuant to the Holdings 9 1/8%
Senior Subordinated Notes Indenture.
"Holdings 9 1/8% Senior Subordinated Notes Indenture" means the Indenture,
dated as of January 31, 1996, between Holdings and The Bank of New York, as
Trustee, as such Indenture may be amended from time to time, under which the
Holdings 9 1/8% Senior Subordinated Notes were issued.
"Holdings Preferred Stock" means the Cumulative Perpetual Preferred Stock
to be issued by Holdings, including any shares of additional preferred stock
to be issued in lieu of cash dividends thereon.
"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.
"Issue Date" means the date of the original issue of the Notes.
"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 Holdings, 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.
"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.
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"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 Holdings, 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.
"Parity Obligation" means any Debt of the Issuer which specifically
provides by its terms that it ranks pari passu with the Notes as to payments
of principal and interest. The Holdings 9 1/8% Senior Subordinated Notes
shall be deemed to be Parity Obligations of Holdings.
"Permitted Affiliate" means any individual who is a director or executive
officer of Holdings, of a Subsidiary of Holdings 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 Holdings) of any
Subsidiary of Holdings made in the ordinary course of its business and in
compliance with all regulatory restrictions on such loans, (iii) Investments
by any Subsidiary of Holdings (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 Holdings (other than an Unrestricted
Affiliate, a Subsidiary of Holdings or a Person that would become an
Unrestricted Affiliate or a Subsidiary as a result of such Investment), (iv)
Investments by Holdings consisting of loans to Affiliates of Holdings 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, (v) Investments by Holdings in any Subsidiary of Holdings; (vi)
Investments by Holdings in any Person which would become a Subsidiary of
Holdings as a result of such Investment, but only if after giving effect to
such Investment such Subsidiary is not engaged in any trade or business other
than (x) activities permissible for subsidiaries of a multiple savings and
loan holding company under Section 10 of the HOLA (or any successor
provision), and (y) the ownership of the Capital Stock of one or more other
Subsidiaries engaged solely in such activities; and (vii) Investments by any
Subsidiary of Holdings in Holdings.
"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.
"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.
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"Qualified Minority Shareholder" means any minority shareholder of a
Subsidiary of Holdings if, at the time of determination, the Senior Notes
remain outstanding, but shall otherwise mean any such minority shareholder
who is not an Affiliate of Holdings (other than an Unrestricted Affiliate, a
Permitted Affiliate or a Subsidiary of Holdings).
"Qualified Preferred Stock" means (x) any Preferred Stock of any
Subsidiary of Holdings (other than the Bank Preferred Stock) which meets the
requirements set forth in clauses (a), (b), (c) and (d) below, and (y) any
Preferred Stock of any Subsidiary of Holdings (other than the Bank Preferred
Stock) issued to Refinance any other Qualified Preferred Stock or, at
Holdings' election, to Refinance any Bank Preferred Stock provided that the
Preferred Stock issued in such Refinancing meets the requirements set forth
in clauses (a), (b), (c) and (e) below:
(a) Such Preferred Stock does not contain any mandatory redemption
provisions which would require it to be redeemed prior to the first
anniversary of the Stated Maturity of the Notes;
(b) The terms of such Preferred Stock do not impose any consensual
encumbrance or restriction on the ability of the issuer thereof to pay
dividends or make distributions on its common stock except in a manner that
is no more restrictive in any material respect than the following, as
determined in good faith by the Board of Directors of Holdings and evidenced
by a resolution adopted by such Board:
(i) Dividends and distributions on common stock or other capital stock of
the issuer may not be declared or paid or set apart for payment at any
time when the issuer has not declared and paid any dividends or
distributions on such Preferred Stock which are required to be declared
and paid as a precondition to dividends or distributions on other capital
stock of the issuer;
(ii) Distributions upon the liquidation, dissolution or winding up of the
issuer, whether voluntary or involuntary ("Liquidating Distributions"),
may not be made on the common stock or other capital stock of the issuer
at any time when such Preferred Stock is entitled to receive Liquidating
Distributions which have not been paid; and
(iii) Dividends and distributions on common stock or other capital stock
of the issuer may not be declared or paid or set apart for payment at any
time when such Preferred Stock is required to be, but has not been,
redeemed pursuant to redemption provisions which meet the requirements of
clause (a) above;
(c) The terms of such Preferred Stock do not impose any consensual
encumbrance or restriction on the ability of the issuer thereof (i) to pay
any Debt or other obligation owed to Holdings; (ii) to make loans or advances
to Holdings; or (iii) to transfer any of its property or assets to Holdings,
except, in any such case, any encumbrance or restriction permitted under
"--Certain Covenants--Limitations on Restrictions on Distributions by
Subsidiaries" (other than clause (h) thereof);
(d) In the case of Preferred Stock issued pursuant to clause (x) above,
Consolidated Net Income of Holdings for the Relevant Period (as defined in
the next sentence) on a pro forma basis, after giving effect to (i) the
issuance of such Preferred Stock (including fees and expenses incurred in
connection with such issuance), (ii) the use of the proceeds thereof, if any,
(iii) any acquisition of capital stock or assets of another Person occurring
in connection with the issuance of such Preferred Stock (including the
anticipated revenue and earnings relating thereto) and (iv) any dividend or
other payment obligations with respect to such Preferred Stock, in each case
as if such Preferred Stock had been issued and any such acquisition had been
made on the first day of the Relevant Period, is no less than the actual
Consolidated Net Income of Holdings for the Relevant Period. "Relevant
Period" means, with respect to any issuance of Preferred Stock, the four full
fiscal quarters most recently ended at least 45 days prior to the date of
such issuance. For purposes of this clause (d), whenever pro forma effect is
to be given to an acquisition of capital stock or assets, the amount of
revenue and earnings relating thereto, or any other circumstance, the pro
forma calculations shall be determined in good faith by a responsible
financial or accounting officer of Holdings; and
(e) In the case of Preferred Stock issued in a Refinancing pursuant to
clause (y) above, the aggregate liquidation value of such Preferred Stock
shall not exceed the sum of the liquidation value of the Preferred Stock
being Refinanced on the date it was originally issued plus reasonable fees
and expenses incurred in connection with such Refinancing and accrued
dividends and premium, if any.
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"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 or Preferred Stock, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire,
or to issue Debt or Preferred Stock in exchange or replacement for, such Debt
or Preferred Stock. "Refinanced" and "Refinancing" shall have correlative
meanings.
"Registration Agreement" means the Registration Agreement dated September
13, 1996, among FN Escrow, Holdings and the Initial Purchasers named therein.
"Registered Exchange Offer" has the meaning ascribed thereto in the
Registration Agreement.
"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 (x) 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 (y) dividends or
distributions on Capital Stock of a Subsidiary of Holdings payable to
Holdings or a Subsidiary of Holdings and to Qualified Minority Shareholders),
(ii) any purchase, redemption or other acquisition or retirement for value of
any Capital Stock (including the Bank Preferred Stock) of Holdings 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 Parity Obligation or
Subordinated Obligation (other than the purchase, repurchase or other
acquisition of Parity Obligations or 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.
"Securities Payment" means (i) any payment or distribution of any kind or
character, whether in cash, property or securities (including any such
payment or distribution which may be payable or deliverable by reason of the
payment of any other Debt of the Issuer being subordinated to the payment of
the Notes), which may be payable or deliverable in respect of the Notes in
any case, proceeding, dissolution, liquidation or other winding up, or
otherwise on account of any principal or interest on the Notes (except for
payments from money or the proceeds of U.S. Governmental Obligations held in
trust pursuant to the provisions described under "--Defeasance"), (ii) any
payment on account of the purchase or other acquisition of the Notes, or
(iii) any deposit made pursuant to the provisions described under
"--Defeasance."
"Senior Indebtedness" means the following obligations, whether outstanding
on the date of the Indenture or thereafter created, incurred or assumed, and
whether at any time owing actually or contingent:
(i) all obligations in respect of the Senior Notes (including all
obligations in respect thereof consisting of the principal of and premium,
if any, and accrued and unpaid interest (including interest accruing on or
after the filing of any petition in bankruptcy or for reorganization
relating to Holdings), and all fees, expenses and other amounts);
(ii) all obligations consisting of the principal of and premium, if any,
and accrued and unpaid interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to
Holdings), and all fees, expenses and other amounts, in respect of (A)
indebtedness of Holdings for money borrowed and (B) indebtedness evidenced
by notes, debentures, bonds or other similar instruments for the payment
of which Holdings is responsible or liable;
(iii) all Capital Lease Obligations of Holdings;
(iv) all obligations of Holdings (A) for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit
transaction, (B) under interest rate swaps, caps, collars, options
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and similar arrangements and foreign currency hedges entered into in
respect of any obligations described in clauses (i), (ii) and (iii) or (C)
issued or assumed as the deferred purchase price of property and all
conditional sale obligations of Holdings and all obligations of Holdings
under any title retention agreement;
(v) all obligations of other Persons of the type referred to in clauses
(ii), (iii) and (iv) and all dividends of other Persons for the payment of
which, in either case, Holdings is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
agreement which has the economic effect of a Guarantee; and
(vi) all obligations of Holdings consisting of modifications or
Refinancings of any obligation described in clauses (i), (ii), (iii), (iv)
or (v);
unless, in the case of any particular obligation, in the instrument creating
or evidencing the same or pursuant to which the same is outstanding, it is
provided that such obligations (a) are subordinate in right of payment to
Senior Indebtedness or (b) are not superior in right of payment to the Notes;
provided, however, that Senior Indebtedness shall not include (1) Debt of
Holdings to a Subsidiary of Holdings or any other Affiliate of Holdings or
any of such Affiliate's Subsidiaries, other than any such Debt consisting of
Senior Notes or any Refinancing thereof, (2) any liability for federal,
state, local or other taxes owed or owing by Holdings, (3) any accounts
payable or other liability to trade creditors arising in the ordinary course
of business (including Guarantees thereof or instruments evidencing such
liabilities), (4) any indebtedness, Guarantee or obligation of Holdings which
is subordinate or junior in any respect to any other indebtedness, Guarantee
or obligation of Holdings, (5) Debt of or amounts owed by Holdings for
compensation to employees or for services rendered to Holdings, (6) amounts
owing under leases (other than Capitalized Lease Obligations), (7) that
portion of any Debt which at the time of Issuance is Issued in violation of
the Indenture; provided, however, that in the case of this clause (7), (A)
any Debt Issued to any Person who had no actual knowledge that the Issuance
of such Debt was not permitted under the Indenture and who received on the
date of Issuance thereof a certificate from an officer of Holdings to the
effect that the Issuance of such Debt would not violate the Indenture shall
constitute Senior Indebtedness and (B) any Debt arising from the honoring by
a bank or other financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts) drawn against
insufficient funds in the ordinary course of business shall constitute Senior
Indebtedness provided that such Debt is extinguished within three business
days of Issuance, (8) the Holdings 9 1/8% Senior Subordinated Notes or (9)
the Notes.
"Senior Nonmonetary Default" means the occurrence or existence and
continuance of any event of default, or of any event which, after notice or
lapse of time (or both), would become an event of default, under the terms of
any instrument pursuant to which any Designated Senior Indebtedness is
outstanding, permitting (after notice or lapse of time or both) one or more
holders of such Designated Senior Indebtedness (or a Designated Senior
Indebtedness Representative) to declare such Designated Senior Indebtedness
due and payable prior to the date on which it would otherwise become due and
payable, other than a Senior Payment Default or Acceleration.
"Senior Notes" means Holdings' 12 1/4% Senior Notes Due 2001 and Holdings'
12 1/4% Senior Exchange Notes Due 2001 issued by Holdings pursuant to the
Senior Notes Indenture.
"Senior Notes Indenture" means the Indenture, dated as of July 15, 1994,
between Holdings and The First National Bank of Boston, as Trustee, as such
Indenture may be amended from time to time, under which the Senior Notes were
issued.
"Senior Payment Default or Acceleration" means (i) the occurrence or
continuance of any default in the payment of principal of or interest on any
Senior Indebtedness or (ii) the occurrence of any other default on Senior
Indebtedness resulting in the maturity of such Senior Indebtedness being
accelerated in accordance with its terms.
"Shelf Registration Statement" has the meaning ascribed thereto in the
Registration Agreement.
"Significant Subsidiary" means: (i) any Subsidiary of Holdings which at
the time of determination either (A) had assets which, as of the date of
Holdings' most recent quarterly consolidated balance sheet,
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constituted at least 5% of Holdings' 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 Holdings' most recent
quarterly consolidated statement of income which constituted at least 5% of
Holdings' total revenues on a consolidated basis for such period or (ii) any
Subsidiary of Holdings which, if merged with all Defaulting Subsidiaries (as
defined below) of Holdings, would at the time of determination either (A)
have had assets which, as of the date of Holdings' most recent quarterly
consolidated balance sheet, would have constituted at least 10% of Holdings'
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 Holdings' most recent quarterly
consolidated statement of income which would have constituted at least 10% of
Holdings' total revenues on a consolidated basis for such period (each such
determination being made in accordance with GAAP). "Defaulting Subsidiary"
means any Subsidiary of Holdings 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 Issue Date or thereafter 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.
"Tax Sharing Agreement" means: (i) that certain agreement effective as of
January 1, 1994 by and among Holdings, certain of its Subsidiaries and Mafco
Holdings, and (ii) any other tax allocation agreement between Holdings or any
of its Subsidiaries with Holdings or any direct or indirect shareholder of
Holdings with respect to consolidated or combined tax returns including
Holdings or any of its Subsidiaries but only to the extent that amounts
payable from time to time by Holdings or any such Subsidiary under any such
agreement do not exceed the corresponding tax payments that Holdings or such
Subsidiary would have been required to make to any relevant taxing authority
had Holdings or such Subsidiary not joined in such consolidated or combined
returns, but instead had filed returns including only Holdings or its
Subsidiaries, provided that any such agreement may provide that, if Holdings
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 Holdings 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 Holdings, such Subsidiary or
any predecessor business thereof (computed as if Holdings, 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 Holdings 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
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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 Holdings or 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. Section Section
77aaa-77bbbb) as in effect on the Issue Date; provided, however, that in the
event the Trust Indenture Act of 1939 is amended after such date, "TIA"
means, to the extent required by any such amendment, the Trust Indenture Act
of 1939 as so amended.
"TNIS" means Trans Network Insurance Services Inc., a Delaware
corporation.
"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
Holdings) controlled (as defined in the definition of "Affiliate") by
Holdings, in which no Affiliate of Holdings (other than (w) Holdings, (x) a
Wholly Owned Subsidiary of Holdings, (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, with respect to Holdings, the Bank and
any Subsidiary of Holdings all the Capital Stock of which (other than
directors' qualifying shares or Qualified Preferred Stock) is owned by
Holdings, the Bank or another Wholly Owned Subsidiary.
REGISTRATION RIGHTS
Holders of New Notes are not entitled to any registration rights with
respect to the New Notes. Pursuant to the Registration Agreement, holders of
Old Notes are entitled to certain registration rights. Under the Registration
Agreement, the Issuer has agreed, for the benefit of the holders of the Old
Notes, that it will, at its cost, (i) by March 19, 1997, file a registration
statement with the SEC with respect to the Exchange Offer and (ii) by June 2,
1997, use its best efforts to cause such registration statement to be
declared effective under the Securities Act. The Registration Statement of
which this Prospectus is a part constitutes the registration statement for
the Exchange Offer.
In the event that (i) applicable interpretations of the staff of the SEC
do not permit the Issuer to effect the Exchange Offer, (ii) for any other
reason the Exchange Offer is not consummated by July 2, 1997, (iii) any
Initial Purchaser so requests with respect to Notes held by it following
consummation of the Exchange Offer, (iv) any holder of Notes is not eligible
to participate in the Exchange Offer or does not receive freely tradeable
Exchange Notes in exchange for exchanged Notes or (v) the Issuer so elects,
then, the Issuer will, at is cost, (a) as promptly as practicable, file a
shelf registration statement covering resales
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of the Old Notes, (b) use its best efforts to cause such shelf registration
statement to be declared effective under the Securities Act and (c) use its
best efforts to keep effective the shelf registration statement until three
years after its effective date. The Issuer will, in the event the filing of
such shelf registration statement becomes necessary, provide to each holder
of the Old Notes copies of the prospectus, which is a part of the shelf
registration statement, notify each such holder when the shelf registration
statement for the Old Notes has become effective and take certain other
actions as are required to permit unrestricted resales of the Notes. A holder
of Old Notes who sells such Old Notes pursuant to the shelf registration
statement generally would be required to be named as a selling securityholder
in the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act
in connection with such sales and will be bound by the provisions of the
Registration Agreement which are applicable to such a holder (including
certain indemnification obligations). If by July 2, 1997, neither (i) the
Exchange Offer is consummated nor (ii) a shelf registration statement with
respect to the resale of the Old Notes is declared effective, the rate per
annum at which the Notes bear interest will be 11 1/8% from and including
July 2, 1997, until but excluding the earlier of (i) the consummation of the
Exchange Offer and (ii) the effective date of such shelf registration
statement.
The summary herein of certain provisions of the Registration Agreement
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Registration Agreement, a
copy of which is filed as an exhibit to the Registration Statement of which
this Prospectus constitutes a part.
BOOK ENTRY; DELIVERY AND FORM
The certificates representing the Notes will be issued in fully registered
form, without coupons. Except as set forth below, the Notes will be deposited
with, or on behalf of, The Depository Trust Company, New York, New York
("DTC"), and registered in the name of Cede & Co. ("Cede") as DTC's nominee
in the form of a global Note certificate (the "Global Certificate") or will
remain in the custody of the Trustee pursuant to the FAST Balance Certificate
Agreement between DTC and the Trustee.
Subject to the terms of the Indenture and the limitations applicable to
the Global Certificate, New Notes may be presented for exchange as provided
below or for registration of transfer (duly endorsed or with the form of
transfer endorsed thereon duly executed) at the office of the Registrar or at
the office of any transfer agent designated by the Issuer for such purpose.
Such transfer or exchange will be effected upon the Registrar's or such
transfer agent's, as the case may be, being satisfied with the documents of
title and identity of the Person making the request. The Issuer has appointed
the Trustee as Registrar. The Issuer may at any time designate additional
transfer agents or rescind the designation of any transfer agent or approve a
change in the office through which any transfer agent acts; provided,
however, that there shall at all times be a transfer agent in the Borough of
Manhattan, The City of New York.
Global Certificate
Ownership of beneficial interests in the Global Certificate will be
limited to persons who have accounts with DTC ("participants") or persons who
hold interests through participants. Upon the issuance of the Global
Certificate, DTC or its custodian will credit, on its internal system, the
respective principal amount of the individual beneficial interests
represented by such Global Certificate to the accounts of its participants.
Such accounts initially will be designated by or on behalf of the Initial
Purchasers. Ownership of beneficial interests in the Global Certificate will
be shown on, and the transfer of those ownership interests will be effected
through, records maintained by DTC or its nominee (with respect to interests
of participants) or by any such participant (with respect to interests of
persons held by such participants on their behalf). Payments, transfers,
exchanges and other matters relating to beneficial interests in the Global
Certificate may be subject to various policies and procedures adopted by DTC
from time to time. None of the Issuer, the Trustee or any of their agents
will have any responsibility or liability for any aspect of DTC's or any
participant's records relating to, or for payments made on account of,
beneficial interests in the Global Certificate, or for maintaining,
supervising or reviewing any records relating to such beneficial interests.
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The Global Certificate will be exchanged for Notes in certificated form if
(i) DTC notifies the Issuer that it is unwilling or unable to continue as
depositary for the Global Certificate or has ceased to be qualified to act as
such as required by the Indenture or (ii) there shall have occurred and be
continuing an Event of Default with respect to the Notes. Upon the occurrence
of such an event, owners of beneficial interests in the Global Certificate
will receive physical delivery of Notes in certificated form. All New Notes
issued in exchange for the Global Certificate or any portion thereof will be
registered in such names as DTC shall direct.
As long as DTC, or its nominee, is the registered holder of the Global
Certificate, DTC or such nominee, as the case may be, will be considered the
sole owner and holder of such Global Certificate (and of the New Notes
represented thereby) for all purposes under the Indenture and the New Notes.
Except in the circumstances referred to in the preceding paragraph, owners of
beneficial interests in the Global Certificate will not be considered the
owners or holders of such Global Certificate (or any New Notes represented
thereby) for any purpose under the Indenture or the New Notes. In addition,
no beneficial owner of an interest in the Global Certificate will be able to
transfer that interest except in accordance with DTC's applicable procedures
(in addition to those under the Indenture) referred to herein. All payments
of principal of, and any interest on, the Global Certificate will be made to
DTC or its nominee, as the case may be, as the holder thereof. The laws of
some jurisdictions require that certain purchasers of securities take
physical delivery of such securities in definitive form.
Investors may hold their interests in the Global Certificate, directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of the Global Certificate held by it or its
nominee, will credit the accounts of the participants with payments of
principal or interest on the date payable in amounts proportionate to their
respective beneficial interests in the principal amount of such Global
Certificate as shown on the records of DTC or its nominee. The Issuer also
expects that payments by participants to owners of beneficial interests in
such Global Certificate held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in street name. Such
payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC's procedures.
DTC has advised the Issuer that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to
whose account with DTC interest in the Global Certificate are credited and
only in respect of such portion of the aggregate principal amount of the
Notes as to which such participant or participants has or have given such
direction. However, if an Event of Default occurs and is continuing under the
Notes, DTC will exchange the Global Certificate for legended certificated
Notes in definitive form, which it will distribute to its participants.
DTC has advised the Issuer as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Securities Exchange Act of 1934, as amended.
DTC was created to hold securities for its participants and facilitate the
clearance and settlement of securities transactions between participants
through electronic book-entry changes in accounts of its participants,
thereby eliminating the need for physical movement of certificates.
Participants include securities-brokers and dealers, banks, trust companies
and clearing corporations and may include certain other organizations.
Indirect access to the DTC system is available to others such as banks,
brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Certificated Notes
As set forth above under "--Global Certificate," if DTC or any successor
depositary is at any time unwilling or unable to continue as a depositary for
the reasons set forth above under "--Global
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Certificate" or if there shall have occurred and be continuing an Event of
Default with respect to the New Notes, the Issuer will issue certificates for
the Notes in definitive registered form in exchange for the Global
Certificate. Certificates for New Notes delivered in exchange for the Global
Certificate or beneficial interests therein will be registered in the names,
and issued in any approved denominations, requested by DTC.
The holder of a registered New Note may transfer such New Note by
surrendering it at (i) the office or agency maintained by the Issuer for such
purpose in the Borough of Manhattan, The City of New York, which initially
will be the office of the Trustee or (ii) the office of any transfer agent
appointed by the Issuer.
DESCRIPTION OF OTHER INDEBTEDNESS AND PREFERRED STOCK
Each of the following summaries of certain indebtedness of Holdings and of
the Holdings Preferred Stock are subject to and qualified in its entirety by
reference to the detailed provisions of the respective agreements and
instruments to which each summary relates. Copies of such agreements and
instruments are filed as exhibits 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 respective agreements.
Holdings Senior Notes
On July 27, 1994 Holdings issued $200 million principal amount of 12 1/4%
senior notes (the "Original Holdings Senior Notes") pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. Holdings consummated an
exchange offer registered under the Securities Act to exchange the Original
Holdings Senior Notes for the Holdings Senior Notes, which have terms
substantially identical in all material respects to the Original Holdings
Senior Notes. Interest is payable semiannually on each May 15 and November
15. The Holdings Senior Notes are unsecured obligations of Holdings and rank
pari passu with all other existing and future senior debt of Holdings and are
effectively subordinated in right of payment to all existing and future
liabilities of Holdings' subsidiaries, and mature on May 15, 2001.
The Holdings Senior Notes may be redeemed at the option of Holdings in
whole or in part at any time during the twelve month period beginning May 15,
1999 at a redemption price of 106.125% 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 Holdings Senior Notes
Indenture) prior to May 15, 1999, Holdings will have the option to redeem the
Holdings Senior Notes in whole at a redemption price equal to the principal
amount thereof plus the Applicable Premium (as defined in the Holdings Senior
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 Holdings Senior Notes Indenture) each holder of
Holdings Senior Notes will have the right to require Holdings to repurchase
all or a portion of such holder's Holdings Senior Notes at 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the
date of repurchase.
The Holdings Senior Notes Indenture contains various restrictive covenants
that, among other things, limit (i) the issuance of additional indebtedness
by Holdings and certain subsidiaries, (ii) the payment of dividends on
capital stock of Holdings and its subsidiaries, and the redemption or
repurchase of the capital stock of Holdings 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
Holdings Senior Notes Indenture) of First Nationwide is less than the Minimum
Common Equity Amount (as defined in the Holdings Senior Notes Indenture)
(iii) the making of certain investments, (iv) transactions with affiliates,
(v) the incurrence of liens on the assets of Holdings, (vi) the termination
or amendment of the Tax Sharing Agreement, (vii) the ability of Holdings to
restrict dividends or distributions from subsidiaries, (viii) consolidations,
mergers and transfers of all or substantially all of Holdings' assets and
(ix) other business activities of Holdings. All of these limitations and
prohibitions, however, are subject to a number of important qualifications.
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Events of default under the Holdings Senior 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 redeem or purchase the Holdings Senior Notes when required
pursuant to the Holdings Senior Notes Indenture, (iv) the failure to comply
with the covenants in the Holdings Senior Notes Indenture, subject in certain
instances to grace periods, (v) failure to pay other indebtedness of Holdings
or a Significant Subsidiary (as defined in the Holdings Senior Notes
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 Holdings or a Significant Subsidiary (as
defined in the Holdings Senior Notes Indenture) and (vii) the failure to pay
any judgment in excess of $25 million.
Holdings 9 1/8% Senior Subordinated Notes
On January 31, 1996, Holdings issued and sold $140.0 million principal
amount of 9 1/8% senior subordinated notes (the "Original Holdings 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. Holdings consummated an exchange offer
registered under the Securities Act to exchange the Original Holdings 9 1/8%
Senior Subordinated Notes for the Holdings 9 1/8% Senior Subordinated Notes,
which have terms substantially identical in all material respects to the
Original Holdings 9 1/8% Senior Subordinated Notes. The Holdings 9 1/8%
Senior Subordinated Notes are unsecured obligations of Holdings and are
subordinated to all existing and future Senior Indebtedness (as defined in
the Holdings 9 1/8% Senior Subordinated Notes Indenture) of Holdings,
including the Holdings Senior Notes.
The Holdings 9 1/8% Senior Subordinated Notes may be redeemed at the
option of Holdings in whole or in part at 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 Holdings 9 1/8% Senior Subordinated Notes Indenture) prior to
January 1, 2001, Holdings will have the option to redeem the Holdings 9 1/8%
Senior Subordinated Notes in whole at a redemption price equal to the
principal amount thereof plus the Applicable Premium (as defined in the
Holdings 9 1/8% 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 Holdings 9
1/8% Senior Subordinated Notes Indenture) each holder of Holdings 9 1/8%
Senior Subordinated Notes will have the right to require Holdings to
repurchase all or a portion of such holder's Holdings 9 1/8% Senior
Subordinated Notes at 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of repurchase.
The Holdings 9 1/8% Senior Subordinated Notes Indenture contains various
restrictive covenants that, among other things, limit (i) the issuance of
additional indebtedness by Holdings and certain subsidiaries, (ii) the
payment of dividends on capital stock of Holdings and its subsidiaries, and
the redemption or repurchase of the capital stock of Holdings 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 Holdings 9 1/8% Senior Subordinated Notes
Indenture) of First Nationwide is less than the Minimum Common Equity Amount
(as defined in the Holdings 9 1/8% Senior Subordinated Notes Indenture),
(iii) the making of certain investments, (iv) transactions and affiliates,
(v) the incurrence of liens on the assets of Holdings to secure pari passu or
subordinated obligations which do not equally and ratably secure the Holdings
9 1/8% Senior Subordinated Notes, (vi) the termination or amendment of the
Tax Sharing Agreement, (vii) the ability of Holdings to restrict dividends or
distributions from subsidiaries, (viii) consolidations, mergers and transfers
of all or substantially all of Holdings' assets and (ix) other business
activities of Holdings. All of these limitations and prohibitions, however,
are subject to a number of important qualifications.
Events of default under the Holdings 9 1/8% 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 Holdings 9 1/8% Senior
Subordinated
247
<PAGE>
Notes when required pursuant to the Holdings 9 1/8% Senior Subordinated Notes
Indenture, (iv) the failure to comply with the covenants in the Holdings 9
1/8% Senior Subordinated Notes Indenture, subject in certain instances to
grace periods, (v) failure to pay other indebtedness of Holdings or a
Significant Subsidiary (as defined in the Holdings 9 1/8% Senior Subordinated
Notes Indenture) in excess of $25 million upon final maturity or as a result
of such indebtedness becoming accelerated and such default continued for a
period of 5 days after notice thereof, (vi) certain events of bankruptcy,
insolvency or reorganization of Holdings or a Significant Subsidiary (as
defined in the Holdings 9 1/8% Senior Subordinated Notes Indenture) and (vii)
the failure to pay any judgment in excess of $25 million.
Holdings Preferred Stock
The Holdings Preferred Stock has a stated liquidation value of $15,000 per
share, plus accrued and unpaid dividends, if any. Dividends on the Holdings
Preferred Stock will be cumulative and will accrue and be payable (i) in cash
at an annual floating rate of the cost of funds to an affiliate of Holdings
under such affiliate's bank credit facility (without taking into account any
default interest that may be payable under such bank credit facility) (such
rate, the "Cost of Funds Rate") and (ii) in newly issued shares of another
series of Cumulative Perpetual Preferred Stock of Holdings (the "Additional
Holdings Preferred Stock") at an annual rate of 2% of the stated liquidation
value of the Holdings Preferred Stock, in each case, if, when and as declared
by the Board of Directors of Holdings. Dividends on the Additional Holdings
Preferred Stock will be cumulative and will accrue and be payable in shares
of Additional Holdings Preferred Stock at an annual rate equal to the Cost of
Funds Rate plus 2% of the stated liquidation value of the Additional Holdings
Preferred Stock if, when and as declared by the Board of Directors of
Holdings. Additional Holdings Preferred Stock will have substantially the
same relative rights, terms and preferences as the Holdings Preferred Stock
except as set forth above with respect to the payment of dividends. If all of
the outstanding shares of the Holdings Preferred Stock are not redeemed by
Holdings before January 1, 2000, all dividends on the Holdings Preferred
Stock and the Additional Holdings Preferred Stock accruing thereafter will be
payable in cash. Dividends on the Holdings Preferred Stock are payable
quarterly on January 1, April 1, July 1 and October 1 of each year,
commencing January 1, 1997, out of funds legally available therefor. The
Holdings Preferred Stock will rank prior to the common stock of Holdings and
to all other classes and series of equity securities subsequently issued.
Except as required by law, the holders of the Holdings Preferred Stock and
the Additional Holdings Preferred Stock will not be entitled to any voting
rights unless the equivalent of four quarterly dividends are in arrears or
certain bankruptcy-related events occur, in which case the number of
directors of Holdings will be increased by two and the holders of the
Holdings Preferred Stock and the Additional Holdings Preferred Stock, voting
together as a class, separately from any other class, will be entitled to
elect two directors, who shall serve until all dividends in arrears have been
paid or declared and set apart for payment or such bankruptcy-related event
has been cured.
The Holdings Preferred Stock and the Additional Holdings Preferred Stock
will be redeemable so long as Special Purpose Corp. is the sole holder
thereof, at any time, and, if Special Purpose Corp. is not the sole holder
thereof, at any time after the fifth anniversary of the issuance of the
Holdings Preferred Stock, in each case, upon prior written notice, at the
option of Holdings, in whole or in part, at a redemption price equal to the
stated liquidation value of $15,000 per share plus any accrued and unpaid
dividends. Upon any redemption of the Holdings Preferred Stock by Holdings, a
pro rata portion of the outstanding Additional Holdings Preferred Stock will
be contributed to the capital of Holdings, without any payment therefor, and
such shares will be retired and canceled. If all of the shares of the
Holdings Preferred Stock are redeemed on or before December 31, 1999, all
outstanding shares of the Additional Holdings Preferred Stock will be
contributed to the capital of Holdings, without any payment therefor, and
such shares will be retired and canceled.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain U.S. federal income tax consequences
associated with the exchange of Old Notes for New Notes and the ownership and
disposition of the New Notes by holders
248
<PAGE>
who acquire the New Notes pursuant to the Exchange Offer. The summary is
based upon current laws, regulations, rulings and judicial decisions all of
which are subject to change. The discussion below does not address all
aspects of U.S. federal income taxation that may be relevant to particular
holders in the context of their specific investment circumstances or certain
types of holders subject to special treatment under such laws (for example,
financial institutions and tax-exempt organizations). In addition, the
discussion does not address any aspect of state, local or foreign taxation
and assumes that holders of the New Notes will hold them as "capital assets"
(generally, property held for investment) within the meaning of Section 1221
of the Code.
For purposes of this discussion, a "United States Holder" is an individual
who is a citizen or resident of the United States, a corporation, a
partnership or other entity created under the laws of the United States or
any political subdivision thereof, or an estate or trust that is subject to
U.S. federal income taxation without regard to the source of income. With
respect to the tax year of any trust that begins after December 31, 1996,
a United States Holder shall mean a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States fiduciaries who have the authority to control all substantial
decisions of the trust. The term "non-United States Holder" means a beneficial
owner of the New Notes who is not a U.S. Holder.
PROSPECTIVE HOLDERS OF THE NEW NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND THE OWNERSHIP AND DISPOSITION OF THE
NEW NOTES AS WELL AS THE APPLICATION OF STATE, LOCAL AND FOREIGN INCOME AND
OTHER TAX LAW.
EXCHANGE OF NOTES
The exchange of Old Notes for New Notes pursuant to the Exchange Offer
should not be treated as an exchange or other taxable event for U.S. federal
income tax purposes because, under United States Treasury regulations, the
New Notes should not be considered to differ materially in kind or extent
from the Old Notes. Rather, the New Notes received by a holder should be
treated as a continuation of the Old Notes in the hands of such holder. As a
result, there should be no U.S. federal income tax consequences to holders
who exchange Old Notes for New Notes pursuant to the Exchange Offer and any
such holder should have the same tax basis and holding period in the New
Notes as it had in the Old Notes immediately before the exchange.
UNITED STATES HOLDERS
Interest payable on the New Notes will be includible in the income of a
United States Holder in accordance with such holder's regular method of
accounting. If a New Note is redeemed, sold or otherwise disposed of, a
United States Holder generally will recognize gain or loss equal to the
difference between the amount realized on the sale or other disposition of
such New Note (to the extent such amount does not represent accrued but
unpaid interest) and such holder's tax basis in the New Note. Subject to the
market discount rules discussed below, such gain or loss will be capital gain
or loss, assuming that the holder has held the New Note as a capital asset,
and will be long-term if the holder has a holding period for the New Note
(which would include the holding period of the Old Notes) of more than one
year at the time of the disposition.
Under the market discount rules of the Code, a holder (other than a holder
who made the election described below) who purchased an Old Note with "market
discount" (generally defined as the amount by which the stated redemption
price at maturity of the Old Note exceeds the holder's purchase price) will
be required to treat any gain recognized on the redemption, sale or other
disposition of the New Note received in the exchange as ordinary income to
the extent of the market discount that accrued during the holding period of
such New Note (which would include the holding period of the Old Note). A
holder who has elected under applicable Code provisions to include market
discount in income as such discount accrues will not, however, be required to
treat any gain recognized as ordinary income under these rules. Holders
should consult their tax advisors as to the portion of any gain that would be
taxable as ordinary income under these provisions.
NON-UNITED STATES HOLDERS
An investment in the New Notes by a non-United States Holder generally
will not give rise to any U.S. federal income tax consequences, unless the
interest received or any gain recognized on the sale,
249
<PAGE>
redemption or other disposition of the New Notes by such holder is treated as
effectively connected with the conduct by such holder of a trade or business
in the United States, or, in the case of gains derived by an individual such
individual is present in the United States for 183 days or more and certain
other requirements are met, and certain identification requirements are met.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Issuer has agreed that for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
such resale. In addition, until , 1997, all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Issuer will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that
it will deliver and be delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 180 days after the Expiration Date, the Issuer will
promptly send additional copies of the Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
document in the Letter of Transmittal. The Issuer has agreed to pay all
expenses incident to the Exchange Offer other than commissions or concessions
of any brokers or dealers and will indemnify the holders of the Notes
(including any broker-dealers) against certain liabilities, including
liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the issuance of the
New Notes will be passed upon for the Issuer by Paul, Weiss, Rifkind, Wharton
& Garrison, New York, New York. Skadden, Arps, Slate, Meagher & Flom LLP, New
York, New York has acted as counsel for the Issuer in connection with the
Exchange Offer. Skadden, Arps, Slate, Meagher & Flom LLP 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
LLP, is a director of Revlon Group Incorporated, a wholly owned subsidiary of
MacAndrews & Forbes.
250
<PAGE>
EXPERTS
The Consolidated Financial Statements of Holdings as of December 31, 1995
and 1994, and for each of the years in the three-year period ended December
31, 1995, have been included herein in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm
as experts in accounting and auditing. The report of KPMG Peat Marwick LLP
refers to a change in accounting for mortgage servicing rights in 1995, a
change in accounting for certain investments in debt and equity securities in
1994 and a change in accounting for income taxes in 1993.
The consolidated statements of financial condition of the FNB Acquired
Business as of December 31, 1993, and the consolidated statements of
operations, equity and cash flows for each of the two years in the period
ended December 31, 1993, have been included herein in reliance upon the
report of Coopers & Lybrand LLP, independent certified public accountants,
given on the authority of that firm as experts in accounting and auditing.
The report of Coopers & Lybrand LLP covering the December 31, 1992
consolidated financial statements refers to a change in accounting for income
taxes and postretirement health benefits.
The consolidated financial statements of SFFed as of December 31, 1995 and
1994, and for each of the three years in the period ended December 31, 1995,
included in this 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 referring to the acquisition of
SFFed), and have been included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
The consolidated financial statements of Cal Fed as of December 31, 1995
and 1994, and for each of the years in the three-year period ended December
31, 1995, have been included herein and in the Registration Statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified
public accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing. The report of KPMG Peat
Marwick LLP refers to a change in accounting for certain acquisitions of
banking or thrift institutions in 1994 and a change in accounting for certain
investments in debt and equity securities in 1993.
251
<PAGE>
INDEX OF DEFINED TERMS*
<TABLE>
<CAPTION>
PAGE
TERM NUMBER
- ---- ------
<S> <C>
Acquisitions ....................... 13
ACS ................................ 53
ALCO ............................... 68
AMT ................................ 18
Andrews Group ...................... 190
Applicable Premium ................. 203
ARM ................................ 76
ARMs ............................... 77
Asset Purchase Agreement ........... 6
Assistance Agreement ............... 6
Bank ............................... 3
Bank Junior Stock .................. 137
Bank Preferred Stock ............... 1
BankAmerica ........................ 6
BIF ................................ 186
Book-Entry Confirmation ............ 123
Book-Entry Transfer Facility ...... 123
Bonuses ............................ 194
Branch Purchases ................... 5
Branch Sales ....................... 5
Brokered Deposits .................. 134
Business Banking Loans ............. 147
Cal Fed ............................ 3
Cal Fed Acquisition ................ 3
Cal Fed Credit ..................... 177
Cal Fed Senior Subordinated Notes . 32
Cal Fed 6 1/2% Convertible
Subordinated Debentures ........... 32
Cal Fed 10% Subordinated Debentures 26
California Federal ................. 3
California Federal Litigation ..... 158
California Federal Preferred Stock,
Series A .......................... 80
Capital Contribution ............... 4
Capital Corporation ................ 1
Capital Corporation Offering ...... 7
Capital Corporation Preferred Stock 1
Capital Loss Coverage .............. 142
Cash Payment ....................... 138
CCI ................................ 100
CFE ................................ 177
CFIP ............................... 177
CFMC ............................... 177
Change of Control .................. 203
Charter ............................ 200
Closing Date ....................... 140
CMT ................................ 98
CMOs ............................... 56
Code ............................... 29
COFI ............................... 82
Coleman ............................ 190
Coleman Worldwide .................. 190
commercial banking loans ........... 147
Common Stock ....................... 1
Company ............................ 1
condominium project ................ 166
Consolidated Cigar ................. 190
Consolidated Cigar Holdings ....... 190
Consulting Agreement ............... 197
Consumer loans ..................... 147
Covered Assets ..................... 6
Covered Asset Recovery ............. 142
CRA ................................ 133
CTL ................................ 147
11 1/2% Bank Preferred Stock ...... 1
Excess ............................. 75
Excess Purchase Price .............. 33
excess servicing ................... 160
excess tax bad debt reserves ...... 178
Exchange Act ....................... 2
Exchange Agent ..................... 9
Exchange Offer ..................... 1
Existing Preferred Stock ........... 1
experience method .................. 178
Fair Lending Laws .................. 187
FASB ............................... 21
FDIC ............................... 3
FDIC Purchase ...................... 58
FDICIA ............................. 24
FGB Realty ......................... 59
FGMH ............................... 44
FHLB ............................... 44
FHLB advances ...................... 95
FHLBS .............................. 3
FHLMC .............................. 137
FICO ............................... 186
FIRREA ............................. 138
First Gibraltar .................... 6
First Gibraltar Holdings ........... 6
- ------------
* Does not include terms defined under "Description of the Notes--Certain
Definitions."
252
<PAGE>
PAGE
TERM NUMBER
- ---- ------
First Gibraltar Oklahoma Sale ..... 6
First Gibraltar Texas Sale ......... 6
First Madison ...................... 6
First Nationwide ................... 3
First Nationwide Management ....... 198
First United Bank Group ............ 191
FN Acquisition ..................... 6
FNB Acquired Business .............. 6
FN Escrow .......................... 1
FN Escrow Merger ................... 3
FN Escrow Preferred Stock .......... 218
FNIC ............................... 143
FNMA ............................... 117
FNMC ............................... 4
Ford Bank Group .................... 191
Ford Motor ......................... 6
Ford Obligation .................... 197
Form OC ............................ 2
FRB ................................ 181
FSLIC .............................. 6
FSLIC/RF ........................... 6
FSLIC/RF Reimbursement ............. 142
GNMA ............................... 131
Goodwill Litigation Asset .......... 139
Granite ............................ 7
Guaranteed Yield ................... 142
HFFC ............................... 5
HOLA ............................... 3
Holdings ........................... 1
Holdings 9 1/8% Senior Subordinated
Notes ............................. 5
Holdings 9 1/8 Senior Subordinated
Notes Indenture ................... 11
Holdings Preferred Stock ........... 4
Holdings Senior Notes .............. 7
Holdings Senior Notes Indenture ... 11
Home Federal ....................... 5
Home Federal Acquisition ........... 5
HUD ................................ 141
Hunter's Glen ...................... 8
Illinois Sale ...................... 34
Incentive Plan ..................... 215
income property loans .............. 147
Initial Purchasers ................. 1
interest rate cap .................. 147
interest bearing liabilities ...... 81
interest earning assets ............ 80
interest rate spread ............... 81
interest rate sensitivity .......... 85
IRR ................................ 182
IRS ................................ 29
Indenture .......................... 2
Issuer ............................. 3
ITT Purchase ....................... 5
leverage capital ratio ............. 75
Litigation Interests ............... 138
LMP ................................ 142
LMUSA .............................. 5
LMUSA Purchases .................... 5
LMUSA 1995 Purchase ................ 5
LMUSA 1996 Purchase ................ 5
LOC ................................ 140
LTV ................................ 28
MacAndrews & Forbes ................ 8
MacAndrews Holdings ................ 6
Madison Financial .................. 197
Madison Realty ..................... 191
Mafco Consolidated ................. 190
Mafco Group ........................ 23
Mafco Holdings ..................... 8
market price ....................... 101
Marvel ............................. 190
Marvel Holdings .................... 190
Marvel III ......................... 191
Marvel Parent ...................... 190
Maryland Acquisition ............... 5
master servicing portfolio ......... 5
Maximum Amount ..................... 140
MBS's .............................. 83
Merger Agreement ................... 3
Meridian Sports .................... 190
Michigan Branch Sale ............... 5
Mortgage Loan Sale Agreement ...... 140
MSRs ............................... 5
NationsBank ........................ 198
negative amortization .............. 147
New Notes .......................... 1
New World Television ............... 191
NYSE ............................... 126
1993 Bulk Sale ..................... 89
1994 Bulk Sales .................... 79
1986 Act ........................... 178
non-accrual loans .................. 90
Northeast Branch Sales ............. 5
Note Purchase Agreement ............ 155
Notes .............................. 1
NPA's .............................. 79
NPL's .............................. 80
253
<PAGE>
PAGE
TERM NUMBER
- ---- ------
NWCG Holdings ...................... 191
NYSE ............................... 1
Offering ........................... 1
OTS ................................ 2
Ohio Branch Sale ................... 5
Old FNB ............................ 6
Old FNB Debentures ................. 136
Old FNB Indenture .................. 136
Old Notes .......................... 1
one year gap ....................... 86
Originated ......................... 75
Parent Holdings .................... 7
Participants ....................... 215
past due loans ..................... 161
PCA Requirements ................... 106
PCT ................................ 190
periodic caps ...................... 83
Pneumo Abex ........................ 211
Promissory Note .................... 218
Protective Advances ................ 140
Purchased .......................... 75
Put Agreement ...................... 7
Put Option ......................... 140
Putable Assets ..................... 21
QIBs ............................... 198
QTL Test ........................... 186
qualifying institutions ............ 178
Recovery Payment ................... 138
Reduction Act ...................... 55
Registration Agreement ............. 1
REO ................................ 146
REI ................................ 100
REIT ............................... 7
repurchase agreements .............. 95
reverse repurchase agreements ..... 95
restructured loans ................. 90
Restructuring ...................... 177
retail lending ..................... 103
retail loan production ............. 148
retirement income plan ............. 177
Revlon ............................. 190
Revlon Products .................... 190
Revlon Worldwide ................... 191
SAIF ............................... 3
San Francisco Federal .............. 5
SEC ................................ 1
Secondary Litigation Interest ..... 139
Secondary Recovery Payment ......... 139
Securities Act ..................... 1
Securitized Loans .................. 170
Series A Preferred Shares .......... 1
Services Agreement ................. 198
SFAS ............................... 27
SFFed .............................. 5
SFFed Acquisition .................. 5
SFFed Notes ........................ 32
Shared Gains ....................... 114
SLMA Advances ...................... 105
Sonoma Purchase .................... 5
Southeast Division ................. 79
Special Purpose Corp. .............. 4
Special Report ..................... 27
Special SAIF Assessment ............ 55
StanFed ............................ 27
Stockholders Agreement ............. 198
Strategic Plan ..................... 146
subservicing portfolio ............. 32
Subsidiary Preferred Stock ......... 1
Tax Sharing Agreement .............. 28
10 5/8% Bank Preferred Stock ...... 1
Texas Closed Banks ................. 6
TCOF ............................... 61
TIA ................................ 127
Tiburon Purchase ................... 5
Tier 1 association ................. 185
Tier 2 association ................. 185
Tier 3 association ................. 186
TNIS ............................... 9
Toy Biz ............................ 190
wholesale lending .................. 103
wholesale loan production .......... 148
Winstar Cases ...................... 138
</TABLE>
254
<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
At September 30, 1996 and for the nine months ended September 30, 1996 and 1995:
Consolidated Statements of Financial Condition (Unaudited) ............................... F-49
Consolidated Statements of Operations (Unaudited) ........................................ F-50
Consolidated Statements of Cash Flows (Unaudited) ........................................ F-51
Notes to Unaudited Consolidated Financial Statements ..................................... F-52
The FNB Acquired Business
At December 31, 1993 and for the years ended December 31, 1993 and 1992:
Report of Independent Accountants ........................................................ F-58
Consolidated Statements of Financial Condition ........................................... F-59
Consolidated Statements of Operations .................................................... F-60
Consolidated Statements of Equity ........................................................ F-61
Consolidated Statements of Cash Flows .................................................... F-62
Notes to Consolidated Financial Statements ............................................... F-64
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-91
Consolidated Statements of Financial Condition ........................................... F-92
Consolidated Statements of Operations .................................................... F-93
Consolidated Statements of Stockholders' Equity .......................................... F-94
Consolidated Statements of Cash Flows .................................................... F-95
Notes to Consolidated Financial Statements ............................................... F-97
Cal Fed Bancorp Inc. and Subsidiaries
At December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993:
Independent Auditors' Report ............................................................. F-126
Consolidated Statements of Financial Condition ........................................... F-127
Consolidated Statements of Operations .................................................... F-128
Consolidated Statements of Shareholders' Equity .......................................... F-129
Consolidated Statements of Cash Flows .................................................... F-130
Notes to Consolidated Financial Statements ............................................... F-131
At September 30, 1996 and for the nine months ended September 30, 1996 and 1995:
Condensed Consolidated Statements of Financial Condition (Unaudited) ..................... F-183
Condensed Consolidated Statements of Operations (Unaudited) .............................. F-184
Condensed Consolidated Statements of Cash Flows (Unaudited) .............................. F-185
Notes to Unaudited Consolidated Financial Statements ..................................... F-186
Unaudited Pro Forma Financial Data of First Nationwide Holdings Inc. and Subsidiaries
Pro Forma Condensed Combined Statement of Financial Condition at September 30, 1996 ...... P-2
Notes to Pro Forma Condensed Combined Statement of Financial Condition ................. P-3
Pro Forma Condensed Combined Statement of Operations for the nine months ended September
30, 1996 ................................................................................. P-8
Notes to Pro Forma Condensed Combined Statement of Operations ............................ P-9
Pro Forma Condensed Combined Statement of Operations for the year ended
December 31, 1995 ........................................................................ P-21
Notes to Pro Forma Condensed Combined Statement of Operations ........................... P-22
</TABLE>
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)
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
OLD FN FAIR FIRST NATIONWIDE REMAINING
CARRYING VALUE CARRYING LIVES (IN
VALUE ADJUSTMENTS 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>
<PAGE>
<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
------------------------------------
ESTIMATED WEIGHTED
AMORTIZED FAIR AVERAGE
COST VALUE YIELD
<S> <C> <C> <C>
Municipal securities:
Maturing within 1 year .................. $1,250 $1,250 8.25%
Maturing after 1 year but within 5 years 205 205 8.25
----------- ----------- ----------
Total .................................. $1,455 $1,455 8.25%
=========== =========== ==========
</TABLE>
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
1995 1994 DECEMBER 31, 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 .................... 7.34 935,780 7.56 371,446
8.01-9.00 .................... 8.47 123,293 8.45 404,859
9.01-10.00 ................... 9.29 149,434 9.31 173,694
10.01-11.00 .................. 10.57 3,696 10.92 49,434
11.01-12.00 .................. 11.52 788 11.12 8,206
12.01-13.00 .................. 12.27 1,587 12.27 1,641
--------- ------------- --------- -----------
4.67% 10,183,801 4.19% 9,149,910
Accrued interest payable ...... 50,755 25,848
Purchase accounting adjustments 7,072 20,898
------------- -----------
Total deposits ............... $10,241,628 $9,196,656
============= ===========
</TABLE>
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 MARKET INTEREST
VALUE (1) 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 MARKET INTEREST
VALUE (1) 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
BALANCES MATURING AVERAGE RATES
------------------------ -----------------
MATURITIES DURING THE YEARS
ENDING DECEMBER 31 FHLB OTHER FHLB OTHER
- --------------------------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C>
1996 ....................... $1,487,166 $ 55,236 6.12% 6.01%
1997 ....................... 240,000 213 8.61 8.10
1998 ....................... 310,000 200 7.34 8.20
1999 ....................... 250 171 7.75 8.19
2000 ....................... -- 121 -- 8.27
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>
WEIGHTED
NOTIONAL AVERAGE RATE ESTIMATED
PRINCIPAL ----------------- MATURITY VARIABLE
MATURITY DATE AMOUNT PAY RECEIVE IN YEARS RATE INDEX
------------- ----------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
April 1996 ..... $ 500,000 6.04% 8.19% .26 3 month LIBOR
September 1996 250,000 5.96 4.19 .71 1 month LIBOR
April 1998 ..... 400,000 6.00 8.38 2.26 3 month LIBOR
------------
Total ........ $1,150,000
============
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED
NOTIONAL AVERAGE RATE ESTIMATED
PRINCIPAL ----------------- MATURITY VARIABLE
MATURITY DATE AMOUNT PAY RECEIVE IN YEARS RATE INDEX
------------- ----------- ----------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
April 1995 ..... $ 500,000 5.06% 7.97% .3 3 month LIBOR
April 1996 ..... 500,000 5.64 8.19 1.3 3 month LIBOR
September 1996 250,000 6.14 4.19 1.8 1 month LIBOR
April 1998 ..... 400,000 5.56 8.38 3.3 3 month LIBOR
------------
Total ........ $1,650,000
============
</TABLE>
The Bank uses interest rate swap agreements to hedge against interest rate
risk inherent in its FHLB advances. Under the agreements, the Bank receives
or makes payments based on the differential between fixed-rate and
variable-rate interest amounts on the notional amount of the agreement. The
notional amounts of these derivatives do not represent amounts exchanged by
the parties and thus, are not a measure of the Bank's exposure through its
use of derivatives. The Bank pays the variable-rate and receives the
fixed-rate under these agreements. The variable interest rates presented in
the table above are based on LIBOR. The current LIBOR rates have been assumed
implicitly, in the aforementioned weighted average receive rate, to remain
constant throughout the term of the respective swaps. Any changes in LIBOR
interest rates would affect the variable-rate information disclosed above.
The Bank is exposed to credit-related losses in the event of
nonperformance by the counterparties to these agreements but does not expect
any counterparties to fail their obligations. The Bank deals only with highly
rated counterparties.
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)
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 FAIR CARRYING FAIR
VALUE VALUE VALUE 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
</TABLE>
- ------------
(1) Designated as a hedge against FHLB advances.
The carrying amounts in the table are included in the accompanying
consolidated statement of financial position under the indicated captions,
except for off-balance-sheet net unrealized gains (losses).
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the 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 $667,955 $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 .......................................... $ 341 $ 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 31, 1995
DATE OF NUMBER OF GENERAL -----------------------------
PURCHASER AGREEMENT BRANCHES LOCATION DEPOSITS RELATED ASSETS
------------- ----------- ----------- ---------- -----------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Fifth Third Bank of Northeastern Ohio 9/22/95 28 Ohio $1,414,695 $18,480
North Fork Bank ....................... 9/28/95 10 Long Island, 602,014 8,222
New York
Middletown Savings Bank ............... 9/29/95 8 Upstate 485,975 5,594
New York
Independence Savings Bank ............. 10/11/95 3 Brooklyn, 330,073 3,308
New York
Republic National Bank ................ 10/31/95 3 Manhattan, 282,580 1,795
New 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>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and amounts due from banks ............................. $ 119,091 $ 154,758
Interest-bearing deposits in other banks .................... 24,788 32,778
Short-term investment securities ............................ 127,339 125,035
--------------- --------------
Cash and cash equivalents .................................. 271,218 312,571
Securities available for sale, at fair value ................ 567,933 348,561
Securities held to maturity ................................. 4,277 1,455
Mortgage-backed securities available for sale at fair value 1,660,140 1,477,514
Mortgage-backed securities held to maturity ................. 1,700,387 1,524,488
Loans held for sale, net .................................... 710,233 1,203,412
Loans receivable, net ....................................... 10,596,983 8,831,018
Covered assets .............................................. -- 39,349
Investment in Federal Home Loan Bank ("FHLB") System ....... 217,529 109,943
Office premises and equipment, net .......................... 92,088 93,509
Foreclosed real estate, net ................................. 58,791 48,535
Accrued interest receivable ................................. 110,811 100,604
Intangible assets ........................................... 144,782 18,606
Mortgage servicing rights ................................... 406,669 241,355
Other assets ................................................ 427,637 295,325
--------------- --------------
Total assets .............................................. $16,969,478 $14,646,245
=============== ==============
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Deposits .................................................... $ 8,799,990 $10,241,628
Securities sold under agreements to repurchase .............. 2,127,574 969,510
Borrowings .................................................. 4,380,368 2,392,862
Other liabilities ........................................... 431,291 279,099
--------------- --------------
Total liabilities ......................................... 15,739,223 13,883,099
--------------- --------------
Minority interest-preferred stock of First Nationwide Bank . 309,376 300,730
Stockholders' equity:
Floating rate cumulative perpetual preferred stock,
$1.00 par value, 10,000 shares issued and outstanding .... 150,000 --
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, 0 and 169.5 shares issued and outstanding at
September 30, 1996 and December 31, 1995, respectively ... -- --
Additional paid-in capital ................................. 47,752 223,000
Net unrealized holding gain on securities available for
sale ...................................................... 35,087 63,512
Retained earnings (substantially restricted) ............... 688,039 175,903
--------------- --------------
Total stockholders' equity ................................ 920,879 462,416
--------------- --------------
Total liabilities, minority interest and stockholders'
equity ................................................... $16,969,478 $14,646,245
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-49
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Interest income:
Loans receivable ......................................... $671,099 $603,814
Mortgage-backed securities ............................... 191,602 156,440
Covered assets ........................................... 1,413 9,869
Loans held for sale ...................................... 45,424 6,959
Securities and interest-bearing deposits in other banks . 24,875 21,084
---------- ----------
Total interest income ................................... 934,413 798,166
---------- ----------
Interest expense:
Deposits ................................................. 323,246 328,879
Securities sold under agreements to repurchase .......... 89,923 77,994
Borrowings ............................................... 200,114 142,323
---------- ----------
Total interest expense .................................. 613,283 549,196
---------- ----------
Net interest income ..................................... 321,130 248,970
Provision for loan losses ................................. 29,700 18,000
---------- ----------
Net interest income after provision for loan losses ..... 291,430 230,970
---------- ----------
Noninterest income:
Loan servicing fees, net ................................. 92,150 48,061
Customer banking fees and service charges ................ 34,356 34,815
Management fees .......................................... 8,016 11,139
Gain on sales of branches ................................ 363,012 --
Gain/(loss) on sales of loans, net ....................... 13,005 (1,113)
Gain/(loss) on sales of assets ........................... 38,396 (180)
Other income ............................................. 46,526 12,534
---------- ----------
Total noninterest income ................................ 595,461 105,256
---------- ----------
Noninterest expense:
Compensation and employee benefits ....................... 155,976 117,897
Occupancy and equipment .................................. 37,441 39,456
Loan expense ............................................. 20,454 6,331
Savings Association Insurance Fund ("SAIF") deposit
insurance premium ....................................... 77,011 16,360
Data processing .......................................... 8,345 7,195
Marketing ................................................ 7,697 11,308
Professional fees ........................................ 13,444 8,281
Foreclosed real estate operations, net ................... (6,841) (232)
Amortization of intangible assets ........................ 6,877 460
Other .................................................... 58,901 42,772
---------- ----------
Total noninterest expense ............................... 379,305 249,828
---------- ----------
Income before income taxes, extraordinary item and
minority interest ........................................ 507,586 86,398
Income tax (benefit) expense .............................. (79,724) 7,429
---------- ----------
Income before extraordinary item and minority interest ... 587,310 78,969
Extraordinary item -- (loss)/gain on early extinguishment
of debt, net ............................................. (1,586) 1,967
---------- ----------
Net income before minority interest ..................... 585,724 80,936
Minority interest -- First Nationwide Bank preferred stock
dividends ................................................ 34,584 25,938
---------- ----------
Net income available to common shareholders ............. $551,140 $ 54,998
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-50
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
------------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 551,140 $ 54,998
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization of intangible assets ........................ 6,877 460
Accretion of premiums and discounts, net ................. (11,431) (4,344)
Amortization of mortgage servicing rights ................ 65,482 19,836
Provision for loan losses ................................ 29,700 18,000
Provision for accrued termination and facilities costs .. -- 13,992
(Gain) loss on sales of assets ........................... (38,396) 180
Gain on sales of branches ................................ (363,012) --
Loss on sales of loans, net .............................. 41,968 7,380
Gain on sales of foreclosed real estate, net ............. (10,533) (2,033)
Extraordinary loss (gain) on early extinguishment of
debt, net .............................................. 1,586 (1,967)
Depreciation and amortization ............................ 9,223 7,206
FHLB stock dividend ...................................... (3,585) (5,216)
Capitalization of originated mortgage servicing rights
and excess servicing fees receivable ................... (54,973) (6,267)
Purchases and originations of loans held for sale ....... (3,554,652) (621,565)
Proceeds from the sales of loans held for sale .......... 4,025,868 411,165
Increase in other assets ................................. (52,854) (6,697)
Decrease (increase) in accrued interest receivable ...... 16,199 (14,735)
(Decrease) increase in other liabilities ................. (13,499) 44,149
Increase in minority interest ............................ 8,646 --
------------- -----------
Total adjustments ....................................... 102,614 (140,456)
------------- -----------
Net cash flows provided by (used in) operating
activities ............................................. 653,754 (85,458)
------------- -----------
</TABLE>
F-51
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements were prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for meeting the requirements
of Regulation S-X, Article 10 and therefore do not include all disclosures
necessary for complete financial statements. In the opinion of management,
all adjustments have been made that are necessary for a fair presentation of
the financial position and results of operations and cash flows as of and for
the periods presented. All such adjustments are of a normal recurring nature.
The results of operations for the three and nine months ended September 30,
1996 are not necessarily indicative of the results that may be expected for
the entire fiscal year or any other interim period. Certain amounts for the
three and nine months periods in the prior year have been reclassified to
conform with the current period's presentation.
The accompanying consolidated financial statements include the accounts of
First Nationwide Holdings Inc. ("FN Holdings" or the "Company"), First
Nationwide Bank, A Federal Savings Bank ("First Nationwide" or "Bank"), whose
common stock is wholly owned by the Company, and the Bank's wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation. The statements should be read in
conjunction with the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1995, as
amended. All terms used but not defined elsewhere herein have meanings
ascribed to them in the Company's Annual Report on Form 10-K, as amended.
Earnings per share data is not presented due to the limited ownership of
the Company. FN Holdings is a holding company whose only significant asset is
all of the common stock of the Bank, and therefore all activities for the
consolidated entity are carried out by the Bank and its operating
subsidiaries.
(2) ACQUISITIONS AND SALES
On February 28, 1995, the Bank (through its wholly owned mortgage bank
operating subsidiary, First Nationwide Mortgage Corporation ("FNMC")),
acquired a 1-4 unit residential mortgage loan servicing portfolio of
approximately $11.4 billion and other assets and liabilities (the "Maryland
Acquisition").
In April 1995, the Bank acquired approximately $13 million in deposits
located in Tiburon, California from East-West Federal Bank, a federal savings
bank (the "Tiburon Purchase"). In August 1995, the Bank acquired three retail
branches located in Orange County, California with deposit accounts totalling
approximately $356 million from ITT Federal Bank, fsb (the "ITT Purchase").
On December 8, 1995, the Bank acquired four retail branches located in Sonoma
County, California with associated deposit accounts of approximately $144
million from Citizens Federal Bank, a Federal Savings Bank (the "Sonoma
Purchase" and, collectively with the Tiburon and ITT Purchases, the "Branch
Purchases").
On October 2, 1995, FNMC purchased from Lomas Mortgage USA, Inc. ("LMUSA")
a loan servicing portfolio of approximately $11.1 billion (including a
sub-servicing portfolio of $3.1 billion), a $2.9 billion master servicing
portfolio in which FNMC monitors the performance and consolidates the
reporting and remittances of multiple servicers for various investors (a
"master servicing portfolio"), and other assets (the "LMUSA 1995 Purchase").
On January 31, 1996, FNMC purchased LMUSA's remaining $14.1 billion loan
servicing portfolio (including a sub-servicing portfolio of $2.4 billion), a
master servicing portfolio of $2.7 billion, $5.9 million in foreclosed real
estate, $46.8 million in net other servicing receivables, $2.6 million in
mortgage loans, and $6.2 million in net other assets (including $1.4 million
in cash and cash equivalents) for a purchase price of approximately $160.0
million payable in installments (the "LMUSA 1996 Purchase" and, together with
the LMUSA 1995 Purchase, the "LMUSA Purchases").
F-52
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On February 1, 1996, First Nationwide acquired SFFed Corp. ("SFFed") and
its wholly owned subsidiary, San Francisco Federal Savings and Loan
Association (the "SFFed Acquisition"). The following is a summary of the
assets acquired and liabilities assumed in connection with the SFFed
Acquisition at February 1, 1996:
<TABLE>
<CAPTION>
ESTIMATED
SFFED BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
------------- ------------- ------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents .......................... $ 181,061 $ -- $ 181,061 --
Mortgage-backed securities ......................... 918,817 11,007 929,824 1-5
Loans receivable, net .............................. 2,715,758 (23,245) 2,692,513 2-18
Office premises and equipment ...................... 20,581 (11,672) 8,909 3-10
Investment in FHLB System .......................... 31,989 -- 31,989 --
Foreclosed real estate, net ........................ 30,018 -- 30,018 --
Accrued interest receivable ........................ 22,740 -- 22,740 --
Mortgage servicing rights .......................... 2,238 13,762 16,000 2-4
Other assets ....................................... 44,938 (7,773) 37,165 2-5
Deposits ........................................... (2,678,692) (10,950) (2,689,642) 1-5
Securities sold under agreements to repurchase .... (815,291) (3,640) (818,931) --
Borrowings ......................................... (227,203) (8,831) (236,034) 1-17
Other liabilities .................................. (50,805) (5,898) (56,703) 1-5
------------- ------------- -------------
$ 196,149 $(47,240) 148,909
============= =============
Purchase price ..................................... 264,245
-------------
Excess cost over fair value of net assets acquired $ 115,336
=============
</TABLE>
The purchase price for the SFFed Acquisition was financed with existing
cash of the Bank and other borrowings, some of which were repaid with the
$311.8 million of proceeds from the sale of consumer loans on February 23,
1996. In connection with the SFFed Acquisition, FN Holdings issued $140
million of 9 1/8% Senior Subordinated Notes Due 2003 (the "Senior Sub Notes")
and contributed the net proceeds thereof of $133 million 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.
F-53
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 1, 1996, the Bank acquired Home Federal Financial Corporation
("HFFC"), and its wholly-owned federally chartered savings association, Home
Federal Savings and Loan Association of San Francisco (the "Home Federal
Acquisition," and together with the SFFed Acquisition, the "1996
Acquisitions"). The aggregate consideration paid in connection with the Home
Federal Acquisition was approximately $67.8 million funded with existing
cash. The following is a summary of the assets acquired and liabilities
assumed in the Home Federal Acquisition at June 1, 1996:
<TABLE>
<CAPTION>
ESTIMATED
HFFC BANK REMAINING
CARRYING FAIR VALUE CARRYING LIVES
VALUE ADJUSTMENTS VALUE (IN YEARS)
----------- ------------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents ................ $ 146,867 $ -- $ 146,867 --
Mortgage-backed securities ............... 4,053 (65) 3,988 1-5
Loans receivable, net .................... 538,722 3,983 542,705 2-18
Office premises and equipment ............ 4,202 (2,165) 2,037 3-10
Investment in FHLB System ................ 6,259 -- 6,259
Foreclosed real estate, net .............. 2,421 (198) 2,223 --
Accrued interest receivable .............. 3,594 -- 3,594 --
Mortgage servicing rights ................ 817 1,657 2,474 2-4
Other assets ............................. 10,016 (202) 9,814 2-5
Deposits ................................. (632,399) (1,875) (634,274) 1-5
Borrowings ............................... (30,000) 241 (29,759) 1-17
Other liabilities ........................ (3,602) (2,940) (6,542) 1-5
----------- ------------- -----------
$ 50,950 $(1,564) 49,386
=========== =============
Purchase price ........................... 67,823
-----------
Excess cost over fair value of net assets
acquired ................................ $ 18,437
===========
</TABLE>
The 1996 Acquisitions and the LMUSA 1996 Purchase were accounted for as
purchases and, accordingly, their respective purchase prices were allocated
to the assets acquired and liabilities assumed in each transaction based on
estimates of fair values at the date of purchase. Since the respective dates
of purchase, the results of operations related to such assets and liabilities
have been included in the Company's consolidated statements of operations.
F-54
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
From September through December of 1995, First Nationwide entered into
contracts for the sale of its retail deposits ("Deposits") and the related
retail banking assets comprised of cash on hand, loans on deposits, and
facilities (collectively, "Assets") in the states of Ohio, New York, New
Jersey and Michigan (collectively, the "Branch Sale Agreements") at gross
prices which represent an average premium of 7.96% of the deposits sold.
During the first half of 1996, the Branch Sale Agreements were consummated in
a series of transactions, as follows (the "Branch Sales"):
<TABLE>
<CAPTION>
CARRYING VALUE AT
SALE RESPECTIVE SALE DATE
CONSUMMATION NUMBER OF ------------------------ PRE-TAX
BRANCH LOCATION DATE BRANCHES DEPOSITS ASSETS GAIN
- --------------- ------------ ---------- ------------------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New York ....... 1/12/96 7 $ 416,476 $ 5,997 $ 32,991
Ohio ........... 1/19/96 28 1,392,561 20,480 130,660
New York ....... 2/23/96 3 270,046 1,838 17,027
New York ....... 3/15/96 5 615,572 8,083 48,933
New Jersey ..... 3/22/96 4 501,262 6,396 35,938
New York ....... 3/22/96 11 637,045 9,465 41,286
Michigan ....... 6/28/96 21 799,226 15,060 56,177
----------- ------------ --------- ---------
79 $4,632,188 $67,319 $363,012
=========== ============ ========= =========
</TABLE>
The Branch Sales were funded with short-term FHLB advances of $2.0 billion
with a weighted average rate of 5.47%, long-term FHLB advances of $.6 billion
with a weighted average rate of 5.41% maturing from April 1997 through March
1998 and securities sold under agreements to repurchase of $1.5 billion with
a weighted average rate of 5.45%, supplemented by cash from operations,
principally the maturity of and principal payments on securities.
The following pro forma financial information combines the historical
results of the Company as if the SFFed Acquisition, LMUSA Purchases, Branch
Sales and the issuance of the Senior Sub Notes had occurred as of the
beginning of the first period presented (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Net interest income $324,207 $325,339
Net income .......... 219,047 130,067
========== ==========
</TABLE>
The gains recognized related to the Branch Sales are excluded from the
above table. The pro forma information does not include the effect of the
Maryland Acquisition, the Home Federal Acquisition or the Branch Purchases
because such effect is not material. The pro forma results are not
necessarily indicative of the results which would have actually been obtained
if the SFFed Acquisition, LMUSA Purchases, Branch Sales and the issuance of
the Senior Sub Notes had been consummated in the past nor do they project the
results of operations in any future period.
On July 27, 1996, FN Holdings entered into an agreement pursuant to which
the Bank will acquire 100% of the outstanding stock of Cal Fed Bancorp Inc.
("Cal Fed") for approximately $1.2 billion of cash consideration and a
portion of litigation interests owned by Cal Fed (the "Cal Fed Acquisition").
Cal Fed Bancorp Inc., a savings and loan holding company, owns 100% of the
common stock of California Federal Bank, A Federal Savings Bank, which at
June 30, 1996, had total assets of approximately $14.0 billion and deposits
of $8.8 billion, and operated 118 branches in California and Nevada. The
acquisition is subject to Cal Fed shareholder and regulatory approval and is
expected to close in the first quarter of 1997.
Pursuant to a merger agreement, dated September 19, 1996 by and between FN
Holdings and FN Escrow (the "FN Escrow Merger"), FN Holdings will acquire the
net proceeds from the September 19, 1996 issuance of FN Escrow's $575 million
of 10 5/8% senior senior subordinated notes due 2003 (the
F-55
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
"Notes"). FN Holdings expects to use (i) the net proceeds of the Notes of
approximately $555 million, together with (ii) the $144.2 million net cash
proceeds from the sale of $150 million aggregate liquidation value of
Holdings Preferred Stock to a corporation owned by Gerald J. Ford, Chairman
of the Board, Chief Executive Officer and Director of the Bank, and (iii)
existing cash, to finance the Cal Fed Acquisition. Upon consummation of the
Cal Fed Acquisition, FN Escrow will be merged with and into FN Holdings.
Pursuant to the FN Escrow Merger, the obligations of FN Escrow under the
Notes will be assumed by FN Holdings.
Upon receipt of the proceeds from the issuance of the Holdings Preferred
Stock to Special Purpose Corp., Holdings loaned to an affiliate approximately
$19 million. Such loan bears interest at the rate of 14% at September 30,
1996, and is an unsecured subordinated obligation of the borrower, which
obligation to Holdings is evidenced by a Promissory Note. The loan is
expected to be repaid concurrently with the closing of the Cal Fed
Acquisition and the FN Escrow Merger. Management believes that the terms and
conditions to such loan are at least as favorable to Holdings as might have
been obtained in a similar transaction.
(3) CASH, CASH EQUIVALENTS, AND STATEMENT OF CASH FLOWS
The Company uses the indirect method to present cash flows from operating
activities. Cash paid for interest for the nine months ended September 30,
1996 and 1995 was $619.5 million and $504.0 million, respectively.
During the nine months ended September 30, 1996, noncash activity
consisted of transfers from loans receivable to foreclosed real estate of
$87.4 million, and the transfers of certain consumer loans from loans held
for sale to loans receivable totalling $27.7 million.
During the nine months ended September 30, 1995, noncash activity
consisted of the transfer of $58.5 million from loans receivable to
foreclosed real estate.
(4) ISSUANCE OF SENIOR SUB NOTES
On January 31, 1996, the Company issued $140 million of its Senior Sub
Notes. The net proceeds of this offering, totalling $133 million, were
contributed to the Bank as additional paid-in capital.
(5) ISSUANCE OF PREFERRED STOCK
On September 19, 1996, the Company issued 10,000 shares of Preferred Stock
("Holdings Preferred Stock") with a liquidation value of $150 million. Cash
dividends on the Holdings Preferred Stock are cumulative and are payable: (i)
in cash at an annual rate of the cost of funds to an affiliate of FN Holdings
under such affiliate's bank credit facility and (ii) in newly issued shares
of another series of Cumulative Perpetual Preferred Stock Holdings
("Additional Preferred Stock") at an annual rate of 2% of the stated
liquidation value of the Holdings Preferred Stock, if, when, and as declared
by the Board of Directors of FN Holdings. The annual cash dividends on the
10,000 shares of Holdings Preferred Stock, assuming such dividends have been
declared by the Board of Directors of FN Holdings, are expected to
approximate $15 million per year.
(6) STOCKHOLDERS' EQUITY
Dividends on the Company's class A, B and C common stock during the nine
months ended September 30, 1996 totalled $24.3 million, $6.1 million, and
$8.6 million, respectively. In addition, the remaining 169.5 shares of the
class C common stock were redeemed during the period, resulting in a capital
distribution totalling $169.5 million. Dividends on the Company's class C
common stock during the nine months ended September 30, 1995 totalled $23.9
million.
(7) GAINS ON SALES OF ASSETS
On June 28, 1996, First Nationwide sold 2,000,000 shares of its investment
in common stock of Affiliated Computer Services, Inc. ("ACS") and acquired
the FDIC's interest in the remaining shares of ACS owned by the Bank. A
pre-tax gain of $40.4 million resulted from this transaction.
F-56
<PAGE>
FIRST NATIONWIDE HOLDINGS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) TERMINATION OF ASSISTANCE AGREEMENT
On August 19, 1996, the Bank and the FSLIC's successor, the FSLIC/RF,
executed an agreement which resulted in the termination of the Assistance
Agreement. As a result of the agreement, the FSLIC/RF paid the Bank the
Covered Asset balance of $39 million and, among other things, assumed the
responsibility for the disposition of several litigation matters involving
Covered Assets which has been retained by the Bank following the FDIC
Purchase. Accordingly, all accounts related to the Assistance Agreement,
including previously established allowances for losses, were extinguished,
resulting in additional noninterest income of $25.6 million.
(9) SPECIAL SAIF ASSESSMENT
On September 30, 1996, the Economic Growth and Regulatory Paperwork
Reduction Act ("Act") of 1996 was enacted. The Act included a special
assessment ("Special SAIF Assessment") related to the recapitalization of the
SAIF, which was levied based on a rate of 65.7 cents per $100 of SAIF-insured
domestic deposits held as of March 31, 1995. As a result of the Act, First
Nationwide recorded a pre-tax charge of $60.1 million on September 30, 1996.
The portion of this assessment related to deposits sold in Ohio, New York,
New Jersey and Michigan will be borne, pursuant to each sales contract, by
the respective purchasers and accordingly, such amounts are not included in
the expense recorded by First Nationwide. Management expects the 1997 SAIF
deposit premiums to decline to 6.4 cents per $100 of SAIF-insured deposits
per year from the prior rate of 23 cents.
(10) EXTRAORDINARY ITEM
On September 12, 1996, First Nationwide repurchased $44 million aggregate
principal amount of the $50 million in Senior Notes assumed in the SFFed
Acquisition, resulting in an extraordinary loss of $1.6 million, net of
income taxes, on the early extinguishment of such debt. In February 1995,
First Nationwide prepaid $250 million in Federal Home Loan Bank advances,
resulting in an extraordinary gain of $2.0 million, net of income taxes, on
the early extinguishment of such borrowings.
(11) NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
("SFAS No. 121"). SFAS No. 121 provides guidance for the recognition and
measurement of impairment of long-lived assets, certain identifiable
intangibles and goodwill related both to assets to be held and used by an
entity and assets to be disposed of. SFAS No. 121 is effective for financial
statements for fiscal years beginning after December 15, 1995. The Company
adopted SFAS No. 121 effective January 1, 1996. Such adoption had no material
impact on the Company's consolidated financial statements.
On June 28, 1996, FASB issued Statement of Financial Accounting Standards
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS No. 125"). SFAS No. 125 provides
accounting and reporting standards for transfers and servicing of financial
assets and extinguishments of liabilities based on consistent application of
a financial-components approach that focuses on control. Under that approach,
after a transfer of financial assets, an entity recognizes the financial and
servicing assets it controls and the liabilities it has incurred,
derecognizes financial assets when control has been surrendered, and
derecognizes liabilities when extinguished. This Statement provides
consistent standards for distinguishing transfers of financial assets that
are sales from transfers that are secured borrowings.
SFAS No. 125 is effective for transfers and servicing of financial assets
and extinguishments of liabilities occurring after December 31, 1996, and is
to be applied prospectively. Earlier or retroactive application is not
permitted. Management has not yet completed its analysis of SFAS No. 125 and
is unable to determine the effect, if any, implementation may have on the
Company's consolidated financial statements.
F-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--RECEIVABLES FROM THE FSLIC/RF (Continued)
During 1993, approximately $72 million of FSLIC/RF assistance was
recognized in other income. The amount of FSLIC/RF assistance recognized as
revenue by the Acquired Business in 1992 is reflected in the statement of
operations as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1992
-----------------
(Dollars in Thousands)
<S> <C>
Interest and Dividend Income:
FSLIC/RF notes and investment securities ............... $ 63,417
Real estate loans ...................................... 36,873
Mortgage-backed securities ............................. (1,439)
Consumer and other loans ............................... (327)
FSLIC/RF yield maintenance on unconsolidated
subsidiaries ........................................... 25,518
-----------------
124,042
Other Income:
Net gain on sales of investment securities ............. 44,812
Other .................................................. 40,585
-----------------
85,397
-----------------
Total ................................................. $209,439
=================
</TABLE>
NOTE 3--INVESTMENT SECURITIES
Investment securities consist of the following:
<TABLE>
<CAPTION>
(Dollars in Thousands) DECEMBER 31, 1993
-------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
----------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
U.S. Government and agency obligations $191,166 $ 698 $ 15 $191,849
Collateralized mortgage obligations .. 182,947 440 852 182,535
Municipal securities .................. 2,316 -- -- 2,316
----------- ------------ ------------ --------------
Total investment securities ......... $376,429 $1,138 $867 $376,700
=========== ============ ============ ==============
</TABLE>
The weighted average interest rate on investment securities was 5.11% at
December 31, 1993. Non-taxable interest recognized on municipal securities
during 1993 and 1992 was $0.7 million and $1 million, respectively.
F-72
<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-73
<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-74
<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-75
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--LOANS RECEIVABLE (Continued)
The following table summarizes real estate loans net of undisbursed loan
funds by collateral type, interest rate type and state concentration as of
December 31, 1993.
<TABLE>
<CAPTION>
(Dollars in millions) 1-4 UNIT RESIDENTIAL 5+ UNIT RESIDENTIAL
--------------------- ---------------------
STATE VARIABLE FIXED VARIABLE FIXED
- ----- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C>
California ......... $3,151 $ 439 $ 932 $159
New York ........... 538 119 194 210
Florida ............ 138 67 50 72
Illinois ........... 125 105 55 16
Hawaii ............. 311 41 -- --
Ohio ............... 145 125 29 12
New Jersey ......... 170 47 58 28
Colorado ........... 35 155 2 3
Texas .............. 68 57 3 40
Nevada ............. 14 4 79 26
Other states (1) .. 565 260 243 186
---------- -------- ---------- -------
Total .............. $5,260 $1,419 $1,645 $752
========== ======== ========== =======
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COMMERCIAL TOTAL
(Dollars in million) AND OTHER REAL
------------------- CONSTRUCTION ESTATE
STATE VARIABLE FIXED VARIABLE LOANS(2) % OF TOTAL
- ----- ---------- ------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C>
California ......... $1,336 $298 $ 3 $ 6,318 55%
New York ........... 47 49 -- 1,157 10
Florida ............ 75 37 -- 439 4
Illinois ........... 51 30 -- 382 3
Hawaii ............. 4 -- -- 356 3
Ohio ............... 31 10 -- 352 3
New Jersey ......... 16 11 -- 330 3
Colorado ........... -- -- -- 195 2
Texas .............. 1 5 -- 174 2
Nevada ............. 37 1 -- 161 1
Other states (1) .. 163 110 15 1,542 14
---------- ------- -------------- --------- ------------
Total .............. $1,761 $551 $18 $11,406 100%
========== ======= ============== ========= ============
</TABLE>
- ------------
(1) There are 40 states, of which no one state has real estate loans in
excess of 1.3% of the total.
(2) The table balances exclude accrued interest receivable, amounts
advanced to borrowers for taxes and insurance, discounts and premiums,
and loss reserves, and include $145 million of loans held for sale.
NOTE 6--LOANS AND INVESTMENT SECURITIES HELD FOR SALE
Assets held for sale at the lower of aggregate amortized cost or estimated
market value, are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
---------------------------
AMORTIZED ESTIMATED
(Dollars in Thousands) COST MARKET VALUE
----------- --------------
<S> <C> <C>
1-4 unit residential real estate loans ............. $145,316 $145,316
Investment securities .............................. 10,000 10,000
Consumer loans ..................................... -- --
----------- --------------
Total loans and investment securities held for sale $155,316 $155,316
=========== ==============
</TABLE>
F-76
<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-77
<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-78
<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>
YEAR ENDED (Dollars in 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>
YEAR ENDED (Dollars in 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-79
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CUSTOMER DEPOSITS
A summary of deposit accounts by category is presented below:
<TABLE>
<CAPTION>
(Dollars in Thousands) DECEMBER 31, 1993
----------------------------
AVERAGE RATE BALANCE
-------------- ------------
<S> <C> <C>
TYPE OF ACCOUNT
Passbook accounts ............... 2.14% $ 838,922
NOW accounts:
Interest bearing ............... 1.04 761,433
Non-interest bearing ........... -- 788,309
Money market deposit accounts .. 2.51 2,786,381
Term accounts:
3.0% or less .................. 2.78 1,078,875
3.01-4.00% .................... 3.45 1,739,313
4.01-5.00 ..................... 4.63 506,427
5.01-6.00 ..................... 5.31 261,512
6.01-7.00 ..................... 6.57 258,522
7.01-8.00 ..................... 7.51 524,059
8.01-9.00 ..................... 8.47 525,305
9.01-10.00 .................... 9.34 283,160
10.01-11.00 .................... 10.64 13,358
11.01-12.00 .................... 11.36 89,455
12.01-13.00 .................... 12.28 91,452
13.01-14.00 .................... 13.43 188
------------
10,546,671
Accrued interest payable ........ 12,479
Purchase accounting adjustments 2,470
------------
Total customer deposits ...... $10,561,620
============
</TABLE>
The weighted average stated interest rates on deposits at December 31,
1993 was 3.54%. Brokered certificates of deposits included above totalled
$230 million at December 31, 1993. Deposit month-end balances averaged $12.1
billion during 1993 with a weighted average rate of interest of 4.00%. At
December 31, 1993, deposit liabilities include $283 million of deposits from
affiliated companies and entities. At December 31, 1993, the Acquired
Business had committed to sell customer deposits held in two branches
totalling approximately $35 million.
The fair value of customer deposits at December 31, 1993 is $10.6 billion.
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the reporting date. The fair
value of fixed maturity term accounts is estimated using the interest rates
currently offered for deposits of similar remaining maturities.
F-80
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--CUSTOMER DEPOSITS (Continued)
A summary of deposit interest expense by category is presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
(Dollars in Thousands) 1993 1992
---------- ---------
<S> <C> <C>
TYPE OF ACCOUNT
Passbook accounts ........................ $ 32,493 $ 28,856
NOW accounts ............................. 11,584 25,154
Money market deposit accounts ............ 78,149 141,917
Term accounts ............................ 361,331 561,124
---------- ---------
483,557 757,051
Interest forfeitures ..................... (1,126) (1,571)
---------- ---------
Total customer deposit interest expense $482,431 $755,480
========== =========
</TABLE>
At December 31, 1993, term accounts have scheduled maturities as follows:
<TABLE>
<CAPTION>
TERM ACCOUNTS
MATURING WITH
(Dollars in Thousands) BALANCES
------------------------
MATURITY TOTAL WEIGHTED
DURING THE YEAR ENDING OVER $100,000 BALANCES AVERAGE
DECEMBER 31, $100,000 AND UNDER MATURING RATE
- ---------------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
1994 .................. $360,710 $3,458,494 $3,819,204 4.36%
1995 .................. 84,698 494,553 579,251 7.42
1996 .................. 66,343 528,031 594,374 7.55
1997 .................. 17,181 196,622 213,803 6.21
1998 .................. 11,184 133,780 144,964 5.60
1999 and thereafter .. 5,859 14,171 20,030 9.53
---------- ------------ ------------
$545,975 $4,825,651 $5,371,626 5.17%
========== ============ ============ ==========
</TABLE>
NOTE 13--SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are summarized as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) DECEMBER 31, 1993
-----------------
<S> <C>
Mortgage-backed securities:
Maturing within 30 days ............................... $554,057
Maturing 30-90 days ................................... 236,291
Maturing 90 days to 1 year ............................ 30,500
Maturing 1-2 years .................................... 13,051
Accrued interest payable .............................. 1,442
-----------------
Total securities sold under agreements to repurchase $835,341
=================
</TABLE>
At December 31, 1993, these agreements had a weighted average interest
rate of 3.73%. The market value of these agreements at December 31, 1993 was
$836 million. The underlying securities were delivered to, and are being held
by securities dealers. These dealers may have loaned the securities to other
parties in the normal course of their operations, but all agreements require
the dealers to resell to the Acquired Business the identical securities at
the maturities of the agreements. Securities sold under agreements to
repurchase averaged $309 million during 1993 and the maximum amount
outstanding at any month-end was $983 million for 1993.
F-81
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued)
At December 31, 1993 the amortized cost of the mortgage-backed securities
subject to the terms of the reverse repurchase agreements was $855 million.
The market value of these securities at December 31, 1993 was $907 million.
The following is a summary by dealer of securities sold under agreements
to repurchase, excluding accrued interest, at December 31, 1993:
<TABLE>
<CAPTION>
(Dollars in Thousands) WEIGHTED AVERAGE
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
BALANCES MATURING AVERAGE RATES
MATURITIES DURING THE ------------------------ ----------------
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-82
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--OTHER BORROWINGS (Continued)
on interest rate exchange agreements, of 5.59%. Included in discounts at
December 31, 1993 are deferred gains on sale of interest rate exchange
agreements totalling $4 million.
At December 31, 1993, advances from Federal Home Loan Banks and other
borrowings had a fair value of approximately $2.6 billion. Fair value of
borrowings is estimated using rates currently offered for liabilities of
similar remaining maturities.
The following is a summary of the carrying value of real estate loans,
mortgage-backed securities, investment securities, and FHLB stock pledged as
collateral for FHLB borrowings:
<TABLE>
<CAPTION>
(Dollars in Thousands) DECEMBER 31, 1993
-----------------
<S> <C>
Real estate loans .......... $4,643,239
Mortgage-backed securities 1,008,222
FHLB stock ................. 152,629
-----------------
Total .................. $5,804,090
=================
</TABLE>
NOTE 15--INTEREST RATE EXCHANGE AGREEMENTS
Interest rate exchange agreements outstanding at December 31, 1993 are as
follows:
<TABLE>
<CAPTION>
NOTIONAL YEAR END INTEREST RATE
(Dollars in Thousands) PRINCIPAL ----------------------
MATURITY DATE AMOUNT PAID RECEIVED VARIABLE RATE INDEX
- ------------- -------- -------- ---------- -------------------
<S> <C> <C> <C> <C>
Paid Variable/Received Fixed:
April 1994 .................. $500,000 3.38% 7.73% 3 Month LIBOR
April 1995 .................. 500,000 3.38 7.97 3 Month LIBOR
April 1996 .................. 500,000 3.38 8.19 3 Month LIBOR
September 1996 .............. 250,000 3.33 4.19 1 Month LIBOR
April 1998 .................. 400,000 3.38 8.38 3 Month LIBOR
</TABLE>
As of December 31, 1993, interest rate exchange agreements totalling $1.35
billion of notional principal are collateralized by a $30 million third party
letter of credit issued. If terminated at December 31, 1993, the interest
rate exchange agreements would generate a pre-tax gain of approximately $133
million. There were no interest rate cap, collar and floor agreements
outstanding at December 31, 1993.
The net decrease in interest expense on customer deposits and borrowings
from interest rate exchange agreements is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(Dollars in Thousands) 1993 1992
--------- ---------
<S> <C> <C>
Interest rate exchanges ................. $87,369 $76,280
Amortization of deferred gains and fees 1,985 2,934
Interest rate caps, collars and floors . -- (750)
--------- ---------
$89,354 $78,464
========= =========
</TABLE>
F-83
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--INTEREST RATE EXCHANGE AGREEMENTS (Continued)
Below is a roll forward of deferred gains associated with interest rate
swaps. These gains resulted from the termination of interest rate swaps in
1990 and are being amortized over the original life of the swap terminated.
<TABLE>
<CAPTION>
<S> <C>
Balance as of December 31, 1991 $ 8,740
Amortization .................... 2,934
---------
Balance as of December 31, 1992 5,806
Amortization .................... 1,985
---------
Balance as of December 31, 1993 $ 3,821
=========
</TABLE>
NOTE 16 -- FEDERAL AND STATE TAXES ON INCOME
The components for the provision (recovery) for federal and state income
taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
(Dollars in Thousands) 1993 1992(*)
---------- -----------
<S> <C> <C>
Federal and state tax expense (benefit):
Current:
Federal ............................. $ 46,730 $ 21,296
State ............................... 7,834 2,000
---------- -----------
54,564 23,296
Deferred: .............................
Federal ............................. (14,156) (50,747)
State ............................... -- --
(14,156) (50,747)
---------- -----------
Expense (benefit) for the period . $ 40,408 $(27,451)
========== ===========
</TABLE>
(*)Excludes cumulative effect of changes in accounting principles.
The Acquired Business adopted Statement of Financial Accounting Standards
No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," as of January 1,
1992. The cumulative effect of this change in accounting principle increased
1992 net income by $13 million. Financial statements for prior years were not
restated to apply the provisions of SFAS No.109. The adoption of SFAS No. 109
changes the method of accounting for income taxes from the deferred method
using Accounting Principles Board Opinion No. 11 ("APB No. 11") to an asset
and liability approach.
Under SFAS No. 109, deferred income taxes reflect the estimated tax effect
of temporary differences between the amount of assets and liabilities for
financial reporting purposes and those amounts as measured by tax laws and
regulations. These temporary differences include purchase accounting
valuation adjustments and other items not previously included in the
determination of deferred income taxes under APB No. 11. Accordingly, certain
purchase accounting valuation adjustments and related amortization have been
modified as a result of the adoption of SFAS No. 109. The impact from the
adoption of SFAS No. 109 as it relates to purchase accounting valuation
adjustments was to increase pre-tax income by $14 million and increase income
tax expense by $14 million for the year ended December 31, 1992.
F-84
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16 -- FEDERAL AND STATE TAXES ON INCOME (Continued)
The components of deferred income tax assets and liabilities as of
December 31, 1993 are as follows:
<TABLE>
<CAPTION>
1993 DEFERRED TAX
---------------------------
(Dollars in Millions) ASSETS LIABILITIES
---------- ---------------
<S> <C> <C>
Loss reserves .......................... $ 76 --
Deferred intercompany transactions .... 47 --
Purchase accounting .................... 23 --
Deferred loan servicing ................ -- $(16)
Deferred loan fees ..................... -- (11)
Employee benefit plans ................. 2 --
All other .............................. 15 (38)
---------- ---------------
163 (65)
Valuation allowances ................... (16) --
---------- ---------------
Total ................................ $147 $(65)
===============
</TABLE>
The valuation allowances established relate primarily to state deferred
tax assets. The Acquired Business' net deferred federal tax assets, including
alternative minimum taxes, are expected to be realized in the consolidated
income tax return, in accordance with the terms of its tax sharing agreement.
A reconciliation of statutory tax rates to effective tax rates is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
(Dollars in Millions) 1993 1992
---------------- -----------------
<S> <C> <C> <C> <C>
Tax at statutory federal rate .................... $ 66 35.0% $ 37 34.0%
Effect of:
Payments from the FSLIC/RF ...................... (25) (12.8) (75) (69.6)
Municipal bond interest ......................... (1) (0.5) (1) (0.9)
Amortization of purchase accounting adjustments,
goodwill and intangible assets ................. 6 3.2 6 5.5
Qualifying loan loss reserve liquidation ........ 8 4.3 -- --
Change in tax rate .............................. (5) (2.7) -- --
Other, net ..................................... (14) (7.5) 5 4.6
------ -------- ------- --------
35 19.0 (28) (26.4)
State tax, net of federal income tax effect ..... 5 2.7 1 0.9
------ -------- ------- --------
Income tax expense (recovery) .................... $ 40 21.7% $(27) (25.5)%
====== ======== ======= ========
</TABLE>
During 1993, the Acquired Business recognized $8 million of federal income
tax charges resulting from the partial liquidation of its qualifying loan
loss reserves for which deferred income taxes have not previously been
provided. The liquidation of the qualifying loan loss reserves resulted from
a decline in the balance of qualifying loans and real estate owned. Included
in retained earnings at December 31, 1993 is $187 million which represents
the accumulation of qualifying loan loss reserve deductions and supplemental
reserve deductions for which no provision for federal income taxes has been
made. If in the future these amounts are used for any purpose other than to
absorb losses on bad debts, or if further reductions in qualifying loans and
real estate owned occur, a tax liability will be imposed on Old FNB for these
amounts at the then-current tax rates.
F-85
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 17--REGULATION
The OTS has established capital regulations requiring all savings
institutions to maintain: (a) tangible capital equal to 1.5% of adjusted
total assets, as defined; (b) core capital equal to 3.0% of adjusted total
assets, as defined; and (c) risk-based capital, equal to 8.0% on December 31,
1993, of risk-weighted assets, as defined.
The following table sets forth the regulatory capital positions as
reported to the OTS by Old FNB at December 31, 1993:
<TABLE>
<CAPTION>
REGULATORY CAPITAL (UNAUDITED)
------------------------------------
CORE
TANGIBLE (LEVERAGE) RISK-BASED
---------- ---------- ------------
<S> <C> <C> <C>
Regulatory capital ratios, as filed with the OTS 6.3% 6.5% 11.1%
========== ========== ============
</TABLE>
The above ratios were calculated using amounts reported to the OTS prior
to the preparation of the Acquired Business' financial statements. The new
management of the Acquired Business intends to continue to comply with all
required capital ratios.
The FDIC Improvement Act of 1992 ("FDICIA") requires each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. In response to this requirement, the OTS adopted final rules,
effective December 19, 1993, based upon FDICIA's five capital tiers: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under FDICIA, the OTS is
required to take supervisory action against institutions that are not deemed
either "well capitalized" or "adequately capitalized." The rules generally
provide that a savings association is "well capitalized" if its total
risk-based capital ratio is 10% or greater, its ratio of core capital to
risk-based assets is 6% or greater, its core capital (leverage) ratio is 5%
or greater, and the institution is not subject to a capital directive.
NOTE 18--EMPLOYEE BENEFIT PLANS
Retirement Plans:
The FNFC Retirement Plan ("Plan") is the primary retirement plan covering
the employees of FNFC, the Acquired Business and their subsidiaries. The Plan
covers substantially all permanent employees who have completed one year of
service. In addition, an unfunded, nonqualified, discretionary plan is
maintained to provide supplemental retirement benefits to certain present and
former senior officers.
During 1991, the Plan benefit formula was modified retroactively to an
effective date of July 1, 1989. Under the Plan's previous benefit formulas,
participants accrued a monthly benefit amount under a defined benefit
formula. Upon revision of the Plan's benefit formulas, the monthly benefit
amount was converted to a lump-sum equivalent value representing the
participant's beginning account balance under the amended plan. Thereafter,
4% of the participant's quarterly eligible compensation is allocated to each
participant's account. Plan net earnings are allocated based on the
participant's account balance. The periodic pension expense for 1993 and 1992
has been calculated using the revised benefit formula and reflects all
adjustments necessary to adopt the provisions of the new Plan.
The Acquired Business' funding policy is to contribute amounts sufficient
to meet funding requirements set forth in U.S. employee benefit and tax laws
plus such additional amounts as the Acquired Business may determine to be
appropriate. A contribution of $0.1 million was made in 1992. No
contributions were required in 1993. All assets are invested with the Ford
Retirement Plan Master Trust. Master Trust assets are principally U.S.
Government and Agency obligations, corporate bonds and notes, and common
stocks.
F-86
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (Continued)
The Plan was previously qualified under 401(a) of the Internal Revenue
Code. The Plan intends to file an application with the IRS for a
determination that the Plan, as amended, satisfies the qualification
requirements of Section 401(a) and related provisions of the Internal Revenue
Code of 1986, as amended. The Plan intends to file the determination letter
application before the required filing due date and to make all such
amendments to the Plan as may be necessary or appropriate to ensure that it
will obtain a favorable determination letter. Pension costs include the
following components:
<TABLE>
<CAPTION>
ENDED DECEMBER 31,
--------------------
(Dollars in Thousands) 1993 1992
--------- ---------
<S> <C> <C>
Benefits credited for service during the year $ 2,099 $ 1,565
Interest cost on projected benefit obligation 2,567 2,690
Actual return on assets ....................... (4,134) (4,470)
Net amortization and deferral ................. (782) (782)
Curtailment (loss) gain ....................... (587) (1,137)
--------- ---------
Net periodic pension cost (credit) ............ $ (837) $(2,134)
========= =========
</TABLE>
Net periodic pension costs at December 31, 1993 and 1992 were computed
using a weighted average discount rate of 8.0%, 8.5% and an expected rate of
return on plan assets of 9.5% for 1993 and 1992.
The projected benefit obligations at December 31, 1993 were determined
using a discount rate of 8%.
F-87
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (Continued)
The status of the retirement plans is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993
--------------------------------
ASSETS EXCEED ACCUMULATED
ACCUMULATED BENEFITS EXCEED
(Dollars in Thousands) BENEFITS ASSETS
--------------- ---------------
<S> <C> <C>
Present value of accumulated retirement benefits:
Vested .......................................... $(34,542) $(2,258)
Non-vested ...................................... (2,320) (53)
--------------- ---------------
Accumulated benefits obligation .................. $(36,862) $(2,311)
=============== ===============
Projected benefit obligation ..................... $(36,862) $(2,311)
Plan assets at fair value ........................ 48,500 --
--------------- ---------------
Projected benefit obligation less than
(in excess of) Plan assets ...................... 11,638 (2,311)
Unrecognized net (asset) obligation at
January 1, 1987 (date of adoption) .............. (4,582) 153
Unamortized amendments ........................... (3,475) 760
Unrecognized net amount resulting from
Plan investment experience ...................... (9,592) (913)
--------------- ---------------
Total accrued pension cost ..................... $ (6,011) $(2,311)
=============== ===============
</TABLE>
Since the plan will not be retained by First Madison upon completion of
its acquisition of the Acquired Business, any plan over funding amount will
remain with FNFC.
Postretirement Benefits Plan:
FNB and certain of its subsidiaries sponsor unfunded plans to provide
medical, dental and vision benefits to certain eligible employees and their
dependents from the date of early retirement to a maximum age of 65. In
general, early retirement is age 55 with 10 years of service. Certain
retirees contribute nothing for their coverage; however, all new retirees
participating in the Plan contribute a portion of the premiums until age 65.
The estimated cost for postretirement health care benefits has been
accrued on an actuarially-determined basis, in accordance with the
requirements of Statement of Financial Accounting Standards No. 106, ("SFAS
No. 106"), "Employers' Accounting for Postretirement Benefits Other Than
Pensions". In 1992, Old FNB elected to recognize immediately the full amount
of the accumulated postretirement benefit obligation of this accounting
change, resulting in an adverse effect on income of $3 million in the first
quarter of 1992. The change reflected an unaccrued retiree benefit obligation
liability of approximately $4 million, partially offset by projected tax
benefits of $1 million.
The status of the postretirement plan is as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) DECEMBER 31, 1993
-----------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees ..................................... $2,202
Active employees eligible to retire ........... 1,818
Other active employees ........................ 1,754
-----------------
Total accrued benefit liability .............. $5,774
=================
</TABLE>
F-88
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 18--EMPLOYEE BENEFIT PLANS (Continued)
The projected benefit obligation at December 31, 1993 was determined
using a discount rate of 7.5%. An increase of 1% in the health care cost
trend rate would cause service and interest costs and the accumulated
postretirement benefit obligation to increase by less than $2 million.
Postretirement benefits costs for the years ended December 31, 1993 and
1992 include the following components:
<TABLE>
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
--------------
(Dollars in Thousands) 1993 1992
------ ------
<S> <C> <C>
Current service cost ................ $288 $249
Interest cost on benefit obligation 389 360
------ ------
Net periodic benefit cost ........... $677 $609
====== ======
</TABLE>
Net periodic benefit cost at December 31, 1993 was computed using a
weighted average discount rate of 7.5%. The initial health care cost trend
rate used was 11.5%, the average trend rate used was 8.7% and the ultimate
trend rate used was 5.5%, with the ultimate rate being achieved in 10 years.
Investment Plan:
At December 31, 1993, FNFC, the Acquired Business and substantially all of
their subsidiaries had a defined contribution plan that is a qualified plan
under Section 401(k) of the Internal Revenue Code ("401(k) Plan"). The 401(k)
Plan has received a favorable determination letter from the IRS. The 401(k)
Plan is available to substantially all employees with at least one year of
employment. Employee contributions are voluntary. Effective January 1, 1993,
the 401(k) Plan has been amended to provide for deferrals of up to twelve
percent of qualifying compensation with a corresponding dollar for dollar
matched employer contribution of the first four percent of eligible employee
contributions. Employees vest immediately in their own contributions, and
vest in the Acquired Business' contributions based on years of service. For
the years ended December 31, 1993 and 1992, the Acquired Business' pre-tax
401(k) Plan contributions were $3 million and $3 million, respectively.
NOTE 19--COMMITMENTS AND CONTINGENCIES
Lending and Investment Commitments:
Outstanding written commitments relating to loans, mortgage-backed
securities and investment securities are as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) DECEMBER 31, 1993
-----------------
<S> <C>
Commitments to originate loans:
Variable rate ................................................. $123,725
Fixed rate .................................................... 148,983
Unused lines of credit provided to consumers .................. 327,671
Commitments to purchase loans and mortgage-backed securities:
Variable rate ................................................. --
Fixed rate .................................................... 8,912
Forward commitments to sell loans and mortgage-backed
securities .................................................... 280,187
</TABLE>
Letters of Credit Commitments:
Through year-end 1985, FNBMC entered into partnership agreements with
developers to acquire and develop multi-family rental projects. The pro jects
are partially funded through tax-exempt mortgage
F-89
<PAGE>
THE ACQUIRED BUSINESS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 19--COMMITMENTS AND CONTINGENCIES (Continued)
revenue bond programs. Commencing in 1984, the Acquired Business began
issuing its letters of credit to guarantee the payment of principal and
interest on bonds issued by various housing authorities, and concurrently
originated and serviced the mortgage loans made by the bond issuers. Should
the Acquired Business be obligated under its letter of credit to redeem the
bonds because of default of a project, the bond trustee is required to assign
the mortgage loan to the Acquired Business. At December 31, 1993, the
Acquired Business had a total of $375 million of such letters of credit
outstanding with remaining terms of 2 to 26 years. Given the uncertainty of
the interaction of these letters of credit with the underlying mortgage loans
and cash flows of collateral properties under future economic conditions, it
is not practicable to estimate the fair value of these letters of credit.
Litigation:
The Acquired Business and its subsidiaries are involved in litigation and
may be subject to claims arising from its operations. The Acquired Business
does not believe that the outcome of these actions, individually or in the
aggregate, will have a material adverse effect on the consolidated financial
position of the Acquired Business.
NOTE 20 -- SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Interest and Income Taxes Paid:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1992
(Dollars in Thousands)---------- ------------
<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-90
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
and Stockholders of SFFed Corp.
We have audited the accompanying consolidated statements of financial
condition of SFFed Corp. and subsidiaries ("SFFed") as of December 31, 1995
and 1994, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
SFFed's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of SFFed Corp. and subsidiaries
at December 31, 1995 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
As discussed in Note 2 to the consolidated financial statements, on
February 1, 1996, SFFed was acquired by and merged into First Nationwide
Bank, A Federal Savings Bank.
Deloitte & Touche LLP
San Francisco, California
April 15, 1996
F-91
<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-92
<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-93
<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-94
<PAGE>
SFFED CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................. $ (200) $ (4,728) $ 9,894
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization of premises and equipment ..... 3,206 3,226 3,043
Amortization of excess of cost over fair value of net assets
acquired .................................................... 669 708 709
Provision for losses, net .................................... 15,968 25,729 13,650
Change in deferred income taxes .............................. 4,195 (2,660) (5,050)
Increase in interest payable ................................. 16,872 5,356 1,293
Increase in interest receivable .............................. (4,802) (1,996) (142)
Dividend income on FHLB stock ................................ (1,530) (1,322) (737)
(Gain) loss on sale of real estate loans, net ................ 205 (491) (4,898)
Amortization of deferred loan fees ........................... (1,778) (2,667) (3,271)
Proceeds from sales of loans originated for sale ............ 46,623 130,824 434,242
Originations of loans held for sale .......................... (58,402) (153,709) (472,847)
Net change in other assets/liabilities ....................... 8,587 (21,137) 2,226
Increase (decrease) in income taxes payable .................. (1,126) (1,040) 4,476
----------- ----------- -----------
Net cash provided by (used in) operating activities .......... 28,487 (23,907) (17,412)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Principal payments received on mortgage-backed securities
available for sale ........................................... 8,467 37,233 --
Principal payments received on mortgage-backed securities held
for investment ............................................... 73,668 31,669 77,610
Purchases of mortgage-backed securities held for investment .. (104,472) (4,074) (10,053)
Maturities of investment securities ........................... -- -- 13,270
Purchases of investment securities ............................ -- -- (6,040)
Principal payments received on loans receivable held for
investment ................................................... 245,990 367,463 385,560
Originations of loans held for investment ..................... (469,761) (795,217) (693,488)
Loans purchased ............................................... (12,386) (1,307) (542)
Proceeds from redemption of FHLB stock ........................ -- -- 2,103
Purchases of FHLB stock ....................................... -- (622) (1,118)
Sales of premises and equipment ............................... 214 43 92
Purchases of premises and equipment ........................... (2,373) (2,791) (2,924)
Sales of real estate .......................................... 24,900 44,923 58,536
Investment in and acquisition of real estate .................. (1,771) (1,738) (3,512)
Other, net .................................................... 754 (3,861) 254
----------- ----------- -----------
Net cash used in investing activities ......................... (236,770) (328,279) (180,252)
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
F-95
<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-96
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
SFFed Corp. ("SFFed") and its wholly owned subsidiary; San Francisco Federal
Savings and Loan Association (the "Association") and its subsidiaries;
Franciscan Financial Corporation, Development Credit Corporation, Capital
Conveyance Company and Capital CMO Services and the subsidiary of Franciscan
Financial Corporation; San Francisco Auxiliary Corporation. All significant
intercompany transactions have been eliminated.
PRIMARY BUSINESS ACTIVITIES
SFFed's principal business is attracting deposits from the general public
and using such funds, along with borrowings from various other sources, to
originate real estate loans secured by deeds of trust, other loans and to
make short-term investments. SFFed's revenues are primarily interest received
from its loan portfolio, investment securities and mortgage-backed securities
and fees related to originating and servicing loans.
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, SFFed considers all highly
liquid investments purchased with an initial maturity of three months or less
to be cash equivalents.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
SFFed enters into purchases of securities under agreements to resell
(repurchase agreements). The amounts advanced under these agreements
represent short-term loans.
MORTGAGE-BACKED SECURITIES ("MBS")
SFFed has converted certain qualifying real estate loans in its portfolio
to Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA") MBS. Additionally, SFFed has purchased MBS
through established securities dealers. Effective December 31, 1993 SFFed
adopted Statement of Financial Accounting Standards No. 115 Accounting for
Certain Investments in Debt and Equity Securities ("SFAS 115"). In accordance
with the provision of SFAS 115, SFFed has identified MBS as either held for
investment or available for sale. SFFed does not have any trading securities.
Premiums and discounts on purchased MBS are amortized or accreted over the
expected life of the underlying mortgages using the interest method.
MBS HELD FOR INVESTMENT
SFFed has the positive intent and ability to hold these MBS to maturity.
These MBS are reported at cost, net of any applicable premium or discount.
Transfers of MBS available-for-sale to MBS held-for-investment portfolio are
recorded at fair value. The related net unrealized holding gains or losses,
net of applicable income taxes, at the date of transfer are reported as a
separate component of stockholders' equity and amortized over the remaining
contractual life of these securities using the interest method.
MBS AVAILABLE FOR SALE
These MBS are reported at their aggregate fair value. Net unrealized gains
and losses are excluded from earnings and reported, net of applicable income
taxes, as a separate component of stockholders'
F-97
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
equity until realized. Gains and losses from the sale of MBS available for
sale are determined using the specific identification method. Any permanent
decline in the fair value of individual securities held for investment and
available for sale below their cost would be recognized through a write-down
of the individual securities to their fair value by a charge to earnings as a
realized loss.
LOANS HELD FOR SALE
During the period of origination, real estate loans are designated as held
either for sale or investment purposes. Loans held for sale are carried at
the lower of cost or estimated market value, determined on an aggregate
basis. Transfers of loans held for sale to the held-for-investment portfolio
are recorded at the lower of cost or market value on the transfer date.
Net unrealized losses are recognized through a valuation allowance by
charges to income.
IMPAIRED AND NON-PERFORMING LOANS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 114, Accounting by Creditors for
Impairment of a Loan ("SFAS 114"), in May 1993 and Statement of Financial
Standards No. 118, Accounting for Creditors for Impairment of a Loan-Income
Recognition and Disclosures ("SFAS 118") (an amendment of SFAS 114), in
October 1994. SFFed adopted SFAS 114 and SFAS 118 effective January 1, 1993.
SFFed, in accordance with the methods prescribed under SFAS 114, considers a
loan impaired when it is "probable" that a creditor will be unable to collect
all amounts due (i.e., both principal and interest) according to the
contractual terms of the loan agreement. The measurement of impairment may be
based on (i) the present value of the expected future cash flows of the
impaired loan discounted at the loan's original effective interest rate, (ii)
the observable market price of the impaired loan, or (iii) the fair value of
the collateral of a collateral-dependent loan. The amount by which the
recorded investment of the loan exceeds the measure of the impaired loan is
recognized by recording a valuation allowance with a corresponding charge to
the provision for loan losses. SFFed has defined residential 1-4 loans and
consumer loans as homogenous loans. Homogenous loans that have had a
modification of terms are individually reviewed to determine if they meet the
definition of a troubled debt restructuring. SFFed's loans are secured
primarily by real estate and therefore, measurement of impairment is based
upon the fair value of the property collateralizing the loan. Where
impairment is determined to be permanent, a charge-off is recorded; where
impairment may be temporary, an allowance is established. SFFed, before the
adoption of SFAS 114, measured loan impairment with the methods prescribed in
this pronouncement. As a result, no additional loss provisions were required
by adoption of SFAS 114.
All loans designated by SFFed as "impaired" are either placed on
non-accrual status or are designated as restructured and are included with
those loans reported as non-performing. SFFed's non-performing loans consist
of loans on which SFFed has ceased the accrual of interest ("non-accrual
loans") and loans on which various concessions have have been made with
respect to the interest rate or other terms due to the inability of the
borrower to service the obligation under the original terms of the agreement
("restructured loans"). It is SFFed's policy to place a loan on non-accrual
status in the event that the borrower is 90 days or more delinquent or
earlier if the timely collection of interest and/or principal appears
doubtful or the risk of default is probable.
ALLOWANCE FOR LOAN LOSSES
SFFed maintains a loan monitoring system which provides a means for the
timely identification of impaired loans and to permit the evaluation of the
adequacy of the allowance for losses. SFFed has established valuation
allowances for estimated losses on specific loans ("specific allowances") and
for the
F-98
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
inherent risk in the loan portfolio which has yet to be specifically
identified ("general allowances"). Specific allowances are provided when a
decline in the value of an impaired loan is identified, based upon the excess
of the outstanding loan amount over the fair value of the related collateral
plus holding and selling costs. General allowances are established based upon
the inherent risk in the loan portfolio that has not been specifically
identified. In conjunction with a review of the loan portfolio, the allowance
for loan losses is evaluated quarterly and maintained at a level believed
adequate by management to absorb estimated probable losses. In evaluating the
general allowance for loan losses, management considers various factors
including historical loss experience, the level and trend of delinquent real
estate conditions, and the composition of the loan portfolio. Losses incurred
upon initial acquisition of real estate owned through foreclosure are charged
to the allowance for loan losses.
While management uses currently available information in evaluating and
adjusting the allowance for loan losses, additions to the allowance may be
required because of changes in future economic, real estate and other
conditions beyond SFFed's control.
INTEREST ON LOANS
Interest on loans is credited to income when earned. Interest is not
recognized on loans that are considered to be uncollectible or in the process
of foreclosure. In general, loans are placed on non-accrual status when they
become 90 days delinquent and a reserve is established for previously accrued
but uncollected interest on such loans. Interest income received on
non-accrual loans is recognized during the year using the cash basis method
of income recognition.
LOAN ORIGINATION FEES
SFFed charges fees for originating loans. These fees, net of certain
related direct loan origination costs, are recognized as an adjustment of the
loan's yield over the contractual life of the loan using the interest method,
which results in a constant rate of return. When a loan is paid-off or sold,
the unamortized balance of any related fees and costs is recognized as
income. Other loan fees and charges representing service costs are reported
in income when collected or earned.
SALES OF LOANS
Gains or losses resulting from sales of loans or interests in loans are
recorded at the time of sale and are determined by the difference between the
net sales proceeds and the carrying value of the assets sold. When the right
to service the loans is retained, a gain or loss is recognized based upon the
net present value of expected amounts to be received or paid resulting from
the difference between the contractual interest rates received from the
borrowers and the rate paid to the buyer, taking into account estimated
prepayments on such loans. Excluded from the net present value portion of the
gain or loss is an amount equal to the present value of a normal servicing
fee. The net asset resulting from the present value computation, representing
deferred revenue or expense, is amortized to operations over the estimated
remaining life of the loan using a method that approximates the interest
method. The balance of deferred revenue and expense has been adjusted as
necessary for loan prepayments in excess of, or below, estimated prepayments
(See Note 6). Any loans held for sale by SFFed are carried at the lower of
cost or market.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation of office property and equipment is computed
using the straight-line method over the
F-99
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
estimated useful lives of the various classes of assets. Amortization of
leasehold improvements is provided for using the straight-line method over
the remaining term of the lease or the estimated useful life of the asset,
whichever is less. Maintenance and repairs are charged to expense and
improvements are capitalized.
REAL ESTATE OWNED
Real estate acquired in settlement of loans is initially recorded at the
lower of the unpaid loan balance or fair value at the date acquired.
Subsequent adjustments, if any, are made when the carrying value exceeds
estimated fair value. Costs related to the development of such properties are
capitalized and holding costs are charged to expense. Real estate acquired
for sale or development is carried at the lower of cost or estimated net
realizable value. The carrying value of this real estate includes capitalized
development and construction costs. The carrying value is reviewed
periodically and adjusted when it exceeds net realizable value. Interest is
capitalized on funds disbursed during the development and construction period
for real estate projects.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED (GOODWILL)
Goodwill is stated net of accumulated amortization and is being amortized
using the straight-line method over periods ranging from 5 to 25 years.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
SFFed enters into sales of securities under agreements to repurchase
(reverse repurchase agreements). Fixed-coupon reverse repurchase agreements
are treated as financing arrangements, and the obligations to repurchase
securities sold are reflected as a liability in the consolidated statements
of financial condition. The securities underlying the agreements remain in
the asset accounts.
TAXES ON INCOME
SFFed accounts for income taxes in accordance with the provisions of the
Statement of Financial Accounting Standards No. 109 Accounting for Income
Taxes ("SFAS 109"). SFAS 109 requires the use of an asset and liability
approach whereby deferred income taxes are computed by applying enacted tax
laws and rates applicable to future periods to the temporary differences
between the tax bases of assets and liabilities and their carrying values for
financial reporting purposes. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the period that
includes the enactment date. Future tax benefits attributable to temporary
differences are recognized to the extent the realization of such benefits is
more likely than not.
EARNINGS PER SHARE
Earnings per share is based on the weighted average number of shares
outstanding (including the dilutive effect of unexercised stock options):
7,855,919, 7,827,665 and 7,956,090 for 1995, 1994 and 1993, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
During 1995, the Financial Accounting Standards Board issued several
Statements of Financial Accounting Standards, ("SFAS's") which are described
below. SFFed has not assessed the impact of these Statements on its financial
position or its result of operations because of SFFed's acquisition by First
Nationwide Bank, A Federal Savings Bank (see Note 2).
F-100
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS 121"), was issued in March 1995. The Statement addresses the
accounting for the impairment of long-lived assets, such as premises,
furniture and equipment, certain identifiable intangibles and goodwill
related to those assets. Long-lived assets and certain identifiable
intangibles are to be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized when the sum of the future cash
flows (undiscounted and without interest charges expected from the use of the
asset and its eventual disposition) is less than the carrying amount of the
asset. The Statement also requires that long-lived assets and identifiable
intangibles, except for assets of a discontinued operation held for disposal,
be accounted for at the lower of cost or fair value less cost to sell. SFAS
121 is effective for financial statements for periods beginning after
December 15, 1995.
In May 1995, the Financial Accounting Standards Board issued SFAS No. 122,
Accounting for Mortgage Servicing Rights ("SFAS 122"). SFAS 122 requires that
an enterprise that acquires servicing rights through either the purchase or
origination of mortgage loans and sells or securitizes these mortgage loans
with servicing rights retained should allocate the total cost of the mortgage
loans to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values. SFAS 122 is effective
for financial statements for periods beginning after December 15, 1995.
SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS 123"), was
issued in October 1995. This Statement prescribes accounting and reporting
standards for all stock-based compensation plans, including employee stock
options, restricted stock and stock appreciation rights. The Statement
defines a "fair value based method" of accounting for employee stock options
and encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation for those plans using the "intrinsic value
based method" under Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees ("Opinion No. 25").
Under the fair value based method, compensation cost is measured at the
grant date of the option based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under the
intrinsic value based method, compensation cost is the excess, if any, of the
quoted market price of the stock at grant date or other measurement date over
the amount an employee must pay to acquire the stock. Under Opinion No. 25,
no compensation cost is recognized.
SFAS 123 requires that an employer's financial statements include certain
disclosures about stock-based compensation agreements regardless of the
method used to account for them. An employer that continues to apply the
accounting provisions of Opinion No. 25 will disclose pro forma amounts that
reflect the difference between compensation cost, if any, included in results
of operations and the related cost measured by the fair value based method,
including tax effects, that would have been recognized in the statement of
operations if the fair value based method had been used. SFAS 123 is
effective for transactions entered into after December 15, 1995.
USE OF FINANCIAL ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-101
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
RECLASSIFICATIONS
Certain of the 1994 and 1993 consolidated financial statement amounts have
been reclassified to conform to the 1995 presentation.
NOTE 2 -- ACQUISITION BY FIRST NATIONWIDE BANK
On August 27, 1995, SFFed entered into an Agreement and Plan of Merger
(the "Merger Agreement") with First Nationwide Bank, A Federal Savings Bank
("First Nationwide"), pursuant to which SFFed was acquired.
The acquisition by and merger into First Nationwide was consummated on
February 1, 1996. Under the Merger Agreement, holders of SFFed common stock
outstanding at the effective time of the merger (other than shares for which
dissenter's rights were perfected, shares held by First Nationwide and shares
held as treasury stock) received $32 per share. The holders of options on the
common stock of SFFed received for each share subject to an option the
difference between $32 and the applicable per share option price. The
aggregate consideration paid by First Nationwide under the Merger Agreement
was approximately $264,000,000. In connection with the acquisition by First
Nationwide, at December 31, 1995, SFFed accrued approximately $9,600,000 of
investment banker and legal fees, contract termination costs, severance and
other employee related costs.
NOTE 3 -- CASH AND INVESTMENTS
SFFed's banking depositories apply an imputed interest credit to balances
left on deposit which is used as an offset to charges for banking services
rendered. The Association is required by the Federal Reserve System to
maintain noninterest-bearing cash balances against some of its customer
certificate and transaction deposit accounts. The required reserves averaged
$3,016,000 during the year ended December 31, 1995. SFFed does not maintain
compensating balances with banks.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The following is a summary of these securities:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Balance at end of period, comprised of mortgage-backed
securities ..................................................... $165,000 $112,000
========== ==========
Average balance during each year ................................ $149,412 $102,983
Maximum balance at any month end ................................ 175,000 138,000
Weighted average interest rate .................................. 6.12% 6.12%
Weighted average days to maturity ............................... 4 4
</TABLE>
These agreements are collateralized by mortgage-backed securities and
loans. At December 31, 1995 and 1994, all agreements to resell securities
were for securities identical to those purchased and were executed with five
primary dealers. The related collateral was held by the dealers arranging the
transactions.
FEDERAL HOME LOAN BANK STOCK
At December 31, 1995 and 1994, this investment consisted of 315,795 and
300,492 shares, respectively, of Federal Home Loan Bank of San Francisco
(FHLB) $100 par value capital stock at cost. The amount of stock owned meets
the last annual regulatory determination. The FHLB capital stock is pledged
to secure borrowings from the FHLB.
F-102
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 4 -- MORTGAGE-BACKED SECURITIES [MBS]
SFFed has classified a portion of its MBS portfolio as "available for
sale" as of December 31, 1995 and 1994. At December 31, 1995 and 1994 the
available-for-sale MBS portfolio is reported in the accompanying Consolidated
Statements of Financial Condition at fair value. The held-for-investment MBS
portfolio is reported at amortized cost. At December 31, 1995, SFFed
reflected an unrealized loss on the MBS available for sale portfolio, net of
tax, of $1,128,000 as a decrease to stockholders' equity. At December 31,
1994 the unrealized loss on the MBS portfolio of $3,449,000, net of tax.
The carrying amount of MBS and their approximate fair values at December
31, 1995 and 1994 were as follows:
MBS available for sale:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Adjustable rate . $46,668 $ 533 -- $47,201
Fixed rate ...... 25,328 539 $ (224) 25,643
----------- ------------ ------------ ---------
Total ........ $71,996 $1,072 $ (224) $72,844
=========== ============ ============ =========
Weighted average
interest rate . 6.53%
===========
DECEMBER 31, 1994
Adjustable rate . $50,242 -- $(1,662) $48,580
Fixed Rate ...... 30,218 $ 127 (1,467) 28,878
----------- ------------ ------------ ---------
$80,460 $ 127 $(3,129) $77,458
=========== ============ ============ =========
Weighted average
interest rate . 6.17%
===========
</TABLE>
MBS held for investment are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------- ------------ ------------ ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Adjustable rate ................ $776,397 $ 9,220 $ (79) $785,538
Fixed rate ..................... 83,157 3,780 -- 86,937
----------- ------------ ------------ ----------
Total .......................... $859,554 $13,000 $ (79) $872,475
=========== ============ ============ ==========
Weighted average interest rate 7.32%
===========
DECEMBER 31, 1994
Adjustable rate ................ $324,757 -- $(7,136) $317,621
Fixed rate ..................... 5,821 $ 23 (208) 5,636
----------- ------------ ------------ ----------
$330,578 $ 23 $(7,344) $323,257
=========== ============ ============ ==========
Weighted average interest rate 5.92%
===========
</TABLE>
F-103
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
The scheduled maturities of MBS available for sale and MBS held for
investment at December 31, 1995, were as follows:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD FOR INVESTMENT
---------------------- -----------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Due from one year to five years $12,158 $11,934 -- --
Due from five years to ten years 894 937 -- --
Due after ten years ............. 58,944 59,973 $859,554 $872,475
----------- --------- ----------- ----------
Total ....................... $71,996 $72,844 $859,554 $872,475
=========== ========= =========== ==========
</TABLE>
The amortized cost of SFFed's MBS portfolio, pledged as collateral in
conjunction with various borrowings and transactions, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Collateral for:
Local government agency deposits .......... $ 550 $ 545
Securities sold under agreements (Note 10) 791,665 371,679
FNMA servicing ............................ 4,638 18,599
---------- ----------
Total .................................. $796,853 $390,823
========== ==========
</TABLE>
At December 31, 1995 and 1994, accrued interest receivable on MBS amounted
to $5,836,000 and $2,160,000, respectively.
MBS converted from SFFed originated loans included in the amortized cost
of MBS available for sale and held for investment at December 31, 1995
totalled $36,056,000 and $740,158,000, respectively (December 31, 1994,
$41,285,000 and $284,087,000).
In accordance with the provisions of SFAS 115, the MBS portfolio has been
classified in the accompanying Consolidated Statements of Financial Condition
according to management's intent. At June 30, 1994, as a result of a revision
of its long-term business plans, SFFed transferred $258,344,000 of its MBS
from the available-for-sale portfolio to its held-for-investment portfolio.
The unrealized holding loss at the date of transfer, in the amount of
$3,055,000, is being amortized as a yield adjustment over the remaining life
of these MBS. At December 31, 1995, the unrealized holding loss related to
this transfer is reflected as a $1,620,000, net of tax, reduction in
stockholders' equity.
F-104
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 5 -- LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
One-to-four family residential loans .... $1,535,791 $1,764,572
Multi-family residential loans ........... 628,410 648,491
Commercial property loans ................ 465,466 500,106
Construction and improved land loans .... 40,230 54,489
------------ ------------
Total ................................ 2,669,897 2,967,658
Consumer loans ........................... 94,749 91,928
Loans secured by savings accounts ....... 7,528 6,689
------------ ------------
Total ................................ 2,772,174 3,066,275
Less:
Undisbursed loan funds .................. (16,468) (12,557)
Deferred loan fees, net ................. (1,160) (4,292)
Discounts and premiums, net ............. (955) (1,093)
Allowance for loan losses ............... (38,603) (36,829)
------------ ------------
Loans receivable held for investment, net $2,714,988 $3,011,504
============ ============
Weighted average interest rate ........... 7.88% 6.90%
============ ============
</TABLE>
The above classifications are net of participation interests in loans sold
and loans serviced for others.
The following is an analysis, by property type, of commercial real estate
loans included above:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Office buildings $225,130 $233,234
Warehouses ....... 93,628 100,813
Shopping centers 17,610 53,970
Motels ........... 20,098 15,958
General purpose . 53,709 24,281
Mobile home parks 9,007 10,449
Other ............ 46,284 61,401
---------- ----------
Total ........ $465,466 $500,106
========== ==========
</TABLE>
F-105
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
Certain of SFFed's real estate loans are pledged as collateral for
borrowings from various sources, as summarized below:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1995 1994
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Collateral for:
FHLB advances (Note 10) ........................ $1,016,450 $1,109,092
Deposits of state and local government agencies 3,502 4,887
------------ ------------
Total ....................................... $1,019,952 $1,113,979
============ ============
</TABLE>
At December 31, 1995 and 1994, accrued interest receivable on loans
amounted to $17,389,000 and $16,184,000, respectively.
Over 99% of SFFed's loan portfolio is secured by property within the state
of California. Additionally, 61% of SFFed's loan portfolio is secured by
property located within the greater San Francisco Bay Area. Accordingly, the
ultimate collectibility of SFFed's loan portfolio is susceptible to changes
in the regional economics and real estate markets within Northern California
and, to a lesser extent, in Southern California.
On occasion, SFFed restructures major loans, generally because of a
borrower's financial difficulties. Interest rate and cash payment concessions
and an extension of a loan's maturity may be granted in such restructurings.
Information concerning impaired loans that were past due for three months
or more or in the process of foreclosure, (nonaccrual loans), and
restructured loans, is summarized as follows:
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Nonaccrual loans:
Balance at year end ................................ $40,976 $44,809 $81,067
Interest foregone .................................. 3,259 3,829 4,362
Restructured loans:
Balance at year end (1) ............................ 4,304 29,639 33,044
Actual interest income recognized .................. 1,123 2,305 2,284
Pro-forma interest income using original loan terms 1,119 2,358 2,387
</TABLE>
- ------------
(1) Ending balances are shown of net of nonaccrual loans. During the second
quarter of 1995, SFFed re-evaluated its policies on restructured loans
and determined that several loans that had been restructured were
current for several years. As such, the December 31, 1995 balance does
not include these loans.
At December 31, 1995, the aggregate investment in loans considered to be
impaired under SFAS 114 was $45,280,000. Included in this amount is
$12,463,000 of impaired loans for which the related allowance for loan losses
was $3,665,000 and $32,817,000 of loans for which no allowance was considered
necessary. The average recorded investment in impaired loans during the year
ended December 31, 1995 was approximately $61,225,000. For the year ended
December 31, 1995, SFFed recognized interest income on those impaired loans
of $1,123,000. Interest income recognized during the year using the cash
basis method of income recognition cannot be practicably determined.
F-106
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
At December 31, 1994, SFFed's aggregate investment in loans considered
impaired under SFAS 114 was $74,448,000. Included in this amount is
$18,069,000 of impaired loans for which the related allowance for loan losses
was $2,430,000 and $56,379,000 of loans for which no allowance was considered
necessary. SFFed recognized approximately $2,305,000 of interest income on
these loans in 1994.
Activity in the allowance for losses on loans, real estate owned and other
transactions is summarized as follows:
<TABLE>
<CAPTION>
REAL ESTATE CONSUMER TOTAL
LOANS LOANS LOANS
------------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1992 ..... $ 33,194 $ 717 $ 33,911
Provision for losses (recoveries) 6,279 304 6,583
Charge-offs ...................... (3,290) (603) (3,893)
Recoveries ....................... 25 171 196
------------- ---------- ----------
Balance at December 31, 1993 ..... 36,208 589 36,797
Provision for losses ............. 16,828 377 17,205
Charge-offs ...................... (16,830) (605) (17,435)
Recoveries ....................... 59 203 262
------------- ---------- ----------
Balance at December 31, 1994 ..... 36,265 564 36,829
Provision for losses ............. 10,169 925 11,094
Charge-offs ...................... (8,895) (945) (9,840)
Recoveries ....................... 262 258 520
------------- ---------- ----------
Balance at December 31, 1995 ..... $ 37,801 $ 802 $ 38,603
============= ========== ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
REAL ESTATE
OWNED OTHER(1) TOTAL
------------- -------- ----------
<S> <C> <C> <C>
Balance at December 31, 1992 ..... $ 6,645 $ 838 $ 41,394
Provision for losses (recoveries) 7,134 (90) 13,627
Charge-offs ...................... (5,975) -- (9,868)
Recoveries ....................... -- -- 196
------------- -------- ----------
Balance at December 31, 1993 ..... 7,804 748 45,349
Provision for losses ............. 8,336 188 25,729
Charge-offs ...................... (4,980) (200) (22,615)
Recoveries ....................... -- -- 262
------------- -------- ----------
Balance at December 31, 1994 ..... 11,160 736 48,725
Provision for losses ............. 3,832 1,042 15,968
Charge-offs ...................... (1,902) (28) (11,770)
Recoveries ....................... -- -- 520
------------- -------- ----------
Balance at December 31, 1995 ..... $13,090 $1,750 $ 53,443
============= ======== ==========
</TABLE>
- ------------
(1) The 1995, 1994 and 1993 provision for losses (recoveries) included
$1,042,000, $188,000 and ($90,000), respectively, related to real
estate development projects.
NOTE 6 -- MORTGAGE BANKING
Loans held for sale are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------------------- --------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
---------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Adjustable-rate single-family loans -- -- $3,627 $3,627
Fixed-rate single-family loans ..... $4,393 $4,393 -- --
---------- -------- ---------- --------
Total .............................. $4,393 $4,393 $3,627 $3,627
========== ======== ========== ========
</TABLE>
SFFed services loans for others amounting to $1,829,863,000,
$1,454,344,000 and $1,518,546,000 at December 31, 1995, 1994 and 1993,
respectively, and are not included in the accompanying Consolidated
Statements of Financial Condition. Income from loan servicing amounted to
$5,460,000, $4,080,000 and $2,621,000 for the years ended December 31, 1995,
1994 and 1993, respectively. Custodial balances maintained in connection with
loans serviced for others were approximately $12,399,000, $8,310,000 and
$31,902,000 at December 31, 1995, 1994 and 1993, respectively.
Activity in the net deferred premiums resulting from sales of loans,
participation interests in loans and securitization of loans when servicing
rights are retained for the three years ended December 31, is summarized as
follows:
F-107
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
<TABLE>
<CAPTION>
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at beginning of year ............................. $ 2,803 $ 3,424 $ 5,361
Additions to gain on sale of loans ....................... 12 175 364
Amortization charged to loan servicing income:
Regular ................................................. (1,447) (1,696) (1,826)
(Increase) decrease due to changes in actual and
estimated prepayments ................................... 980 900 (475)
--------- --------- ---------
Balance at end of year ................................... $ 2,348 $ 2,803 $ 3,424
========= ========= =========
</TABLE>
NOTE 7 -- PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- ESTIMATED
1995 1994 USEFUL LIVES
---------- -------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Land ........................................... $ 4,811 $ 4,811 --
Buildings ...................................... 10,170 10,064 40 years
Leasehold improvements ......................... 14,717 13,754 Life of lease
Furniture and equipment ........................ 22,347 23,447 5-20 years
Construction in progress ....................... 57 131 --
---------- --------
Total ...................................... 52,102 52,207
Less accumulated depreciation and amortization (30,203) 29,261
---------- --------
Net ........................................ $ 21,899 $22,946
========== ========
</TABLE>
Depreciation and amortization expense amounted to $3,206,000, $3,226,000
and $3,043,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
NOTE 8 -- REAL ESTATE OWNED
Real estate owned is comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Real estate acquired through foreclosure and held for sale or development $ 45,494 $ 36,944
Less allowance for losses (Note 5) ....................................... (13,090) (11,160)
---------- ----------
Net .................................................................. $ 32,404 $ 25,784
========== ==========
</TABLE>
Real estate acquired by foreclosure during 1995 and 1994, as adjusted to
the lower of cost or fair value, amounted to $34,580,000 and $47,436,000,
respectively.
F-108
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 9 -- CUSTOMER DEPOSITS
Customer deposits consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1995 1994
---------------------- ----------------------
AMOUNT % AMOUNT %
------------ -------- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Passbook accounts:
0.01 to 4.50% ........................ $ 572,848 21.3% $ 76,250 3.1%
NOW and money market deposit accounts:
0.01 to 6.00% ........................ 279,867 10.4 490,153 19.7
------------ -------- ------------ --------
Demand deposits ....................... 852,715 31.7 566,403 22.8
------------ -------- ------------ --------
Certificate accounts:
Less than 3.00% ...................... 15,022 0.6 33,858 1.4
3.00 to 4.99% ........................ 132,192 4.9 863,911 34.8
5.00 to 6.99% ........................ 1,548,151 57.4 921,283 37.1
7.00 to 8.99% ........................ 144,910 5.4 95,133 3.8
9.00 to 10.99% ....................... 196 -- 1,350 0.1
11.00% and above ..................... 57 -- 50 --
------------ -------- ------------ --------
Total certificate accounts ............ 1,840,528 68.3 1,915,585 77.2
------------ -------- ------------ --------
Total customer deposits ............... $2,693,243 100.0% $2,481,988 100.0%
============ ======== ============ ========
Weighted average interest rate ....... 5.13% 4.61%
======== ========
</TABLE>
Noninterest bearing deposits were $29,061,000 and $23,335,000 at December
31, 1995 and 1994, respectively.
A summary of certificate accounts by maturity is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1995 1994
---------------------- ---------------------
AMOUNT % AMOUNT %
------------ -------- ------------ -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Maturity within one year $1,108,847 60.3% $1,316,580 68.7%
One to two years ......... 243,006 13.2 334,842 17.5
Two to three years ....... 127,333 6.9 156,595 8.2
Three or more years ..... 361,342 19.6 107,568 5.6
------------ -------- ------------ -------
Total ................ $1,840,528 100.0% $1,915,585 100.0%
============ ======== ============ =======
</TABLE>
Customer deposits include approximately $387,385,000 and $373,347,000 of
accounts with balances in excess of $100,000 at December 31, 1995 and 1994,
respectively.
At December 31, 1995 and 1994, accrued interest payable on customer
deposits, included in other liabilities in the accompanying Statements of
Financial Condition, was $363,000 and $491,000, respectively.
F-109
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
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>
YEAR ENDING DECEMBER 31: (DOLLARS IN THOUSANDS)
- ------------------------
<S> <C>
1996 ........................... $266,969
1997 ........................... 7,500
1998 ........................... --
1999 ........................... --
2000 ........................... --
Thereafter ..................... 483
--------------------
$274,952
====================
Weighted average interest rate 6.90%
====================
</TABLE>
F-110
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
At December 31, 1995 and 1994, SFFed had pledged certain real estate
loans (see Note 5), mortgage-backed securities (see Note 4) and SFFed's
investment in stock of the FHLB of San Francisco (see Note 3) to secure FHLB
advances.
MORTGAGE-BACKED BONDS
In September 1994, SFFed retired the collateralized mortgage obligation at
face value and incurred a loss of $347,000.
SENIOR NOTES
In September 1994, SFFed issued $50,000,000 of its senior notes due
September 1, 2004. The notes are reported net of unamortized issuance costs.
The notes bear interest at the rate of 11.20% payable semi-annually on March
1 and September 1. Under the terms of the notes, SFFed may not make any
prepayments of principal, except that in the event of a change in control of
SFFed, SFFed shall offer to prepay the notes in full. SFFed may contribute up
to $34,000,000 from the proceeds of the note sale to the Association in the
form of equity capital and by December 31, 1995 SFFed had so contributed
$30,000,000.
The note agreement contains certain restrictive covenants which, among
other things, (1) require SFFed to maintain certain capital levels, (2)
restrict the amount of funds available for payment of dividends on SFFed's
stock or for the repurchase of its stock and (3) establish a maximum ratio of
non-performing assets (as defined) to consolidated total assets. If an event
of default occurs, including failure to comply with any restrictive covenant,
the notes may become immediately payable in full. SFFed was in compliance
with all terms of the note agreement at December 31, 1995.
NOTE 11 -- TAXES ON INCOME
The provision (benefit) for taxes on income in the accompanying
Consolidated Statements of Operations is comprised of the following items:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
-------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal income tax ....... $ (760) $ (357) $ 9,338
California franchise tax (15) (383) 3,617
-------- ---------- ---------
Total ................. (775) (740) 12,955
-------- ---------- ---------
Deferred:
Federal income tax ....... 873 (1,748) (3,453)
California franchise tax 1,470 (912) (1,597)
-------- ---------- ---------
Total ................. 2,343 (2,660) (5,050)
-------- ---------- ---------
Total:
Federal income tax ....... 113 (2,105) 5,885
California franchise tax 1,455 (1,295) 2,020
-------- ---------- ---------
Total ................. $1,568 $(3,400) $ 7,905
======== ========== =========
</TABLE>
F-111
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
The liability for taxes on income at December 31, 1995 and 1994 in the
accompanying Consolidated Statements of Financial Condition includes a net
deferred tax liability totalling $1.9 million for 1995 and a net deferred tax
asset totalling $2.3 million for 1994, that have been provided for the
temporary differences between the tax bases and financial statement carrying
amounts of assets and liabilities. Tax benefits attributable to temporary
differences are recognized to the extent that realization of such benefits is
more likely than not. The major sources of these temporary differences
comprising SFFed's net deferred tax liability and net deferred tax (asset) at
December 31, 1995 and 1994, respectively, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Loan fee income and discounts deferred for tax
purposes ..................................... $ 18,508 $ 17,243
FHLB stock dividends ........................... 3,244 2,311
Deferred servicing-related premiums on loans ... 933 999
Tax basis versus financial statement basis
depreciation expense ......................... 2,701 2,846
Investments in partnerships .................... 54 179
Other .......................................... -- 682
---------- ----------
Gross deferred tax liabilities ................. 25,440 24,260
---------- ----------
GROSS DEFERRED TAX ASSETS:
Federal tax basis loss carryovers .............. (12) (648)
Deferred interest on restructured loans ........ (605) (692)
Accrued pension plan contributions ............. (6,160) (4,380)
Book basis loss reserves ....................... (13,349) (17,052)
Minimum pension liability adjustment ........... (241) (376)
CMO investment trust ........................... (972) (887)
Unrealized loss on securities available for sale (709) (2,507)
Contract accruals .............................. (1,373) --
Other .......................................... (106) --
---------- ----------
Gross deferred tax assets ...................... (23,527) (26,542)
---------- ----------
Net deferred tax liability (asset) ............. $ 1,913 $ (2,282)
========== ==========
</TABLE>
F-112
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
The differences between the federal statutory income tax rate and the
effective rate of SFFed's tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- --------- -------
<S> <C> <C> <C>
Federal statutory tax rate ...................... 35.0% (35.0)% 35.0%
Increase (reduction) in tax rate resulting from:
California franchise tax, net of federal
benefit ..................................... 7.5 (7.5) 7.4
Amortization and write-down of intangible asset 20.9 3.1 1.4
Change in base year tax bad debt reserve ...... -- (5.0) (3.4)
Deferred tax adjustment resulting from tax rate
change ...................................... -- -- 1.1
Capitalized merger costs ...................... 84.9 -- --
Interest on officer's life insurance .......... (14.6) -- --
California enterprise zone deduction .......... (9.0) -- --
Other ......................................... (10.1) 2.6 2.9
-------- --------- -------
Effective tax rate .............................. 114.6% (41.8)% 44.4%
======== ========= =======
</TABLE>
Under the Internal Revenue Code, the Association in determining taxable
income is allowed a special bad debt deduction based on a percentage of
taxable income (8% for 1995, 1994 and 1993) or on specific experience
formulas. The Association used the experience method in 1995, 1994 and 1993
in determining the federal income tax bad debt deduction for tax return
purposes for each respective year.
A deferred tax liability has not been recognized for the amount of the
Association's tax bad debt reserves that arose in tax years beginning before
December 31, 1987. These reserves amounted to approximately $15.9 million at
both December 31, 1995 and 1994. The amount of the unrecognized deferred tax
liability on such reserves at both December 31, 1995 and 1994 was
approximately $5.6 million. This deferred tax liability could be recognized
if, in the future, (1) that portion of the Association's retained earnings
represented by these reserves is used for purposes other than to absorb
losses from bad debts, including dividends or distributions in liquidation,
(2) the Association fails to meet the definition of a "qualified savings
institution," or (3) there is a change in the federal tax law.
During 1994 the Internal Revenue Service (IRS) completed its examination
of SFFed's tax returns for the years 1989 and 1990. The IRS had previously
completed its examination of SFFed's tax returns for 1987 and 1988. As a
result of these examinations the IRS has proposed adjustments, primarily
related to timing differences as to the recognition of income and expense for
tax return purposes. The most significant proposed adjustment relates to
deferred loan fee income. SFFed filed a formal protest with the IRS in 1994
contesting the results of the audit of 1989 and 1990 (SFFed had previously
filed a protest with regards to the results of 1987 and 1988 examinations).
Taxes associated with the proposed adjustments which are being protested
amount to approximately $23.5 million. SFFed believes that the income tax
returns are substantially correct as originally filed. SFFed has established
a deferred tax liability in prior periods for substantially all the items
included in the IRS proposed adjustments. Accordingly, SFFed's exposure is
limited to interest on any tax deficiency that may finally be assessed. SFFed
believes that any additional tax and interest thereon which may be due will
not have a materially adverse effect on the consolidated financial position
or results of operations of SFFed.
F-113
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 12 -- STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS
Office of Thrift Supervision (OTS) regulations issued pursuant to the
Financial Institutions Reform Recovery and Enforcement Act of 1989 (FIRREA)
specify minimum tangible, core and risk-based capital requirements for thrift
institutions. The amount of the Association's net worth included in its
minimum regulatory capital requirements is not available for the payment of
dividends and may only be used to cover any future losses. Various
adjustments are required to be made to stockholder's equity and total assets
for computing these capital ratios, depending on an institution's capital and
asset structure (see the following table). For purposes of computing the
risk-based capital requirement, the regulations assign a degree of credit
risk to each of a thrift's assets and off-balance sheet liabilities, ranging
from zero to 100%.
Under Section 38 of the Federal Deposit Insurance Corporation Improvement
Act of 1991 (FDICIA), federal banking authorities are required to take prompt
corrective action against undercapitalized financial institutions, imposing a
series of increasing constraints on the operations of such institutions,
depending on the level of their undercapitalization. There are five capital
levels specified by FDICIA, ranging from well capitalized to critically
undercapitalized. OTS regulations set forth the minimum capital ratios for
each of these levels. Based upon qualitative judgments made during its most
recent examination of an institution, the OTS may downgrade an institution's
capital level by one step (e.g., a well capitalized institution can be
reclassified as adequately capitalized). Under these regulations, the
Association is deemed to be well capitalized at December 31, 1995.
The Association's regulatory capital position at December 31, 1995 and
1994 is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------- --------------------------
TANGIBLE, TANGIBLE,
CORE, CORE,
TIER 1 TOTAL TIER 1 TOTAL
RISK-BASED RISK-BASED RISK-BASED RISK-BASED
CAPITAL (1) CAPITAL CAPITAL (1) CAPITAL
------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Capital per Association financial statements ..... $231,966 $231,966 $219,225 $219,225
Adjustments for regulatory capital purposes:
Goodwill (2) ..................................... (8,054) (8,054) (8,722) (8,722)
Investment in nonincludable subsidiaries (2) .... (8,924) (8,924) (8,205) (8,205)
Unrealized loss on securities available for sale,
net of tax ...................................... 1,128 1,128 3,449 3,449
General valuation allowances ...................... -- 27,829 -- 26,771
------------ ------------ ------------ ------------
Regulatory capital .............................. $216,116 $243,945 $205,747 $232,518
============ ============ ============ ============
<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-114
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
<TABLE>
<CAPTION>
ACTUAL MINIMUM
DECEMBER 31, 1995 REQUIREMENT
------------------- -------------------
CAPITAL RATIO CAPITAL RATIO
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIRREA Capital Standards:
Tangible ................................... $216,116 5.43% $ 59,717 1.50%
Core (leverage) ............................ 216,116 5.43 199,433 3.00
Risk-based ................................. 243,945 10.92 178,720 8.00
FDICIA Capital Standards (well capitalized):
Leverage ................................... $216,116 5.43% $199,056 5.00%
Tier 1 risk-based .......................... 216,116 9.67 134,041 6.00
Total risk-based ........................... 243,945 10.92 223,401 10.00
</TABLE>
<TABLE>
<CAPTION>
ACTUAL MINIMUM
DECEMBER 31, 1994 REQUIREMENT
------------------- -------------------
CAPITAL RATIO CAPITAL RATIO
---------- ------- ---------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FIRREA Capital Standards:
Tangible .................................. $205,747 5.54% $ 55,666 1.50%
Core (leverage) ........................... 205,747 5.54 111,332 3.00
Risk-based ................................ 232,518 10.84 171,662 8.00
FDICIA Capital Standards (well
capitalized):
Leverage .................................. $205,747 5.54 $185,552 5.00
Tier 1 risk-based ......................... 205,747 9.59 128,746 6.00
Total risk-based .......................... 232,518 10.84 214,577 10.00
</TABLE>
During 1995, SFFed contributed $5,000,000 from the senior note proceeds to
the Association as equity capital. During 1994, SFFed contributed $30,000,000
to the Association as equity capital, including $25,000,000 of the proceeds
from the sale of its senior notes. See Note 10 concerning certain covenants
included in the senior note agreement.
In August 1994, the OTS issued a regulation adding an interest rate risk
component to the risk-based capital requirement for thrifts. Those thrifts
that have an above normal interest rate risk exposure will be subject to take
a deduction from the total capital available in computing their risk-based
capital requirement. The regulation, which was to become effective as of
December 31, 1994, has been postponed indefinitely, pending the testing of an
OTS appeals process at certain institutions and the impositions of similar
requirements by federal banking agencies. Based upon its December 31, 1995
computations, SFFed does not currently have an above normal interest rate
risk.
At periodic intervals, both the OTS and the FDIC routinely examine the
Association's financial statements as part of their legally prescribed
oversight of the savings and loan industry. Based on these examinations, the
regulators can direct that the Association's financial statements be adjusted
in accordance with their findings. No such adjustments were required by the
regulators as a result of their most recent examination of the Association
which was completed in March 1995.
Pursuant to a quarterly dividend policy initiated in 1993, SFFed paid cash
dividends totalling $2,042,000 or $0.26 per share on its common stock during
1995 compared with $0.28 per share in 1994 and $0.15 per share in 1993.
F-115
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
NOTE 13 -- PARENT COMPANY FINANCIAL INFORMATION
SFFed and its subsidiary file a consolidated federal income tax return in
which the taxable income or loss of SFFed is combined with that of its
subsidiary. SFFed's share of income tax expense is based on the amount which
would be payable if separate returns were filed. Accordingly, SFFed's equity
in the net income or loss of its subsidiary is excluded from the computation
of the provision for income taxes for financial statement purposes.
SFFed's statements of financial condition and related statements of
operations and cash flows are as follows:
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash ..................................................................... $ 234 $ 169
Note receivable from subsidiary .......................................... 11,770 24,170
Tax benefit .............................................................. 3,613 893
Other assets ............................................................. 2,022 1,018
Investment in subsidiary ................................................. 231,966 219,225
---------- ----------
Total ................................................................ $249,605 $245,475
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses ......................................................... $ 4,970 $ 1,773
Senior notes (Note 10) ................................................... 49,245 49,158
Stockholders' equity (see Consolidated Statements of Financial Condition) 195,390 194,544
---------- ----------
Total ................................................................ $249,605 $245,475
========== ==========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
INCOME
$
Dividend from subsidiary .......................................... -- $ -- $1,000
Interest on investments ........................................... 1,151 835 238
--------- ---------- --------
1,151 835 1,238
--------- ---------- --------
EXPENSES
General and administrative ........................................ 3,464 576 395
Interest on senior notes .......................................... 5,703 1,756 --
Federal and state income tax benefit .............................. (2,577) (605) (79)
--------- ---------- --------
6,590 1,727 316
--------- ---------- --------
Income (loss) before undistributed net income (loss) of subsidiary (5,439) (892) 922
Undistributed net income (loss) of subsidiary ..................... 5,239 (3,836) 8,972
--------- ---------- --------
Net income (loss) ................................................. $ (200) $(4,728) $9,894
========= ========== ========
</TABLE>
F-116
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
--------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................................. $ (200) $ (4,728) $ 9,894
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Undistributed net (income) loss of subsidiary ................ (5,239) 3,836 (8,972)
Amortization of organization expense ......................... -- -- 42
Income tax benefit ........................................... (2,577) (605) (79)
Net change in other assets/liabilities ....................... 2,401 705 378
--------- ---------- ---------
Net cash provided by (used in) operating activities ........... (5,615) (792) 1,263
--------- ---------- ---------
Cash flows from investing activities:
Maturities of investment securities ........................... -- -- 13,270
Purchases of investment securities ............................ -- -- (6,040)
Note receivable from subsidiary ............................... 12,400 (16,800) (7,370)
Capital contributions to subsidiary ........................... (5,000) (30,000) --
Other, net .................................................... (54) -- (106)
--------- ---------- ---------
Net cash provided by (used in) investing activities ........... 7,346 (46,800) (246)
--------- ---------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ........................ 376 404 488
Proceeds from issuance of senior notes ........................ -- 49,158 --
Payment of dividends .......................................... (2,042) (2,192) (1,166)
--------- ---------- ---------
Net cash provided by (used in) financing activities ........... (1,666) 47,370 (678)
--------- ---------- ---------
Net increase (decrease) in cash and cash equivalents .......... 65 (222) 339
Cash and cash equivalents at Beginning of Year ................. 169 391 52
--------- ---------- ---------
Cash and cash equivalents at End of Year ....................... $ 234 $ 169 $ 391
========= ========== =========
</TABLE>
NOTE 14 -- PENSION PLANS AND OTHER RETIREMENT BENEFITS
PENSION PLANS
The Association has five noncontributory pension plans: A qualifying
defined benefit plan covering substantially all employees over the age of 21
who meet minimum service requirements, and four nonqualifying supplemental
plans to provide eligible plan members benefits, based on compensation and
length of service, greater than permitted by the terms of the qualified plan.
Assets of the qualified plan are maintained by a trustee and administered by
the Association's advisory committee. Such assets consist primarily of money
market funds, government securities, corporate bonds and common stocks. The
nonqualifying plans have no assets. The Association has voluntary agreed to
make contributions to each Plan sufficient to provide for the payment of
pension benefits to Plan participants.
During the third quarter of 1995, SFFed recorded an approximate $1.7
million reduction of retirement plan expenses reflecting a net curtailment
gain arising from the suspension of SFFed's defined benefit retirement plan.
The gain is net of the costs of enhancing certain retirement benefits under
that plan immediately before it was suspended and net of certain other costs
associated primarily with enhancing benefits provided under SFFed's defined
contribution (401(k)) plan. During the fourth quarter
F-117
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
of 1995, SFFed recorded an approximate $1.4 million increase in retirement
plan expenses arising from the suspension of SFFed's nonqualified
supplemental retirement plans related to the anticipated acquisition of SFFed
as discussed in Note 2.
Net periodic pension cost and its components are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost -benefits earned ........ $ 875 $ 1,897 $ 1,810
Interest on projected benefit obligation 2,814 2,756 2,410
Return on plan assets ................... (1,887) (1,531) (1,640)
Other components -net ................. 280 819 602
Curtailment gain -qualified plan ..... (1,689) -- --
Curtailment loss -unqualified plans .. 1,406 -- --
--------- --------- ---------
Net periodic pension cost ............... $ 1,799 $ 3,941 $ 3,182
========= ========= =========
</TABLE>
Assumptions used were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Discount rate .................................. 7.25% 8.00% 6.50%
Rate of increase in compensation levels ....... 5.00 5.00 5.00
Expected long-term rate of return on assets (1) 8.00 8.00 8.50
</TABLE>
F-118
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
The following table shows the funded status and amounts recognized in the
Consolidated Statements of Financial Condition:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
QUALIFIED PLAN -- ASSETS LESS THAN ACCUMULATED BENEFITS
Actuarial present value of benefit obligations:
Vested benefits ........................................ $ 31,022 $ 23,257
Nonvested benefits ..................................... 543 734
---------- ----------
Accumulated benefit obligation ........................ $ 31,565 $ 23,991
========== ==========
Projected benefit obligation for service rendered to
date ................................................... $ 31,565 $ 28,627
Plan assets at fair value ............................... (28,098) (21,787)
---------- ----------
Plan assets less than projected benefit obligation ..... 3,467 6,840
Unrecognized net loss from past experience different
from that assumed ...................................... (928) (1,520)
Unrecognized net asset being recognized over 13 years .. 437 546
Unrecognized prior service cost ......................... -- (680)
Adjustment required to recognize minimum liability ..... 491 --
---------- ----------
Accrued pension cost (included in "Other Liabilities") . $ 3,467 $ 5,186
========== ==========
NONQUALIFIED PLANS -- ACCUMULATED BENEFITS EXCEED ASSETS
Actuarial present value of benefit obligations:
Vested benefits ........................................ $ 7,171 $ 5,847
Nonvested benefits ..................................... -- 7
---------- ----------
Accumulated benefit obligation ........................ $ 7,171 $ 5,854
========== ==========
Projected benefit obligation for service rendered to
date ................................................... $ 7,171 $ 7,678
Plan assets at fair value ............................... -- --
---------- ----------
Plan assets less than projected benefit obligation ..... 7,171 7,678
Unrecognized net loss from past experience different
from that assumed ...................................... (1,069) (1,668)
Unrecognized net obligation being recognized over 15
years .................................................. (202)
Unrecognized prior service cost ......................... (667)
Adjustment required to recognize minimum liability ..... 1,069 916
---------- ----------
Accrued pension cost (included in "Other Liabilities") . $ 7,171 $ 6,057
========== ==========
</TABLE>
In accordance with the provisions of Statement of Financial Accounting
Standards No. 87 (SFAS 87), Employer's Accounting for Pensions, SFFed has
recognized an additional pension liability of $570,000 and $885,000 in 1995
and 1994, respectively, representing the excess of the accumulated benefit
obligation over the fair value of pension plan assets and accrued pension
liability. As required by SFAS 87, in 1995, this liability, net of an income
tax benefit of $242,000, has been reflected as a $328,000 reduction of
stockholders' equity and in 1994, this liability, net of an income tax
benefit of $376,000, has been
F-119
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
established by a $509,000 reduction of stockholders' equity. This additional
liability is a result of a change in the discount rate used in the
measurement of pension plan benefits and a reduction in the expected
long-term rate of return on pension plan assets.
OTHER POSTRETIREMENT BENEFITS
Effective January 1, 1993, SFFed adopted the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 106 ("SFAS
106") Employers' Accounting for Postretirement Benefits Other than Pensions.
Under SFAS 106, the cost of postretirement benefits other than pensions (e.g.
health care) must be recognized on an accrual basis as employees perform
services to earn the benefits. Many of the provisions and concepts of SFAS
106 are similar to current standards on accounting for pensions. Based on the
transition provisions of SFAS 106, the accumulated postretirement benefit
obligation at the date of adoption (the transition obligation) may be
recognized in income as the cumulative effect of an accounting change in the
period of adoption or delayed and amortized over future periods as a
component of net periodic postretirements cost. The transition obligation at
January 1, 1993 has been estimated at $4.0 million, which SFFed is amortizing
to expense over 20 years as permitted by SFAS 106. SFFed has estimated that
accounting for covered benefits on an accrual basis, as required by SFAS 106,
rather than the pay-as-you-go method previously used by SFFed, increased
expense for 1993 by approximately $0.4 million. During the fourth quarter of
1995, SFFed recorded an approximate $1.9 million increase in retirement
medical benefits expenses resulting from the curtailment of the plan due to
the anticipated acquisition of SFFed, as discussed in Note 2.
NOTE 15 -- EMPLOYEE INCENTIVE AND COMPENSATION PLANS
SFFed's Stock Incentive Plan, which was amended in 1994 to increase the
number of shares reserved thereunder for issuance by 500,000 shares, provides
for up to 1,271,500 shares of common stock to be issued to directors and key
employees of SFFed and its subsidiaries. Directors of SFFed are granted
options for 10,000 shares of common stock upon their initial election to the
Board of Directors. The Plan provides that stock options may be either
incentive stock options ("ISO"), as defined by Section 422 of the Internal
Revenue Code, or nonstatutory options which do not satisfy the provisions of
Code Section 422. The Plan also provides for the issuance of stock
appreciation rights ("SAR") and restricted stock.
ISOs may be granted at an option price not less than fair market value as
of the date of grant and nonstatutory options at a price determined by the
Stock Option Committee provided for in the Plan. Stock options may be
exercised with cash, shares of SFFed's common stock, or a combination of cash
and common stock equal to the option price.
In 1990 a stock option plan for non-employee directors (Directors' Plan)
was established to allow those directors the choice of receiving nonstatutory
options in lieu of their annual retainer fees. In 1994 the Directors' Plan
was amended permitting participants to elect to receive nonstatutory options
in lieu of their attendance fees as well as retainer fees. In addition, the
Directors' Plan was further amended to provide an option pricing model
generally accepted by the financial community as reflective of the fair
market value of the interest received by the Directors in exchange for the
cash compensation. The exercise price of options granted under this plan is
$1.00 per share. The maximum number of shares of common stock which may be
issued under the Directors' Plan is 200,000 shares, provided that the
aggregate number of shares of common stock issuable under this plan and
SFFed's Stock Incentive Plan shall not exceed 1,271,500 shares.
SARs are only granted in conjunction with all or any part of any stock
option granted under the Plan. A SAR entitles the holder to receive cash,
shares of SFFed's common stock or a combination thereof, at the discretion of
SFFed, equal to the excess of the fair market value at the date of exercise
over the option price of the related stock option. Exercise of a SAR cancels
the related stock option.
F-120
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
During 1992 certain key employees agreed to convert their existing SARs
for limited stock appreciation rights ("LSAR"). LSARs are subject to the same
terms and conditions as SARs but are exercisable only if there is a change of
control of SFFed.
Restricted stock is subject to such restrictions against sale, transfer or
other disposition, as may be determined at the time of making the award.
Employees forfeit all shares of restricted stock if they leave the employ of
SFFed and its subsidiaries prior to the lapse of restrictions.
All nonstatutory options and related SARs granted may be exercised prior
to a dissolution or liquidation of SFFed or a sale of substantially all the
assets of SFFed or a merger or consolidation in which SFFed is not the
surviving entity.
No ISOs have been granted through December 31, 1995. Nonstatutory options,
restricted stock, SARs and LSARs granted, exercised or terminated are
summarized as follows:
<TABLE>
<CAPTION>
TOTAL RESTRICTED
SHARES STOCK OPTIONS
---------- ------------ ----------
<S> <C> <C> <C>
Outstanding at December 31, 1992 ... 594,453 6,603 587,850
Granted ............................ 6,096 -- 6,096
Exercised .......................... (49,915) -- (49,915)
Restrictions lapsed ................ (2,996) (2,996) --
Terminated/cancelled ............... (44,780) -- (44,780)
---------- ------------ ----------
Outstanding at December 31, 1993 ... 502,858 3,607 499,251
Granted ............................ 103,146 -- 103,146
Exercised .......................... (33,379) -- (33,379)
Restrictions lapsed ................ (2,691) (2,691) --
Terminated/cancelled ............... (6,118) -- (6,118)
---------- ------------ ----------
Outstanding at December 31, 1994 (2) 563,816 916 562,900
Granted ............................ 117,508 20,000 97,508
Exercised .......................... (29,965) -- (29,965)
Restrictions lapsed ................ (916) (916) --
Terminated/cancelled ............... (1,264) -- (1,264)
---------- ------------ ----------
Outstanding at December 31, 1995 (2) 649,179 20,000 629,179
========== ============ ==========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRICE
SARS (1) LSARS PER SHARE
---------- ---------- -------------
<S> <C> <C> <C>
Outstanding at December 31, 1992 ... 61,143 272,536
Granted ............................ -- -- $ 1.00
Exercised .......................... (24,826) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25-14.13
Terminated/cancelled ............... (18,037) -- 6.38-17.00
---------- ----------
Outstanding at December 31, 1993 ... 18,280 272,536
Granted ............................ -- 86,550 1.00-18.88
Exercised .......................... (5,918) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25-14.13
Terminated/cancelled ............... (1,124) (20,682) 6.38-17.00
---------- ----------
Outstanding at December 31, 1994 (2) 11,238 338,404
Granted ............................ -- 87,600 1.00-20.25
Exercised .......................... (1,264) -- 6.38-17.00
Restrictions lapsed ................ -- -- 11.25
Terminated/cancelled ............... (511) (9,000) 6.38-17.00
---------- ----------
Outstanding at December 31, 1995 (2) 9,463 417,004
========== ==========
</TABLE>
- ------------
(1)All SARs are related to options. The exercise of SARs results in a
surrender of the related option.
(2)Options and SARs exercisable at December 31, 1995 were 444,177 and
9,463, respectively.
The number of shares available for future options was 393,045 and 510,533
at December 31, 1995 and 1994, respectively. See Note 2 regarding the
treatment of options in connection with the acquisition of SFFed by First
Nationwide.
Incentive Plans are maintained to provide a means of awarding incentive
compensation to most officers and employees, including loan agents. The Plans
are nonqualified plans and all disbursements are paid from the general assets
of SFFed. For the years ended December 31, 1995, 1994 and 1993 SFFed's
expense under these plans amounted to approximately $183,000, $422,000 and
$1,726,000, respectively. SFFed maintains a savings plan for its employees
and the employees of its subsidiaries. The plan allows participants to make
contributions by salary deductions equal to 15% or less of their salary
pursuant to Section 401(k) of the Internal Revenue Code. Employee
contributions are matched by SFFed at the rate
F-121
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
of 50% of such contributions up to 2% of the employee's salary. SFFed's
matching contributions, under the terms of the plan, must be used to purchase
SFFed's common stock. SFFed contributions to the plan amounted to $413,000,
$347,000 and $316,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
NOTE 16 -- ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of SFFed's financial
instruments is in accordance with the provisions of Statement of Financial
Accounting Standards No. 107 ("SFAS 107") Disclosures about Fair Value of
Financial Instruments. The valuation methods used by SFFed are set forth
below.
The accuracy and usefulness of the fair value information disclosed herein
is limited by the following factors.
o Because no market exists for a significant portion of SFFed's
financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments,
and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and
therefore cannot be determined with precision. Changes in these
assumptions could significantly affect the estimates.
o These estimates do not reflect any premium or discount that could
result from offering for sale at one time SFFed's entire holding of
a particular financial asset.
o SFAS 107 excludes from its disclosure requirements certain financial
instruments and various significant assets and liabilities that are
not considered to be financial instruments.
Because of these and other limitations, the aggregate fair value amounts
presented in the following table do not represent the underlying value of
SFFed.
F-122
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
The carrying amounts and the estimated fair values of SFFed's financial
instruments at December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents .............. $ 195,251 $ 195,251 $ 165,206 $ 165,206
Federal Home Loan Bank stock ........... 31,579 31,579 30,049 30,049
Mortgage-backed securities ............. 932,398 945,319 408,036 400,715
Loans held for sale .................... 4,393 4,393 3,627 3,627
Loans receivable held for investment .. 2,714,988 2,708,195 3,011,504 2,942,263
Excess servicing ....................... 2,348 25,825 2,803 14,175
LIABILITIES
Demand deposits ........................ 852,715 852,715 566,403 566,403
Certificate accounts ................... 1,840,528 1,852,308 1,915,585 1,899,119
Borrowings ............................. 1,041,559 1,049,860 1,012,820 1,006,902
OFF BALANCE SHEET FINANCIAL INSTRUMENTS
Commitments to originate loans and
related hedging program (unrealized
gain) ................................. -- 46 -- 371
</TABLE>
The following methods and assumptions were used by SFFed in computing the
estimated fair values in the above table:
Cash and Cash Equivalents and Federal Home Loan Bank Stock and Demand
Deposits: The carrying amounts of these financial instruments approximate
their fair values.
Mortgage-Backed Securities: Fair values of these securities are based on
year-end quoted market prices.
Loans Held for Sale: The fair value of these loans has been based on
market prices of similar loans traded in the secondary market.
Loans Receivable Held for Investment: For fair value estimation purposes,
these loans have been categorized by type of loan (e.g., one-to-four unit
residential) and then further segmented between adjustable or fixed rates and
performing or nonperforming. Where possible, the fair value of these groups
of loans has been based on secondary market prices for loans with similar
characteristics. The fair value of the remaining loans has been estimated by
discounting the future cash flows using current interest rates being offered
for loans with similar terms to borrowers of similar credit quality.
Excess Servicing (Deferred Premium on Sales and Securitization of
Loans): Fair value of this asset has been estimated by reference to market
loan prepayment assumptions and interest rates for similar pools of loans.
Certificate Accounts and Borrowings: Fair values have been estimated using
projected cash flows discounted at replacement rates offered at each year end
for instruments of similar remaining maturities.
Commitments to Originate Loans and Related Hedging Program: The fair value
of the amount of commitments to originate loans considered likely to fund has
been estimated based on current secondary market prices for similar loans. No
loans were being originated for sale at December 31, 1995 and 1994.
F-123
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
The fair value estimates disclosed above were based on market prices and
other available information at year-end 1995 and 1994, respectively. No
detailed valuation has been performed since December 31, 1995 and, although
SFFed is not aware of any changes that could significantly impact these
estimates, current fair value estimates could be materially different from
the year-end 1995 amounts presented above.
NOTE 17 -- COMMITMENTS AND CONTINGENCIES
Outstanding commitments relating to loans and MBS are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Commitments to originate loans ..... $31,341 $ 76,928
Commitments to sell loans ........... 1,014 1,423
Commitments to convert loans to MBS -- 199,784
Commitments to purchase MBS ......... -- 100,000
Forward commitments to sell loans .. 4,500 --
</TABLE>
At December 31, 1995 SFFed's commitments to originate loans included
$10,977,000 of fixed-rate loans at interest rates ranging from 6.38% to
7.88%, and were outstanding for no more than 30 days.
SFFed on occasion has securitized (received MBS for loans) and sold loans
with recourse provisions. In 1995, SFFed did not have any sales of loans or
MBS with recourse. The principal balance of loans that have been securitized
or sold with recourse at December 31, 1995 and 1994 were $478,348,000 and
$11,796,000, respectively.
As part of the normal course of business, SFFed has entered into forward
transactions in order to reduce its exposure to fluctuations in interest
rates associated with originating loans for sale. At December 31, 1995
forward commitments to sell loans was $4,500,000.
LITIGATION
SFFed is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, after
consultations with counsel, the ultimate disposition of these matters will
not have a materially adverse effect on SFFed's consolidated financial
position or results of operations.
LEASE COMMITMENTS
Certain branches and offices are leased by SFFed under the terms of
operating leases expiring at various dates through the year 2029. Lease
rental expense amounted to $7,223,000, $7,173,000 and $8,009,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. Future
approximate minimum lease payments under the terms of the existing operating
leases are as follows:
F-124
<PAGE>
SFFED CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(CONTINUED)
<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-125
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Cal Fed Bancorp Inc.:
We have audited the accompanying consolidated statements of financial
condition of Cal Fed Bancorp Inc. and subsidiaries (the "Company") as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for each of the
years in the three-year period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Cal Fed
Bancorp Inc. and subsidiaries as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995 in conformity with generally
accepted accounting principles.
As discussed in Note 1 of the notes to the consolidated financial
statements, the Company adopted the provisions of the Financial Accounting
Standards Board's Statements of Financial Accounting Standards No. 72,
Accounting for Certain Acquisitions of Banking or Thrift Institutions, in
1994, and No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in 1993.
KPMG Peat Marwick LLP
Los Angeles, California
January 18, 1996
F-126
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
----------- -----------
<S> <C> <C>
ASSETS
Cash ................................................................... $ 273.7 $ 292.8
Short-term liquid investments .......................................... 74.1 333.8
Securities purchased under agreements to resell ........................ 1,674.6 48.2
Securities available for sale (market value: $200.3 in 1995 and
$1,731.5 in 1994) ..................................................... 200.3 1,731.5
Securities held to maturity (market value $2,361.3 in 1995 and $2,437.2
in 1994) .............................................................. 2,366.7 2,525.1
Loans receivable held for sale (market value: $13.8 in 1995 and $1.3 in
1994) ................................................................. 13.6 1.3
Loans receivable held for investment ................................... 9,290.0 8,746.0
Federal Home Loan Bank stock ........................................... 135.7 134.1
Interest receivable .................................................... 79.5 79.6
Premises and equipment ................................................. 71.2 81.5
Real estate held for sale .............................................. 49.5 77.9
Prepaid expenses and other assets ...................................... 91.7 130.6
----------- -----------
Total Assets ....................................................... $14,320.6 $14,182.4
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ............................................................... $ 9,476.7 $ 8,360.9
Advances from Federal Home Loan Banks .................................. 2,671.0 2,526.0
Securities sold under agreements to repurchase ......................... 857.3 1,751.0
Student Loan Marketing Association advances ............................ 200.0 475.0
Subordinated debentures ................................................ 57.6 66.5
Interest payable ....................................................... 29.4 18.6
Other liabilities ...................................................... 141.1 186.1
----------- -----------
Total Liabilities .................................................. $13,433.1 $13,384.1
=========== ===========
Preferred stock of subsidiary .......................................... 266.0 266.0
Stockholders' equity
Common stock .......................................................... 49.2 49.2
Additional paid-in capital ............................................ 838.6 836.6
Net unrealized holding gains (losses) on securities available for sale -- (19.2)
Retained earnings (deficit) ........................................... (266.3) (334.3)
----------- -----------
Total Stockholders' Equity ......................................... 621.5 532.3
----------- -----------
Total Liabilities and Stockholders' Equity ......................... $14,320.6 $14,182.4
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-127
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
Interest income:
Loans receivable ................................................. $ 706.9 $ 630.4 $ 756.5
Securities held to maturity ...................................... 170.3 135.5 160.9
Securities purchased under agreements to resell .................. 68.5 44.0 30.5
Securities available for sale .................................... 49.4 75.2 61.7
Short-term liquid investments .................................... 12.9 23.0 4.3
--------- ---------- ----------
Total interest income ......................................... 1,008.0 908.1 1,013.9
--------- ---------- ----------
Interest expense:
Deposits ......................................................... 441.6 390.8 516.1
Borrowings ....................................................... 254.5 175.7 95.8
--------- ---------- ----------
Total interest expense ........................................ 696.1 566.5 611.9
--------- ---------- ----------
Net interest income ........................................... 311.9 341.6 402.0
Provision for loan losses ......................................... 31.8 74.9 163.5
--------- ---------- ----------
Net interest income after provision for loan losses .......... 280.1 266.7 238.5
Other income:
Fee income ....................................................... 54.5 62.4 64.3
(Loss) gain on sales of loans .................................... (0.3) 0.5 5.4
Gain on sales of securities ...................................... 6.9 0.2 --
Gain on sale of Southeast Division ............................... -- 135.0 --
Other ............................................................ 2.4 3.1 0.5
--------- ---------- ----------
Total other income ............................................ 63.5 201.2 70.2
--------- ---------- ----------
Other expenses:
Compensation ..................................................... 97.1 118.7 133.9
Office occupancy ................................................. 39.4 47.3 50.2
Other general and administrative ................................. 79.4 89.2 102.5
Federal deposit insurance premiums and special assessments ...... 26.0 35.1 36.7
--------- ---------- ----------
Total general and administrative expenses ..................... 241.9 290.3 323.3
Operations of real estate held for sale .......................... 8.0 45.9 118.3
Loss on assets held for accelerated disposition .................. -- 274.8 --
Amortization of goodwill ......................................... -- -- 15.5
--------- ---------- ----------
Total other expenses .......................................... 249.9 611.0 457.1
--------- ---------- ----------
Earnings (loss) before income tax expense (benefit) and cumulative
effect of change in accounting for goodwill ...................... 93.7 (143.1) (148.4)
Income tax expense (benefit) ...................................... 0.1 6.3 (2.9)
--------- ---------- ----------
Earnings (loss) before cumulative effect of change in accounting
for goodwill ..................................................... 93.6 (149.4) (145.5)
Cumulative effect of change in accounting for goodwill ........... -- (273.7) --
--------- ---------- ----------
Net earnings (loss) before dividends on preferred stock of
subsidiary ................................................... 93.6 (423.1) (145.5)
Dividends on preferred stock of subsidiary ........................ 25.6 16.9 3.8
--------- ---------- ----------
Net earnings (loss) available for common stockholders ............ $ 68.0 $(440.0) $ (149.3)
========= ========== ==========
Earnings (loss) per common share before the cumulative effect of
change in accounting for goodwill ................................ $ 1.36 $ (3.82) $ (5.98)
Loss per share of the cumulative effect of change in accounting
for goodwill ..................................................... $ -- $ (6.28) $ --
Net earnings (loss) per common share .............................. $ 1.36 $(10.10) $ (5.98)
</TABLE>
See accompanying notes to consolidated financial statements.
F-128
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
Common stock:
Balance at beginning of year ......................................... $ 49.2 $ 25.0 $ 25.0
Issuance of shares of common stock .................................. -- 21.6 --
Exercise of common stock warrants ................................... -- 2.6 --
--------- --------- ---------
Balance at end of year ............................................... 49.2 49.2 25.0
--------- --------- ---------
Additional paid-in capital:
Balance at beginning of year ......................................... 836.6 658.2 662.6
Issuance of shares of common stock .................................. -- 161.7 --
Exercise of common stock warrants ................................... -- 20.7 --
Long-term incentive stock options ................................... 2.0 4.3 0.1
Other ............................................................... -- (8.3) (4.5)
Balance at end of year ............................................... 838.6 836.6 658.2
--------- --------- ---------
Net unrealized holding (losses) gains on securities available for
sale:
Balance at beginning of year ......................................... (19.2) 8.3 (0.7)
Net unrealized holding gains (losses) ............................... 19.2 (27.5) 9.0
--------- --------- ---------
Balance at end of year ............................................... -- (19.2) 8.3
--------- --------- ---------
Retained earnings (deficit):
Balance at beginning of year ......................................... (334.3) 105.7 255.0
Net earnings (loss) available for common stockholders .............. 68.0 (440.0) (149.3)
--------- --------- ---------
Balance at end of year ............................................... (266.3) (334.3) 105.7
--------- --------- ---------
Total Stockholders' Equity ............................................ $ 621.5 $ 532.3 $ 797.2
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-129
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) available for common stockholders .......... $ 68.0 $ (440.0) $ (149.3)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Loss on assets held for accelerated disposition ................ -- 274.8 --
Cumulative effect of change in accounting principle ........... -- 273.7 --
Depreciation and amortization .................................. 13.0 14.8 33.1
Accretion of fees and discounts ................................ (13.5) (37.3) (21.0)
Provision for losses on loans receivable ....................... 31.8 74.9 163.5
(Recovery) provision for losses on real estate held for sale .. (7.4) 79.7 93.6
Loss (gain) on sales of loans .................................. 0.3 (0.5) (5.4)
Loans originated for sale ...................................... (117.2) (115.8) (648.3)
Gain on sales of securities .................................... (6.9) (0.2) --
Proceeds from sales of loans receivable held for sale ......... 183.2 1,099.4 940.1
Decrease in other assets ....................................... 39.0 7.3 46.3
(Decrease) increase in other liabilities ....................... (34.4) 17.0 (2.1)
Other items .................................................... (11.1) (20.5) (25.9)
----------- ----------- -----------
Net cash provided by operating activities ................... 144.8 1,227.3 424.6
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated for investment ................................ (2,128.9) (2,503.5) (2,020.1)
Purchases of securities available for sale ..................... (202.9) (1,519.2) (5.5)
Proceeds from sales of securities available for sale .......... 976.3 670.4 --
Proceeds from sales of loans held for investment ............... -- -- 65.1
Net (purchases) maturities of securities held to maturity ..... (54.2) 0.4 (145.7)
Principal collected on loans receivable held for investment ... 1,152.1 1,406.9 1,877.2
Principal collected on securities held to maturity ............ 435.8 533.5 597.4
Proceeds from maturities of securities ......................... 808.8 1.0 254.5
Net (increase) decrease in FHLB stock .......................... (1.6) (12.6) 29.0
Proceeds from sales of real estate held for sale, net ......... 136.8 398.2 522.7
Net (additions) dispositions of premises and equipment ........ (2.8) 8.3 2.3
Net decrease (increase) in short-term liquid investments ...... 259.7 (27.0) 123.9
Net (increase) decrease in securities purchased under
agreements to resell .......................................... (1,626.4) (18.0) 9.6
Proceeds from sale of California Thrift & Loan ................. -- -- 30.3
----------- ----------- -----------
Net cash (used) provided by investing activities ........... (247.3) (1,061.6) 1,340.7
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in deposits ................................ 1,115.8 (4,239.9) (511.2)
Proceeds from Federal Home Loan Bank advances .................. 3,135.0 1,710.0 505.0
Payments on Federal Home Loan Bank advances .................... (2,990.0) (200.0) (1,328.7)
Net (decrease) increase in reverse repurchase agreements ...... (893.7) 1,501.2 (185.3)
Proceeds from other borrowings ................................. 3.0 202.0 317.5
Payments on other borrowings and subordinated debentures ...... (286.7) (41.4) (300.9)
Proceeds from the issuance of common shares .................... -- 210.9 --
Proceeds from the issuance of preferred shares of subsidiary .. -- 164.2 89.0
----------- ----------- -----------
Net cash provided (used) by financing activities ........... 83.4 (693.0) (1,414.6)
----------- ----------- -----------
Net (decrease) increase in cash ................................. (19.1) (527.3) 350.7
Cash at beginning of period ..................................... 292.8 820.1 469.4
----------- ----------- -----------
Cash at end of period ........................................... $ 273.7 $ 292.8 $ 820.1
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-130
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Cal Fed Bancorp Inc. was incorporated as a Delaware corporation to serve
as the holding company for California Federal Bank, F.S.B. ("California
Federal") During the 1995 fourth quarter, California Federal received both
regulatory and shareholder approval to reorganize into a holding company
structure. Prior to the effective date of the reorganization, Cal Fed Bancorp
Inc. was a wholly-owned subsidiary of California Federal. On December 22,
1995, as part of the reorganization into a holding company structure,
California Federal contributed $22 million in capital to Cal Fed Bancorp Inc.
On January 1, 1996, the reorganization was effected whereby each share of
California Federal, common stock was converted into one share of Cal Fed
Bancorp Inc. common stock. As a result of the reorganization, California
Federal, became a wholly-owned subsidiary of Cal Fed Bancorp Inc. The other
equity securities remain outstanding securities of California Federal.
However, while the 7 3/4% noncumulative convertible preferred stock, Series A
of California Federal remains an outstanding security of California Federal,
the Series A preferred stock will be convertible into shares of Cal Fed
Bancorp Inc. common stock if converted. The Bank may call the Series A
preferred stock at anytime on or after March 31, 1996 at its par value of
$25.00.
The consolidated financial statements include the accounts of Cal Fed
Bancorp Inc. and its subsidiaries ("the Bank"). The Bank maintains 125 full
service branches in California and Nevada and is one of the largest savings
associations in the United States. The Bank offers a broad range of consumer
financial services including demand and term deposits and mortgage and
consumer loans. Subsidiaries of the Bank sell insurance and investment
products to the Bank's customers, and have previously engaged in the real
estate investment and development and trust business. The Bank's deposit
gathering and loan production operations are concentrated in California,
particularly in Southern California.
It is the Bank's policy to consolidate all majority-owned subsidiaries.
All significant intercompany balances and transactions have been eliminated
in consolidation. Certain reclassifications have been made to the 1994 and
1993 data in order to conform to the current presentation. The preparation of
the Bank's financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the Financial Statements and
the reported operations of the Bank for the periods presented. Actual results
may differ from those estimates calculated by the Bank.
In December 1995, California Federal contributed approximately $22 million
in capital to Cal Fed Bancorp Inc. as part of the reorganization into a
holding company structure. Although the contribution did not impact
California Federal's consolidated regulatory capital at December 31, 1995,
California Federal's regulatory capital will be reduced by the amount of the
contribution in 1996.
SHORT-TERM LIQUID INVESTMENTS
The Bank's short-term liquid investments consist of federal funds sold and
certificates of deposit. These investments generally mature within 60 days.
The Bank invests in these assets as a means to maximize its return on
short-term funds that it holds for liquidity purposes.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
The Bank invests in securities purchased under agreements to resell
("repurchase agreements") to maximize the yield on its liquid assets. The
Bank obtains collateral for these agreements, which normally consists of U.S.
treasury securities or mortgage-backed securities ("MBS") guaranteed by
agencies of the U.S. government. The collateral is held in the custody of a
trustee, who is not a party to the transaction.
F-131
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The duration of these agreements is typically less than 30 days. The Bank
deals only with nationally recognized investment banking firms as the
counterparties to these agreements. The Bank's investment in repurchase
agreements solely consisted of securities purchased under agreements to
resell identical securities.
INVESTMENTS IN SECURITIES
The Bank's investment in securities principally consists of U.S. treasury
securities and mortgage-backed securities. The Bank has created MBS when it
exchanges pools of loans for mortgage-backed securities ("securitized
loans"). The Bank adopted Statement of Financial Accounting Standard No. 115,
Accounting for Certain Investments in Debt and Equity Securities ("SFAS 115")
at December 31, 1993. In accordance with SFAS 115, the Bank classifies its
investment in securities as held to maturity securities, trading securities
and available for sale securities as applicable. The Bank did not hold any
trading securities at December 31, 1995 or 1994.
Available for Sale Securities
The Bank has classified certain securities as "available for sale". The
Bank classifies securities as available for sale based upon a determination
that such securities may be sold at a future date or if there are foreseeable
circumstances under which the Bank would sell such securities.
Securities designated as available for sale are recorded at market value.
Changes in the market value of debt securities held for sale are included in
shareholders' equity as unrealized holding gains or losses net of the related
tax effect, if any. Unrealized losses, on available for sale securities
reflecting a decline in value judged to be other than temporary, are charged
to income in the Consolidated Statement of Operations. Realized gains or
losses on available for sale securities are computed on a specific
identification basis.
Securities Held to Maturity
The Bank has classified certain securities as "held to maturity".
Securities are designated as held to maturity if the Bank has the positive
intent and the ability to hold the securities to maturity. Held to maturity
securities are carried at amortized cost, adjusted for the amortization of
any related premiums or the accretion of any related discounts into interest
income using a methodology which approximates a level yield of interest over
the estimated remaining period until maturity. Unrealized losses on held to
maturity securities, reflecting a decline in value, judged by the Bank to be
other than temporary, are charged to income and reported under the caption
"Gain (loss) on Sale of Securities" in the Consolidated Statements of
Operations.
LOANS RECEIVABLE
The Bank's principal interest earning asset is loans receivable. The Bank
primarily originates loans secured by residential property of 4 units or less
("residential 1-4 loans"). Prior to 1993, the Bank was active in the
origination of loans secured by residential properties of 5 or more units
("multifamily loans") and loans secured by office buildings, shopping
centers, industrial buildings, warehouses, marinas and hotels ("commercial
real estate loans.") The Bank currently limits its originations of
multifamily and commercial real estate loans to finance the sale of real
estate. Prior to 1993, the Bank was active in the origination of loans
secured by vehicles, mobile homes, boats and unsecured personal loans
("consumer loans"). Since 1993, the Bank has ceased originating consumer
loans for its own portfolio. However, the Bank does originate consumer loans
for other financial institutions for a fee. The Bank segregates its loan
portfolio into loans held for sale and loans held for investment. The Bank
normally designates a loan as held for sale at the time of origination. The
Bank's portfolio of residential 1-4 loans, multifamily loans and
F-132
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
commercial real estate loans are primarily secured by property located in
California. The Bank continues to focus its origination efforts in
California, particularly in Southern California. The Bank's ability to
originate loans is affected by economic conditions, competition and the
market for real estate in California. Likewise, the ability of the Bank's
borrowers to honor their contractual loan obligations to the Bank are also
affected by the strength of the California economy and particularly the
availability of employment and the pricing for residential housing. Should
the California economy, the market for real estate, and/or the availability
of employment experience a significant downturn over the near term, the Bank
may experience a reduction in the level of loan originations and/or an
increase in loan losses.
Loans Receivable Held for Sale
The Bank has designated certain of its loans receivable as "held for
sale". In determining the level of loans held for sale, the Bank considers
whether such loans would be sold in response to liquidity needs,
asset/liability management requirements, regulatory capital needs and other
factors. The Bank's current policy is to designate substantially all
originations of fixed-rate residential 1-4 loans that conform to the
underwriting criteria of Fannie Mae ("FNMA"), formerly known as the Federal
National Mortgage Association or Freddie Mac ("FHLMC"), formerly known as the
Federal Home Loan Mortgage Corporation, as held for sale.
Loans held for sale are recorded at the lower of cost or market value.
Unrealized losses are recorded as reduction in earnings and are included
under the caption "Gain (loss) on sale of loans" in the Consolidated
Statements of Operations. Realized gains and losses from the sale of loans
receivable are computed under the specific identification method.
Gains and Losses from the Sale of Loans
The Bank sells whole loans and participations in mortgage loans to
institutional and private investors. Gains and losses resulting from the
sales of loans are determined on the specific identification method and
reflect the extent that the sales proceeds exceed or are less than the Bank's
investment in the loans (which includes adjusting the unpaid principal
balance of the loans for unearned discounts, premiums and deferred fees and
costs at the time of sale). In some cases, the Bank sells loans and continues
to service such loans for the investor. In these cases, the Bank recognizes a
gain or loss on the loan sale measured by the present value of the difference
between the yield on the loans and the yield to be paid to the buyer, reduced
by the normal servicing fees, over the estimated remaining lives of those
loans using market prepayment, default and discount rate assumptions. If
loans are sold with recourse, the estimated liability under the recourse
provisions is provided for in the computation of the gain or loss. The
resulting deferred discount or premium ("excess servicing") is amortized as
an addition to or deduction from income using the interest method, adjusted
for actual prepayments. The Bank periodically reviews the remaining premium
to ensure that it does not exceed the present value of the estimated excess
servicing fees, using current estimates of market prepayments and default. In
the event that actual prepayments exceed the assumptions used in determining
the gain or loss, the deferred premium is adjusted to reflect current
prepayment projections by a charge to operations. To the extent sales of
loans involve the sale of part of a loan or a pool of loans with
disproportionate credit and prepayment risks, the cost basis is allocated
based upon the relative fair market value of the portion sold and the portion
retained on the date such loans were acquired or, if that is not
determinable, the date of sale. The amount of excess servicing recorded by
the Bank was $3.9 million at both December 31, 1995 and 1994. Such amounts
were included in "Prepaid expenses and other assets" on the Consolidated
Statements of Financial Condition.
Loan Servicing
The Bank services its loan portfolio and real estate and consumer loans
which are owned by independent investors. Loans serviced by the Bank for
others are primarily the result of the Bank selling
F-133
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
loans while retaining the servicing of such loans. Loans which are serviced
for other parties are not included with loans receivable or any other asset
in the accompanying consolidated financial statements. Fees earned for
servicing loans for others are reported as income when the related loan
payments are collected. Loan servicing costs are charged to expense as
incurred.
Loans Receivable Held for Investment
The Bank's loan portfolio is comprised of residential 1-4 loans, loans
secured by income producing real estate ("income property loans") and
consumer loans. Since 1993, the Bank has not actively engaged in originating
income property loans, except to finance the sale of the Bank's real estate.
Loans receivable are generally recorded at the contractual amounts owed by
borrowers, less deferrals, unearned interest, the allowance for loan losses,
undisbursed funds and purchase premiums and discounts. Interest on loans is
credited to income as earned, to the extent deemed collectible. Discounts on
loans purchased and unearned interest on consumer loans is accreted into
interest income using the interest method over the contractual lives of the
loans, adjusted for actual prepayments.
Loan Origination Fees and Costs
Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an adjustment
of loan yield using the interest method. When a loan is paid off or sold, any
unamortized net deferred fee balance is credited to income. Commitment fees
received in connection with the purchase of loans are deferred and recognized
over the life of the resulting loans as an adjustment of yield, or if the
commitment expires unexercised, credited to income upon expiration of the
commitment. Any costs in connection with the purchase of loans are expensed
as incurred.
Impaired and Non-Performing Loans
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 114, Accounting by Creditors
for Impairment of a Loan ("SFAS 114"). Under SFAS 114, a loan is impaired
when it is "probable" that a creditor will be unable to collect all amounts
due (i.e., both principal and interest) according to the contractual terms of
the loan agreement. SFAS 114 excludes among other items, large groups of
smaller-balance homogenous loans that are collectively evaluated for
impairment. The Bank adopted SFAS 114 as of January 1, 1995. The Bank has
defined residential 1-4 loans, consumer loans, multifamily loans with an
outstanding balance of less than $750,000 and commercial real estate loans
with an outstanding balance of less than $500,000 as homogenous loans. All
homogenous loans that are 90 days or more delinquent or are in foreclosure
are automatically placed on non-performing status. Additionally, homogenous
loans that have had a modification of terms are individually reviewed to
determine if they meet the definition of a troubled debt restructuring. The
measurement of impairment may be based on (i) the present value of the
expected future cash flows of the impaired loan discounted at the loan's
original effective interest rate; (ii) the observable market price of the
impaired loan, or (iii) the fair value of the collateral of a
collateral-dependent loan. The amount by which the recorded investment of the
loan exceeds the measure of the impaired loan is recognized by recording a
valuation allowance with a corresponding charge to the provision for losses.
For all loans secured by real estate, the Bank measures impairment and
establishes specific valuation allowances by utilizing the fair value of the
property collateralizing the loan. Additionally, SFAS 114 eliminates the
requirement that a creditor account for certain loans as foreclosed assets
until the creditor has taken possession of the collateral. SFAS 114 became
effective for financial statements issued for fiscal years beginning after
December 15, 1994 and is required to be adopted prospectively.
All loans designated by the Bank as "impaired" are either placed on
non-accrual status or are designated as restructured and are included with
those loans reported as non-performing. The Bank did
F-134
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
not experience a material impact upon its financial condition or operations
from the implementation of SFAS 114. The Bank's non-performing loans consist
of loans on which the Bank has ceased the accrual of interest ("non-accrual
loans") and loans on which various concessions have been made with respect to
the interest rate or other terms due to the inability of the borrower to
service the obligation under the original terms of the agreement
("restructured loans"). It is the Bank's policy to place a loan on
non-accrual status in the event that the borrower is 90 days or more
delinquent or earlier if the timely collection of interest and/or principal
appears doubtful. When a loan is determined to be impaired and/or placed on
non-accrual status, the accrued and unpaid interest receivable is reversed.
All cash subsequently collected on non-accrual loans are used to reduce the
recorded investment in the loan until the loan is returned to performing
status. The Bank's policy allows for loans that are contractually performing
to be designated as impaired and to be placed on non-accrual status, if the
future collection of interest and or principal appears doubtful or the risk
of default is probable.
Allowance for Loan Losses
The Bank has established valuation allowances for estimated losses on
specific loans ("specific valuation allowances") and for the inherent risk in
the loan portfolio which has yet to be specifically identified ("general
valuation allowances").
The Bank maintains a loan monitoring system which provides a means for the
timely identification of impaired and potential problem loans and to permit
the evaluation of the adequacy of the allowances for losses. The Bank's loan
monitoring system has established specific policies relating to its
residential 1-4, income property, commercial banking and consumer loan
portfolios. Additionally, the Bank is required by various regulatory agencies
to monitor and classify its assets as Pass, Special Mention, Substandard,
Doubtful and Loss. The Bank's monitoring system further disaggregates loans
that are determined to be Pass into four separate grades. Additionally, the
Bank places loans on a watchlist if they exhibit certain credit
characteristics. These characteristics include dollar size, tenant
concentration and the timing of maturity.
The Bank's residential 1-4 loans and consumer loans are relatively
homogenous and no single residential 1-4 or consumer loan possesses the
potential for significant risk of loss. Therefore, the Bank normally
evaluates the risk of loss on these loans by analyzing their loss experience,
performance, default rates and other indicators of risk for the portfolios as
a whole. The Bank stratifies its income property loan portfolio by size and
by type and treats performing multi-family loans with outstanding principal
balances less than $750,000 and commercial real estate loans with balances
less than $500,000 as homogenous portfolios. Income property loans that are
below the homogenous threshold are evaluated for impairment based upon their
payment status and on a pool basis. For income property loans exceeding the
homogenous threshold, the Bank conducts a periodic review of each loan in
order to test each loan for impairment. The frequency and type of review is
dependent upon the inherent risk attributed to each loan. The level of risk
is measured by a scale which evaluates each loan on a continuum of multiple
grades. The frequency and intensity of the loan review is directly
proportionate to the adversity of the loan grade. The Bank evaluates the risk
of default and the risk of loss for each loan subject to individual
monitoring. During 1995, the Bank expanded the scope of its individual loan
monitoring to include commercial real estate loans with an outstanding
principal balance in excess of $500,000. Previously, the Bank had utilized a
threshold of $750,000 for all income property loans. The Bank expanded the
scope of its non-homogenous loans to ensure that a majority of its commercial
real estate loans were subject to individual review. Non-performing income
property loans and performing loans that have been graded substandard,
special mention, or watchlist are typically reviewed on a quarterly basis.
Current appraisals are generally obtained annually as long as the loan
continues to possess certain risk characteristics. These loans are monitored
throughout the year by a review of the collateral's operating performance and
the borrowers
F-135
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
indicated or demonstrated ability to continue to meet their obligations. When
necessary, the Bank utilizes operating statements of the collateral to
perform its own discounted cash flow analyses. These analyses provide the
basis for specific valuation allowances. Numerous other factors are
considered in the evaluation, including a review of certain individual
borrowers' current financial status, credit standing, available collateral,
the Bank's judgment regarding prevailing and anticipated economic conditions
and other relevant factors.
Specific valuation allowances are provided when an identified decline in
the value of an impaired loan (or the related collateral) is identified. The
determination of specific valuation allowances includes a periodic evaluation
of the financial status of certain individual borrowers or collateral
relating to loans specifically identified as containing elements of potential
risk in the loan portfolio. For loans that are impaired and secured by real
estate or other collateral, the Bank provides specific allowances based upon
the excess of the outstanding loan amount over the fair value of the related
collateral with consideration of holding and selling costs.
General valuation allowances are based upon the inherent risk in the loan
portfolio that has not been specifically identified. The general valuation
allowance is based upon a number of factors, including historical loss
experience, the level of non-performing and internally classified loans, the
composition of the loan portfolio, estimated remaining lives of the various
types of loans within the portfolio, prevailing and forecasted economic
conditions and the Bank's judgment. General allowances are provided for all
loans, regardless of any specific allowances provided. The determination of
the Bank's allowance for loan losses is based on estimates that are affected
by changes in the regional or national economy and market conditions. The
Bank believes that as of December 31, 1995 and 1994, the allowance for loan
losses is adequate based on current economic and market conditions. However,
in the course of evaluating the adequacy of the allowance for loan losses,
the Bank has assumed that the California economy and the market for real
estate will remain in the same relative condition that it was in at December
31, 1995. Should these factors experience a downturn in the near term or if
market interest rates increase significantly in the near term, the Bank could
experience a material increase in the level of loan defaults and charge-offs.
REAL ESTATE HELD FOR SALE
Real estate held for sale consists of real estate acquired in settlement
of loans ("REO") and real estate investments ("REI"). REO generally results
when property collateralizing a loan is foreclosed upon or otherwise acquired
by the Bank in satisfaction of the loan. REO is recorded at the lower of the
recorded investment in the loan satisfied, the fair value or the disposition
value of the related assets acquired less anticipated disposition costs. The
fair value of the assets is based upon a current appraisal adjusted for
estimated carrying and selling costs. The disposition value is based upon the
current market pricing of the asset. Net cash receipts on REO are recorded as
a reduction in the basis of the asset. Net cash payments are expensed as
incurred. The Bank's REI consist of properties that the Bank, through its
subsidiaries, acquired for purposes of development. The Bank has not been
actively involved in real estate investment or development for several years.
The Bank's REI consist of properties where the Bank is actively seeking to
dispose of the property in an expeditious manner. The Bank records its REI at
the lower of cost or fair value of the properties. The Bank determines fair
value by utilizing recent sales activity and deducting for holding and
disposition costs over the estimated remaining period to sell the projects.
The Bank has assumed an orderly disposition in estimating the holding period
to sale. Should the Bank be unable to sell the project at the projected
prices, or if the holding period is substantially longer than forecast, or if
the Bank's intent with respect to an orderly disposition were to change, the
fair value ultimately realized by the Bank could be materially lower than the
Bank's current forecast.
F-136
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
PREMISES AND EQUIPMENT, DEPRECIATION AND CAPITALIZATION OF INTEREST
Maintenance and repairs on premises and equipment are charged to expense
in the year incurred. Depreciation and amortization of premises and equipment
are computed using the straight-line method over the estimated useful lives
of the assets. Interest incurred on amounts used to finance the construction
of such assets is capitalized and amortized over the depreciable lives of the
related assets.
GOODWILL
Goodwill, which represents the excess of cost over the fair value of
tangible and identifiable intangible net assets acquired, was amortized on a
straight-line basis over the expected periods to be benefited, ranging from
20 to 40 years. During 1994, the Bank applied Statement of Financial
Accounting Standards No. 72 Accounting for Certain Acquisitions of Banking or
Thrift Institutions ("SFAS 72") to acquisitions initiated, by the Bank, prior
to September 30, 1982. SFAS 72 requires, among other things, that to the
extent, the fair value of liabilities assumed exceeds the fair value of
identifiable assets acquired from a banking or thrift institution, the
unidentifiable intangible asset recognized (i.e., goodwill) generally shall
be amortized over a period no longer than the discount on the acquired
long-term interest earning assets. SFAS 72 was effective for acquisitions
initiated after September 30, 1982 with retroactive application permitted.
The Bank had been accounting for its acquisitions initiated subsequent to
September 30, 1982 in accordance with SFAS 72. The cumulative effect of the
retroactive application of SFAS 72 resulted in the acceleration of the Bank's
goodwill amortization arising from the Bank's thrift institution acquisitions
initiated prior to September 30, 1982. Under generally accepted accounting
principles, the cumulative effect from the retroactive application of SFAS 72
must be reflected as of the first day of the fiscal year in which it is
implemented. To that extent, $273.7 million of remaining unamortized goodwill
was eliminated effective January 1, 1994.
INCOME TAXES
The Bank files a consolidated federal income tax return and a combined
California franchise tax report with its subsidiaries.
The Bank has adopted financial Accounting Standards Board Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS
109") and has applied the provisions of SFAS 109 retroactively to January 1,
1982. Under the asset and liability method of SFAS 109, deferred income tax
expense (benefit) is derived by establishing deferred tax assets and
liabilities as of the reporting date for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date. The Bank's evaluation of the
realizability of deferred tax assets includes consideration of the amount and
timing of future reversals of existing temporary differences, as well as
available taxable income in carryback years. The Bank has not considered
income from future operations in evaluating the realizability of its deferred
tax assets. See Note 20 Income Taxes.
STOCKHOLDERS' EQUITY
The par value of the Bank's common stock was $1.00 per share at December
31, 1995 and at December 31, 1994. The number of shares issued and
outstanding were 49,200,444 and 49,199,044 at December 31, 1995 and 1994,
respectively. The authorized number of common shares were 100,000,000 at
December 31, 1995 and 1994.
F-137
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
During the 1995 fourth quarter, California Federal obtained regulatory
and shareholder approval to reorganize into a holding company structure. As a
result of the reorganization, on January 1, 1996, each share of California
Federal common stock was converted into one share of Cal Fed Bancorp Inc.
common stock. Consequently, California Federal became a wholly-owned
subsidiary of Cal Fed Bancorp Inc. The other equity securities remain
outstanding securities of California Federal. However, the 7 3/4%
noncumulative convertible preferred stock, Series A of California Federal is
convertible into shares of Cal Fed Bancorp Inc. common stock if converted.
The par value of the 7 3/4% noncumulative convertible preferred stock,
Series A of California Federal was $25.00 per share at both December 31, 1995
and December 31, 1994, respectively. The designated and outstanding number of
shares at December 31, 1995 were 3,800,000 and 3,740,000, respectively.
Preferred stock, Series A, dividends are not cumulative and are payable
quarterly when declared by the Board of Directors of California Federal
Quarterly dividend payments commenced May 15, 1993. The preferred stock,
Series A, is convertible by the holder into common stock at anytime, unless
previously redeemed by California Federal, at a conversion price of $20.16
per share of common stock, subject to adjustment. The preferred stock, Series
A, is not redeemable prior to March 31, 1996. The preferred stock, Series A,
is redeemable solely at the option of California Federal at any time on or
after March 31, 1996, in whole or in part, at par value plus declared but
unpaid dividends.
During 1994, California Federal issued 1,725,000 shares of 10 5/8%
noncumulative perpetual preferred stock, Series B ("Preferred Stock, Series
B"). Cash dividends on the Preferred Stock, Series B, are not cumulative and
are payable quarterly when declared by the Board of Directors of California
Federal. The Preferred Stock, Series B, has a liquidation preference and par
value of $100.00 per share. The par value of the Preferred Stock, Series B
was $100.00 per share at December 31, 1995 and 1994. Both the designated and
outstanding number of shares at December 31, 1995 and 1994 were 1,725,000.
The Preferred Stock, Series B, is generally not redeemable prior to April 1,
1999. The Preferred Stock, Series B, is redeemable at the option of
California Federal, in whole or in part, at $105.313 per share on or after
April 1, 1999 and prior to April 1, 2000, and at prices decreasing annually
thereafter to the liquidation preference of $100.00 per share on or after
April 1, 2003, plus declared but unpaid dividends. In addition, the Preferred
Stock, Series B, is redeemable at the option of California Federal or its
successor or any acquiring or resulting entity with respect to California
Federal on or after April 1, 1996 and prior to April 1, 1999 in whole, but
not in part, in the event of a change of control of California Federal at
$114.50 per share.
On February 28, 1993, California Federal completed a one-for-five reverse
stock split (the "Reverse Stock Split") of all classes of California Federal
common stock. The Reverse Stock Split has been reflected in the consolidated
financial statements of the Bank for and at all periods presented. Therefore,
the par value, the number of shares issued, the number of shares authorized,
the number of shares outstanding and the average number of shares at and for
all periods are presented as if the reverse stock split had occurred at the
first day of each fiscal year for all periods presented.
NET EARNINGS (LOSS) PER SHARE
Net earnings (loss) per common share is computed by dividing net earnings
(loss) available to common stockholders by the weighted average number of
common shares outstanding, including the dilutive effect, if any, of common
stock equivalents. For the years ended December 31, 1995, 1994 and 1993, the
weighted average number of shares used to calculate primary earnings (loss)
per share were 49,855,150; 43,556,167 and 24,971,836, respectively. For the
years ended December 31, 1995, 1994 and 1993 the weighted average number of
shares used to calculate fully diluted earnings (loss) per share were
50,020,218; 43,556,167 and 24,971,836, respectively.
F-138
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
FINANCIAL INSTRUMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 107 "Disclosures about Fair Value of Financial
Instruments" ("SFAS 107").
Financial instruments are defined under SFAS 107 as cash, evidence of an
ownership in an entity, or a contract that conveys or imposes on an entity
the contractual right or obligation to either receive or deliver cash or
another financial instrument.
A significant portion of the Bank's assets and liabilities are financial
instruments as defined under SFAS 107. The Bank is also a party to financial
instruments that are not reported on the Consolidated Statements of Financial
Condition ("off balance sheet financial instruments"). Such off-balance sheet
financial instruments include: commitments to originate loans, standby
letters of credit, recourse arrangements and interest rate exchange
agreements.
Risks Associated with Financial Instruments
Credit Risk
Credit risk of a financial instrument is the possibility that a loss may
result from the failure of another party to perform in accordance with the
terms of the contract. The most significant credit risk associated with the
Bank's financial instruments is concentrated in its loans receivable.
Additionally, the Bank is subject to credit risk on certain off-balance sheet
financial instruments. The Bank utilizes a loan monitoring system to evaluate
the level of credit risk on its loan portfolio and utilizes a similar process
for loans sold by the Bank with recourse and standby letters of credit. The
Bank's credit risk with respect to interest rate exchange agreements is
limited to the premium paid on interest rate cap and floor arrangements, and
the amount of interest due from the counterparty.
Market Risk
Market risk of a financial instrument is the possibility that future
changes in market prices may reduce the value of a financial instrument or
increase the contractual obligations of the Bank. The Bank's market risk is
concentrated in its portfolios of securities held for sale and loans
receivable. The Bank's securities held for sale are traded in active markets.
The values of these securities are susceptable to fluctuations in the general
market. When a borrower fails to meet the contractual requirements of his
loan agreement, the Bank is subject to the market risk of the collateral
securing the loan.
Interest Rate Risk
Financial instruments are subject to interest rate risk to the extent that
they reprice on a frequency, degree or basis that varies from market
repricing. The Bank is subject to interest rate risk to the degree that its
interest earning assets reprice on a different frequency or schedule than its
interest bearing liabilities. A majority of the Bank's loans receivable and
mortgage backed securities reprice based upon the eleventh district cost of
funds index ("COFI"). The repricing of COFI tends to lag market interest
rates. The Bank closely monitors the pricing sensitivity of its financial
instruments and, if deemed cost effective, utilizes hedging and other
asset/liability techniques to mitigate the impact of interest rate risk.
Concentrations of Credit Risk
The Bank's lending activities are principally conducted in California and
the Bank currently focuses on the origination of residential 1-4 loans. The
largest concentration of the Bank's loan portfolio is located
F-139
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
in the Los Angeles County area of California. The ability of the Bank's
borrowers to repay their commitments is contingent on several factors,
including the economic conditions in the borrower's geographic region,
primarily Southern California, market interest rates, and upon the individual
financial condition of the borrower.
Fair Value of Financial Instruments
SFAS 107 requires the disclosure of the fair value of financial
instruments, whether or not recognized on the statement of financial
condition, for which it is practicable to estimate the value. SFAS 107
requires that the Bank disclose estimated fair values for its financial
instruments. Fair values, estimates and assumptions are set forth in Note 21
Fair Value of Financial Instruments.
Derivative Financial Instruments
The Bank's derivative financial instruments are primarily limited to
interest rate exchange contracts and such contracts are predominantly
utilized for hedging activities for existing assets and liabilities.
The Bank uses several types of interest rate exchange contracts as an
integral part of its asset/liability management program including: (i)
interest rate swaps, (ii) interest rate caps and (iii) interest rate floors.
Interest rate exchange agreements have been utilized primarily to reduce
interest rate risk on certain interest bearing liabilities and interest
earning assets. Interest rate swap agreements are instruments in which the
Bank and another party agree to exchange interest payments on a notional
amount. When using interest rate cap agreements, the Bank pays another party
a premium in exchange for cash payments on a notional amount in the event
that a specified index exceeds a specified rate. When utilizing interest rate
floors, the Bank pays a premium in exchange for cash payments on a notional
amount in the event that a specified index is less than a specified rate.
These premiums are amortized over the duration of the agreement. The notional
amounts of interest rate exchange agreements are not reflected in the
Consolidated Statements of Financial Condition, but are disclosed in the
notes to these Consolidated Financial Statements. The Bank records interest
income and expense on the accrual method for its interest rate exchange
agreements. Changes in the value of interest rate exchange agreements that
are designated as held for a purpose other than trading are not reflected in
the Consolidated Financial Statements unless the Bank determined that it was
probable that the counterparty would default. Interest rate exchange
agreements that are designated as held for trading purposes are evaluated at
fair value, and in the event that such evaluation indicates a net liability
to the Bank, such liablility is reflected on the Consolidated Statements of
Financial Condition with corresponding charge reflected on the Consolidated
Statement of Operations. To the extent that the Bank is in a gain position,
the Bank records net cash flow as income upon receipt and typically does not
record unrealized gains as income.
NEWLY ENACTED AND PROPOSED ACCOUNTING PRONOUNCEMENTS
In October 1994, the FASB issued Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairment of a Loan --
Income Recognition and Disclosures" ("SFAS 118"). SFAS 118 amends SFAS 114 to
allow a creditor to use existing methods for recognizing interest income on
an impaired loan. Additionally, SFAS 118 requires, among other things,
additional disclosure, either in the body of the Financial Statements or in
the accompanying notes, about the recorded investment in certain impaired
loans and about how a creditor recognizes interest income related to those
impaired loans. SFAS 118 is effective for financial statements issued for
fiscal years beginning after December 15, 1994. The disclosures required by
SFAS 118 are reflected in the Notes to the Consolidated Financial Statements.
In March 1995, the FASB issued Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of" ("SFAS 121").
F-140
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
SFAS 121 establishes accounting standards for the impairment of long-lived
assets, certain identifiable intangibles, and goodwill related to those
assets to be held and used for long-lived assets and certain identifiable
intangibles to be disposed of. SFAS 121 requires that long-lived assets and
certain identifiable intangibles to be held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In the event that a
long-lived asset is determined to be impaired, an impairment loss shall be
recognized. SFAS 121 prescribes that impairment losses for long-lived assets
shall be measured as the amount by which the carrying amount of the asset
exceeds its fair value. Additionally, SFAS 121 provides that long-lived
assets, to be disposed by sale or abandonment, shall be reported at the lower
of carrying amount or fair value less cost of disposition. This statement is
effective for financial statements for fiscal years beginning after December
15, 1995, earlier application is permitted. The Bank has not yet implemented
SFAS 121 and does not believe that it will have a material adverse effect on
its financial position or results of operations.
In May 1995, the FASB issued Statement of Financial Accounting Standards
No. 122, "Accounting for Mortgage Servicing Rights" ("SFAS 122"), an
amendment of FASB Statement No. 65 "Accounting for Certain Mortgage Banking
Activities" ("SFAS 65"). SFAS 122 amends SFAS 65 to remove the distinction in
accounting for mortgage servicing rights resulting from originated loans and
those resulting from purchased loans. Additionally, SFAS 122 requires that a
mortgage banking enterprise assess its capitalized mortgage servicing rights
for impairment based on the fair value of those rights SFAS 122 is to be
applied prospectively to fiscal years beginning after December 15, 1995,
earlier application is permitted. The Bank has not yet implemented SFAS 122
and does not believe that it will have a material adverse effect on its
financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
SFAS 123 establishes financial accounting and reporting standards for
stock-based employee compensation plans. Those plans include all arrangements
by which employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts based on
the price of the employer's stock. Examples are stock purchase plans, stock
options, restricted stock, and stock appreciation rights. This Statement also
applies to transactions in which an entity issues its equity instruments to
acquire goods or services from nonemployees. Those transactions must be
accounted for, or at least disclosed in the case of stock options, based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable. The accounting
requirements of SFAS 123 are effective for transactions entered into in
fiscal years that begin after December 15, 1995. The disclosure requirements
of SFAS 123 are effective for financial statements for fiscal years beginning
after December 15, 1995, or for an earlier fiscal year for which SFAS 123 is
initially adopted for recognizing compensation cost. The Bank has not yet
implemented SFAS 123 and does not believe that it will have a material
adverse effect on its financial position or results of operation.
In November 1995, the FASB issued a Special Report as an aid in
understanding and implementing Statement of Financial Accounting Standards
No. 115. "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). The Special Report included such guidance that enabled the Bank
to reassess the appropriateness of the classifications of all securities held
and account for any resulting reclassifications at fair value in accordance
with SFAS 115. During the fourth quarter of 1995, the Bank, in accordance
with the Special Report, redesignated $17.2 million of MBS from "held to
maturity" to "available for sale". Prior to December 31, 1995, the Bank sold
the MBS for a loss of less than $0.1 million.
PROPOSED LEGISLATION
The Bank's deposits are insured by the Savings Association Insurance Fund
("SAIF") to a maximum of $100,000 for each insured depositor. The Federal
Deposit Insurance Corporation ("FDIC") administers
F-141
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
a separate Bank Insurance Fund ("BIF") applicable to commercial banks and
certain other non-SAIF insured institutions. Legislation is currently under
consideration by Congress which includes a one-time assessment for SAIF
members such as the Bank. Should legislation be enacted in its currently
contemplated form, the Bank's one-time assessment would be approximately $80
million, based upon the Bank's insured deposits at March 31, 1995 and an
assumed assessment rate of 85 basis points. Additionally, once the SAIF has
been recapitalized through the one-time assessment, the Bank's deposit
insurance premium assessments would be reduced from the current rate. The
currently proposed legislation has evolved significantly over recent months
and may continue to change until final legislation is enacted, if ever.
Moreover, there can be no assurance that a premium reduction will occur.
Assuming the proposed one-time special assessment became law in 1996 and
was immediately charged against results of operations, the one-time
assessment would, most likely, have a material adverse effect on the Bank's
1996 results of operations. However, the Bank believes that it has sufficient
regulatory capital to continue to be classified as "well-capitalized"
following such an assessment. In addition, the Bank would not face any
liquidity issues as a result of such a one-time assessment.
In addition, this proposed legislation would also significantly change the
federal income tax law affecting the bad debt reserves of savings
institutions. Although these proposed tax law changes are generally intended
to provide favorable tax results to savings institutions, there are unique
situations, such as in the case of the Bank, where the results may be
unfavorable in comparison to current tax law. The proposed legislation is
currently under review and may change significantly before final legislation
is enacted, if ever.
NOTE 2: SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purposes of the Consolidated Statements of Cash Flows, the Bank
defines cash as currency on hand and demand deposits with other financial
institutions.
<TABLE>
<CAPTION>
1995 1994 1993
--------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Cash Paid (Received) During the Year for:
Interest expense ............................ $685.2 $ 557.8 $617.4
Income taxes refunded ....................... (1.6) (8.5) (41.1)
Non-Cash Investing and Financing activities:
Loan foreclosures ........................... 146.2 189.3 506.3
Loans exchanged for mortgage-backed
securities .................................. 239.7 424.0 411.9
Transfer of securities to available for sale 17.2(A) -- 578.0
Transfer of loans to held for sale(B) ....... 78.7 1,213.9 189.6
Transfer of loans to held for investment .... -- -- 127.4
</TABLE>
- ------------
(A) In November 1995, the FASB issued a Special Report as an aid to
understanding and implementing SFAS 115. During the fourth quarter of
1995, the Bank, in accordance with the Special Report, redesignated
$17.2 million of MBS from "held to maturity" to "available for sale"
and, prior to December 31, 1995, sold the MBS for a loss of less than
$0.1 million.
(B) During 1994, the Bank designated $1.2 billion of performing and
non-performing loans as assets held for accelerated disposition. This
designation was made during 1994 as an integral part of the bank's
program to improve its capital position, reduce non-performing assets
and improve its operating efficiency.
F-142
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: SHORT-TERM LIQUID INVESTMENTS
The Bank's short-term liquid investments include certificates of deposit,
commercial paper and Federal funds sold. The amount of short-term liquid
investments held by the Bank at any point in time is a function of many
factors including: liquidity requirements, projected cash requirements and
cash flows.
The following table presents the Bank's short-term liquid investments at
the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------------------- ------------------------------------------------
WEIGHTED AVG. WEIGHTED AVG.
CARRYING WEIGHTED AVG. MATURITY CARRYING WEIGHTED AVE. MATURITY
VALUE RATE (DAYS) VALUE RATE (DAYS)
------------------- -------------- -------------- ------------------ -------------- -------------
(DOLLARS IN MILLIONS) (DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Federal funds
sold .......... $70.0 5.80% 2 $330.0 6.28% 3
Certificates of
deposit ....... 4.1 5.19 27 3.8 3.18 32
------------------- -------------------
$74.1 5.77 $333.8 6.25
=================== ===================
</TABLE>
At both December 31, 1995 and 1994 accrued interest and dividends
receivable related to short-term liquid investments held to maturity was $0.2
million.
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL
Securities purchased under agreements to resell are collateralized by
mortgage-backed securities at December 31, 1995 and by U.S. Treasury
securities at December 31, 1994. The following table provides additional
information on the agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1995 1994
----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Carrying value of agreements to resell .................... $1,674.6 $ 48.2
Market value of collateral ................................ 1,704.4 48.3
Maximum amounts of outstanding agreements to resell at any
month-end ................................................ 1,704.2 48.2
Average amounts of outstanding agreements to resell for
the year ................................................. 1,144.5 1,032.9
Weighted average interest rate for the year ............... 5.99% 4.26%
Weighted average interest rate on year-end balances ...... 6.01% 5.70%
Weighted average maturity of outstanding agreements to
resell (days) ............................................ 11 3
</TABLE>
F-143
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL (Continued)
At December 31, 1995 and 1994, the Bank held only securities purchased
under agreements to resell the identical securities. The securities
collateralizing these agreements are held in the custodial accounts of a
trustee, who is not a party to the agreement for the Bank for the duration of
the agreements. The following table presents the Bank's securities purchased
under agreements to resell, by counterparty, at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
COUNTERPARTY 1995 1994
- ------------------ ---------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Lehman Brothers .. $ 700.7 $48.2
Nomura Securities 500.0 --
Bear Stearns ...... 473.9 --
---------- -------
$1,674.6 $48.2
========== =======
</TABLE>
Accrued interest related to securities purchased under agreements to
resell at December 31, 1995 and 1994 totaled $2.7 million and less than $0.1
million, respectively.
NOTE 5: SECURITIES AVAILABLE FOR SALE
The carrying values, market values and weighted average rate of securities
available for sale at December 31, 1995 are as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED
UNREALIZED UNREALIZED HOLDING WEIGHTED
HISTORICAL CARRYING HOLDING HOLDING GAINS MARKET AVERAGE
COST VALUE GAINS LOSSES (LOSSES) VALUE RATE
------------- ---------- ------------ ------------ ------------ -------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year $150.0 $149.9 $ -- $(0.1) $(0.1) $149.9 4.00%
Maturing after 1 year
but within 5 years ... 50.3 50.4 0.1 -- 0.1 50.4 7.46
------------ ---------- ------------ ------------ ------------ --------
$200.3 $200.3 $0.1 $(0.1) $ -- $200.3 4.87%
============ ========== ============ ============ ============ ========
</TABLE>
The carrying values, market values and weighted average rate of securities
available for sale at December 31, 1994 are as follows:
<TABLE>
<CAPTION>
NET
UNREALIZED UNREALIZED UNREALIZED WEIGHTED
HISTORICAL CARRYING HOLDING HOLDING HOLDING MARKET AVERAGE
COST VALUE GAINS LOSSES LOSSES VALUE RATE
---------- ------------ ------------ ------------ ---------- ---------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities:
Maturing within 1 year $1,001.2 $ 997.5 $-- $ (3.7) $ (3.7) $ 997.5 4.64%
Maturing after 1 year
but within 5 years .... 749.5 734.0 -- (15.5) (15.5) 734.0 6.19
------------ ---------- ------------ ------------ ------------ ----------
$1,750.7 $1,731.5 $-- $(19.2) $(19.2) $1,731.5 5.30%
============ ========== ============ ============ ============ ==========
</TABLE>
F-144
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: SECURITIES AVAILABLE FOR SALE (Continued)
The table below presents the activity of securities available for sale
for the periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
---------- ----------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1, ... $1,731.5 $ 894.7 $ 546.0
Purchases .............. 202.9 1,519.2 5.5
Sales .................. (969.4) (670.2) --
Transfers .............. 17.2(A) -- 578.0(B)
Maturities(C) .......... (801.1) 22.2 (250.1)
Market value adjustment 19.2 (34.4) 15.3
---------- ---------- ----------
Balance, December 31, . $ 200.3 $1,731.5 $ 894.7
========== ========== ==========
</TABLE>
- ------------
(A) During 1995, the Bank transferred $17.2 million of mortgage-backed
securities held to maturity to securities available for sale. See
Note 6 Securities Held to Maturity for further information.
(B) During 1993, the Bank adopted SFAS 115 and accordingly $578.0 million
of securities held to maturity were transferred to securities
available for sale.
(C) Maturities include amortization of premiums and accretion of
discounts.
Accrued interest receivable on securities available for sale at December
31, 1995 and December 31, 1994 totaled $2.7 million and $15.0 million,
respectively.
Proceeds from sales of securities available for sale during the years
ended December 31, 1995, 1994 and 1993 were $976.3 million, $670.4 million
and zero, respectively.
The Bank has pledged certain securities, including those available for
sale, as collateral for advances from the Student Loan Mortgage Association
("SLMA") and various other borrowings. The following table presents the
outstanding balances at the Bank's carrying value of securities pledged as
collateral at December 31, 1995 and 1994, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Repurchase agreements .. $ -- $692.6
SLMA advances .......... 124.9 287.0
Other borrowings ....... 58.8 11.9
-------- --------
$183.7 $991.5
======== ========
</TABLE>
NOTE 6: SECURITIES HELD TO MATURITY
The Bank's securities held to maturity have primarily consisted of MBS.
The Bank had an investment in a guaranteed investment contract, which matured
in 1995. The Bank's portfolio of MBS consist of securities issued by agencies
of the United States, such as Fannie Mae ("FNMA"). The investments are
purchased or are obtained by exchanging pools of mortgage loans for the
securities ("securitized loans").
F-145
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: SECURITIES HELD TO MATURITY (Continued)
Summarized below are securities held to maturity at December 31, 1995 and
1994:
<TABLE>
<CAPTION>
1995 1994
----------------------------------------------------------------------------------------------------
GROSS GROSS GROSS GROSS
CARRYING UNREALIZED UNREALIZED MARKET CARRYING UNREALIZED UNREALIZED MARKET
VALUE GAINS LOSSES VALUE VALUE GAINS LOSSES VALUE
------------ ------------ ---------- ---------- ------------ ---------- --------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities:
FNMA .................... $1,192.7 $17.9 $ (0.2) $1,210.4 $1,359.5 $0.4 $(46.4) $1,313.5
California Federal
AA-rated mortgage
pass-through securities 802.3 1.3 (5.2) 798.4 787.1 -- (21.1) 766.0
Other ................... 371.7 1.5 (20.7) 352.5 367.1 -- (20.8) 346.3
---------- ------------ ------------ ---------- ---------- ------------ ------------ ---------
2,366.7 20.7 (26.1) 2,361.3 2,513.7 0.4 (88.3) 2,425.8
---------- ------------ ------------ ---------- ---------- ------------ ------------ ---------
Guaranteed investment
contracts ................. -- -- -- -- 11.4 -- -- 11.4
---------- ------------ ------------ ---------- ---------- ------------ ------------ ---------
$2,366.7 $20.7 $(26.1) $2,361.3 $2,525.1 $0.4 $(88.3) $2,437.2
========== ============ ============ ========== ========== ============ ============ =========
</TABLE>
The weighted average interest rates of MBS held to maturity were 6.93% and
6.08% at December 31, 1995 and 1994, respectively. Accrued interest
receivable related to MBS held to maturity outstanding at December 31, 1995
and 1994 totaled $13.8 million and $12.7 million, respectively. The Bank
utilizes MBS as collateral for various borrowings. At December 31, 1995 and
1994, $1,316.3 million and $1,710.6 million, respectively, of MBS, were
pledged as collateral for various borrowings as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1995 1994
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Advances from FHLB ..... $ 255.9 $ 309.7
Repurchase agreements .. 908.9 1,080.3
SLMA advances .......... 108.6 269.9
Other obligations ...... 42.9 50.7
---------- ----------
$1,316.3 $1,710.6
========== ==========
</TABLE>
At December 31, 1995, the Bank had $1,064.5 million of securitized loans
with some form of recourse to the Bank. In the unanticipated event the
securitized loans are sold, purchasers would have varying forms of recourse
to the Bank. The recourse provisions subject the Bank to varying degrees of
liability in the event of loss. The Bank currently intends to hold its
portfolio of mortgage-backed securities until maturity. The following table
presents the composition of securitized loans with potential recourse, by
collateral type, at December 31, 1995:
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL
LOAN TO VALUE LOAN TO VALUE
ORIGINAL RATIO GREATER RATIO GREATER
SECURITIZED LOANS LOAN TO VALUE THAN 80% THAN 80%
WITH RECOURSE RATIO LESS THAN WITH WITHOUT
COLLATERALIZED BY =80% PMI(A) PMI(A) TOTAL
- --------------------- --------------- --------------- --------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Residential 1-4 units $ 636.1 $51.0 $10.1 $ 697.2
Multi-family property 365.7 -- 1.6 367.3
--------------- --------------- --------------- ---------
$1,001.8 $51.0 $11.7 $1,064.5
=============== =============== =============== =========
</TABLE>
- ------------
(A) Private mortgage insurance (PMI) provides limited insurance protection
to the Bank in the event of default.
F-146
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: SECURITIES HELD TO MATURITY (Continued)
The Bank periodically reviews the credit quality of its portfolio of MBS.
In the case of securitized loans with recourse provisions, the Bank makes an
assessment of the credit quality of the underlying loans. See Note 1 Summary
of Significant Accounting Policies for a discussion of the Bank's loan
monitoring policies.
In November 1995, the FASB issued a Special Report as an aid to
understanding and implementing SFAS 115. During the fourth quarter of 1995,
the Bank, in accordance with the Special Report, redesignated $17.2 million
of MBS from "held to maturity" to "available for sale" and, prior to December
31, 1995, sold the MBS for a loss of less than $0.1 million. There were no
sales of MBS during the year ended December 31, 1994.
NOTE 7: LOANS RECEIVABLE HELD FOR SALE
In order to manage its asset size, liquidity requirements, the composition
and interest rate sensitivity of its interest earning assets and other
factors; the Bank originates certain fixed rate residential 1-4 loans for
sale.
At December 31, 1995 and 1994, the historical cost bases of loans
receivable held for sale were $13.6 million and $1.3 million, respectively.
At December 31, 1995 and 1994, the market value of loans receivable held for
sale were $13.8 million and $1.3 million, respectively. Market values, at
December 31, 1995 and 1994, were based upon quotes of similar or identical
loans.
Gross unrealized gains on loans receivable held for sale were $0.2 million
and zero at December 31, 1995 and 1994, respectively. Gross unrealized losses
on loans receivable held for sale were zero at both December 31, 1995 and
1994. Proceeds from sales of loans receivable held for sale were $183.2
million, $1,099.4 million and $940.1 million for the years ended December 31,
1995, 1994 and 1993, respectively.
The following table summarizes the gains and losses recorded for the
periods presented for loans receivable:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Realized gains from sales of loans receivable ............. $ 0.3 $ 1.0 $ 6.6
Realized losses from sales of loans receivable ........... (0.6) (0.5) (4.4)
Net lower of cost or market adjustment for unrealized
gains .................................................... -- -- 3.2
-------- ------- -------
Net (losses) gains ........................................ $(0.3) $ 0.5 $ 5.4
======== ======= =======
</TABLE>
F-147
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT
Loans receivable held for investment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Loans secured by real estate:
Residential 1-4 ........................... $7,277.6 $6,543.3
Equity .................................... 64.1 79.3
---------- ----------
7,341.7 6,622.6
Income property:
Multi-family ............................. 1,346.2 1,458.1
Shopping centers ......................... 81.8 94.5
Office buildings ......................... 168.9 192.1
Other income property .................... 291.3 278.5
---------- ----------
Total income property ................... 1,888.2 2,023.2
---------- ----------
Total loans secured by real estate(A) ... 9,229.9 8,645.8
Consumer:
Mobile homes ............................. 66.3 79.6
Vehicles ................................. 21.5 49.4
Equity creditline ........................ 137.8 168.7
Unsecured ................................ 14.6 16.1
Loans secured by deposits ................ 9.4 8.8
---------- ----------
Total consumer loans .................... 249.6 322.6
---------- ----------
9,479.5 8,968.4
Loss:
Undisbursed loan funds .................... 0.1 --
Deferred loan (costs) fees ................ (13.9) (4.3)
Allowance for loan losses ................. 181.0 211.6
Unearned interest on equity/consumer loans 1.3 4.1
Discount on acquired loans ................ 7.4 9.7
---------- ----------
Total loans receivable ..................... 9,303.6 8,747.3
Less: Loans held for sale (see Note 7) .... 13.6 1.3
---------- ----------
Loans receivable held for investment ...... $9,290.0 $8,746.0
========== ==========
</TABLE>
- ------------
(A) Includes construction loans of $1.4 million at both December 31, 1995
and 1994.
Certain of the Bank's adjustable loan programs allow the borrower to make
monthly payments which are lower than the amount required to amortize the
loan until its maturity in any particular month. In the event that the
monthly payment is not sufficient to pay the interest accruing during the
month, the deficiency is added to the loan's principal balance ("negative
amortization"). In the event that a loan incurs significant negative
amortization, there is an increased risk that the market value of the
underlying collateral on the loan may be insufficient to fully satisfy the
outstanding principal and interest, should the borrower default.
At December 31, 1995 and 1994, the Bank's loan portfolio included $4.7
billion and $4.6 billion, respectively, of loans with the potential to
negatively amortize, of which $1.4 billion and $1.0 billion of loans had some
amount of negative amortization.
F-148
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
Accrued interest receivable related to loans receivable including loans
held for sale at December 31, 1995 and 1994 totaled $60.1 million and $51.7
million, respectively.
The Bank has pledged certain loans as collateral for advances from the
FHLB, letters of credit, interest rate swaps, and capital lease obligations.
The following table presents the outstanding balance of loans pledged as
collateral at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Pledged as collateral for:
Advances from FHLB ............ $3,322.1 $3,408.1
Letters of credit from FHLB .. 52.3 107.4
Interest rate swap agreements -- 6.9
Capital lease obligations .... 8.7 9.5
---------- ----------
$3,383.1 $3,531.9
========== ==========
</TABLE>
The Bank's loans are concentrated in (i) loans secured by residential
property of 1-4 units, (ii) loans with collateral located in California and
(iii) loans secured by residential property of five units or more. The
following table shows the concentrations of the gross real estate secured
portfolio by state and property type:
<TABLE>
<CAPTION>
INCOME PROPERTY
------------------------------------------
RESIDENTIAL 1-4 EQUITY MULTI-FAMILY COMMERCIAL
---------------------- ---------------- ---------------------- ------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
---------------------- ---------------- ---------------------- ------------------
STATE 1995 1994 1995 1994 1995 1994 1995 1994
- -------------- ---------- ---------- ------- ------- ---------- ---------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California .... $6,288.9 $5,574.7 $49.5 $24.8 $1,234.6 $1,338.1 $512.7 $530.3
Florida ....... 456.4 533.3 11.3 45.8 31.5 34.5 14.8 16.7
Nevada ........ 183.4 182.9 2.9 7.1 41.7 42.8 6.3 8.0
Georgia ....... 79.6 92.0 0.1 1.4 7.9 8.1 2.0 2.1
New York ...... 34.4 30.3 -- -- 0.1 0.2 -- --
Arizona ....... 16.1 5.9 0.1 0.1 15.3 16.5 1.6 1.7
New Jersey .... 32.5 27.9 -- -- -- -- -- --
Texas ......... 24.8 19.5 -- -- 2.5 4.1 0.6 1.4
Connecticut .. 21.0 23.0 -- -- -- -- -- --
Washington .... 13.5 4.5 -- -- 4.9 5.0 -- --
Colorado ...... 16.4 3.0 -- -- -- -- 1.6 2.7
Illinois ...... 11.3 1.3 0.1 -- 1.1 1.3 -- --
Other (1) ..... 99.3 45.0 0.1 0.1 6.6 7.5 2.4 2.2
---------- ---------- ------- ------- ---------- ---------- -------- --------
$7,277.6 $6,543.3 $64.1 $79.3 $1,346.2 $1,458.1 $542.0 $565.1
========== ========== ======= ======= ========== ========== ======== ========
</TABLE>
- ------------
(1) Includes states with totals less than $11 million.
The majority of the Bank's California real estate loans are secured by
property located in Los Angeles, Orange, and San Diego counties.
At December 31, 1995, the largest amount of loans to a single borrower
totaled $39.8 million. The collateral for the loan is a 224,840 square foot
office building occupied entirely by certain of the Bank's operating and
administrative departments and subject to a lease for the life of the loan.
F-149
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
Impaired and Non-Performing Loans
The Bank identifies impaired loans through its loss monitoring process.
See Note 1 Summary of Significant Accounting Policies for further information
about the Bank's loan monitoring process. The Bank stratifies its review
procedures by loans that are reviewed on an individual basis, and those that
are treated as homogeneous pools. Loans that are considered to be homogeneous
are evaluated on the basis of their payment record and/or on a pool basis.
All homogenous loans that are 90 days or more delinquent or are in
foreclosure are automatically placed on non-performing status. Additionally,
homogeneous loans that have had a modification of terms are individually
reviewed to determine if they meet the definition of a troubled debt
restructuring.
Loans that are individually monitored are determined to be impaired if it
is determined that it is probable that the Bank will be unable to collect the
contractual amount of principal and interest owed to the Bank. The Bank's
policy allows for a loan to be designated as impaired even if the borrower
has currently fulfilled his repayment obligations. Loans that are delinquent
90 days or more, in foreclosure or if the borrower has filed for bankruptcy
are normally designated as impaired. If a loan is designated as impaired, the
loan is either placed on non-accrual status or designated as a restructured
loan and is included as a non-performing loan. Cash collected on impaired
loans on non-accrual status is generally applied as a reduction to the
carrying value of the loan.
The Bank has identified two types of non-performing loans within its
portfolio: non-accrual loans and restructured loans. The following table
summarizes the Bank's gross non-performing loans by property type at the
dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------------
1995 1994
--------------------------------------- ---------------------------------------
NON-ACCRUAL RESTRUCTURED TOTAL NON-ACCRUAL RESTRUCTURED TOTAL
------------- -------------- -------- ------------- -------------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Residential 1-4 ......... $ 99.6 $3.0 $102.6 $ 97.7 $5.8 $103.5
Income property:
Multi-family ........... 86.3 0.3 86.6 55.9 -- 55.9
Shopping centers ....... 1.3 -- 1.3 2.3 -- 2.3
Office buildings ....... 8.8 -- 8.8 6.7 -- 6.7
Hotels/motels .......... -- -- -- 0.2 -- 0.2
Other income property . 6.8 -- 6.8 13.5 -- 13.5
------------- -------------- -------- ------------- -------------- --------
Total income property 103.2 0.3 103.5 78.6 -- 78.6
------------- -------------- -------- ------------- -------------- --------
Consumer ................ 3.5 -- 3.5 1.9 -- 1.9
------------- -------------- -------- ------------- -------------- --------
$206.3 $3.3 $209.6 $178.2 $5.8 $184.0
============= ============== ======== ============= ============== ========
Interest not recognized $ 10.6 $ -- $ 10.6 $ 18.0 $0.1 $ 18.1
============= ============== ======== ============= ============== ========
</TABLE>
For the years ended December 31, 1995 and 1994, interest income of less
than $0.1 million and $0.6 million, respectively, was recorded on
restructured loans. This was less than $0.1 million and $0.1 million,
respectively, lower than what would have been recorded if the restructured
loans had been performing in accordance with their original contractual
terms.
F-150
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
The following table summarizes the Bank's concentration of gross
non-accrual and restructured loans by state as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------------
NON-ACCRUAL RESTRUCTURED
-------------------------------------- ----------------------------------
STATE 1995 1994 1995 1994
- ------------ ------------------ ------------------ ---------------- ----------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California . $188.7 91.5% $162.8 91.4% $3.1 94.0% $5.8 100.0%
Florida ..... 8.5 4.1 9.7 5.4 -- -- -- --
Nevada ...... 3.5 1.7 1.5 0.8 0.2 6.0 -- --
Georgia ..... 1.2 0.6 0.9 0.5 -- -- -- --
Texas ....... 1.0 0.5 -- -- -- -- -- --
Arizona ..... 0.4 0.2 -- -- -- -- -- --
Other ....... 3.0 1.4 3.3 1.9 -- -- -- --
-------- -------- -------- -------- ------ -------- ------ --------
$206.3 100.0% $178.2 100.0% $3.3 100.0% $5.8 100.0%
======== ======== ======== ======== ====== ======== ====== ========
</TABLE>
The following table presents impaired loans with specific allowances and
impaired loans without specific allowances by property type and by the method
that impairment is determined at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------
GROSS SPECIFIC
AMOUNT ALLOWANCE NET AMOUNT
-------- ----------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Impairment Measured By Individual Review:
Impaired Loans with Specific Allowances:
Multi-family ...................................... $ 86.1 $18.7 $ 67.4
Commercial real estate:
Office buildings ................................. 8.8 2.0 6.8
Shopping centers ................................. 1.3 0.2 1.1
Industrial ....................................... 5.8 1.1 4.7
Other ............................................ 0.9 0.3 0.6
-------- ----------- ------------
Total commercial real estate ...................... 16.8 3.6 13.2
-------- ----------- ------------
Total impaired loans with specific allowances ..... 102.9 22.3 80.6
-------- ----------- ------------
Impaired Loans without Specific Allowances:
Residential 1-4 ................................... 3.0 -- 3.0
Multi-family ...................................... 0.5 -- 0.5
Commercial real estate ............................ 0.1 -- 0.1
-------- ----------- ------------
Total impaired loans without specific allowances .. 3.6 -- 3.6
-------- ----------- ------------
Total impaired loans measured by individual review 106.5 22.3 84.2
-------- ----------- ------------
Impairment Measured on a Pool Basis:
Residential 1-4 ................................... 99.6 -- 99.6
Consumer .......................................... 3.5 -- 3.5
-------- ----------- ------------
103.1 -- 103.1
-------- ----------- ------------
Total impaired loans ............................... $209.6 $22.3 $187.3
======== =========== ============
</TABLE>
F-151
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
The Bank has designated all impaired loans at December 31, 1995 as
non-accrual or as a troubled debt restructuring. For all impaired loans, the
Bank evaluates the need for a specific allowance by comparing the fair value
of the related collateral to the net recorded investment in the loan. For all
impaired loans where the fair value of the related collateral is less than
the net recorded investment in the loan, the Bank allocates a specific
allowance equal to the excess of the net recorded investment in the loan over
the fair value of the related collateral with consideration given to holding
and selling costs. All uncollected interest relating to impaired loans has
been fully reversed from income. At December 31, 1995, the Bank had
designated $81.3 million of loans as impaired that were performing in
accordance with their contractual terms. The Bank applies cash collections
from impaired loans as a reduction of the loan's carrying amount. The average
recorded investment in the impaired loans was $89.2 million for the year
ended December 31, 1995. During the year ended December 31, 1995, the Bank
did not recognize interest income on impaired loans.
Allowance for Loan Losses
The Bank's policies for providing the appropriate level of allowance for
loan losses are discussed further in Note 1 Summary of Significant Accounting
Policies.
The following table presents an analysis of the general and specific
allowances at the dates presented:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------------- ---------------------------------
SPECIFIC GENERAL SPECIFIC GENERAL
ALLOWANCE ALLOWANCE TOTAL ALLOWANCE ALLOWANCE TOTAL
----------- ----------- -------- ----------- ----------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Real estate:
Residential 1-4 ..... $ -- $ 45.0 $ 45.0 $ 4.1 $ 44.0 $ 48.1
Income property .... 24.3 90.0 114.3 30.4 112.0 142.4
----------- ----------- -------- ----------- ----------- -------
Total real estate 24.3 135.0 159.3 34.5 156.0 190.5
Consumer ............. -- 11.7 11.7 -- 11.1 11.1
Unallocated .......... -- 10.0 10.0 -- 10.0 10.0
----------- ----------- -------- ----------- ----------- -------
Total ............. $24.3 $156.7 $181.0 $34.5 $177.1 $211.6
=========== =========== ======== =========== =========== =======
</TABLE>
F-152
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
Activity in the allowance for loan losses for the years ended December
31, 1995, 1994 and 1993 is summarized as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1, .......... $211.6 $ 254.3 $ 324.0
Provision for losses ......... 31.8 74.9 163.5
Charge-offs:
Real estate:
Residential 1-4 ............ (24.8) (19.5) (44.1)
Income property:
Multi-family .............. (30.2) (56.1) (64.9)
Shopping centers .......... (4.9) (0.9) (17.3)
Office buildings .......... (5.5) (15.2) (20.4)
Hotels/motels ............. -- (11.6) (16.0)
Other income property .... (1.6) (6.2) (4.1)
-------- --------- ---------
Total income property ... (42.2) (90.0) (122.7)
-------- --------- ---------
Total real estate .......... (67.0) (109.5) (166.8)
Commercial banking ......... -- (6.8) (61.0)
Consumer ................... (5.4) (7.0) (12.7)
-------- --------- ---------
Total Charge-offs ......... (72.4) (123.3) (240.5)
-------- --------- ---------
Recoveries:
Real estate:
Residential 1-4 ............ 3.1 0.9 1.2
Income property:
Multi-family .............. 5.2 0.9 4.7
Shopping centers .......... 0.1 -- 2.0
Office buildings .......... 0.4 0.3 3.3
Hotels/motels ............. -- -- 0.3
Other income property .... -- 0.4 0.9
-------- --------- ---------
Total income property ... 5.7 1.6 11.2
-------- --------- ---------
Total real estate ........... 8.8 2.5 12.4
Commercial banking .......... -- 2.1 0.3
Consumer .................... 1.2 1.1 1.7
-------- --------- ---------
Total recoveries ........... 10.0 5.7 14.4
-------- --------- ---------
Net charge-offs .............. (62.4) (117.6) (226.1)
-------- --------- ---------
Allowances of sold subsidiary -- -- (7.1)
-------- --------- ---------
Balance, December 31, ........ $181.0 $ 211.6 $ 254.3
======== ========= =========
</TABLE>
During the normal course of business, the Bank has securitized and/or sold
certain loans with recourse. Estimated probable loan losses and related costs
of collection and repossession are provided for at the time of such sales and
are periodically reevaluated. The Bank evaluates the credit risk of loans
sold with recourse in the same manner as it reviews its own portfolio of
loans. The Bank has accrued an allowance for potential future losses on loans
sold with recourse. Such allowance is included with "Other liabilities" on
the Consolidated Statements of Financial Condition.
F-153
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
A summary of the outstanding balance of loans sold with recourse at
December 31, 1995 follows:
<TABLE>
<CAPTION>
RESIDENTIAL INCOME
1-4 PROPERTY TOTAL
------------- ---------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Loans with original loan to value ratio less than or
equal to 80% ........................................... $125.4 $253.6 $379.0
Loans with original loan to value ratio greater than
80%:
With PMI ............................................... 2.2 -- 2.2
Without PMI ............................................ 28.8 26.3 55.1
------------- ---------- --------
$156.4 $279.9 $436.3
============= ========== ========
</TABLE>
The Bank has obtained credit insurance for $390.3 million of residential
loans sold with recourse not included in the amounts above. The amount of the
Bank's liability on these loans was limited to $2.8 million at December 31,
1995. The insurance was obtained to limit the Bank's risk of loss on these
loans. The fair value of the Bank's potential obligation for recourse or
guarantees on loans sold with recourse at December 31, 1995 and 1994 was
determined to approximate the value of the liability established by the Bank
for the potential cost of such obligations, which totaled $11.5 million and
$11.4 million at December 31, 1995 and December 31, 1994, respectively.
At December 31, 1995, $3.8 billion of loans owned by others were serviced
by the Bank (virtually all of which were originated by the Bank) compared to
$4.5 billion and $5.3 billion at December 31, 1994 and 1993, respectively.
Loan servicing fees, which are included as a component of "Fee income" on
the Consolidated Statements of Operations, totaled $12.4 million, $14.6
million and $18.5 million for the years ended December 31, 1995, 1994 and
1993, respectively.
During 1993, the Bank sold $5.9 million of loan servicing, and recorded
gains on the sales of $0.2 million. Such gains have been included with "Other
income" on the Consolidated Statements of Operations. During 1995 and 1994,
the Bank had no sales of loan servicing.
F-154
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: LOANS RECEIVABLE HELD FOR INVESTMENT (Continued)
Fair Value of Loans Receivable
The fair value information presented below represents the Bank's estimate
of the fair value of its loans held for investment. The assumptions inherent
in these fair value estimates may be found in Note 21 Fair Value of Financial
Instruments.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------- ----------------------------
BOOK VALUE (A) FAIR VALUE BOOK VALUE (A) FAIR VALUE
-------------- ------------ -------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Residential 1-4 loans:
Fixed ........................... $ 994.1 $ 996.6 $ 688.6 $ 664.0
Adjustable ...................... 6,295.3 6,293.1 5,888.5 5,700.0
-------------- ------------ -------------- ------------
Total residential 1-4 loans ... 7,289.4 7,289.7 6,577.1 6,364.0
Multi-family loans ............... 1,269.7 1,230.6 1,336.3 1,255.8
Commercial real estate loans .... 494.3 485.0 525.3 505.2
Consumer loans ................... 236.6 240.8 307.3 305.4
-------------- ------------ -------------- ------------
Total loans held for investment $9,290.0 $9,246.1 $8,746.0 $8,430.4
============== ============ ============== ============
</TABLE>
- ------------
(A) Book value is presented net of undisbursed loan funds, discounts,
deferred items and allowances for loan losses.
NOTE 9: REAL ESTATE HELD FOR SALE
The Bank's real estate held for sale is comprised of REO and REI.
A summary of real estate held for sale, net of allowance for losses,
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Residential 1-4 ...... $47.3 $58.6
Multi-family ......... 1.5 5.1
Office buildings .... 0.3 5.6
Hotels/motels ........ -- 6.1
Other income property 0.4 2.5
------- -------
$49.5 $77.9
======= =======
</TABLE>
F-155
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: REAL ESTATE HELD FOR SALE (Continued)
The following table presents the Bank's real estate held for sale by
state and property type at December 31, 1995:
<TABLE>
<CAPTION>
RESIDENTIAL OFFICE COMMERCIAL/
1-4 UNITS MULTIFAMILY BUILDINGS INDUSTRIAL TOTAL
------------- ------------- ----------- ------------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
California . $45.6 $1.5 $0.3 $0.3 $47.7
Florida ..... 1.2 -- -- -- 1.2
Georgia ..... 0.3 -- -- -- 0.3
Nevada ...... 0.2 -- -- -- 0.2
Alabama ..... -- -- -- 0.1 0.1
------------- ------------- ----------- ------------- -------
Total ....... $47.3 $1.5 $0.3 $0.4 $49.5
============= ============= =========== ============= =======
REO ......... $20.0 $1.5 $0.3 $0.4 $22.2
REI ......... 27.3 -- -- -- 27.3
------------- ------------- ----------- ------------- -------
Total ....... $47.3 $1.5 $0.3 $0.4 $49.5
============= ============= =========== ============= =======
</TABLE>
The operating results of real estate held for sale are summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
(Losses) gains from the sale of real estate and other
net operating income ................................... $(15.4) $ 33.8 $ (24.7)
Recoveries of (provision for) losses on real estate .... 7.4 (79.7) (93.6)
--------- --------- ---------
$ (8.0) $(45.9) $(118.3)
========= ========= =========
</TABLE>
During the second quarter of 1995, the Bank provided an allowance with
respect to certain litigation involving loans made in 1989 and 1990 to
California Communities, Inc. ("CCI"), a currently inactive subsidiary of the
Bank formerly engaged in real estate development activities. During the
second quarter of 1995, an Orange County California Superior Court jury
rendered a verdict in which it determined that the Bank was financially
liable for two loans made to CCI by the plaintiff on which CCI had defaulted.
The jury awarded the plaintiff $6.5 million in compensatory damages and
punitive damages of $20.0 million against the Bank and $5.0 million against
CCI. The Bank has began the process of appealing the judgment. While the Bank
believes that its liability from this litigation, if any, will be less than
the amount awarded by the jury, there can be no assurance that the ultimate
outcome of this litigation will result in an amount less than the amount
determined by the jury and it is possible that the Bank and its subsidiary
could ultimately be found liable for an amount in excess of the allowance
that the Bank has established. The provision for this allowance has been
included in 1995 real estate operations.
The following table presents the activity in the allowance for losses on
real estate held for sale:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Balance, January 1, ................. $ 95.7 $ 121.6 $ 136.6
(Recoveries of) provision for losses (7.4) 79.7 93.6
Net charge-offs ..................... (49.2) (105.6) (108.6)
-------- --------- ---------
Balance, December 31, ............... $ 39.1 $ 95.7 $ 121.6
======== ========= =========
</TABLE>
F-156
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: REAL ESTATE HELD FOR SALE (Continued)
Amounts charged off against the allowance for losses are shown net of
recoveries. During 1995, the Bank reduced its allowance for losses on real
estate held for sale. The reduction resulted from a decrease in the Bank's
portfolio of real estate held for sale and a decrease in the level of
charge-offs during 1995. The 1994 bulk sales transactions reduced the level
of delinquent loans which has resulted in lower levels of foreclosures and
losses. The Bank did not experience a material level of recoveries during
1994 or 1993.
NOTE 10: FEDERAL HOME LOAN BANK STOCK
The Bank's investment in Federal Home Loan Bank of San Francisco ("FHLB")
stock at December 31, 1995 and 1994 was $135.7 million and $134.1 million,
respectively. The FHLB provides a central credit facility for member
institutions. As a member of the FHLB system, the Bank is required to own
capital stock in the FHLB in an amount at least equal to the greater of 1% of
the aggregate principal amount of its unpaid home loans, home purchase
contracts and similar obligations at the end of each calendar year, assuming
for such purposes that at least 30% of its assets were home mortgage loans,
or 5% of its advances (borrowings) from the FHLB. The Bank was in compliance
with this requirement at December 31, 1995. The fair value of the Bank's FHLB
stock approximates book value due to the Bank's ability to redeem such stock
with the FHLB at par value.
NOTE 11: PREMISES AND EQUIPMENT
Premises and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Land ......................... $ 12.0 $ 12.2
Buildings .................... 103.8 110.6
Furniture and equipment ..... 102.6 103.4
--------- ---------
218.4 226.2
Less accumulated depreciation (147.2) (144.7)
--------- ---------
$ 71.2 $ 81.5
========= =========
</TABLE>
The Bank has operating lease commitments on certain premises and
equipment. Lease expense, net of sublease income, totaled $25.5 million,
$30.7 million and $33.2 million for the years ended December 31, 1995, 1994
and 1993, respectively. Sublease income totaled $9.8 million, $10.3 million
and $10.5 million for the years ended December 31, 1995, 1994 and 1993,
respectively.
Annual minimum lease commitments at the dates presented were:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
-------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Within one year .. $ 22.3 $ 22.6
Within two years . 21.7 22.3
Within three years 20.2 21.7
Within four years 23.4 20.5
Within five years 22.9 23.8
Thereafter ........ 160.2 194.2
-------- -------
$270.7 $305.1
======== =======
</TABLE>
F-157
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: ACCELERATED DISPOSITION OF ASSETS
During 1994, the Bank completed the accelerated disposition of $1.3
billion of performing and non-performing assets (the "1994 Bulk Sales"). The
assets included in the 1994 Bulk Sales included loans receivable and REO. The
loans receivable were transferred from the portfolio of loans held for
investment to "held for accelerated disposition" as an integral part of the
Bank's 1994 program to raise capital, reduce non-performing assets and
improve operating efficiency. The 1994 Bulk Sales were designed to reduce the
Bank's non-performing assets and reduce the Bank's exposure to certain
performing loans with higher risk profiles than the Bank wished to retain in
its portfolio. In selecting performing loans for the 1994 Bulk Sales, the
Bank considered the credit risk inherent in the loan, the concentration that
certain loans possessed because of the geographic location of the collateral,
the size of the loan and/or the overall relationship with certain borrowers.
A substantial amount of the performing loans sold as part of the 1994 Bulk
Sales were classified as substandard or designated as special mention. The
Bank recorded a $274.8 million loss from the 1994 Bulk Sales. The Bank
recorded $60.4 million of charge-offs, relating to previously established
specific allowances, on loans receivable included in the 1994 Bulk Sales.
The table below presents the composition of the assets sold in the 1994
Bulk Sales:
<TABLE>
<CAPTION>
PERFORMING NON-ACCRUAL RESTRUCTURED
LOANS LOANS LOANS REO TOTAL
------------ ------------- -------------- -------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Residential 1-4 ....... $ 62.4 $121.8 $ -- $ 47.0 $ 231.2
Multi-family .......... 487.3 183.5 7.6 34.7 713.1
Commercial real estate 272.4 113.9 -- 20.6 406.9
------------ ------------- -------------- -------- ---------
$822.1 $419.2 $7.6 $102.3 $1,351.2
============ ============= ============== ======== =========
</TABLE>
During 1993, the Bank completed the sale of a pool of $232.1 million of
non-performing assets and collected $52.4 million of payoffs on
non-performing assets (the "1993 Bulk Sale"). Those transactions resulted in
a $228.7 million reduction in non-accrual loans and a $55.8 million reduction
in REO. The 1993 Bulk Sale resulted in $80.0 million of charge-offs. The
charge-offs related to the 1993 Bulk Sale were primarily related to
previously established specific valuation allowance.
NOTE 13: DEPOSITS
The Bank obtains deposits primarily through a network of full service
branches located in California and Nevada. Deposits obtained by the Bank are
insured by the SAIF of the FDIC up to a maximum of $100,000 for each
depositor.
F-158
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: DEPOSITS (Continued)
A summary of deposit balances and weighted average rates at the dates
indicated follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------- -------------------------
BALANCE RATE BALANCE RATE
---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Passbook accounts .............. $ 509.7 2.22% $ 578.2 2.22%
Money market and NOW accounts . 2,008.4 2.65 2,121.1 2.38
Non-interest bearing commercial 216.9 -- 184.9 --
---------- ----------
2,735.0 2,884.2
Certificate accounts:
2.00% to 2.99% ................ 16.5 2.86 28.9 2.86
3.00% to 3.99% ................ 22.5 3.34 861.0 3.85
4.00% to 4.99% ................ 208.2 4.61 2,352.4 4.53
5.00% to 5.99% ................ 2,545.3 5.49 1,605.3 5.51
6.00% to 6.99% ................ 3,630.4 6.26 296.9 6.70
7.00% to 7.99% ................ 293.0 7.13 322.9 7.29
8.00% to 8.99% ................ 23.3 8.45 3.4 8.15
9.00% to 9.99% ................ 2.5 9.29 4.6 9.20
10.00% to 10.99% .............. -- -- 0.8 10.51
11.00% to 11.99% .............. -- -- 0.5 11.55
---------- ----------
Total certificate accounts .. 6,741.7 5.95 5,476.7 4.99
---------- ----------
$9,476.7 4.87% $8,360.9 4.02%
========== ==========
</TABLE>
Deposit maturities are summarized as follows at the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Maturing within one year ........................ $8,216.6 $7,392.3
Maturing after one year and within two years ... 946.6 521.7
Maturing after two years and within three years 196.2 178.9
Maturing after three years and within four years 53.6 182.8
Maturing after four years and within five years 26.6 44.4
Thereafter ...................................... 37.1 40.8
---------- ----------
$9,476.7 $8,360.9
========== ==========
</TABLE>
Jumbo certificates and other deposit accounts with balances of $100,000 or
greater included in the above table had the following remaining contractual
maturities:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------
1995 1994
---------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
3 months or less .................. $ 789.5 $ 681.1
Over 3 months but within 6 months 247.2 132.6
Over 6 months but within 12 months 369.9 249.3
Over 12 months .................... 112.2 70.1
---------- ---------
$1,518.8 $1,133.1
========== =========
</TABLE>
F-159
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: DEPOSITS (Continued)
At December 31, 1995, the Bank had $273.8 million of brokered deposits.
At December 31, 1994, the Bank had no brokered deposits. Accrued interest
payable on deposits at December 31, 1995 and 1994 was $10.8 million and $2.7
million, respectively, which is included in "Interest payable" on the
Consolidated Statements of Financial Condition.
On August 4, 1994, the Bank completed the sale of 44 branches located in
Florida and Georgia ("Southeast Division"). At the time of the sale, the
Southeast Division had deposits totaling approximately $3.9 billion. The Bank
received a 4.10% deposit premium from the sale which contributed to a net
gain of $135.0 million recorded from the sale. The $135.0 million net gain
from the sale of the Southeast Division is included with "Other income" in
the Consolidated Statements of Operations for 1994.
A summary of interest expense by deposit type is summarized in the table
below for the years indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Passbook accounts ............. $ 11.1 $ 14.9 $ 18.8
Money market and NOW accounts 55.3 60.2 83.3
6-Month certificates .......... 26.2 27.8 41.0
9-Month to 1-Year certificates 133.5 113.5 154.4
Other certificates ............ 215.5 174.4 218.6
-------- -------- -------
$441.6 $390.8 $516.1
======== ======== =======
</TABLE>
Savings deposit fees, which are included as a component of "Fee income" in
the Consolidated Statements of Operations, totaled $25.4 million, $25.2
million and $26.1 million for the years ended December 31, 1995, 1994 and
1993, respectively.
NOTE 14: ADVANCES FROM FEDERAL HOME LOAN BANK
FHLB advances totaling $2,671.0 million at December 31, 1995 and $2,526.0
million at December 31, 1994, principally adjustable rate, fixed term, with
interest rates ranging from 5.77% to 9.71% are secured by MBS and certain
mortgage loans aggregating $3.6 billion and $3.7 billion at December 31, 1995
and 1994, respectively. The rates of the FHLB advances primarily reprice
based upon the LIBOR index and therefore are sensitive to its volatility.
Accrued interest payable on FHLB advances was $16.6 million and $9.5 million
at December 31, 1995 and 1994, respectively. The accrued interest on FHLB
advances is included with "Interest payable" on the Consolidated Statements
of Financial Condition.
A summary of maturities of FHLB advances and weighted average interest
rates at December 31, 1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994
------------------- -------------------
AMOUNT RATE AMOUNT RATE
---------- ------- ---------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Maturing in one year $ 880.0 6.16% $2,015.0 6.21%
Maturing in two years 1,780.0 5.98 500.0 6.36
Maturing in three years -- -- -- --
Maturing in four years 11.0 9.71 -- -
Maturing in five years -- -- 11.0 9.71
---------- ----------
$2,671.0 6.06% $2,526.0 6.25%
========== ==========
</TABLE>
F-160
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: ADVANCES FROM FEDERAL HOME LOAN BANK (Continued)
At December 31, 1995, the Bank had credit availability with the FHLB
which allows borrowings up to 30% of the Bank's assets, subject to the
balance of pledged collateral, with terms up to ten years in the form of FHLB
Advances and Letters of Credit.
During 1995, $1.6 billion of the Bank's FHLB advances, utilized as a
funding source for the sale of the Southeast Division, matured. Those
borrowings bore an interest rate based upon the 1 month LIBOR plus 0.27%.
When those borrowings matured, the FHLB offered to renew them. In order to
reduce the cost of those borrowings, the Bank entered into an interest rate
swap agreement which reduces the cost of the advances to approximately the
one month LIBOR plus 0.20%. The interest rate swap agreement was established,
such that the index which determines the interest that the Bank receives is
identical to the index that the Bank pays relative to the FHLB Advances. The
notional amount of the swaps totaled $1.5 billion at December 31, 1995 and
the maturity of the swaps is identical to that of the FHLB advances. The
counterparty to the interest rate swaps is an internationally recognized
broker-dealer.
NOTE 15: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The securities sold under agreements to repurchase ("reverse repurchase
agreements") were collateralized by MBS at December 31, 1995 and by MBS and
U.S. Treasury securities at December 31, 1994. The following table provides
additional information on the agreements:
<TABLE>
<CAPTION>
1995 1994
--------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Carrying value of agreements to repurchase ............ $ 857.3 $1,751.0
Carrying value of collateral .......................... 908.9 1,772.9
Market value of collateral ............................ 907.5 1,783.5
Maximum amounts of outstanding agreements
at any month-end ..................................... 1,336.8 1,751.0
Average amounts of outstanding agreements ............. 1,098.9 1,493.0
Weighted average interest rate for the year ........... 5.91% 4.52%
Weighted average interest on year-end balances ....... 5.56% 5.87%
Weighted average maturity of outstanding agreements
(days) ............................................... 148 53
</TABLE>
The securities collateralizing these agreements are held in the custodial
account of a trustee that is not a party to the agreements, until the
maturities of the agreements. For all of the agreements, the dealers have
agreed to resell the identical securities to the Bank. The following table
presents reverse repurchase agreements by counterparty:
<TABLE>
<CAPTION>
COUNTERPARTY DECEMBER 31, 1995 DECEMBER 31, 1994
- -------------- ----------------- -----------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Lehman Brothers ...... $780.9 $ 674.5
Bear Stearns ......... 76.4 --
Morgan Stanley ....... -- 700.1
FHLB of San Francisco -- 326.5
Smith Barney ......... -- 49.9
----------------- -----------------
$857.3 $1,751.0
================= =================
</TABLE>
Accrued interest related to reverse repurchase agreements at December 31,
1995 and 1994 totaled $1.2 million and $4.7 million, respectively.
F-161
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: STUDENT LOAN MARKETING ASSOCIATION ADVANCES
The advance from the Student Loan Marketing Association ("SLMA Advances")
was $200.0 million at December 31, 1995 and was secured by MBS with a
carrying value of $108.6 million and government securities with a carrying
value of $124.9 million and had a weighted average interest rate of 5.86%. At
December 31, 1994, the advances totaled $475.0 million and were secured by
MBS with a carrying value of $269.9 million and government securities with a
carrying value of $287.0 million and had a weighted average interest rate of
6.43%. The SLMA Advance outstanding at December 31, 1995 is scheduled to
mature on September 18, 1996.
Accrued interest related to SLMA Advances at December 31, 1995 and 1994
totaled $0.4 million and $0.9 million, respectively.
NOTE 17: SUBORDINATED DEBENTURES
The Bank's subordinated debentures consist of (i) a senior subordinated
note, (ii) subordinated debentures issued in connection with the 1992
corporate restructuring and (iii) convertible subordinated debentures.
Senior Subordinated Note. The Bank has outstanding a $50.0 million, 10.68%
unsecured senior subordinated note which is scheduled to mature on December
22, 1998.
1992 Subordinated Debentures. On December 16, 1992, the Bank issued $13.6
million of 10.0% unsecured subordinated debentures due 2003. The Bank
repurchased $8.7 million of these debentures during 1995 for no material gain
or loss.
Convertible Subordinated Debentures. The debentures were issued in 1986 by
CalFed Inc., the Bank's former holding company, which as a result of the 1992
corporate restructuring was merged with and into XCF Acceptance Corporation
("XCF"), a subsidiary of the Bank. The debentures are unsecured obligations
of XCF, bear an annual interest rate of 6.5%, and, effective January 1, 1996,
are convertible into the common stock of Cal Fed Bancorp Inc. at a conversion
price of $143.95 per share. The debentures are redeemable at the option of
the holders on February 20, 2000, at 123% of their principal amount.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
DATE OF INTEREST
1995 1994 MATURITY RATE
------- ------- --------------- ----------
(DOLLARS
IN MILLIONS)
<S> <C> <C> <C> <C>
Senior Subordinated Note ........... $50.0 $50.0 Dec. 22, 1998 10.68%
1992 Subordinated Debt ............. 4.9 13.6 Jan. 3, 2003 10.00
Convertible Subordinated Debentures 2.7 2.9 Feb. 20, 2001 6.50%
------- -------
$57.6 $66.5
======= =======
</TABLE>
Accrued interest related to subordinated debentures at December 31, 1995
and 1994 totaled $0.4 million and $0.8 million, respectively.
F-162
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 18: INTEREST EXPENSE ON BORROWINGS
Interest expense on borrowings is comprised of the following for the years
indicated:
<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------------------
1995 1994 1993
-------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Securities sold under agreements to repurchase
(short-term) ............................................. $ 64.9 $ 68.5 $14.6
FHLB advances (short-term) ................................ 14.7 7.4 2.3
Other ..................................................... -- -- 0.6
-------- -------- -------
Interest expense on short-term borrowings ................ 79.6 75.9 17.5
-------- -------- -------
Securities sold under agreements to repurchase (long-term) -- -- 8.3
FHLB advances (long-term) ................................. 139.4 76.2 52.4
Medium-term notes ......................................... -- -- 0.4
Convertible subordinated debentures ....................... 0.2 0.2 0.2
Subordinated debentures ................................... 0.7 1.4 1.4
SLMA advances (long-term) ................................. 29.2 16.5 9.5
Other ..................................................... 5.4 5.5 6.1
-------- -------- -------
Interest expense on long-term borrowings ................. 174.9 99.8 78.3
-------- -------- -------
Total Interest Expense on Borrowings ...................... $254.5 $175.7 $95.8
======== ======== =======
</TABLE>
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS
The Bank's use of derivative financial instruments is limited to interest
rate exchange agreements. The Bank utilizes interest rate exchange agreements
as an integral part of its asset/liability management program.
The primary focus of the Banks' asset/liability management program is to
measure and monitor the sensitivity of net interest income under varying
interest rate scenarios. On a quarterly basis, the Bank simulates the level
of net interest income expected to be earned over a twelve month period
following the date of the simulation. The simulation is based on a projection
of market interest rates at varying levels and estimates the impact of such
market rates on the levels of interest earning assets and interest bearing
liabilities during the measurement period. Also, any periodic or lifetime
caps that contractually limit the repricing of any interest earning asset is
considered.
Based upon the outcome of the simulation analysis, the Bank may consider
the use of interest rate exchange agreements as a means of reducing the
volatility of projected net interest income within certain ranges of
projected changes in interest rates. The Bank evaluates the effectiveness of
entering into any interest rate exchange agreements by measuring the cost of
such agreements in relation to the reduction in net interest income
volatility within an assumed range of interest rates.
F-163
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
The following tables present the Bank's interest rate exchange agreements
which were designated as hedges at December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
MONTHS AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
TYPE OF INTEREST RATE NOTIONAL TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT AMOUNT MATURITY THE BANK THE BANK LIABILITY HEDGED
- ---------------------- ------------------ ------------ -------------- ------------- ---------------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest rate swap .. $ 25.0 5 5.74% 8.77% FHLB advances
Interest rate swap .. 500.0 10 5.94 5.63 FHLB advances
Interest rate swap .. 100.0 3 5.45 5.94 2-year fixed rate CDs
Interest rate swap .. 100.0 4 7.45 5.75 18-month fixed rate CDs
Interest rate swap .. 100.0 3 6.36 5.60 1-year fixed rate CDs
Interest rate swap .. 1,540.0 15 5.83% 5.91% FHLB advances (A)
-------------------
Total .............. $2,365.0
===================
</TABLE>
- ------------
(A) Please refer to Note 14 Advances from Federal Home Loan Bank for
further information about this interest rate swap.
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-------------------------------------------------------------------------------------
WEIGHTED WEIGHTED
MONTHS AVERAGE YIELD AVERAGE YIELD DESCRIPTION OF
TYPE OF INTEREST RATE NOTIONAL TO DUE TO PAYABLE BY ASSET OR
EXCHANGE AGREEMENT AMOUNT MATURITY THE BANK THE BANK LIABILITY HEDGED
------------------ ------ ---------- ------------- -------------- ----------------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C> <C> <C>
Interest rate swap .. $191.5 9 4.19% 8.38% Fixed rate loans
Interest rate swap .. 25.0 17 6.31 8.77 FHLB advances
Interest rate swap .. 50.0 9 5.07 6.13 2-year fixed rate CDs
Interest rate swap .. 100.0 15 5.45 6.13 2-year fixed rate CDs
Interest rate swap .. 75.0 8 3.86 6.08 FHLB advances
Interest rate swap .. 50.0 10 5.07% 6.13% 2-year fixed rate CDs
------------------
Total .............. $491.5
==================
</TABLE>
The estimated fair value of swaps designated as hedges at December 31,
1995 and 1994 were gains (losses) of $7.1 million and $(6.6) million,
respectively.
At December 31, 1995 and 1994, the Bank had an index amortizing interest
rate swap which was designated as held for trading with a notional balance of
$50.0 million, with interest payable at a variable rate determined by a
specified index (3 month LIBOR) in exchange for interest receivable at a
fixed rate. At December 31, 1995, this agreement had a weighted average rate
to be paid by the Bank of 5.94% and the weighted average rate to be received
was 4.82%. At December 31, 1994, this agreement had a weighted average rate
to be paid by the Bank of 5.63% and the weighted average rate to be received
was 4.82%. The agreement has an expiration date of April 1999. It is
partially collateralized by MBS and a letter of credit amounting to
approximately $5.4 million at December 31, 1995. The fair value of the index
amortizing swap at December 31, 1995 was a liability of $0.3 million. Such
liability has been reflected on the Consolidated Statements of Financial
Condition. The average fair value of the index amortizing swap during 1995
was a liability of $1.0 million. The fair value of the index amortizing swap
at December 31, 1994 was a liability of $2.2 million. Such liability has been
reflected on the Consolidated Statements of Financial Condition.
F-164
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 19: DERIVATIVE FINANCIAL INSTRUMENTS (Continued)
At December 31, 1995 and 1994, the Bank was also a party to an interest
rate floor contract maturing September 1998. In addition, the Bank was a
party to an interest rate floor contract that matured in June 1995. The Bank
paid the counterparties premiums in exchange for cash payments in the event
that a specified index (e.g., 5-year CMT, 1-year CMT) falls below the strike
price. At December 31, 1995, the notional amount of the remaining interest
rate floor was $100.0 million, the strike price was 3.38% and the monthly
floating rate was 5.29%. At December 31, 1994, the notional amount of the
interest rate floors was $150.0 million, the weighted average strike price
was 4.51% and the monthly floating rate for the interest rate floor was based
on the 1-year Treasury Constant Maturity Rate for the floor contract maturing
September 1998 and the 5-year Treasury Constant Maturity Rate for the floor
contract that matured in June 1995. The unamortized premium on the interest
rate floors was zero and $0.3 million at December 31, 1995 and 1994,
respectively. At December 31, 1995, the floating rate exceeded the strike
price by 1.91%. At December 31, 1994, the floating rate exceeded the strike
price by an average of 2.79%.
The Bank adheres to credit guidelines when entering into interest rate
exchange agreements in order to minimize its exposure to credit loss in the
event of non-performance by the counterparties to the agreements. In the
event that a counterparty to an interest rate swap does not perform in
accordance with the terms of the agreement, the Bank would be at risk for the
amount of the net interest receivable due from the counterparty. At December
31, 1995, the Bank was at risk for $11.9 million of net interest receivable
from its counterparties on its aggregate interest rate exchange portfolio.
NOTE 20: INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
AT DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Current Tax Expense (Benefit):
Federal ............................................ $ -- $ -- $ 2.9
State .............................................. 0.1 -- 0.5
-------- -------- --------
0.1 -- 3.4
-------- -------- --------
Deferred Tax Expense (Benefit):
Federal ............................................ 41.1 (49.0) (20.8)
State .............................................. 11.4 (12.3) (10.0)
-------- -------- --------
52.5 (61.3) (30.8)
Change in valuation allowance for deferred tax asset (52.5) 61.3 30.8
-------- -------- --------
Net change in net deferred taxes ................... -- -- --
-------- -------- --------
Total income tax expense (benefit) ................. $ 0.1 $ -- $ 3.4
======== ======== ========
Total allocated to continuing operations .......... $ 0.1 $ 6.3 ($ 2.9)
Total allocated to shareholders' equity ............ -- (6.3) 6.3
-------- -------- --------
Total tax expense (benefit) ....................... $ 0.1 $ -- $ 3.4
======== ======== ========
</TABLE>
F-165
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (Continued)
The table below sets forth the significant components of the net deferred
tax asset/liability at December 31, 1995 and December 31, 1994 (as adjusted
and restated for 1994 and prior year tax returns filed through 1995):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
--------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Components of the deferred tax asset:
Bad debt reserve ............................... $ (87.1) $(152.8)
Real estate and partnerships ................... (38.8) (37.7)
Prior year affirmative adjustments, net ....... (48.0) (48.0)
Depreciation ................................... (10.3) (8.6)
Net operating loss carryforward ................ (30.9) (24.8)
Alternative minimum tax credit carryforward ... (27.8) (27.8)
Other .......................................... (11.7) (12.5)
--------- ----------
(254.6) (312.2)
Valuation allowance ............................ 146.3 198.8
--------- ----------
Deferred tax asset, net of valuation allowance (108.3) (113.4)
Components of the deferred tax liability:
Loan fees, interest and discount, net ......... 51.9 54.3
FHLB stock ..................................... 36.9 36.4
Accrued interest income ........................ 12.7 13.2
Prepaid expense ................................ 2.5 6.5
Other .......................................... 10.6 9.3
--------- ----------
Deferred tax liability ........................ 114.6 119.7
--------- ----------
Net deferred tax liability .................... $ 6.3 $ 6.3
========= ==========
Net state deferred tax liability ................ $ 6.3 $ 6.3
Net federal deferred tax liability .............. -- --
--------- ----------
Net deferred tax liability .................... $ 6.3 $ 6.3
========= ==========
</TABLE>
The change in the valuation allowance from December 31, 1994 relates to
the decrease in the net deductible temporary difference in 1995 that cannot
be realized through carryback to prior periods. The valuation allowance of
$146.3 million at December 31, 1995 includes $11.0 million related to a $31.5
million acquired federal net operating loss expiring in 2002 and 2003 and
$19.9 million attributable to the Bank's tax losses occurring in 1993, 1994
and 1995. In the event the $31.5 million net operating loss is utilized, 65%
of the tax benefits may at some time be payable to the FDIC pursuant to the
acquisition agreement.
Although the Bank has reported net earnings since the quarter ended June
1994, significant regulatory and tax law changes have been proposed that
could adversely affect future earnings for both financial reporting and
income tax purposes. See Proposed Legislation in Note 1 -- Summary of
Significant Accounting Policies for further information. In addition, even
though the Bank has reported net earnings for financial reporting purposes
during this period, it has continued to generate losses for income tax
purposes, thus raising uncertainty regarding the realizability of its net
operating loss carryforward and other deferred tax assets. Accordingly, the
Bank has recorded a valuation allowance equal to its net deductible temporary
difference at December 31, 1995 as well as at December 31, 1994.
F-166
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (Continued)
The Bank generated net operating losses in 1993, 1994 and 1995 for
federal income tax purposes of $5.7 million, $21.3 million and $16.5 million
expiring in 2008, 2009 and 2010, respectively. In addition, the Bank has
adjusted net operating loss carryforwards from 1993, 1994 and 1995 for
California franchise tax purposes of $16.7 million, $23.9 million and $0.8
million expiring in 1998, 1999 and 2000, respectively. The Bank also has
alternative minimum tax credit carryforwards of $19.6 million for federal
income tax purposes and $8.2 million for California franchise tax purposes
which have no expiration date.
For federal income tax purposes, savings institutions that meet certain
definitional and other tests may compute a bad debt deduction based on either
the percentage of taxable income method or the experience method. For years
subsequent to 1986, the Bank has computed its deduction for qualifying real
property loans based on the experience method. The experience method allows a
deduction for an amount necessary to increase a savings institution's tax bad
debt reserve, adjusted for net charge-offs during the current year, up to the
greater of the adjusted base year reserve amount or an amount based on the
savings institution's actual 6 year moving average experience. For years
subsequent to 1987, the adjusted base year reserve amount at the end of any
year is the tax bad debt reserve amount at the end of 1987 proportionately
decreased by any reduction in the aggregate related loan base at the end of
the current year relative to the end of 1987.
The consolidated financial statements at December 31, 1995 and 1994 do not
include a potential federal income tax liability of $25.3 million and zero,
respectively, attributable to the Bank's tax bad debt reserves. Circumstances
that may require an accrual of this unrecorded tax liability are: a failure
to meet the tax definition of a savings institution and, if the currently
proposed tax law changes are enacted, dividend payments in excess of tax
earnings and profits and other distributions in dissolution, liquidation or
redemption of stock.
A reconciliation of total income tax expense (benefit) and the amount
computed by applying the statutory federal corporate income tax rate to
earnings (loss) from continuing operations before income tax expense
(benefit) follows:
<TABLE>
<CAPTION>
PERCENT OF PRETAX EARNINGS
------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Statutory federal corporate income tax rate 35.0% (35.0)% (35.0)%
State tax, net of federal income tax effect 0.1 0.7 (0.5)
-------- --------- ---------
35.1 (34.3) (35.5)
Increase (decrease) resulting from:
Valuation allowance ........................ (43.9) 34.2 14.0
Bad debt deduction ......................... 0.7 3.4 14.7
Amortization of goodwill ................... -- -- 3.6
Distribution of Participation Interests ... 8.4 -- --
Rate change ................................ -- -- (1.5)
Other, net ................................. (0.2) 1.1 2.7
-------- --------- ---------
0.1% 4.4% (2.0)%
======== ========= =========
</TABLE>
The Internal Revenue Service ("IRS") and the California Franchise Tax
Board ("FTB") have completed examinations of the Bank's consolidated federal
income tax returns through 1988 and combined California franchise tax reports
through 1985, respectively, and have proposed certain adjustments primarily
related to timing differences as to the recognition of taxable income and
expense. The Bank previously filed formal protests with both the IRS and the
FTB to take exception to these
F-167
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 20: INCOME TAXES (Continued)
proposed adjustments and has filed claims for refund to recover its payment
of the assessed federal deficiencies. The Bank currently intends to pursue
most of the positions set forth in its federal and California protests as
well as in its federal refund claims.
In addition, the IRS has completed its examination of the consolidated
federal income tax returns filed by the Bank's former life insurance company
affiliate, Beneficial Standard Life Insurance Company ("BSLIC"), through 1989
and in December 1993, assessed certain deficiencies against BSLIC. In March
1994, the Bank filed a Tax Court petition on behalf of BSLIC, and in November
1995, the Tax Court rendered its decision affirming the Bank's position on
most of the issues contested by the Bank on behalf of BSLIC.
The Bank's current income tax receivables at December 31, 1995 and 1994
were $7.9 million and $9.6 million, respectively.
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following summary presents a description of the methodologies and
assumptions used to estimate the fair value of the Bank's financial
instruments. Much of the information used to determine fair value is highly
subjective. When applicable, readily available market information has been
utilized. However, for a significant portion of the Bank's financial
instruments, active markets do not exist. Therefore, considerable judgments
were required in estimating fair value for certain items. The subjective
factors include, among other things, the estimated timing and amount of cash
flows, risk characteristics, credit quality and interest rates, all of which
are subject to change. Since the fair value is estimated as of December 31,
1995 and December 31, 1994, the amounts that will actually be realized or
paid at settlement or maturity of the instruments could be significantly
different.
Cash and Short-Term Investments
The book value of cash and short-term investments approximates the fair
value of such assets because of the short maturity of such investments.
Securities Purchased Under Agreements to Resell
The book value of securities purchased under agreements to resell
approximates the fair value of such securities due to the short term maturity
of such investments.
Securities Available for Sale and Securities Held to Maturity
The Bank has utilized market quotes for similar or identical securities in
an actively traded market, where such a market exists, or has obtained quotes
from independent security brokers or dealers to determine the fair value of
its securities available for sale and securities held to maturity.
Loans Receivable
The fair value of loans receivable was computed as follows: (i) for loans
held for sale, quotes were obtained from independent brokers or dealers; (ii)
for performing residential loans held for investment, the Bank aggregated the
loans into pools based upon secondary market requirements for mortgage-backed
securities and utilized market quotes for similar securities; (iii) for
performing consumer, commercial banking and income property, the fair value
was determined by a discounted cash flow analysis and (iv) the fair value of
impaired income property loans was determined on an individual basis, based
upon the fair value of the related collateral, reduced by an estimate of the
cost and timing of dispositions. For impaired residential 1-4 and consumer
loans, fair value was estimated based on a discounted cash flow analysis,
adjusted for the Bank's estimate of excess credit risk.
F-168
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
Deposits
The fair value of deposits was determined as follows: (i) for demand
deposits, passbook accounts, money market accounts and other deposits
immediately withdrawable, fair value was determined to approximate the amount
payable on demand and (ii) for fixed maturity deposits, the fair value was
estimated by discounting expected cash flows using an average of rates
offered by other institutions combined with the Bank's current offering rates
of term deposits with similar maturities. In accordance with SFAS 107, no
value has been assigned to the Bank's long-term relationships with its
deposit customers (core deposit intangible) since it is not a financial
instrument as defined under SFAS 107.
Borrowings
The fair value of the Bank's borrowings was determined as follows: (i) the
fair value of FHLB advances was based upon current rates for advances with
similar terms and maturities; (ii) the fair value of student loan marketing
advances was estimated to approximate the amounts due as the rates on these
borrowings fluctuate with a market index; (iii) the fair value of reverse
repurchase agreements was based upon the current pricing for such agreements
and (iv) the fair value of the Bank's various other borrowings was based upon
alternative borrowing costs.
Off-Balance Sheet Financial Instruments
The fair value of the Bank's off-balance sheet financial instruments was
determined as follows: (i) the fair value of interest rate exchange
agreements that do not have an active market was determined by computing the
net present value of the estimated interest due to the Bank as compared to
the estimated interest due to the counterparties of the interest rate
exchange agreements; (ii) the fair value of the Bank's recourse arrangements
on assets sold was determined to approximate the value of the liability
currently recorded for such recourse arrangements; and (iii) the Bank's
standby letters of credit and commitments to originate or sell loans have
terms that are consistent with current market terms. Therefore, the Bank
estimates that the face amount of these commitments approximates book value.
F-169
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21: FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The following table presents fair value estimates and carrying amounts
for financial instruments at December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ ---------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
FINANCIAL INSTRUMENT ASSETS:
Cash ............................................ $ 273.7 $ 273.7 $ 292.8 $ 292.8
Short-term liquid investments ................... 74.1 74.1 333.8 333.8
Securities purchased under agreements to resell 1,674.6 1,674.6 48.2 48.2
Securities available for sale ................... 200.3 200.3 1,731.5 1,731.5
Securities held to maturity ..................... 2,366.7 2,361.3 2,525.1 2,437.2
Loans receivable held for sale .................. 13.6 13.8 1.3 1.3
Loans receivable held for investment(A) ........ 9,290.0 9,246.1 8,746.0 8,430.4
Accrued interest receivable and other ........... 83.4 98.4 83.5 95.5
FINANCIAL INSTRUMENT LIABILITIES:
Savings deposits(B) ............................. 9,476.7 9,534.6 8,360.9 8,425.0
Advances from federal home loan banks ........... 2,671.0 2,676.0 2,526.0 2,548.7
Securities sold under agreements to repurchase . 857.3 852.2 1,751.0 1,750.6
Student loan marketing association advances .... 200.0 193.9 475.0 461.0
Other borrowings ................................ 58.1 65.3 66.8 72.3
Interest payable ................................ 29.4 29.4 18.6 18.6
Other liabilities ............................... 140.6 140.6 185.8 185.8
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS:
Interest rate floors(C) ......................... -- -- -- --
Interest rate swaps (designated as a hedge) .... -- 7.1 -- (6.6)
Interest rate swaps (designated as held for
trading)(C) .................................... (0.3) (0.3) (2.2) (2.2)
Loans sold with recourse(D) ..................... $ 11.5 $ 11.5 $ 11.4 $ 11.4
</TABLE>
- ------------
(A) Please see Note 8 Loans Receivable Held for Investment for additional
detail.
(B) The fair value does not include any amount that relates to core
deposit intangibles, since they are not defined as financial
instruments under SFAS 107.
(C) The estimated fair values represent either a net gain or a net
(loss). The net loss has been reflected in the Consolidated Statement
of Financial Position as a component of "other liabilities."
(D) These amounts represent the Bank's estimate of its credit exposure
with respect to loans sold with recourse.
F-170
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 22: COMMITMENTS AND CONTINGENCIES
The Bank is a party to various outstanding commitments and contingent
liabilities in the normal course of business which are not reflected in the
accompanying consolidated financial statements. The following is a summary of
such commitments and contingencies:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1995 1994
------- -------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
Standby letters of credit ................. $ 57.9 $ 63.6
Commitments to sell loans ................. 15.7 1.8
Commitments to fund fixed rate loans ..... 232.0 231.6
Commitments to fund adjustable rate loans 98.3 208.2
</TABLE>
The Bank makes contractual commitments to extend credit, which are legally
binding agreements to lend money to customers at predetermined interest rates
for a specified period of time. The Bank does not anticipate any material
loss as a result of these transactions. The Bank applies the same credit
standards used in the lending process when extending these commitments, and
periodically reassesses the customers' creditworthiness through ongoing
credit reviews.
The fair value of the Bank's commitments at December 31, 1995 and 1994 was
based upon (i) the contractual terms of the commitment as compared to market
terms, (ii) the period of time that the commitments could be exercised and
(iii) the inherent credit risk of the commitments. The fair value of the
Bank's commitments approximates the amount of the outstanding commitment at
December 31, 1995 and 1994.
During the second quarter of 1995, the Bank provided an allowance with
respect to certain litigation involving loans made in 1989 and 1990 to
California Communities Inc. ("CCI"), a currently inactive subsidiary of the
Bank formerly engaged in real estate development activities. During the
second quarter of 1995, an Orange County, California Superior Court jury
rendered a verdict in which it determined that the Bank was financially
liable for two loans made to CCI by the plaintiff. CCI subsequently defaulted
on the loans. The jury awarded the plaintiff $6.5 million in compensatory
damages and punitive damages of $20.0 million against the Bank and $5.0
million against CCI. The Bank has begun the process of appealing the
judgment. While the Bank believes that its liability from this litigation, if
any, will be less than the amount awarded by the jury, there can be no
assurance that the ultimate outcome of this litigation will result in an
amount less than the amount determined by the jury and it is possible that
the Bank and its subsidiary could ultimately be found liable for an amount in
excess of the allowance that has been established. The provision for this
allowance has been included in 1995 real estate operations.
The Bank is involved as a defendant in certain legal proceedings
incidental to its business. The Bank has established an accrual for its
estimate of the potential liability that it believes it may be found liable
for. However, it is possible that the Bank's actual liability may be
substantially higher or lower than the amount of the established allowance.
The Bank does not believe that the litigation to which it is a party, if
adversely decided, in the aggregate would have a material adverse effect upon
the Bank's financial condition. However, adverse decisions in such matters
could have a material adverse effect upon the Bank's results of operations
for the relevant period or periods in which they occur.
F-171
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL
Common Stock
The Bank's common stock at December 31, 1995 and 1994 is summarized in the
table below:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
Par value ............................... $ 1.00 $ 1.00
Number of shares authorized ............. 100,000,000 100,000,000
Number of shares issued and outstanding 49,200,444 49,199,044
</TABLE>
During the 1995 fourth quarter, California Federal obtained regulatory and
shareholder approval to reorganize into a holding company structure, which
will provide greater flexibility for meeting future financial and competitive
needs. As a result of the reorganization, on January 1, 1996, each share of
the California Federal's common stock was converted into one share of Cal Fed
Bancorp Inc. common stock. Consequently, California Federal became a
wholly-owned subsidiary of Cal Fed Bancorp Inc.
Preferred Stock of Subsidiary
In March 1993, California Federal issued 3,740,000 shares of 7 3/4%
noncumulative convertible preferred stock at its liquidation preference of
$25.00 per share (the "Preferred Stock, Series A"). The issuance of the
Preferred Stock, Series A, resulted in an $89.0 million increase in the
equity capital of California Federal, after deducting issue costs of $4.5
million. Effective January 1, 1996, the Preferred Stock, Series A, is
convertible by the holders into the common stock of Cal Fed Bancorp Inc. at
any time at a conversion price of $20.16 per share, subject to adjustment.
The Preferred Stock, Series A, is not redeemable prior to March 31, 1996. At
or after March 31, 1996, the Preferred Stock, Series A, is redeemable at the
option of California Federal, in whole or in part, at par value plus declared
but unpaid dividends.
In March 1994, California Federal issued 1,725,000 shares of 10 5/8%
noncumulative perpetual preferred stock at its liquidation preference of
$100.00 per share (the "Preferred Stock, Series B"). The issuance of the
Preferred Stock, Series B resulted in an $164.2 million increase in the
equity capital of California Federal, after deducting issue costs of $8.3
million. The Preferred Stock, Series B, is generally not redeemable prior to
April 1, 1999. The Preferred Stock, Series B, is redeemable at the option of
California Federal, in whole or in part, at $105.313 per share on or after
April 1, 1999 and prior to April 1, 2000, and at prices decreasing annually
thereafter to the liquidation preference of $100.00 per share on or after
April 1, 2003, plus declared but unpaid dividends. In addition, the Preferred
Stock, Series B, is redeemable at the option of California Federal or its
successor or any acquiring or resulting entity with respect to California
Federal on or after April 1, 1996 and prior to April 1, 1999 in whole, but
not in part, in the event of a change of control of California Federal at
$114.50 per share. The preferred stock of subsidiary is accounted for as a
minority interest in the accompanying financial statements. Dividends on
preferred stock of subsidiary are accounted for as expense in the audited
financial statements.
Common Stock Warrants
In December 1992, California Federal issued 13,879,865 warrants to
purchase California Federal common stock during June 1994. Throughout June
1994, warrant holders were entitled to purchase one share of the common stock
of California Federal for $9.00 and five warrants. Approximately 93% of the
warrants were exercised. Warrants not exercised by June 30, 1994 became
worthless and no longer entitled the holders to purchase any shares of the
common stock of California Federal. The exercised warrants provided
California Federal with $23.3 million of additional equity capital during
1994.
F-172
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL (Continued)
Participation Interests
During 1995, California Federal registered contingent litigation recovery
participation interests ("Participation Interests") to be issued to its
common shareholders. The Participation Interests represent a right to receive
an amount equal to up to 25.377745% of the cash payment, if any, actually
received by California Federal, resulting from the pending goodwill lawsuit
of California Federal against the federal government. In the lawsuit,
California Federal Bank, alleges that the United States breached certain
contractual commitments regarding the computation of its regulatory capital
and deprived California Federal of certain of its property without just
compensation in violation of the United States constitution. The claims of
California Federal arose from changes, mandated by FIRREA, with respect to
the rules for computing the regulatory capital of California Federal. The
Bank's stockholders of record on July 14, 1995, received one Participation
Interest for every ten shares of common stock owned on the record date. The
Participation Interests were distributed on July 28, 1995 and began trading
on the NASDAQ Small Cap Market under the symbol "CALGZ" on August 1, 1995.
Regulatory Capital
As a savings institution which is regulated by the OTS, California Federal
is required to comply with the capital requirements of the OTS. The
regulations of the OTS require savings institutions to maintain certain
minimum levels of regulatory capital. An institution that fails to comply
with its regulatory capital requirements must obtain OTS approval of a
capital plan and can be subject to a capital directive and certain
restrictions on its operations. An institution that fails to obtain OTS
approval of its capital plan is deemed to be in an unsafe and unsound
condition and could be the subject of the appointment of a conservator or a
receiver. At December 31, 1995, the industry-wide minimum regulatory capital
requirements were:
o Tangible capital of 1.5% of adjusted total assets, consisting
generally of stockholders' equity, but excluding most intangible
assets such as goodwill.
o A leverage ratio requiring core capital of 3.0% of adjusted total
assets, consisting of tangible capital plus supervisory goodwill
(certain goodwill arising as a result of the acquisition of troubled
institutions and regulatory assisted acquisitions).
o Total risk-based capital consisting of core capital plus certain
subordinated debt and other capital instruments and general valuation
allowances on loans receivable equal to 8.0% of the value of
risk-weighted assets plus off-balance sheet items.
The table below presents the capital ratios of California Federal as
compared to the industry-wide minimum capital requirements at December 31,
1995:
<TABLE>
<CAPTION>
CALIFORNIA REGULATORY EXCESS
FEDERAL REQUIREMENT CAPITAL
------------------- ------------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Tangible Capital . $845.3 5.91% $214.5 1.50% $630.8
Core Capital ...... $845.3 5.91% $429.0 3.00% $416.3
Risk-based Capital $961.4 12.36% $623.0 8.00% $338.4
</TABLE>
The OTS has implemented a system requiring regulatory sanctions against
institutions that are not adequately capitalized, with the sanctions growing
more severe the lower the institution's capital. The OTS has established
specific capital ratios for five separate capital categories: "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized."
F-173
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL (Continued)
Under the OTS regulations, an institution is treated as well capitalized
if its ratio of total capital to risk-weighted assets is 10.0% or more, its
ratio of core capital to risk-weighted assets is 6.0% or more, its ratio of
core capital to total assets is 5.0% or greater and it is not subject to any
order or directive by the OTS to meet a specific capital level.
At December 31, 1995, (i) the total risk-based capital ratio of California
Federal was 12.36 percent, $183.3 million in excess of "well-capitalized"
requirements, (ii) the Tier I risk-based capital ratio of California Federal
was 10.90 percent, $380.1 million in excess of "well-capitalized"
requirements, and (iii) the leverage ratio of California Federal was 5.91
percent, $130.2 million in excess of "well-capitalized" requirements.
Therefore, at December 31, 1995, California Federal met and exceeded all of
the requirements of a well capitalized institution.
An institution is undercapitalized if its ratio of total capital to
risk-weighted assets is less than 8.0%, its ratio of core capital to
risk-weighted assets is less than 4.0% or its ratio of core capital to total
assets is less than 4.0% (3.0% if the institution receives the highest rating
on the CAMEL examination rating system). An institution whose capital falls
between the well capitalized and undercapitalized levels is treated as
adequately capitalized. An institution is treated as significantly
undercapitalized if the above capital ratios are less than 6.0%, 3.0%, or
3.0% respectively. An institution is treated as critically undercapitalized
if its ratio of tangible equity (core capital, plus cumulative preferred
stock, minus intangible assets other than qualifying supervisory goodwill and
certain purchased mortgage servicing rights) to total assets is equal to or
less than 2.0%. The OTS can apply to an institution in a particular capital
category the sanctions that apply to the next lower capital category if the
OTS determines, after providing the institution notice and opportunity for a
hearing, that (1) the institution is in an unsafe and unsound condition, or
(2) the institution received, in its most recent report of examination, a
less-than-satisfactory rating for asset quality, management, earnings, or
liquidity, and the deficiency has not been corrected. The OTS cannot,
however, use this authority to require an adequately capitalized institution
to file a capital restoration plan, or to subject a significantly
undercapitalized institution to the sanctions applicable to critically
undercapitalized institutions.
Following is a reconciliation of the shareholder's equity of California
Federal Bank, F.S.B. to regulatory capital as of December 31, 1995:
<TABLE>
<CAPTION>
TANGIBLE CORE RISK-BASED
CAPITAL CAPITAL CAPITAL
--------- ------------ --------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Shareholders' Equity of California Federal .............. $887.5 $887.5 $887.5
Non-allowable capital:
Intangible assets .................................... (17.1) (17.1) (17.1)
Investment in non-permissible subsidiaries ........... (25.1) (25.1) (25.1)
Tier II capital items:
Allowable subordinated debt .......................... -- -- 19.2
Allowable general valuation allowance on loans
receivable
(limited to 1.25% of risk-weighted assets) .......... -- -- 96.9
---------- --------- ------------
Regulatory capital of California Federal ................ 845.3 845.3 961.4
Bank's minimum regulatory capital requirement .......... 214.5 429.0 623.0
---------- --------- ------------
Excess over minimum regulatory capital requirements .. $630.8 $416.3 $338.4
========== ========= ============
</TABLE>
With certain limited exceptions, California Federal's investments in and
extensions of credit to any subsidiary engaged in activities not permissible
for a national bank ("non-includable subsidiaries") must be deducted from
capital over a phase-in period.
F-174
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23: STOCKHOLDERS' EQUITY, PREFERRED STOCK OF SUBSIDIARY AND REGULATORY
CAPITAL (Continued)
The table below presents the amount of investments in and extensions of
credit to non-includable subsidiaries which may be included in regulatory
capital for the periods indicated:
<TABLE>
<CAPTION>
AMOUNT WHICH
MAY BE INCLUDED
FOR THE PERIOD IN CAPITAL
- --------------------------------- -------------------
<S> <C>
July 1, 1994 to June 30, 1995 ... 60%
July 1, 1995 to June 30, 1996 ... 40%
After June 30, 1996 .............. 0%
</TABLE>
At December 31, 1995, California Federal had $16.7 million included in the
regulatory capital relating to such investments and extensions of credit.
Restriction on Shareholder's Equity and Dividends
The payment of dividends, stock repurchases, and other capital
distributions by California Federal are subject to regulation by the OTS. The
OTS requires 30 days' prior notice of any capital distribution. On December
5, 1994, the OTS proposed various amendments to its rules on capital
distributions to conform them to the prompt corrective action system
established by the Federal Deposit Insurance Corporation Improvement Act of
1991. Under the proposed regulation, those institutions that have the CAMEL
ratings of 1 or 2 and are not controlled by a holding company would no longer
be required to notify OTS before capital distributions. Most other savings
institutions could make capital distributions upon giving notice to OTS
provided that, following the distribution, the institution would remain at
least adequately capitalized as defined by the prompt corrective action
system. The proposed amendments are pending.
Pursuant to statutes, savings institutions that do not meet their current
capital requirements generally may not make any capital distributions.
Tax Bad Debt Reserves
For federal income tax purposes, savings institutions meeting certain
definitional and other tests are allowed special bad debt reserve deductions.
If amounts appropriated to these tax bad debt reserves in excess of an
allowable offset computed under the experience method ("excess tax bad debt
reserves") are used for the payment of nontaxable dividends or other
distributions to stockholders (including distributions in dissolution,
liquidation or redemption of stock), an amount will generally be includable
in taxable income. The amount includable in taxable income is equal to the
distribution plus the federal income tax attributable thereto, up to the
aggregate amount of excess tax bad debt reserves. At December 31, 1995, the
Bank's total tax bad debt reserves of approximately $76 million did not
include any amount which may represent excess tax bad debt reserves.
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS
Retirement Plans
The Bank has two defined benefit plans: one covering its employees
("retirement income plan") and one for the non-employee directors ("outside
directors plan"). Prior to 1995, the bank had two outside directors plans.
During 1995, one of the outside directors plans was terminated and
subsequently liquidated. Effective May 31, 1993, the retirement income plan
was frozen and all accrued benefits were automatically 100% vested. The plan
froze all accrued benefits, however; credited service will continue to accrue
for purposes of determining eligibility for early retirement (and the
applicable early retirement reduction factors).
F-175
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (Continued)
The Bank's funding policy for the retirement income plan is to contribute
an amount equal to the minimum required contribution under the Employee
Retirement Income Security Act of 1974. The Bank from time to time may
increase its contribution beyond the minimum reflecting the tax and cash
position of the Bank and the funded status of the plan. The outside directors
plan is unfunded. Additionally, the Bank had a supplemental defined benefit
retirement plan for key employees (the "supplemental plan") which was
terminated on December 31, 1993. The Bank has recorded a liability of $0.1
million as of December 31, 1995 related to the supplemental plan.
The following tables set forth the pension plan's funded status and
amounts recognized in the Bank's consolidated statements for the years
indicated:
<TABLE>
<CAPTION>
RETIREMENT INCOME PLAN
-------------------------------------------
ASSETS ASSETS ASSETS
EXCEED EXCEED EXCEED
ACCUMULATED ACCUMULATED ACCUMULATED
BENEFITS BENEFITS BENEFITS
------------- ------------- -------------
1995 1994 1993
------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $34.4 million in 1995, $30.9 million in 1994, $39.1
million in 1993 ........................................... $35.3 $30.1 $39.0
============= ============= =============
Projected benefit obligation for service rendered to date . $35.3 $30.1 $39.0
Plan assets at fair value, primarily listed stock and fixed
income securities ......................................... 35.5 33.3 40.5
------------- ------------- -------------
Excess of projected benefit obligation under plan assets .. (0.2) (3.2) (1.5)
Unrecognized net gain (loss) from past experience different
from that assumed ......................................... (7.7) (3.3) (4.5)
Transition amount from initial application of SFAS 87 ..... -- -- --
Unrecognized prior service cost ............................ -- -- --
Adjustment required to recognize minimum liability ........ -- -- -
------------- ------------- -------------
Pension (asset) included in other liabilities ............... $(7.9) $(6.5) $(6.0)
============= ============= =============
Net pension expense included the following components:
Service cost -benefits earned during the period ............ $ -- $ -- $ 2.0
Interest cost on projected benefit obligation ............... 2.0 2.4 2.9
Actual return on plan assets ................................ (5.7) (1.5) (3.2)
Other, net .................................................. 3.3 (1.3) 0.5
------------- ------------- -------------
Net periodic pension (income) expense ....................... $(0.4) $(0.4) $ 2.2
============= ============= =============
</TABLE>
F-176
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (Continued)
<TABLE>
<CAPTION>
ACCUMULATED ACCUMULATED ACCUMULATED
BENEFITS BENEFITS BENEFITS
EXCEED EXCEED EXCEED
ASSETS ASSETS ASSETS
------------- ------------- -------------
1995(A) 1994(A) 1993(B)
------------- ------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation, including vested benefits
of $34.4 million in 1995, $30.9 million in 1994, $39.1
million in 1993 ........................................... $0.1 $ 2.3 $ 2.7
============= ============= =============
Projected benefit obligation for service rendered to date . $0.1 $ 2.3 $ 2.7
Plan assets at fair value, primarily listed stock and fixed
income securities ......................................... -- -- --
------------- ------------- -------------
Excess of projected benefit obligation over plan assets ... 0.1 2.3 2.7
Unrecognized net gain (loss) from past experience different
from that assumed ......................................... -- (0.9) (1.2)
Transition amount from initial application of SFAS 87 ..... -- (0.2) (0.2)
Unrecognized prior service cost ............................ -- -- --
Adjustment required to recognize minimum liability ........ -- 1.1 1.4
------------- ------------- -------------
Pension (asset) liability included in other liabilities .... $0.1 $ 2.3 $ 2.7
============= ============= =============
Net pension expense included the following components:
Service cost -benefits earned during the period ............ $ -- $ 0.1 $ 0.1
Interest cost on projected benefit obligation ............... -- 0.2 0.2
Actual return on plan assets ................................ -- -- --
Other, net .................................................. -- 0.1 0.1
------------- ------------- -------------
Net periodic pension expense ................................ $ -- $ 0.4 $ 0.4
============= ============= =============
</TABLE>
(A) These amounts relate to both the supplemental plan and the outside
directors plan.
(B) These amounts relate to the outside directors plan.
Average assumptions used for all plans were:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Discount rate .................................. 7.25% 8.00% 7.25%
Rate of increase in compensation levels ....... N/A(C) N/A(C) N/A(C)
Expected long-term rate of return on assets ... 8.50% 8.50% 8.50%
</TABLE>
(C) Not applicable due to a freeze in accrued benefits of the plan.
The FASB has issued Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions ("SFAS
106"). SFAS 106 became effective for fiscal years beginning after December
15, 1992. SFAS 106 establishes accounting standards for all employers'
postretirement benefits other than pensions; however, it focuses on
postretirement health care benefits. SFAS 106 changes the current practice of
accounting for postretirement benefits on a cash basis by accruing the cost
of these benefits during the years the employee renders the necessary
service. The Bank has a defined benefit postretirement plan which provides
for postretirement medical benefits to eligible retired employees.
F-177
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (Continued)
The following table sets forth the postretirement benefits plans funded
status and amount recognized in the Bank's consolidated statements for the
years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
------- -------
(DOLLARS
IN MILLIONS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation:
Current Retirees ........................................................ $ 2.1 $ 2.2
Current Actives ......................................................... 1.0 1.5
------- -------
$ 3.1 $ 3.7
======= =======
Accumulated Postretirement Benefit Obligation ............................ $ 3.1 $ 3.7
Plan assets at fair value ................................................ -- --
------- -------
Excess of accumulated postretirement benefit obligations under plan
assets .................................................................. 3.1 3.7
Unrecognized transition obligation ....................................... (4.0) (4.3)
Unrecognized net gain .................................................... 3.1 2.4
------- -------
Net postretirement benefit liability included in other liabilities ..... $ 2.2 $ 1.8
======= =======
Net Periodic Postretirement Benefit Cost:
Service cost ............................................................ $ 0.2 $ 0.3
Interest cost ........................................................... 0.3 0.4
Amortization of transition obligation ................................... 0.2 0.3
Other, net .............................................................. (0.2) 0.4
------- -------
Net periodic postretirement benefit cost ............................... $ 0.5 $ 1.4
======= =======
Effect of one percent increase in trend rates:
Service and interest cost ............................................... $ 0.1 $ 0.1
======= =======
Accumulated postretirement benefit obligation ........................... $ 0.4 $ 0.5
======= =======
</TABLE>
The cost of inflation for health care and medical costs of plan
participants (the "health care trend rate") was assumed to start at 11.5% and
gradually trend downward over 11 years to 6%. The assumed discount rate, in
determining postretirement benefits, was 7.25% and 8.00% at December 31, 1995
and 1994, respectively. At December 31, 1995 and 1994, there were no plan
assets related to this plan.
F-178
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 24: EMPLOYEE RETIREMENT BENEFIT PLANS (Continued)
Investment Plus Plan
The Investment Plus Plan (the "Plan") is a defined contribution plan that
is available to substantially all employees. The Plan is a qualified plan
under Section 401(k) of the Internal Revenue Code. Employee contributions are
voluntary, as employees may elect to defer from one to ten percent of
compensation, exclusive of overtime, bonuses or other special payments
("qualifying compensation"). Participants vest immediately in their own
contributions and they vest in the Bank's contributions based on years of
service. Up to 4% of participants' contributions are matched by the Bank on a
schedule that is determined by the participants' years of service with the
Bank. The table below presents the Bank's matching contributions as
determined by the participants' years of service.
<TABLE>
<CAPTION>
BANK'S MATCHING
OF PARTICIPANTS' PARTICIPANTS'
CONTRIBUTIONS UP VESTING IN THE
TO 4% OF QUALIFIED BANK'S
YEARS OF SERVICE COMPENSATION CONTRIBUTION
- ---------------------------------------- ------------------ --------------
<S> <C> <C>
Less than 1 year ........................ 0% 0%
At least 1 year but less than 2 years .. 125 0
At least 2 years but less than 3 years . 125 25
At least 3 years but less than 4 years . 125 50
At least 4 years but less than 5 years . 125 75
At least 5 years, but less than 10 years 150 100
10 or more years ........................ 200% 100%
</TABLE>
The Bank's contributions may be made without regard to current or
accumulated profits, provided that the Plan is designed to qualify as a
profit sharing plan for purposes of Section 401(a), et seq. of the Internal
Revenue Code. For the years ended December 31, 1995, 1994 and 1993, the
Bank's pre-tax plan expense was $3.9 million, $4.2 million and $3.3 million,
respectively.
NOTE 25: STOCK INCENTIVE PLANS
In December 1995, the Bank's stockholders approved the 1995 Employee Stock
Incentive Plan for Cal Fed Bancorp Inc. Under the 1995 Employee Stock
Incentive Plan, 2,000,000 shares of common stock of Cal Fed Bancorp Inc. may
be issued pursuant to grants of options or other stock based awards, subject
to certain adjustments to prevent dilution. The 1995 Employee Stock Incentive
Plan became effective upon its adoption by the stockholders. As of December
31, 1995, no options were granted or exercised under the 1995 Employee Stock
Incentive Plan.
In addition, in December 1995, the stockholders also approved the 1995
Non-Employee Director Stock Option Plan for Cal Fed Bancorp Inc. Under the
1995 Non-Employee Director Stock Option Plan, 170,000 shares of common stock
of Cal Fed Bancorp Inc. may be issued pursuant to grants of options, subject
to certain adjustments to prevent dilution. The 1995 Non-Employee Director
Stock Option Plan became effective upon its adoption by the stockholders and
these options generally became exercisable over a twenty year period from the
date of grant. The first date of grant is the day after the 1997 Annual
Meeting of Stockholders of Cal Fed Bancorp Inc. As of December 31, 1995, no
options of the 1995 Non-Employee Directors Plan were granted or exercised.
In 1983, the Bank's stockholders approved the 1983 Stock Incentive Plan
under which 1,500,000 shares of common stock could have been granted as
options or sold as restricted stock to eligible employees. Those options
generally became exercisable over a four year period from the date of grant.
All options granted under the 1983 Stock Incentive Plan were vested on
December 16, 1992. Option
F-179
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: STOCK INCENTIVE PLANS (Continued)
activity, giving effect for the one-for-five reverse stock split which
occurred on February 28, 1993, during 1995, 1994 and 1993 follows:
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------- ---------------------------- ----------------------------
NUMBER NUMBER NUMBER
OF RANGE OF OF RANGE OF OF RANGE OF
SHARES OPTION PRICES SHARES OPTION PRICES SHARES OPTION PRICES
--------- ---------------- ---------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1 . 1,200 $15.63-$172.50 43,200 $15.63-$172.50 104,554 $15.63-$172.50
Granted ............. -- -- -- -- -- --
Canceled or expired (1,200) 86.875 (42,000) 21.25- 163.75 (61,354) 15.63- 172.50
Exercised ........... -- -- -- -- -- --
--------- ---------------- ---------- ---------------- ---------- ----------------
Balance, December 31 -- --- -- 1,200 $15.63-$172.50 43,200 $15.63-$172.50
========= ================ ========== ================ ========== ================
</TABLE>
There were no 1983 Stock Incentive Plan options exercised during 1995,
1994 or 1993.
In 1993, the Bank's stockholders approved the 1993 Employee Stock
Incentive Plan under which 1,600,000 shares of common stock may be granted
subject to certain adjustments to prevent dilution. Option activity during
1995 and 1994 follows:
<TABLE>
<CAPTION>
1995 1994 1993
----------------------------- ----------------------------- -----------------------------
NUMBER NUMBER NUMBER
OF RANGE OF OF RANGE OF OF RANGE OF
SHARES OPTION PRICES SHARES OPTION PRICES SHARES OPTION PRICES
----------- ---------------- ----------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1 . 1,411,450 $ 1.000-$15.875 1,318,500 $1.000-$15.875 -- --
Granted ............. 35,000 9.875- 12.750 287,200 9.375- 13.625 1,655,900 $ 1.000-$15.875
Canceled or expired (12,850) 12.125- 15.750 (194,250) 7.300- 15.750 (337,400) 13.875- 15.875
Exercised ........... (1,400) 12.125 -- -- -- --
----------- ---------------- ----------- ---------------- ----------- ----------------
Balance, December 31 1,432,200 $ 1.000-$15.875 1,411,450 $1.000-$15.875 1,318,500 $ 1.000-$15.875
=========== ================ =========== ================ =========== ================
</TABLE>
At December 31, 1995, there were 166,400 shares available for future
grant. At December 31, 1995, the weighted average option prices for shares
under option and for shares exercisable were $7.21 and $6.51, respectively.
The weighted average option prices of shares exercised was $12.125 at
December 31, 1995. On the date of the 1993 grant, the market price of the
Bank's common stock exceeded the exercise price such that $8.0 million of
deferred compensation expense was recorded at the date of grant. These
options generally vest and become exercisable to the participants over a 36
month period. During 1995 and 1994, approximately $2.0 million and $4.3
million, respectively, was charged to compensation expense. The Bank has a
total of $1.7 million of deferred compensation expense scheduled to be
recorded between January 1, 1996 and December 31, 1996.
In 1994, the Bank's stockholders approved the 1994 Non-Employee Director
Stock Option Plan under which 161,000 shares of common stock may be granted
subject to certain adjustments to prevent dilution.
Option activity for the 1994 Non-Employee Director Stock Option Plan
follows:
<TABLE>
<CAPTION>
1995 1994
-------------------------------- --------------------------------
NUMBER OF RANGE OF NUMBER OF RANGE OF
SHARES OPTION PRICES SHARES OPTION PRICES
------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
Balance, January 1 ...... 120,000 $10.00 -- $ --
Granted ................. -- -- 120,000 10.00
Canceled or expired .... -- -- -- --
Exercised ............... -- -- -- --
------------- ----------------- ------------- -----------------
Balance, December 31 ... 120,000 $10.00 120,000 $10.00
============= ================= ============= =================
</TABLE>
F-180
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25: STOCK INCENTIVE PLANS (CONTINUED)
At December 31, 1995, there were 41,000 shares available for future grant.
The weighted average exercise price for shares under option was $10.00 at
December 31, 1995.
NOTE 26: QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1995 1995 1995 1995
---------- --------- -------------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income ............................... $245.6 $252.1 $249.9 $260.4
Interest expense .............................. 172.8 175.7 170.0 177.6
----------- ---------- --------------- --------------
Net interest income ........................... 72.8 76.4 79.9 82.8
Provision for loan losses ..................... 8.3 8.6 7.6 7.3
Other income .................................. 14.5 14.3 21.5(A) 13.2
Other expenses ................................ 64.3 60.3 61.9 63.4
Income tax expenses ........................... -- 0.1 -- --
Dividends on Preferred Stock of Subsidiary ... 6.4 6.4 6.4 6.4
----------- ---------- --------------- --------------
Net earnings available for common stockholders $ 8.3 $ 15.3 $ 25.5 $ 18.9
=========== ========== =============== ==============
Net earnings per share ........................ $ 0.17 $ 0.31 $ 0.50 $ 0.38
=========== ========== =============== ==============
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1994 1994 1994 1994
---------- --------- -------------- -------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Interest income ................................ $ 224.1 $229.6 $222.3 $232.1
Interest expense ............................... 133.1 139.0 139.6 154.8
----------- ---------- --------------- --------------
Net interest income ............................ 91.0 90.6 82.7 77.3
Provision for loan losses ...................... 43.9 11.4 11.2 8.4
Other income ................................... 17.4 17.5 151.4(B) 14.9
Other expenses ................................. 381.1(C) 85.7 73.4(D) 70.8
Income tax expense ............................. 5.8 0.5 -- --
Dividends on Preferred Stock of Subsidiary .... 1.8 2.3 6.4 6.4
----------- ---------- --------------- --------------
(Loss) earnings before the cumulative effect of
change in accounting for goodwill ............. (324.2) 8.2 143.1 6.6
Cumulative effect of change in accounting for
goodwill ...................................... (273.7) -- -- --
----------- ---------- --------------- --------------
Net (loss) earnings available for common
stockholders .................................. $(597.9) $ 8.2 $143.1 $ 6.6
=========== ========== =============== ==============
Net (loss) earnings per share before the
cumulative effect of change in accounting for
goodwill ...................................... $(11.39) $ 0.17 $ 2.87 $ 0.13
Net (loss) earnings per share of the cumulative
effect of change in accounting for goodwill .. (9.62) -- -- --
----------- ---------- --------------- --------------
Net (loss) earnings per share .................. $(21.01) $ 0.17 $ 2.87 $ 0.13
=========== ========== =============== ==============
</TABLE>
- ------------
(A) Includes a $6.8 million gain on the sale of $729.3 million of Treasury
securities.
(B) Includes $135.0 million gain from the sale of Southeast Division.
(C) Includes $280.0 million provision for estimated losses on assets held
for accelerated disposition.
(D) Includes $5.2 million recovery upon consummation of the sale of assets
held for accelerated disposition.
F-181
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 27: PARENT COMPANY FINANCIAL INFORMATION
The following financial statements are for Cal Fed Bancorp Inc., the
parent company, on a stand-alone basis. These financial statements should be
read in conjunction with the other Notes to the consolidated financial
statements.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS
Cash ............................. $ 22.1 $ --
Investment in California Federal 599.4 532.3
-------- --------
$621.5 $532.3
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Total liabilities ................ $ -- $ --
-------- --------
Total stockholders' equity ...... 621.5 532.3
-------- --------
$621.5 $532.3
======== ========
</TABLE>
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
------- ---------- ----------
<S> <C> <C> <C>
Equity in undistributed net earnings (loss) of
subsidiaries available for common stockholders .......... $68.0 $(440.0) $(149.3)
------- ---------- ----------
Net earnings (loss) available to common stockholders ..... $68.0 $(440.0) $(149.3)
======= ========== ==========
</TABLE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
-------- ---------- ----------
<S> <C> <C> <C>
Net Cash Flows from Operating Activities:
Net earnings (loss) available to common stockholders ..... $ 68.0 $(440.0) $(149.3)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Equity in undistributed net (earnings) loss of
subsidiaries available for common stockholders ........ (68.0) 440.0 149.3
-------- ---------- ----------
Net cash provided by operating activities .............. -- -- --
Cash Flows from Investing Activities: ..................... -- -- --
-------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from initial capitalization ..................... 22.1 -- --
-------- ---------- ----------
Net increase in cash ...................................... $ 22.1 $ -- $ --
Cash at beginning of year ................................. -- -- --
-------- ---------- ----------
Cash at end of year ....................................... $ 22.1 $ -- $ --
======== ========== ==========
</TABLE>
F-182
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Cash ......................................................... $ 197.9 $ 273.7
Short-term liquid investments ................................ -- 74.1
Securities purchased under agreements to resell .............. 1,438.4 1,674.6
Securities available for sale ................................ 6.0 200.3
Securities held to maturity .................................. 2,040.8 2,366.7
Loans receivable held for sale ............................... 32.2 13.6
Loans receivable held for investment ......................... 10,022.9 9,290.0
Federal Home Loan Bank stock ................................. 164.3 135.7
Interest receivable .......................................... 74.9 79.5
Premises and equipment ....................................... 64.0 71.2
Real estate held for sale .................................... 15.2 49.5
Prepaid expenses and other assets ............................ 70.1 91.7
--------------- --------------
Total Assets ............................................. $14,126.7 $14,320.6
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ..................................................... $ 8,763.0 $ 9,476.7
Advances from Federal Home Loan Banks ........................ 3,261.0 2,671.0
Securities sold under agreements to repurchase ............... 962.7 857.3
Student Loan Marketing Association advances .................. -- 200.0
Subordinated debentures ...................................... 57.0 57.6
Interest payable ............................................. 23.4 29.4
Other liabilities ............................................ 232.5 141.1
--------------- --------------
Total Liabilities ........................................ 13,299.6 13,433.1
--------------- --------------
Stockholders' Equity
Preferred Stock of Subsidiary ............................... 172.5 266.0
Common stock ................................................ 49.4 49.2
Additional paid-in capital .................................. 841.0 838.6
Net unrealized holding losses on securities available for
sale ....................................................... -- --
Retained earnings (deficit) ................................. (235.8) (266.3)
--------------- --------------
Total Stockholders' Equity ............................... 654.6 621.5
--------------- --------------
Total Liabilities and Stockholders' Equity ............... $14,126.7 $14,320.6
=============== ==============
</TABLE>
- ------------
* Common stock value at par is $100.
See accompanying notes to consolidated financial statements.
F-183
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED SEPTEMBER 30,
------------------
1996 1995
-------- --------
<S> <C> <C>
Interest income:
Loans receivable ............................................... $567.8 $520.7
Securities held to maturity .................................... 109.9 128.3
Securities purchased under agreements to resell ................ 71.0 41.8
Securities available for sale .................................. 9.2 46.0
Short-term liquid investments .................................. 3.7 10.8
-------- --------
Total interest income ....................................... 761.6 747.6
-------- --------
Interest expense:
Deposits ....................................................... 326.2 322.8
Borrowings ..................................................... 174.5 195.7
-------- --------
Total interest expense ...................................... 500.7 518.5
-------- --------
Net interest income ......................................... 260.9 229.1
Provision for loan losses ....................................... 30.8 24.5
-------- --------
Net interest income after provision for loan losses ........ 230.1 204.6
Other income:
Fee income ..................................................... 44.6 40.3
Gain (loss) on sales of loans .................................. 0.7 (0.3)
Gain on sales of securities held for sale ...................... 1.1 6.8
Other .......................................................... 15.5 3.5
-------- --------
Total other income .......................................... 61.9 50.3
-------- --------
Other expenses:
Compensation ................................................... 72.3 72.8
Office occupancy ............................................... 27.9 29.5
Other general and administrative ............................... 58.6 57.5
Federal deposit insurance premiums ............................. 17.7 19.4
-------- --------
Total general and administrative expenses ................... 173.9 179.2
Savings Association Insurance Fund special assessment ......... 58.1 --
Operations of real estate held for sale ........................ 8.0 7.3
-------- --------
Total other expenses ........................................ 242.6 186.5
-------- --------
Earnings (loss) before income tax expenses ...................... 51.1 68.4
Income tax expense .............................................. 0.1 0.1
-------- --------
Earnings (loss) before dividends on preferred stock of
subsidiary ................................................. 49.3 68.3
Dividends on preferred stock of subsidiary ...................... 18.9 19.2
-------- --------
Net earnings (loss) available for common stockholders .......... $ 30.4 $ 49.1
======== ========
Primary net earnings (loss) per common share .................... $ 0.61 $ 0.99
Fully diluted net earnings (loss) per common share .............. 0.60 0.98
</TABLE>
See accompanying notes to consolidated financial statements.
F-184
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED SEPTEMBER 30,
------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
(Loss) earnings before dividends on preferred stock of subsidiary . $ 49.3 $ 68.3
Adjustments to reconcile net (loss) earnings to net cash provided
by operating activities:
Depreciation and amortization ..................................... 8.7 9.8
Accretion of fees and discounts ................................... (0.9) (12.8)
Provision for losses on loans receivable .......................... 30.8 24.5
Provision for losses (recoveries) on real estate held for sale ... 5.0 (7.2)
Savings Association Insurance Fund special assessment ............ 58.1 --
(Gain) loss on sales of loans ..................................... (0.7) 0.3
Loans originated for sale ......................................... (191.5) (81.5)
Gain on sales of securities ....................................... (1.1) (6.8)
Proceeds from sales of loans receivable held for sale ............ 219.8 149.1
Decrease in other assets .......................................... 26.2 23.8
Increase (decrease) in other liabilities .......................... 27.6 (13.1)
Other items ....................................................... (12.5) 0.7
----------- -----------
Net cash provided by operating activities ...................... 218.8 155.1
CASH FLOWS FROM INVESTING ACTIVITIES:
Loans originated for investment ................................... (1,894.6) (1,634.6)
Purchases of securities available for sale ........................ (211.0) (152.5)
Proceeds from sales of securities available for sale ............. 250.4 952.2
Purchases of mortgage-backed securities held to maturity ......... -- (65.7)
Principal collected on loans receivable held for investment ...... 1,026.9 804.5
Principal collected on securities held to maturity ................ 325.1 310.2
Proceeds from maturities of securities ............................ 156.0 807.8
Net (increase) decrease in FHLB stock ............................. (28.6) 13.1
Proceeds from sales of real estate held for sale, net ............ 103.7 91.3
Net additions of premises and equipment ........................... (1.3) (1.3)
Net (increase) decrease in short-term liquid investments ......... 74.1 99.7
Net decrease (increase) in securities purchased under agreements
to resell ........................................................ 236.2 (1,382.4)
----------- -----------
Net cash provided (used) by investing activities ............... 36.9 (157.7)
CASH FLOWS FROM FINANCING ACTIVITIES:
(Decrease) increase in deposits ................................... (713.1) 1,077.1
Proceeds from Federal Home Loan Bank advances ..................... 2,030.0 1,235.0
Payments on Federal Home Loan Bank advances ....................... (1,440.0) (1,385.0)
Net increase (decrease) in reverse repurchase agreements ......... 105.4 (949.7)
Proceeds from other borrowings .................................... 0.3 3.0
Payments on other borrowings and subordinated debentures ......... (201.1) (9.7)
Redemption of preferred stock of subsidiary ....................... (93.5) --
Payment of dividends on preferred stock of subsidiary ............ (18.9) (19.2)
----------- -----------
Net cash used by financing activities .......................... (330.9) (48.5)
----------- -----------
Net decrease increase in cash ...................................... (75.8) (51.1)
Cash at beginning of period ........................................ 273.7 292.8
----------- -----------
Cash at end of period .............................................. $ 197.9 $ 241.7
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-185
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(1) PRESENTATION OF FINANCIAL INFORMATION
In the opinion of Cal Fed Bancorp Inc. and its subsidiaries (the
"Company"), the accompanying unaudited consolidated financial statements,
prepared from the Company's books and records, contain all adjustments
(consisting of only normal recurring accruals) necessary for a fair
presentation of the Company's financial condition as of September 30, 1996,
June 30, 1996, December 31, 1995 and September 30, 1995, and the results of
operations and statements of cash flows for the nine months ended September
30, 1996 and 1995.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and, therefore, do
not include all information and footnotes necessary to present the financial
position, results of operations and statements of cash flows in conformity
with generally accepted accounting principles.
Included in the preparation of such statements are certain material
estimates related to determining the allowances for potential losses on
loans, real estate and the impairment of other assets. Additionally, the
Company has made certain estimates relating to various legal proceedings in
which the Company has been named as a defendant and has established
allowances in accordance with its estimates. In the event that actual losses
materially exceed the allowances established, the Company may realize a
material adverse impact on its financial condition and results of operations.
During the 1995 fourth quarter, California Federal Bank F.S.B. (the
"Bank") obtained regulatory and shareholder approval to reorganize into a
holding company structure to provide greater flexibility for meeting future
financial and competitive needs. As a result of the reorganization, on
January 1, 1996, each share of the Bank's common stock was converted into one
share of Cal Fed Bancorp Inc. common stock and the Bank became a wholly-owned
subsidiary of Cal Fed Bancorp Inc. In order to present comparative financial
statements and other financial information, the Company's financial
statements and other financial information reported herein for periods prior
to the reorganization into a holding company structure are presented on an
"as if" pooling-of-interests basis.
In March 1993, the Bank issued 3,740,000 shares of 7 3/4% noncumulative
convertible preferred stock at a liquidation preference of $25.00 per share
(the "Preferred Stock, Series A"). Effective January 1, 1996, the Preferred
Stock, Series A, was convertible by the holders into the common stock of Cal
Fed Bancorp Inc. at any time at a conversion price of $20.16 per share,
subject to adjustment.
During the second quarter of 1996, the Bank called for redemption all
3,740,000 shares of the Preferred Stock, Series A. Except for the conversion
of 18,820 shares into 23,336 shares of the Company's common stock, the Series
A shares were redeemed effective June 14, 1996 at a redemption price of
$25.00 per share, plus a dividend of $0.398264 per share.
In March 1994, the Bank issued 1,725,000 shares of 10.625% noncumulative
perpetual preferred stock at its liquidation preference of $100.00 per share
(the "Preferred Stock, Series B"). The issuance of the Preferred Stock,
Series B is generally not redeemable prior to April 1, 1999. The Preferred
Stock, Series B, is redeemable at the option of the Bank, in whole or in
part, at $105.313 per share on or after April 1, 1999 and prior to April 1,
2000, and at prices decreasing annually thereafter to the liquidation
preference of $100.00 per share on or after April 1, 2003, plus declared but
unpaid dividends. In addition, the Preferred Stock, Series B, is redeemable
at the option of the Bank or its successor or any acquiring or resulting
entity with respect to the Bank on or after April 1, 1996 and prior to April
1, 1999 in whole, but not in part, in the event of a change of control of the
Bank at $114.50 per share.
F-186
<PAGE>
CAL FED BANCORP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996
The Preferred Stock, Series A and Series B are presented on the Company's
Consolidated Statements of Financial Condition as "Preferred Stock of
Subsidiary."
The following material under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" is written with
the presumption that the users of the interim financial statements have read
or have access to the most recent report on Form 10-K which contains the
latest audited financial statements and notes thereto, together with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations as of December 31, 1995 and for the year then ended.
(2) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
For the purposes of the Consolidated Statements of Cash Flows, the Bank
defines cash as currency on hand and demand deposits with other financial
institutions.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------
1996 1995
------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash Paid (Received) During the Period for:
Interest expense ........................................ $506.7 $514.7
Income taxes ............................................ 11.4 (1.6)
Non-Cash Investing and Financing Activities:
Additions to real estate acquired in settlement of loans 97.0 110.0
Loans exchanged for mortgage-backed securities .......... -- 239.7
Change in unrealized gain on securities available for
sale .................................................... -- 18.5
Transfers (from) to loans held for sale (to) from loans
held for investment .................................... 47.1 78.5
</TABLE>
(3) NET EARNINGS (LOSS) PER COMMON SHARE INFORMATION
For the purposes of calculating net earnings (loss) per common share, the
Company used the following weighted average number of shares for the periods
presented:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Primary net earnings (loss) per
common share ........................ 49,412,545 49,946,620 50,147,218 49,807,312
Fully diluted net earnings (loss) per
common share ........................ 49,412,545 54,658,496 50,253,911 50,020,288
</TABLE>
Please refer to Exhibit 11 for further information on the calculation of
earnings (loss) per common share.
F-187
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data gives effect to the Acquisitions,
the Branch Sales the Capital Corporation Offering and and the issuances of
the Holdings Preferred Stock, the Holdings 9 1/8% Senior Subordinated Notes
and the Notes. The Branch Purchases and the Home Federal Acquisition have not
been reflected in the pro forma financial data because such transactions are
not material either individually or in the aggregate.
The following pro forma financial data as of and for the nine months ended
September 30, 1996 are based on (i) the historical consolidated statement of
financial condition of Holdings giving effect to the Cal Fed Acquisition, the
issuance of the Notes, and the Capital Corporation Offering as if such
transactions occurred on September 30, 1996, and (ii) the historical
consolidated statement of operations of Holdings for the nine months ended
September 30, 1996 giving effect to the Cal Fed Acquisition, the SFFed
Acquisition, the LMUSA 1996 Purchase, the Branch Sales, the Capital
Corporation Offering and the issuances of the Holdings Preferred Stock, the
Holdings 9 1/8% Senior Subordinated Notes and the Notes, as if such
transactions occurred on January 1, 1995. The following pro forma financial
data for the year ended December 31, 1995 is based on the historical
consolidated statement of operations of Holdings for the year ended December
31, 1995 giving effect to the Acquisitions, the Branch Sales, the Capital
Corporation Offering and the issuances of the Holdings Preferred Stock, the
Holdings 9 1/8% Senior Subordinated Notes and the Notes as if such
transactions occurred on January 1, 1995. The pro forma adjustments are based
on available information and upon certain assumptions that management
believes are reasonable under the circumstances. The Acquisitions are
accounted for under the purchase method of accounting. Under this method of
accounting, the purchase price has been allocated to the assets and
liabilities acquired based on preliminary estimates of fair value. The actual
fair value is determined as of the consummation of each of the Acquisitions.
The pro forma financial data do not necessarily reflect the results of
operations or the financial position of Holdings that actually would have
resulted had the Acquisitions, the Branch Sales, the Capital Corporation
Offering and the issuances of the Holdings Preferred Stock, the Holdings
9 1/8% Senior Subordinated Notes and the Notes occurred at the dates indicated,
or project the results of operations or financial position of Holdings for
any future date or period.
The following pro forma financial data should be read in conjunction with
the Consolidated Financial Statements of Holdings and the notes thereto, the
Consolidated Financial Statements of SFFed and the notes thereto and the
Consolidated Financial Statements of Cal Fed and California Federal and the
notes thereto. Capitalized terms used and not defined herein have the
meanings set forth in the Prospectus.
P-1
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CAL FED ACQUISITION (A)
-------------------------------------------------------------
CAL FED
HOLDINGS CAL FED VALUATION PRO FORMA ACQUISITION
HISTORICAL HISTORICAL(I) ADJUSTMENTS(II) ADJUSTMENTS(III) PRO FORMA
------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents . $ 271,218 $ 197,900 $ 0 $(992,839)(2) $ (794,939)
Securities ................. 572,210 1,444,400 (741)(1) (300,000)(2) 1,143,659
Mortgage-backed securities 3,360,527 2,040,800 4,768 (1) -- 2,045,568
Loans receivable, net ..... 11,307,216 10,055,100 (31,685)(1) -- 10,023,415
Office premises and
equipment, net ............ 92,088 64,000 (56,633)(1) -- 7,367
Mortgage servicing rights,
net ....................... 406,669 4,866 27,392 (1) -- 32,258
Core deposit and other
intangible assets ......... 144,782 14,580 (14,580)(1) 531,094 (1) 531,094
Other assets ............... 814,768 305,054 185,720 (1) -- 490,774
------------- ------------- --------------- -------------- -------------
Total assets ............... $16,969,478 $14,126,700 $114,241 $(761,745) $13,479,196
============= ============= =============== ============== =============
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits ................... $ 8,799,990 $ 8,763,000 $ 3,839 (1) $ -- $ 8,766,839
Borrowings ................. 6,507,942 4,304,100 (2,043)(1) -- 4,302,057
Other liabilities .......... 431,291 232,500 5,300 (1) -- 237,800
------------- ------------- --------------- -------------- -------------
Total liabilities .......... 15,739,223 13,299,600 7,096 -- 13,306,696
------------- ------------- --------------- -------------- -------------
Minority interest .......... 309,376 172,500 -- -- 172,500
Stockholders' Equity:
Preferred Stock ........... 150,000 -- -- -- --
Common Stock .............. 1 49,400 -- (49,400)(3) --
Additional paid-in
capital .................. 47,752 841,000 -- (841,000)(3) --
Net unrealized holding
gain on securities ....... 35,087 -- -- -- --
Retained earnings
(deficit) ................ 688,039 (235,800) 107,145 (1) 128,655 (3) --
------------- ------------- --------------- -------------- -------------
Stockholders' equity .... 920,879 654,600 107,145 (761,745) --
------------- ------------- --------------- -------------- -------------
Total liabilities, minority
interest and stockholders'
equity .................... $16,969,478 $14,126,700 $114,241 $(761,745) $13,479,196
============= ============= =============== ============== =============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PRO FORMA
CAPITALIZATION(B) COMBINED
--------------- -------------
<S> <C> <C>
ASSETS
Cash and cash equivalents . $ 555,000 (1) $ 31,279
Securities ................. -- 1,715,869
Mortgage-backed securities -- 5,406,095
Loans receivable, net ..... -- 21,330,631
Office premises and
equipment, net ............ -- 99,455
Mortgage servicing rights,
net ....................... -- 438,927
Core deposit and other
intangible assets ......... -- 675,876
Other assets ............... 20,000 (1) 1,325,542
--------------- -------------
Total assets ............... $ 575,000 $31,023,674
=============== =============
LIABILITIES, MINORITY
INTEREST AND
STOCKHOLDERS' EQUITY
Deposits ................... $ -- $17,566,829
Borrowings ................. (482,650)(2) 10,902,349
575,000 (1)
Other liabilities .......... 669,091
--------------- -------------
Total liabilities .......... 92,350 29,138,269
--------------- -------------
Minority interest .......... 500,000 (2) 981,876
Stockholders' Equity:
Preferred Stock ........... -- 150,000
Common Stock .............. -- 1
Additional paid-in
capital .................. (17,350)(2) 30,402
Net unrealized holding
gain on securities ....... -- 35,087
Retained earnings
(deficit) ................ -- 688,039
--------------- -------------
Stockholders' equity .... (17,350) 903,529
--------------- -------------
Total liabilities, minority
interest and stockholders'
equity .................... $ 575,000 $31,023,674
=============== =============
</TABLE>
- ------------
(A) See note (A) on page P-3.
(B) See note (B) on page P-7.
(i) Represents historical amounts obtained from Cal Fed's unaudited
financial statements.
(ii) Represents adjustments to (i) record Cal Fed's assets and liabilities
at preliminary estimates of their respective fair values and (ii) the
elimination of Cal Fed's historical intangible assets.
(iii) Represents adjustments to record (i) the purchase price of the Cal Fed
Acquisition, and (ii) the elimination of the common equity of Cal Fed.
P-2
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION
(1) The Cal Fed Acquisition will be accounted for using the purchase method
of accounting. The total purchase cost will be allocated first to the
tangible and identifiable intangible assets and liabilities of Cal Fed
based on their respective fair values and the remainder will be allocated
to goodwill. The aggregate purchase price was determined as follows:
<TABLE>
<CAPTION>
<S> <C>
Purchase price, as defined:
Shares outstanding at September 30, 1996 . 49,427,074
Options outstanding at September 30, 1996 1,355,140
------------
Total .................................. 50,782,214
Purchase price per share .................. $ 23.50
------------
Purchase price for outstanding shares .... $ 1,193,382
Exercise of options outstanding (a) ...... (10,800)
------------
Purchase price ............................ 1,182,582
Acquisition fees and expenses (b) ........ 110,257
------------
Total .................................. $ 1,292,839
============
</TABLE>
The following is a reconciliation of the common equity of Cal Fed to the
fair value of the net assets to be acquired by Holdings:
<TABLE>
<CAPTION>
<S> <C> <C>
Common equity of Cal Fed at September 30, 1996 ... $ 654,600
Fair value adjustments (c):
Securities ...................................... $ (741)
Mortgage-backed securities ...................... 4,768
Loans receivable, net ........................... (31,685)
Mortgage servicing rights ....................... 27,392
Office premises and equipment (d) ............... (56,633)
Litigation receivable, net (other assets) (e) .. 132,720
Other assets (f) ................................ 53,000
Deposits accounts ............................... (3,839)
Borrowings ...................................... 2,043
Other liabilities (g) ........................... (5,300)
Elimination of historical intangible assets .... (14,580)
----------
107,145 107,145
-----------
Fair value of net assets acquired ............... 761,745
Purchase cost ................................... 1,292,839
-----------
Excess of purchase cost over net assets acquired
("goodwill") ................................... $ 531,094
===========
</TABLE>
(a) Represents cash to be received by Cal Fed in settlement of stock
options and stock appreciation rights outstanding as of September 30,
1996 (1,355,140 options outstanding at an average price of $7.97 per
share).
P-3
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION (CONTINUED)
(b) Represents fees and costs consisting of the following:
<TABLE>
<CAPTION>
<S> <C>
Severance costs ....................................... $ 45,500
Pension plan termination costs ........................ 6,700
Conversion and contract termination costs ............. 33,257
Investment banking, legal and other professional costs 24,800
---------
$110,257
=========
</TABLE>
Severance costs were estimated based on (i) obligations assumed by
Holdings under Cal Fed's compensation agreements with eleven of its
executive officers; (ii) transaction bonuses paid to six California Federal
executive officers; (iii) severance benefits paid or payable pursuant to a
letter agreement between Cal Fed and Holdings for approximately 850
employees who are parties to separate employment agreements; and (iv)
relocation benefits for employees who have been offered employment
opportunities in northern California. The obligations of Holdings pursuant
to items (i) and (ii) above approximate $15.5 million and $10 million,
respectively. Non-contract employees are eligible to be paid three weeks of
severance per year of service, with a minimum payment of eight weeks
severance. In addition, 52 employees have guaranteed minimum severance
payments, which often exceed the three weeks per year of service. Holdings'
termination plan has been developed, and employees to be terminated have
been so notified. Termination dates generally fall within six months of the
consummation of the Cal Fed Acquisition.
Pension termination costs represent lump sum distributions which are
required under Cal Fed's defined benefit programs upon termination of such
plans. These amounts, totalling $4.2 million, have not been previously
accrued. In addition, the purchase agreement includes $2.5 million to be
allocated to an employee retention pool, established to provide additional
incentive to critical employees to remain with Cal Fed until the Cal Fed
Acquisition was consummated.
The majority of conversion and contract costs of $33.3 million represents
costs and penalties expected to be incurred by Holdings in connection with
the cancellation of outstanding contracts. Such contracts consist primarily
of data processing services and real property lease arrangements. This
amount also includes the transfer cost of mortgage loan servicing,
estimated at $40 per loan, based on First Nationwide's historical
experience.
(c) Fair value adjustments are amortized against (accreted to) net income
as follows:
<TABLE>
<CAPTION>
PERIOD OF AMORTIZATION
ITEM METHOD OF AMORTIZATION (ACCRETION) (ACCRETION)
- ------------------------------ ------------------------------------------------ --------------------------
<S> <C> <C>
Mortgage-backed securities Level yield method over effective terms of such 6 to 9 years
assets, considering estimated prepayments
Loans receivable Level yield method over effective terms of 2 to 12 years
such assets, considering estimated
prepayments
Mortgage servicing rights Level yield method over effective terms of 2 to 7 years
such assets, considering estimated
prepayments
Goodwill Straight-line method 15 years
Deposit accounts Level yield method over stated terms of such 1 to 6 years
liabilities
Borrowings Level yield method over stated terms of such 1 to 9 years
liabilities
</TABLE>
P-4
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION (CONTINUED)
With respect to goodwill, representing the excess of the purchase price
over the fair value of tangible assets acquired and liabilities assumed
(the "Excess"), Holdings does not currently anticipate that any of the
Excess will be allocated to "identifiable intangible assets" (i.e., core
deposit intangible) in connection with the Cal Fed Acquisition. Based on
prior core deposit intangible studies, management estimates that the value
of California deposits would approximate $135 million, at September 30,
1996. The average life of this intangible, based on historical experience,
is approximately five years. On the other hand, goodwill related to
financial institutions is, by industry standards, typically amortized over
a 25 year period. Holdings has elected to amortize the Excess over 15
years. This treatment is predicated on the fact that 15 years is a
reasonable approximation of the combined lives of a separately determinable
core deposit intangible and the remaining Excess, and that non-segregation
of these assets would not have a significant effect on Holdings' financial
statements.
(d) Includes (i) $45.7 million in fair value adjustments to reflect
obligations assumed under master lease arrangements on Cal Fed's two
corporate facilities at market rental rates, net of sub-lease income;
(ii) fair value adjustments to reflect lease obligations on branch
facilities at market rates; and (iii) fair value adjustments related
to certain data processing hardware and software.
(e) Represents the estimated after-tax recovery that will inure to
Holdings from the California Federal Litigation, net of amounts
payable to holders of the Litigation Interests and the Secondary
Litigation Interests. The estimated fair value of such litigation
asset was determined based on the following methodology:
CALCULATION OF ESTIMATED GROSS PROCEEDS (WHOLE DOLLARS)
<TABLE>
<CAPTION>
<S> <C>
CALGZ Closing Price at September 30, 1996 $ 11.375
CALGZ Shares Outstanding ................. 5,075,549
---------------
CALGZ Total Value ........................ $ 57,734,370
CALGZ Share of Litigation Proceeds ...... 25.37775%
---------------
Total Value, After-tax Proceeds .......... $227,499,955
Gross-up for Tax Effect (1-40.2%) ....... 59.80%
---------------
$380,434,708(i)
Subjective Discount (ii) ................. 57,065,206
---------------
Estimated Gross Proceeds ................. $323,369,502
===============
</TABLE>
(i) No adjustment for expenses included due to immateriality to total
proceeds.
(ii) Subjective discount of approximately 15% was applied in
consideration of the variability of the market prices of the CALGZ
interests over time (which may be attributed in part to the
market's assumptions concerning, among other things, the time
frame for the final settlement of the California Federal
Litigation, the related discount for the time value of money, and
past and future expenses incurred in pursuing the California
Federal Litigation). After discount, estimated gross proceeds
represent a CALGZ price of $9.67 per share.
P-5
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(A) CAL FED ACQUISITION (CONTINUED)
DISTRIBUTION OF PROCEEDS
<TABLE>
<CAPTION>
<S> <C>
Estimated Gross Proceeds .................... $ 323,370
Tax Liability, Estimated at 40.2% ........... 129,995
-----------
Total After-tax Proceeds .................... $ 193,375
===========
Distribution to Class A Certificate Holders $ 193,375
CALGZ Share of After-tax Proceeds ........... 25.37775%
-----------
Total Distribution to Class A Holders ...... $ 49,074
===========
Remaining After-tax Proceeds ................ $ 144,301
Holdings Initial Distribution ............... 125,000
-----------
Remainder for Secondary Distribution ....... $ 19,301
===========
Holdings--40% Distribution .................. $ 7,720
Class B Certificate Holders--60%
Distribution ............................... 11,581
-----------
Total Secondary Distribution ............... $ 19,301
===========
Holdings Distribution:
Initial Distribution ....................... $ 125,000
40% Secondary Distribution ................. 7,720
-----------
Total Holdings Distribution ............... $ 132,720
===========
</TABLE>
Once the allocation of purchase price has been made, Holdings will
incur periodic charges against earnings for any market value
declines in the carrying value of this asset. Market value will be
determined based upon the market value of the CALGZ and Secondary
Litigation Interests, and will also consider a decline in value
related to factors of which management is aware which may not be
reflected in the market values of these securities. Any increases in
market value above the original cost basis established through
purchase accounting will be deferred until the final realization of
the settlement.
(f) Includes fair value adjustments to reflect (i) federal income tax and
interest receivable, net of California franchise tax and interest
payable, and (ii) investor advances accounts related to the loan
servicing operation.
(g) Includes fair value adjustments to deficit escrow accounts.
(2) Represents payment by Holdings in connection with the Cal Fed
Acquisition. The cash portion of the purchase price will be obtained by
liquidating certain of Cal Fed's assets at book value, as follows:
<TABLE>
<CAPTION>
<S> <C>
Existing cash .................................................... $ 992,839
Sale of securities available for sale and proceeds from
securities purchased under agreements to resell ................. 300,000
-----------
Purchase Price ................................................. $1,292,839
===========
</TABLE>
(3) Represents the elimination of the common equity components of Cal Fed of
$761,745.
P-6
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL CONDITION
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS UNLESS OTHERWISE NOTED)
(B) CAPITALIZATION
(1) Represents the issuance of the Notes:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Notes $575,000
Less: deferred issuance costs .......... (20,000)
----------
Net proceeds .......................... $555,000
==========
</TABLE>
(2) Represents the proceeds from the Capital Corporation Offering:
<TABLE>
<CAPTION>
<S> <C>
Proceeds from the issuance of the Capital Corporation
Preferred Stock .......................................... $500,000
Less: issuance costs (additional paid-in capital) ........ (17,350)
----------
Net proceeds ............................................. $482,650
==========
Net proceeds will be used to reduce borrowings of the Bank.
</TABLE>
P-7
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA 1996 CAL FED
ACQUISITION PURCHASE ACQUISITION
HOLDINGS PRO FORMA PRO FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B) TOTALS (C)
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .................. $716,523 $21,821 $ -- $579,125
Securities ........................ 24,875 1,017 -- 80,200
Mortgage-backed securities ........ 191,602 3,174 -- 127,000
Other interest income ............. 1,413 -- -- (21,792)
------------ ------------- ------------ -------------
Total interest income ............ 934,413 26,012 -- 764,533
INTEREST EXPENSE:
Deposits .......................... 323,246 12,401 -- 318,700
Borrowings ........................ 290,037 6,114 (848) 173,525
------------ ------------- ------------ -------------
Total interest expense ........... 613,283 18,515 (848) 492,225
Net interest income ............... 321,130 7,497 848 272,308
Provision for loan losses ......... 29,700 500 -- 30,800
------------ ------------- ------------ -------------
Net interest income after
provision for loan losses ........ 291,430 6,997 848 241,508
NONINTEREST INCOME:
Customer banking fees ............. 34,356 199 -- 36,300
Mortgage banking operations ...... 92,150 191 3,484 3,500
Net gain (loss) on sales of assets 414,413 (1,140) -- 1,800
Other ............................. 54,542 239 51 15,500
------------ ------------- ------------ -------------
Total noninterest income ......... 595,461 (511) 3,535 57,100
NONINTEREST EXPENSE:
Compensation and benefits ......... 155,976 1,257 2,070 50,994
Other ............................. 223,329 2,616 1,099 175,824
------------ ------------- ------------ -------------
Total noninterest expense ........ 379,305 3,873 3,169 226,818
------------ ------------- ------------ -------------
Income (loss) before income taxes
and minority interest ............ 507,586 2,613 1,214 71,790
Income tax (benefit) expense ..... (79,724) 369 120 11,439
------------ ------------- ------------ -------------
Income (loss) before minority
interest ......................... 587,310 2,244 1,094 60,351
MINORITY INTEREST ................. 34,584 -- -- 18,900
------------ ------------- ------------ -------------
Net income (loss) ................. 552,726 2,244 1,094 41,451
Holdings Preferred Stock dividends -- -- -- --
------------ ------------- ------------ -------------
Net income (loss) available to
common stockholders .............. $552,726 $ 2,244 $1,094 $ 41,451
============ ============= ============ =============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
BRANCH SALES
PRO FORMA PRO FORMA PRO FORMA
TOTALS(D) ADJUSTMENTS (E) COMBINED
-------------- --------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable .................. $ (110) $ -- $1,317,359
Securities ........................ -- -- 106,092
Mortgage-backed securities ........ -- -- 321,776
Other interest income ............. -- -- (20,379)
-------------- --------------- ------------
Total interest income ............ (110) -- 1,724,848
INTEREST EXPENSE:
Deposits .......................... (40,742) -- 613,605
Borrowings ........................ 44,835 (19,757)(1) 540,791
45,820 (2)
1,065 (2)
-------------- --------------- ------------
Total interest expense ........... 4,093 27,128 1,154,396
Net interest income ............... (4,203) (27,128) 570,452
Provision for loan losses ......... -- -- 61,000
-------------- --------------- ------------
Net interest income after
provision for loan losses ........ (4,203) (27,128) 509,452
NONINTEREST INCOME:
Customer banking fees ............. (3,965) -- 66,890
Mortgage banking operations ...... -- -- 99,325
Net gain (loss) on sales of assets 10 -- 415,083
Other ............................. (163) -- 70,169
-------------- --------------- ------------
Total noninterest income ......... (4,118) -- 651,467
NONINTEREST EXPENSE:
Compensation and benefits ......... (4,337) -- 205,960
Other ............................. (3,387) 2,143 (3) 401,691
67 (3)
-------------- --------------- ------------
Total noninterest expense ........ (7,724) 2,210 607,651
-------------- --------------- ------------
Income (loss) before income taxes
and minority interest ............ (597) (29,338) 553,268
Income tax (benefit) expense ..... (59) (1,859)(4) (69,714)
-------------- --------------- ------------
Income (loss) before minority
interest ......................... (538) (27,479) 622,982 (7)
MINORITY INTEREST ................. -- 30,797 (5) 84,281
-------------- --------------- ------------
Net income (loss) ................. (538) (58,276) 538,701
Holdings Preferred Stock dividends -- 13,859 (6) 13,859
-------------- --------------- ------------
Net income (loss) available to
common stockholders .............. $ (538) $(72,135) $ 524,842 (i)
============== =============== ============
</TABLE>
- ------------
(A) See note (A) on page P-9.
(B) See note (B) on page P-12.
(C) See note (C) on page P-14.
(D) See note (D) on page P-17.
(E) See note (E) on page P-19.
P-8
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ONE MONTH ENDED JANUARY 31, 1996 (A)
-------------------------------------------------------------
SFFED
ACQUISITION
VALUATION PRO FORMA PRO FORMA
(A) SFFED ACQUISITION HISTORICAL ADJUSTMENTS (B) ADJUSTMENTS (C) TOTALS
- ----------------------------------- ------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
$
Loan receivable .................... $20,524 $ 1,297 (1) -- $21,821
Securities ......................... 1,017 -- -- 1,017
Mortgage-backed securities ......... 2,976 198 (1) -- 3,174
Other interest income .............. -- -- -- --
------------ --------------- --------------- -------------
Total interest income ............. 24,517 1,495 -- 26,012
INTEREST EXPENSE:
Deposits ........................... 11,693 708 (1) -- 12,401
Borrowings ......................... 5,861 253 (1) -- 6,114
------------ --------------- --------------- -------------
Total interest expense ............ 17,554 961 -- 18,515
------------ --------------- --------------- -------------
Net interest income ................ 6,963 534 -- 7,497
Provision for loan losses .......... 500 -- -- 500
------------ --------------- --------------- -------------
Net interest income after provision
for loan losses ................... 6,463 534 -- 6,997
NONINTEREST INCOME:
Customer banking fees .............. 199 -- -- 199
Mortgage banking operations ....... 557 (366)(1) -- 191
Net gain (loss) on sales of assets (1,140) -- -- (1,140)
Other .............................. 239 -- -- 239
------------ --------------- --------------- -------------
Total noninterest income .......... (145) (366) -- (511)
NONINTEREST EXPENSE:
Compensation and benefits .......... 6,041 -- (4,784)(3) 1,257
Other .............................. 4,315 1,076 (2) (2,775)(4) 2,616
------------ --------------- --------------- -------------
Total noninterest expense ......... 10,356 1,076 (7,559) 3,873
------------ --------------- --------------- -------------
Income (loss) before income taxes
and minority taxes ................ (4,038) (908) 7,559 2,613
Income tax (benefit) expense ...... (4,993) -- 5,362 (5) 369
------------ --------------- --------------- -------------
Net income (loss) before minority
interest .......................... 955 (908) 2,197 2,244
------------ --------------- --------------- -------------
MINORITY INTEREST .................. -- -- -- --
------------ --------------- --------------- -------------
Net income (loss) .................. $ 955 $ (908) $ 2,197 $ 2,244
============ =============== =============== =============
</TABLE>
- ------------
(a) The SFFed Acquisition was consummated on February 1, 1996. Historical
results represent unaudited results of operations of SFFed for the
month ended January 31, 1996.
(b) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization of
historical goodwill.
(c) Represents adjustments to reflect (i) the elimination of certain
noninterest expense due to consolidation of SFFed operations with First
Nationwide's and (ii) the elimination of certain historical noninterest
expense recorded by SFFed as a result of the acquisition by First
Nationwide, and (iii) income taxes relative to the SFFed Acquisition.
P-9
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES
AND MINORITY INTEREST
(A) SFFED ACQUISITION (CONTINUED) INCREASE (DECREASE)
- --------------------------------- -------------------------
<S> <C>
(1) Represents amortization or accretion of fair value adjustments for the one
month ended January 31, 1996 as follows:
Loans receivable, net ......................................................... $ 1,297
Mortgage-backed securities .................................................... 198
Deposits ...................................................................... (708)
Borrowings .................................................................... (253)
Mortgage servicing rights ..................................................... (366)
IMPACT ON INCOME
BEFORE INCOME TAXES
AND MINORITY INTEREST
INCREASE (DECREASE)
-------------------------
(2) Represents adjustments for the one month ended January 31, 1996 consisting of the following:
Amortization of fair value adjustments--amortization of goodwill .............. $(1,131)
Elimination of amortization of SFFed's historical goodwill .................... 55
-------------------------
$(1,076)
=========================
(3) Represents adjustments to compensation and benefits expense for the one month ended January 31, 1996
relating to the consolidation of SFFed's operations into those of Holdings:
Decrease in compensation and benefits due to the reduction in headcount from
620 at January 1, 1996 to approximately 260 after the consummation of the SFFed
Acquisition. Substantially all retained employees represent retail branch
personnel. ................................................................ $ 1,586
Elimination of certain nonrecurring expenses recorded by SFFed related to
the acquisition by Holdings:
Accrual for severance for employees noticed for termination in January
1996 .................................................................... 2,459
Directors retirement plan and fees ...................................... 388
Expense related to restricted stock options ............................. 351
-------------------------
$ 4,784
=========================
</TABLE>
P-10
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
(4) Represents adjustments to other noninterest expense relating to the
consolidation of SFFed's operations into those of Holdings. Substantially
all of SFFed's operations have been consolidated into the existing
operations of Holdings, resulting in a reduction in headcount of
approximately 58% with the remaining personnel primarily consisting of
retail branch personnel. In addition, ten retail branches have been
closed. The estimates are based on the pro-rata portion of the annual
expense reduction computed for the year ended December 31, 1995.
<TABLE>
<CAPTION>
SFFED COST OF 1995
HISTORICAL ONGOING EXPENSE
COSTS OPERATIONS REDUCTION
------------ ------------ -----------
<S> <C> <C> <C>
Expense decreases due to consolidation:
Mortgage banking operations:
Occupancy expenses, including insurance ........... $ 1,329 $ 588 $ 741
Travel, automobile and employee dues .............. 282 67 215
Telecommunications, postage and supplies .......... 900 214 686
Other, net ........................................ 1,047 460 587
------------ ------------ -----------
Subtotal mortgage banking operations ............. $ 3,558 $ 1,329 $ 2,229
============ ============ ===========
Retail Banking operations--reductions due to
consolidation of ten retail branches and retail
operations center:
Occupancy expenses, including insurance ........... $11,220 $ 3,405 $ 7,815
SAIF assessment reduction based on lower historical
assessment rate for First Nationwide ............. 6,811 6,011 800
Travel, automobile and employee dues .............. 410 60 350
Telecommunications and data processing ............ 1,766 364 1,402
Postage and messenger costs ....................... 666 473 193
Other costs, net .................................. 216 108 108
------------ ------------ -----------
Subtotal retail banking operations ............... $21,089 $10,421 $10,668
============ ============ ===========
Overhead areas, including executive offices, legal,
human resources, information services, accounting,
and strategic planning areas:
Occupancy costs ................................... $ 1,316 $ -- $ 1,316
Data processing costs ............................. 2,848 1,000 1,848
Marketing and advertising expenses ................ 2,094 500 1,594
Other overhead costs .............................. 8,072 8,072 --
------------ ------------ -----------
Subtotal overhead areas .......................... $14,330 $ 9,572 $ 4,758
============ ============ ===========
Total decreases due to consolidation ............ $38,977 $21,322 $17,655
============ ============ ===========
Estimated impact on January 1996 ( 1/12 of 1995 Expense Reduction) .............. $ 1,471
Elimination of certain nonrecurring expenses recorded by
SFFed related to the acquisition by First Nationwide:
Retirement of office, premises and equipment ................................... 1,115
Directors and officers insurance premiums ...................................... 189
-----------
Total expense reduction for the month ended January 31, 1996 ................ $ 2,775
===========
(5) Represents amount necessary to adjust historical tax expense to the pro forma computation. Pro
forma tax expense for the month ended January 31, 1996 related to the SFFed Acquisition was
computed as follows:
Income before taxes ........................................................... $ 2,613
Add: permanent differences--amortization of goodwill .......................... 1,131
-----------
Taxable income ................................................................ $ 3,744
===========
Federal AMT, reduced, to the extent of 90%, by net operating loss carryovers .. $ 69
State taxes, at an assumed rate of 8% ......................................... 300
-----------
$ 369
===========
</TABLE>
P-11
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ONE MONTH ENDED JANUARY 31, 1996 (A)
----------------------------------------------------------------------------
LMUSA
PRO FORMA 1996 PURCHASE
(B) LMUSA 1996 PURCHASE HISTORICAL (A) ADJUSTMENTS (B) ADJUSTMENTS (C) PRO FORMA TOTALS
- ----------------------- ---------------- ----------------- ----------------- --------------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .................................. $ -- $ -- $ -- $ --
Securities ........................................ -- -- -- --
Mortgage-backed securities ........................ -- -- -- --
Other interest income ............................. -- -- -- --
---------------- ----------------- ----------------- --------------------
Total interest income ........................... -- -- -- --
INTEREST EXPENSE:
Deposits .......................................... -- -- -- --
Borrowings ........................................ -- -- (848)(2) (848)
---------------- ----------------- ----------------- --------------------
Total interest expense .......................... -- -- (848) (848)
---------------- ----------------- ----------------- --------------------
Net interest income ............................... -- -- 848 848
Provision for loan losses ......................... -- -- -- --
---------------- ----------------- ----------------- --------------------
Net interest income after provision for loan
losses ........................................... -- -- 848 848
NONINTEREST INCOME:
Customer banking fees ............................. -- -- -- --
Mortgage banking operations ....................... 5,363 (1,879)(1) -- 3,484
Net gain (loss) on sales of assets ................ -- -- -- --
Other ............................................. 51 -- -- 51
---------------- ----------------- ----------------- --------------------
Total noninterest income ........................ 5,414 (1,879) -- 3,535
NONINTEREST EXPENSE:
Compensation and benefits ......................... 2,070 -- -- 2,070
Other ............................................. 1,940 -- (841)(3) 1,099
---------------- ----------------- ----------------- --------------------
Total noninterest expense ....................... 4,010 -- (841) 3,169
---------------- ----------------- ----------------- --------------------
Income (loss) before income taxes and minority
interest ......................................... 1,404 (1,879) 1,689 1,214
Income tax (benefit) expense ...................... -- -- 120 (4) 120
---------------- ----------------- ----------------- --------------------
Net income (loss) before minority interest ....... 1,404 (1,879) 1,569 1,094
---------------- ----------------- ----------------- --------------------
MINORITY INTEREST ................................. -- -- -- --
---------------- ----------------- ----------------- --------------------
Net income (loss) ................................. $1,404 $(1,879) $1,569 $1,094
================ ================= ================= ====================
</TABLE>
- ------------
(a) The LMUSA 1996 Purchase was consummated on January 31, 1996.
Accordingly, historical financial data relating to operations acquired
in the LMUSA 1996 Purchase is presented for the month ended January 31,
1996 (unaudited). Historical financial statements were not available;
accordingly, historical data presented reflects best estimates of
management.
(b) Represents adjustments to reflect (i) the amortization of the fair
value of mortgage servicing rights and (ii) the elimination of
amortization of historical mortgage servicing rights.
(c) Represents adjustments to reflect (i) the decrease in interest expense
resulting from the transfer of custodial accounts acquired to First
Nationwide, (ii) elimination of certain other noninterest expense due
to consolidation with the Bank's existing mortgage banking operations,
and (iii) income taxes relative to the LMUSA 1996 Purchase.
P-12
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(B) LMUSA 1996 PURCHASE (CONTINUED)
(1) Represents the difference between the amortization of pro forma recorded
balance of mortgage servicing rights and the historical amortization of
mortgage servicing rights as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME BEFORE
INCOME TAXES AND
MINORITY INTEREST
INCREASE/(DECREASE)
-----------------------
<S> <C>
Pro forma amortization .... $(2,284)
Historical amortization (i) 405
-----------------------
$(1,879)
=======================
</TABLE>
(i) Represents elimination of amortization of mortgage servicing
rights of $405 included in LMUSA's historical statement of
operations for the month ended January 31, 1996.
(2) Represents a decrease in interest expense resulting from the transfer of
custodial accounts acquired to First Nationwide.
(3) Represents the impact on other noninterest expense of (i) the elimination
of historical amounts related to LMUSA operations not included in the
LMUSA 1996 Purchase and (ii) the consolidation of the LMUSA 1996 Purchase
into the Bank's existing mortgage banking operations, as follows:
<TABLE>
<CAPTION>
DECREASE
LMUSA ESTIMATED IN OTHER
HISTORICAL FUTURE NONINTEREST
COSTS COSTS EXPENSE
------------ ----------- -------------
<S> <C> <C> <C>
Components of LMUSA historical noninterest
expense:
Facilities depreciation .......................... $ 128 $ -- (ii) $(128)
Data processing, document storage, administrative
services and management fees .................... 833 120 (iii) (713)
Other miscellaneous costs ........................ 979 979 --
------------ ----------- -------------
$1,940 $1,099 $(841)
============ =========== =============
</TABLE>
(ii) Represents historical amounts related to operations not included in
the LMUSA 1996 Purchase.
(iii) Represents amounts necessary to replace these services based on
Holdings' historical annual cost per loan based on the average
number of loans serviced.
(4) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the month ended January 31,
1996 related to the LMUSA 1996 Purchase was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ........................ $ 23
State taxes, at an assumed rate of 8% ............. 97
-----
$120
=====
</TABLE>
P-13
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
CAL FED
ACQUISITION
CAL FED VALUATION PRO FORMA PRO FORMA
(C) CAL FED ACQUISITION HISTORICAL ADJUSTMENTS (A) ADJUSTMENTS (B) TOTALS
- ----------------------- ------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ................................... $567,800 $ 11,325 (1) $ -- $579,125
Securities ......................................... 80,200 -- -- 80,200
Mortgage-backed securities ......................... 109,900 17,100 (1) -- 127,000
Other interest income .............................. 3,700 -- (25,492)(3) (21,792)
------------ --------------- --------------- -------------
Total interest income ............................. 761,600 28,425 (25,492) 764,533
INTEREST EXPENSE:
Deposits ........................................... 326,200 (7,500)(1) -- 318,700
Borrowings ......................................... 174,500 (975)(1) -- 173,525
------------ --------------- --------------- -------------
Total interest expense ............................ 500,700 (8,475) -- 492,225
------------ --------------- --------------- -------------
Net interest income ................................ 260,900 36,900 (25,492) 272,308
Provision for loan losses .......................... 30,800 -- -- 30,800
------------ --------------- --------------- -------------
Net interest income after provision for loan losses 230,100 36,900 (25,492) 241,508
NONINTEREST INCOME:
Customer banking fees .............................. 36,300 -- -- 36,300
Mortgage banking operations ........................ 8,300 (4,800)(1) -- 3,500
Net loss on sales of assets ........................ 1,800 -- -- 1,800
Other .............................................. 15,500 -- -- 15,500 (6)
------------ --------------- --------------- -------------
Total noninterest income .......................... 61,900 (4,800) -- 57,100
NONINTEREST EXPENSE:
Compensation and benefits .......................... 72,300 -- (21,306)(4) 50,994
Other .............................................. 170,300 41,909 (2) (36,385)(4) 175,824
------------ --------------- --------------- -------------
Total noninterest expense ......................... 242,600 41,909 (57,691) 226,818
------------ --------------- --------------- -------------
Income (loss) before income taxes .................. 49,400 (9,809) 32,199 71,790
Federal and state income taxes ..................... 100 -- 11,339 (5) 11,439
------------ --------------- --------------- -------------
Net income (loss) .................................. 49,300 (9,809) 20,860 60,351
------------ --------------- --------------- -------------
MINORITY INTEREST .................................. 18,900 -- -- 18,900
------------ --------------- --------------- -------------
Net income (loss) available to common stockholders $ 30,400 $(9,809) $ 20,860 $ 41,451
============ =============== =============== =============
<FN>
- ------------
(a) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization of Cal
Fed's historical intangible assets.
(b) Represents adjustments to reflect (i) the reduction in interest income
relative to the loss in yield on the purchase price of the Cal Fed
Acquisition funded with existing cash, (ii) the elimination of certain
noninterest expense due to consolidation of Cal Fed's operations with
Holdings' and (iii) income taxes relative to the Cal Fed Acquisition.
See further discussion at Notes (3) and (4).
</TABLE>
P-14
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(C) CAL FED ACQUISITION (CONTINUED)
(1) Represents amortization or accretion of fair value adjustments as
follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES
AND MINORITY INTEREST
INCREASE/(DECREASE)
---------------------
<S> <C>
Loans receivable, net ..... $11,325
Mortgage-backed securities 17,100
Deposits ................... 7,500
Borrowings ................. 975
Mortgage servicing rights . (4,800)
</TABLE>
(2) Represents adjustments consisting of the following:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES
AND MINORITY INTEREST
INCREASE/(DECREASE)
---------------------
<S> <C>
Amortization of fair value adjustment--amortization of
goodwill .................................................... $(44,465)
Elimination of amortization of Cal Fed's historical
intangible assets ........................................... 2,556
---------------------
$(41,909)
=====================
</TABLE>
(3) Represents the reduction in interest income relative to the loss in
yield on the purchase price of the Cal Fed Acquisition funded with
existing cash. The loss was estimated using an interest rate of 5.75%,
which approximates the average interest rate on short term investments
for the nine months ended September 30, 1996.
(4) Represents adjustments to other noninterest expense relating to the
consolidation of Cal Fed's operations into those of Holdings. A
substantial portion of Cal Fed's operations will be consolidated into
the existing operations of Holdings, resulting in a reduction in
headcount of 850, or approximately 36%, across all business areas. In
addition, seven retail branches and two administrative offices will be
closed. Expected savings from such consolidation include compensation,
occupancy, travel, telecommunications, data processing and marketing
expenses. The expense reduction for the nine months ended September 30,
1996 represents a 36% reduction over historical levels based on
management's current transition plan for the second year following the
consummation of the Cal Fed Acquisition:
<TABLE>
<CAPTION>
CAL FED COST OF ADJUSTMENT-
HISTORICAL ONGOING EXPENSE
BUSINESS AREA: COSTS OPERATIONS REDUCTION
- ----------------------- ------------ ------------ -------------
<S> <C> <C> <C>
Compensation:
Retail Banking ........ $36,731 $36,245 $ 486
Information Technology 532 951 (419)
Commercial Real Estate 5,005 1,643 3,362
Mortgage Banking ...... 13,837 9,452 4,385
Legal ................. 1,371 618 753
Finance ............... 5,163 924 4,239
Internal Audit ........ 1,154 212 942
Executive and Other .. 4,014 243 3,771
Human Resources ....... 2,941 347 2,594
Corporate Services ... 1,571 378 1,193
------------ ------------ -------------
72,319 51,013 21,306
</TABLE>
P-15
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(C) CAL FED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
CAL FED COST OF ADJUSTMENT-
HISTORICAL ONGOING EXPENSE
BUSINESS AREA: COSTS OPERATIONS REDUCTION
- ------------------------------ ------------- ------------ -------------
<S> <C> <C> <C>
Occupancy & Other Expense:
Retail Banking ............... $ 48,397 $ 22,955 $ 25,442
Information Technology ...... 20,862 7,164 13,698
Commercial Real Estate ...... 2,306 381 1,925
Mortgage Banking ............. 2,809 3,363 (554)
Legal ........................ 1,919 5,145 (3,226)
Finance ...................... 4,410 570 3,840
Internal Audit ............... 317 33 284
Executive and Other .......... 4,935 458 4,477
Human Resources .............. 1,790 173 1,617
Corporate Services ........... 4,202 15,320 (11,118)
------------- ------------ -------------
91,947 55,562 36,385
SAIF Deposit Insurance Premium 75,778 75,778 --
------------- ------------ -------------
Total Noninterest Expense ... $240,044(i) $182,353 $ 57,691
============= ============ =============
</TABLE>
(i) Balance represents total historical noninterest expense of $242,600
less historical amortization of intangible assets already adjusted in
note 2 on page P-15.
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the nine months ended
September 30, 1996 related to the Cal Fed Acquisition was computed as
follows:
<TABLE>
<CAPTION>
<S> <C>
Income before taxes ............................................. $ 71,790
Add back: permanent differences--amortization of goodwill ...... 44,465
----------
Taxable income .................................................. $116,255
==========
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $ 2,139
State taxes, at an assumed rate of 8% ........................... 9,300
----------
$ 11,439
==========
</TABLE>
(6) Includes $12,000 gain on sale of California Federal's branches in San
Diego county.
P-16
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BRANCH SALES
OHIO SALE MICHIGAN SALE NORTHEAST SALE PRO FORMA
(D) BRANCH SALES PRO FORMA PRO FORMA PRO FORMA TOTALS
- -------------------------------------------- ------------ --------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ (6)(a) $ (27)(a) $ (77)(a) $ (110)
Securities .................................. -- -- -- --
Mortgage-backed securities .................. -- -- -- --
Other interest income ....................... -- -- -- --
------------ --------------- -------------- --------------
Total interest income ...................... (6) (27) (77) (110)
INTEREST EXPENSE:
Deposits .................................... (3,392)(a) (17,009)(a) (20,341)(a) (40,742)
Borrowings .................................. 3,522 (1) 19,560 (1) 21,753 (1) 44,835
------------ --------------- -------------- --------------
Total interest expense ..................... 130 2,551 1,412 4,093
------------ --------------- -------------- --------------
Net interest income ......................... (136) (2,578) (1,489) (4,203)
Provision for loan losses ................... -- -- -- --
------------ --------------- -------------- --------------
Net interest income after provision for loan
losses ..................................... (136) (2,578) (1,489) (4,203)
NONINTEREST INCOME:
Customer banking fees ....................... (256)(a) (2,147)(a) (1,562)(a) (3,965)
Mortgage banking operations ................. -- -- -- --
Net gain (loss) on sales of assets .......... -- 2 8 10
Other ....................................... (15)(a) (63)(a) (85)(a) (163)
------------ --------------- -------------- --------------
Total noninterest income ................... (271) (2,208) (1,639) (4,118)
NONINTEREST EXPENSE:
Compensation and benefits ................... (516)(a) (2,133)(a) (1,688)(a) (4,337)
Other ....................................... (265)(a) (1,456)(a) (1,666)(a) (3,387)
------------ --------------- -------------- --------------
Total noninterest expense .................. (781) (3,589) (3,354) (7,724)
------------ --------------- -------------- --------------
Income (loss) before income taxes and
minority interest .......................... 374 (1,197) 226 (597)
Income tax (benefit) expense ................ 37 (118) 22 (59)(2)
------------ --------------- -------------- --------------
Net income (loss) before minority interest . 337 (1,079) 204 (538)
------------ --------------- -------------- --------------
MINORITY INTEREST ........................... -- -- -- --
------------ --------------- -------------- --------------
Net income (loss) ........................... $ 337 $ (1,079) $ 204 $ (538)
============ =============== ============== ==============
</TABLE>
- ------------
(a) Represents historical information for the six months ended June 30, 1996
related to the retail banking facilities in Ohio, Michigan and the
Northeast. Other noninterest expense includes occupancy, SAIF insurance
premiums, marketing, OTS assessments, data processing and
telecommunications directly attributable to the Ohio, Michigan and
Northeast retail branch operations. Amounts represent historical
information from January 1, 1996 through the date of sale.
P-17
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(D) BRANCH SALES (CONTINUED)
(1) Represents increase in interest expense on borrowings to fund the
Branch Sales, as follows:
<TABLE>
<CAPTION>
SALE DEPOSITS PRE-TAX AMOUNT PRO FORMA
DATE LOCATION SOLD ASSETS GAIN BORROWED RATE DAYS INTEREST EXPENSE
- --------- ------------ ------------ --------- ---------- ------------ ---------- ------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1/19/96 Ohio $1,392,561 $20,480 $130,660 $1,241,417 5.45%(i) 19 $ 3,522
================
1/12/96 New York 416,476 5,997 32,991 377,512 5.45%(i) 12 $ 676
2/23/96 New York 270,046 1,838 17,027 251,154 5.45%(i) 54 2,025
3/15/96 New York 615,572 8,083 48,933 558,514 5.45%(i) 75 6,255
3/22/96 New Jersey 501,262 6,396 35,938 458,932 5.45%(i) 82 5,619
3/22/96 New York 637,045 9,465 41,286 586,269 5.45%(i) 82 7,178
----------------
Total Northeast $21,753
================
6/28/96 Michigan 799,226 15,060 56,177 727,755 5.45%(i) 180 $19,560
================
</TABLE>
(i) Rate represents the average rates paid on new borrowings used to
finance the Branch Sales during the nine months ended September
30, 1996.
(2) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the nine months ended
September 30, 1996 related to the Branch Sales was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
FEDERAL AMT, REDUCED, TO THE EXTENT OF 90%, BY NET OPERATING
LOSS CARRYOVERS ................................................ $(11)
State taxes, at an assumed rate of 8% ........................... (48)
-------
$(59)
=======
</TABLE>
P-18
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
(E) PRO FORMA ADJUSTMENTS
(1) Represents the decrease in interest expense relative to the paydown of
securities sold under agreements to repurchase with proceeds from the
issuance of the Capital Corporation Preferred Stock. The reduction in
interest expense was established using an interest rate of 5.458%, the
weighted average rate of these obligations during the nine months ended
September 30, 1996 using a one month LIBOR rate less five basis points.
(2) Represents interest expense as follows:
<TABLE>
<CAPTION>
<S> <C>
$575 million Notes ...................................... $45,820
$140 million Holdings 9 1/8% Senior Subordinated Notes
issued January 31, 1996 (expense for one month) ....... 1,065
</TABLE>
(3) Represents the amortization of:
<TABLE>
<CAPTION>
<S> <C>
$20,000 in deferred debt issuance costs over the seven year
term of the Notes ............................................. $2,143
$5,60 0 in deferred debt issuance costs over the seven year term
of the Holdings 9 1/8% Senior Subordinated Notes (for one
month) ........................................................ 67
</TABLE>
(4) Represents amounts necessary to adjust historical tax expense to the
pro forma computation. Pro forma tax expense for the nine months ended
September 30, 1996 related to the reduction in interest expense on
borrowings related to the utilization of proceeds from the Capital
Corporation Offering, the issuance of the Holdings 9 1/8% Senior
Subordinated Notes and the Notes was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced to the extent of 90%, by net
operating loss carryovers ................................ $ (561)
State taxes, at an assumed rate of 4.425% ................. (1,298)
---------
$(1,859)
=========
</TABLE>
(5) Represents preferred stock dividends on the $500,000 Series A Preferred
Shares, net of tax benefit, at 9 1/8% per annum. The tax benefit is due
to the deductibility of the dividend for income tax purposes as a
result of California Federal Preferred Capital Corporation's
qualification as a real estate investment trust. It is expected that
the issuance of the Capital Corporation Preferred Stock, by increasing
core capital, will enable the Bank to retain a higher base of
interest-earning assets, resulting in incrementally higher related
earnings.
(6) Represents dividends on Holdings Preferred Stock (estimated at 12% per
annum), including the compounding effect of dividends paid-in-kind.
(7) Includes the following:
(a) gains of approximately $334.0 million (on an after-tax basis)
realized in connection with the Branch Sales consummated during the
nine months ended September 30, 1996;
(b) gain of approximately $10.8 million (on an after-tax basis)
representing California Federal's gain on branch sales consummated
during the nine months ended September 30, 1996;
(c) deferred tax benefit of the Bank of $125 million;
(d) after-tax gain on sale of Affiliated Computer Systems (ACS) common
stock of $36.4 million;
(e) expense of $106.4 million (on an after-tax basis) relating to the
Special SAIF Assessment;
(f) after-tax income of $23.0 million realized in connection with the
termination of the Assistance Agreement; and
(g) expense of $30.2 million (on an after-tax basis) relating to a
management incentive plan.
P-19
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
SFFED LMUSA CAL FED
ACQUISITION PURCHASES ACQUISITION
HOLDINGS PRO FORMA PRO FORMA PRO FORMA
HISTORICAL TOTALS(A) TOTALS(B) TOTALS(C)
------------ ------------- ----------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ 823,864 $230,713 $22,477 $ 722,000
Securities .................................. 28,396 10,685 -- 124,200
Mortgage-backed securities .................. 212,880 62,403 -- 192,600
Other interest income ....................... 10,705 -- -- (21,089)
------------ ------------- ----------- -------------
Total interest income ...................... 1,075,845 303,801 22,477 1,017,711
INTEREST EXPENSE:
Deposits .................................... 447,359 143,797 -- 396,200
Borrowings .................................. 287,456 74,587 2,018 245,400
------------ ------------- ----------- -------------
Total interest expense ..................... 734,815 218,384 2,018 641,600
Net interest income ......................... 341,030 85,417 20,459 376,111
Provision for loan losses ................... 37,000 11,094 -- 31,800
------------ ------------- ----------- -------------
Net interest income after provision for loan
losses ..................................... 304,030 74,323 20,459 344,311
NONINTEREST INCOME:
Customer banking fees ....................... 47,493 5,291 -- 42,100
Mortgage banking operations ................. 70,265 860 76,445 3,600
Net gain (loss) on sales of assets .......... 147 -- (1,851) 6,600
Other ....................................... 33,068 1,677 2,690 2,400
------------ ------------- ----------- -------------
Total noninterest income ................... 150,973 7,828 77,284 54,700
NONINTEREST EXPENSE:
Compensation and benefits ................... 154,288 11,141 19,500 69,408
Other ....................................... 178,265 34,896 38,081 158,283
------------ ------------- ----------- -------------
Total noninterest expense .................. 332,553 46,037 57,581 227,691
------------ ------------- ----------- -------------
Income (loss) before income taxes and
minority interest .......................... 122,450 36,114 40,162 171,320
Income tax (benefit) expense ................ (57,185) 4,890 3,952 22,692
------------ ------------- ----------- -------------
Income (loss) before minority interest ..... 179,635 31,224 36,210 148,628
MINORITY INTEREST ........................... 34,584 -- -- 25,600
------------ ------------- ----------- -------------
Net income (loss) ........................... 145,051 31,224 36,210 123,028
Holdings Preferred Stock dividends .......... -- -- -- --
------------ ------------- ----------- -------------
Net income (loss) available to common
stockholders ............................... $ 145,051 $ 31,224 $36,210 $ 123,028
============ ============= =========== =============
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
BRANCH SALES
PRO FORMA PRO FORMA PRO FORMA
TOTALS(D) ADJUSTMENTS(E) COMBINED
-------------- -------------- ------------
<S> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ (623) $ -- $1,798,431
Securities .................................. -- -- 163,281
Mortgage-backed securities .................. -- -- 467,883
Other interest income ....................... -- -- (10,384)
-------------- -------------- ------------
Total interest income ...................... (623) -- 2,419,211
INTEREST EXPENSE:
Deposits .................................... (211,530) -- 775,826
Borrowings .................................. 280,671 (28,998)(1) 935,003
61,094 (2)
12,775 (2)
-------------- -------------- ------------
Total interest expense ..................... 69,141 44,871 1,710,829
Net interest income ......................... (69,764) (44,871) 708,382
Provision for loan losses ................... -- -- 79,894
-------------- -------------- ------------
Net interest income after provision for loan
losses ..................................... (69,764) (44,871) 628,488
NONINTEREST INCOME:
Customer banking fees ....................... (22,228) -- 72,656
Mortgage banking operations ................. -- -- 151,170
Net gain (loss) on sales of assets .......... -- -- 4,896
Other ....................................... (789) -- 39,046
-------------- -------------- ------------
Total noninterest income ................... (23,017) -- 267,768
NONINTEREST EXPENSE:
Compensation and benefits ................... (19,476) -- 234,861
Other ....................................... (25,823) 2,857 (3) 387,359
800 (3)
-------------- -------------- ------------
Total noninterest expense .................. (45,299) 3,657 622,220
-------------- -------------- ------------
Income (loss) before income taxes and
minority interest .......................... (47,482) (48,528) 274,036
Income tax (benefit) expense ................ (4,671) (3,075)(4) (33,397)
-------------- -------------- ------------
Income (loss) before minority interest ..... (42,811) (45,453) 307,433
MINORITY INTEREST ........................... -- 41,063 (5) 101,247
-------------- -------------- ------------
Net income (loss) ........................... (42,811) (86,516) 206,186
Holdings Preferred Stock dividends .......... -- 18,139 (6) 18,139
-------------- -------------- ------------
Net income (loss) available to common
stockholders ............................... $(42,811) $(104,655) $188,047
============== ============== ============
</TABLE>
- ------------
(A) See note (A) on page P-21.
(B) See note (B) on page P-25.
(C) See note (C) on page P-27.
(D) See note (D) on page P-30.
(E) See note (E) on page P-32.
P-20
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(A) SFFED ACQUISITION
<TABLE>
<CAPTION>
SFFED
ACQUISITION
VALUATION PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS(A) ADJUSTMENTS(B) TOTALS
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .......................... $215,147 $ 15,566 (1) $ -- $230,713
Securities ................................ 10,685 -- -- 10,685
Mortgage-backed securities ................ 60,024 2,379 (1) -- 62,403
Other interest income ..................... -- -- -- --
------------ -------------- -------------- -------------
Total interest income .................... 285,856 17,945 -- 303,801
INTEREST EXPENSE:
Deposits .................................. 135,299 8,498 (1) -- 143,797
Borrowings ................................ 71,543 3,044 (1) -- 74,587
------------ -------------- -------------- -------------
Total interest expense ................... 206,842 11,542 -- 218,384
------------ -------------- -------------- -------------
Net interest income ....................... 79,014 6,403 -- 85,417
Provision for loan losses ................. 11,094 -- -- 11,094
------------ -------------- -------------- -------------
Net interest income after provision for
loan losses .............................. 67,920 6,403 -- 74,323
NONINTEREST INCOME:
Customer banking fees ..................... 5,291 -- -- 5,291
Mortgage banking operations ............... 5,255 (4,395)(1) -- 860
Net gain (loss) on sales of assets ....... -- -- -- --
Other ..................................... 1,677 -- -- 1,677
------------ -------------- -------------- -------------
Total noninterest income ................. 12,223 (4,395) -- 7,828
NONINTEREST EXPENSE:
Compensation and benefits ................. 35,518 -- (24,377)(3) 11,141
Other ..................................... 43,257 12,905 (2) (21,266)(4) 34,896
------------ -------------- -------------- -------------
Total noninterest expense ................ 78,775 12,905 (45,643) 46,037
------------ -------------- -------------- -------------
Income (loss) before income taxes and
minority interest ........................ 1,368 (10,897) 45,643 36,114
Income tax (benefit) expense .............. 1,568 -- 3,322 (5) 4,890
------------ -------------- -------------- -------------
Net income (loss) before minority interest (200) (10,897) 42,321 31,224
MINORITY INTEREST ......................... -- -- -- --
------------ -------------- -------------- -------------
Net income (loss) ......................... $ (200) $(10,897) $ 42,321 $ 31,224
============ ============== ============== =============
</TABLE>
- ------------
(a) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization of
historical goodwill.
(b) Represents adjustments to reflect (i) the elimination of certain
noninterest expense due to consolidation of SFFed operations with First
Nationwide, (ii) the elimination of certain historical noninterest
expense recorded by SFFed as a result of the acquisition by First
Nationwide and (iii) income taxes relative to the SFFed Acquisition.
P-21
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
(1) Represents amortization or accretion of fair value adjustments as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES 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 AND
MINORITY INTEREST
INCREASE/(DECREASE)
-----------------------
<S> <C>
Amortization of goodwill ................................. $(13,574)
Elimination of amortization of SFFed's historical
goodwill ................................................ 669
-----------------------
$(12,905)
=======================
</TABLE>
(3) Represents adjustments to noninterest expense relating to the
consolidation of SFFed's operations into those of Holdings and the
elimination of nonrecurring historical expenses related to the SFFed
Acquisition:
<TABLE>
<CAPTION>
<S> <C>
Decrease in compensation and benefits due to the reduction in headcount from 620
at January 1, 1995 to approximately 260 after the consummation of the SFFed
Acquisition. Substantially all retained employees represent retail branch
personnel ................................................................... $19,037
Elimination of certain accruals recorded by SFFed related to the acquisition
by Holdings:
Payments under employment contracts ......................................... 2,080
Accruals for benefit plans frozen by First Nationwide ....................... 3,260
---------
$24,377
=========
</TABLE>
(4) Represents adjustments to other noninterest expense relating to the
consolidation of SFFed's operations into those of Holdings and the
elimination of nonrecurring historical expenses of SFFed. Substantially
all of SFFed's operations have been consolidated into the existing
operations of Holdings, resulting in a reduction in headcount of
approximately 58% with the remaining personnel primarily consisting of
retail branch personnel. In addition, ten retail branches have been
closed.
P-22
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
SFFED COST OF ADJUSTMENT-
HISTORICAL ONGOING EXPENSE
COSTS OPERATIONS REDUCTION
------------ ------------ -------------
<S> <C> <C> <C>
Expense decreases due to consolidation:
Mortgage banking operations:
Occupancy expenses, including insurance ....... $ 1,329 $ 588 $ 741
Travel, automobile and employee dues .......... 282 67 215
Telecommunications, postage and supplies ...... 900 214 686
Other, net .................................... 1,047 460 587
------------ ------------ -------------
Subtotal mortgage banking operations ......... $ 3,558 $ 1,329 $ 2,229
============ ============ =============
Retail Banking operations -reductions due to
consolidation of ten retail branches and retail
operations center:
Occupancy expenses, including insurance ....... $11,220 $ 3,405 $ 7,815
SAIF assessment reduction based on lower
historical assessment rate for First
Nationwide .................................. 6,811 6,011 800
Travel, automobile and employee dues .......... 410 60 350
Telecommunications and data processing ........ 1,766 364 1,402
Postage and messenger costs ................... 666 473 193
Other costs, net .............................. 216 108 108
------------ ------------ -------------
Subtotal retail banking operations ........... $21,089 $10,421 $10,668
============ ============ =============
Overhead areas, including executive offices,
legal, human resources, information services,
accounting, and strategic planning areas:
Occupancy costs ............................... $ 1,316 $ -- $ 1,316
Data processing costs ......................... 2,848 1,000 1,848
Marketing and advertising expenses ............ 2,094 500 1,594
Other overhead costs .......................... 8,072 8,072 --
------------ ------------ -------------
Subtotal overhead areas ...................... $14,330 $ 9,572 $ 4,758
============ ============ =============
Total decreases due to consolidation ........ $38,977 $21,322 $17,655
Elimination of certain nonrecurring expense
recorded by SFFed related to the acquisition by
First Nationwide:
Data processing termination fees .............. 875 -- 875
Investment banker fees related to the SFFed
Acquisition ................................. 2,311 -- 2,311
Legal fees related to the SFFed Acquisition ... 425 -- 425
------------ ------------ -------------
Total expense reduction ..................... $42,588(i) $21,322 $21,266
============ ============ =============
</TABLE>
- ------------
(i) Balance represents total historical noninterest expense of $43,257 less
historical amortization of goodwill already adjusted in note 2 on page
P-22.
P-23
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(A) SFFED ACQUISITION (CONTINUED)
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December 31,
1995 related to the SFFed Acquisition was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Income before taxes ............................................. $36,114
Add back: permanent differences--amortization of goodwill ...... 13,574
---------
Taxable income .................................................. $49,688
=========
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $ 915
State taxes, at an assumed rate of 8% ........................... 3,975
---------
$ 4,890
=========
</TABLE>
P-24
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(B) LMUSA PURCHASES
<TABLE>
<CAPTION>
PRO FORMA LMUSA PURCHASES
HISTORICAL(A) ADJUSTMENTS(B) ADJUSTMENTS(C) PRO FORMA TOTALS
------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ............................ $ 22,477 $ -- $ -- $22,477
Securities .................................. -- -- -- --
Mortgage-backed securities .................. -- -- -- --
Other interest income ....................... -- -- -- --
------------- -------------- -------------- ----------------
Total interest income ..................... 22,477 -- -- 22,477
INTEREST EXPENSE:
Deposits .................................... -- -- -- --
Borrowings .................................. 38,358 -- (36,340)(2) 2,018
------------- -------------- -------------- ----------------
Total interest expense .................... 38,358 -- (36,340) 2,018
------------- -------------- -------------- ----------------
Net interest income ......................... (15,881) -- 36,340 20,459
Provision for loan losses ................... -- -- -- --
------------- -------------- -------------- ----------------
Net interest income after provision for loan
losses ..................................... (15,881) -- 36,340 20,459
NONINTEREST INCOME:
Customer banking fees ....................... -- -- -- --
Mortgage banking operations ................. 77,887 (1,442)(1) -- 76,445
Net gain (loss) on sales of assets .......... (1,851) -- -- (1,851)
Other ....................................... 2,690 -- -- 2,690
------------- -------------- -------------- ----------------
Total noninterest income .................. 78,726 (1,442) -- 77,284
NONINTEREST EXPENSE:
Compensation and benefits ................... 38,426 -- (18,926)(3) 19,500
Other ....................................... 300,091 -- (262,010)(4) 38,081
------------- -------------- -------------- ----------------
Total noninterest expense ................... 338,517 -- (280,936) 57,581
------------- -------------- -------------- ----------------
Income (loss) before income taxes and
minority interest .......................... (275,672) (1,442) 317,276 40,162
Income tax (benefit) expense ................ -- -- 3,952 (5) 3,952
------------- -------------- -------------- ----------------
Net income (loss) before minority interest . (275,672) (1,442) 313,324 36,210
MINORITY INTEREST ........................... -- -- -- --
------------- -------------- -------------- ----------------
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 management.
(b) Represents adjustments to reflect (i) the amortization of the fair
value of mortgage servicing rights and (ii) the elimination of
amortization of historical mortgage servicing rights.
(c) Represents adjustments to reflect (i) the decrease in interest expense
resulting from the transfer of custodial accounts acquired to First
Nationwide, (ii) decreases in compensation and benefits expense due to
reduction in staffing, (iii) elimination of certain other noninterest
expense due to consolidation with Holdings' existing mortgage banking
operations, and (iv) income taxes relative to the LMUSA Purchases.
P-25
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(B) LMUSA PURCHASES (CONTINUED)
(1) Represents the difference between the amortization of pro forma
recorded balance of mortgage servicing rights and the historical
amortization of mortgage servicing rights as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME BEFORE
INCOME TAXES 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 Holdings as a result
of the LMUSA Purchases, with average annual compensation and benefits
per employee of $30.
(4) Represents the impact on other noninterest expense of (i) the
elimination of historical amounts related to LMUSA operations not
included in the LMUSA Purchases and (ii) the consolidation of the LMUSA
Purchases into the Bank's existing mortgage banking operations, as
follows:
<TABLE>
<CAPTION>
DECREASE
LMUSA ESTIMATED IN OTHER
HISTORICAL FUTURE NONINTEREST
COSTS COSTS EXPENSE
------------ ------------- -------------
<S> <C> <C> <C>
Components of historical noninterest expense:
Interest rate swap agreements ............... $ 6,615 $ -- (ii) $ (6,615)
Facilities charge-offs ...................... 38,559 -- (ii) (38,559)
Facilities depreciation ..................... 1,797 -- (ii) (1,797)
Provision for losses on assets held for sale 180,255 -- (ii) (180,255)
Reorganization items ........................ 16,892 -- (ii) (16,892)
Data processing, document storage,
administrative services and management
fees ....................................... 20,896 3,004 (iii) (17,892)
Other miscellaneous costs ................... 35,077 35,077 --
------------ ------------- -------------
$300,091 $38,081 $(262,010)
============ ============= =============
</TABLE>
(ii) Represents historical amounts related to operations not
included in the LMUSA Purchases.
(iii) Represents amounts necessary to replace these services based
on Holdings' historical annual cost per loan based on the
average number of loans serviced.
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December
31, 1995 related to the LMUSA Purchases was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ................................. $ 739
State taxes, at an assumed rate of 8% ...................... 3,213
-------
$3,952
=======
</TABLE>
P-26
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(C) CAL FED ACQUISITION
<TABLE>
<CAPTION>
CAL FED
ACQUISITION
CAL FED VALUATION PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS (A) ADJUSTMENTS (B) TOTALS
------------ --------------- --------------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable .............................. $ 706,900 $ 15,100 (1) $ -- $ 722,000
Securities .................................... 124,200 -- -- 124,200
Mortgage-backed securities .................... 164,000 28,600 (1) -- 192,600
Other interest income ......................... 12,900 -- (33,989)(3) (21,089)
------------ --------------- --------------- -------------
Total interest income ........................ 1,008,000 43,700 (33,989) 1,017,711
INTEREST EXPENSE:
Deposits ...................................... 441,600 (45,400)(1) -- 396,200
Borrowings .................................... 254,500 (9,100)(1) -- 245,400
------------ --------------- --------------- -------------
Total interest expense ....................... 696,100 (54,500) -- 641,600
------------ --------------- --------------- -------------
Net interest income ........................... 311,900 98,200 (33,989) 376,111
Provision for loan losses ..................... 31,800 -- -- 31,800
------------ --------------- --------------- -------------
Net interest income after provision for loan
losses ....................................... 280,100 98,200 (33,989) 344,311
NONINTEREST INCOME:
Customer banking fees ......................... 42,100 -- -- 42,100
Mortgage banking operations ................... 12,400 (8,800)(1) -- 3,600
Net gain (loss) on sales of assets ............ 6,600 -- -- 6,600
Other ......................................... 2,400 -- -- 2,400
------------ --------------- --------------- -------------
Total noninterest income ..................... 63,500 (8,800) -- 54,700
NONINTEREST EXPENSE:
Compensation and benefits ..................... 97,100 -- (27,692)(4) 69,408
Other ......................................... 152,800 55,811 (2) (50,328)(4) 158,283
------------ --------------- --------------- -------------
Total noninterest expense .................... 249,900 55,811 (78,020) 227,691
------------ --------------- --------------- -------------
Income (loss) before income taxes and minority
interest ..................................... 93,700 33,589 44,031 171,320
Income tax (benefit) expense .................. 100 -- 22,592 (5) 22,692
------------ --------------- --------------- -------------
Net income (loss) before minority interest ... 93,600 33,589 21,439 148,628
MINORITY INTEREST ............................. 25,600 -- -- 25,600
------------ --------------- --------------- -------------
Net income (loss) ............................. $ 68,000 $ 33,589 $ 21,439 $ 123,028
============ =============== =============== =============
</TABLE>
- ------------
(a) Represents adjustments to reflect (i) the amortization or accretion of
fair value adjustments and (ii) the elimination of amortization of Cal
Fed's historical intangible assets.
(b) Represents adjustments to reflect (i) the reduction in interest income
relative to the loss in yield on the purchase price of the Cal Fed
Acquisition funded with existing cash, (ii) the elimination of certain
noninterest expense due to consolidation of Cal Fed operations with
Holdings' and (iii) income taxes relative to the Cal Fed Acquisition.
P-27
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(C) CAL FED ACQUISITION (CONTINUED)
(1) Represents amortization or accretion of fair value adjustments as follows:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES
AND MINORITY INTEREST
INCREASE/(DECREASE)
---------------------
<S> <C>
Loans receivable, net .... $15,100
Mortgage-backed securities 28,600
Deposits .................. 45,400
Borrowings ................ 9,100
Mortgage servicing rights (8,800)
</TABLE>
(2) Represents adjustments consisting of the following:
<TABLE>
<CAPTION>
IMPACT ON INCOME
BEFORE INCOME TAXES
AND MINORITY INTEREST
INCREASE/(DECREASE)
---------------------
<S> <C>
Amortization of fair value adjustment--amortization of goodwill .... $(59,287)
Elimination of amortization of Cal Fed's historical intangible
assets ............................................................. 3,476
---------------------
$(55,811)
=====================
</TABLE>
(3) Represents the reduction in interest income relative to the loss in
yield on the purchase price of the Cal Fed Acquisition funded with
existing cash. The loss was estimated using an interest rate of 5.75%,
which approximates the average interest rate on short term investments
during 1995.
(4) Represents adjustments to other noninterest expense relating to the
consolidation of Cal Fed's operations into those of Holdings. A
substantial portion of Cal Fed's operations will be consolidated into
the existing operations of Holdings, resulting in a reduction in
headcount of 850, or approximately 35%, across all business areas. In
addition, seven retail branches and two administrative offices will be
closed. Expected savings from such consolidation include compensation,
occupancy, travel, telecommunications, data processing and marketing
expenses. The expense reduction for the year ended December 31, 1995
represents a 32% reduction over historical levels based on management's
current transition plan:
P-28
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(C) CAL FED ACQUISITION (CONTINUED)
<TABLE>
<CAPTION>
CAL FED COST OF ADJUSTMENT-
HISTORICAL ONGOING EXPENSE
BUSINESS AREA: COSTS OPERATIONS REDUCTION
- -------------- ------------- ------------ -------------
<S> <C> <C> <C>
Compensation:
Retail Banking ................ $ 50,284 $ 50,913 $ (629)
Information Technology ........ 625 1,428 (803)
Commercial Real Estate ........ 8,248 1,851 6,397
Mortgage Banking .............. 18,426 12,545 5,881
Legal ......................... 1,930 880 1,050
Finance ....................... 6,412 875 5,537
Internal Audit ................ 1,383 212 1,171
Executive and Other ........... 5,932 0 5,932
Human Resources ............... 2,818 300 2,518
Corporate Services ............ 1,071 433 638
------------- ------------ -------------
97,129 69,437 27,692
Occupancy & Other Expense:
Retail Banking ................ 12,166 27,555 (15,389)
Information Technology ........ 30,048 8,549 21,499
Commercial Real Estate ........ 3,739 379 3,360
Mortgage Banking .............. 7,055 4,788 2,267
Legal ......................... 3,364 7,420 (4,056)
Finance ....................... 7,819 481 7,338
Internal Audit ................ 560 0 560
Executive and Other ........... 6,193 0 6,193
Human Resources ............... 3,574 0 3,574
Corporate Services ............ 48,782 23,800 24,982
------------- ------------ -------------
123,300 72,972 50,328
SAIF Deposit Insurance Premium 25,996 25,996 --
------------- ------------ -------------
Total Noninterest Expense .... $246,425(i) $168,405 $ 78,020
============= ============ =============
</TABLE>
(i) Balance represents total historical noninterest expense of $249,900
less historical amortization of intangible assets already adjusted in
note 2 on page P-28.
(5) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December
31, 1995 related to the Cal Fed Acquisition was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Income before taxes ............................................. $171,320
Add back: permanent differences--amortization of goodwill ...... 59,287
----------
Taxable income .................................................. $230,607
==========
Federal AMT, reduced, to the extent of 90%, by net operating
loss carryovers ................................................ $ 4,243
State taxes, at an assumed rate of 8% ........................... 18,449
----------
$ 22,692
==========
</TABLE>
P-29
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(D) BRANCH SALES
<TABLE>
<CAPTION>
BRANCH SALES
OHIO SALE MICHIGAN SALE NORTHEAST SALE PRO FORMA
PRO FORMA PRO FORMA PRO FORMA TOTALS
------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable ....................... $ (119)(a) $ (64)(a) $ (440)(a) $ (623)
Securities ............................. -- -- -- --
Mortgage-backed securities ............. -- -- -- --
Other interest income .................. -- -- -- --
------------- --------------- -------------- --------------
Total interest income ................. (119) (64) (440) (623)
INTEREST EXPENSE:
Deposits ............................... (65,588)(a) (32,677)(a) (113,265)(a) (211,530)
Borrowings ............................. 86,565 (1) 45,869 (1) 148,237 (1) 280,671 (1)
------------- --------------- -------------- --------------
Total interest expense ................ 20,977 13,192 34,972 69,141
------------- --------------- -------------- --------------
Net interest income .................... (21,096) (13,256) (35,412) (69,764)
Provision for loan losses .............. -- -- -- --
------------- --------------- -------------- --------------
Net interest income after provision for
loan losses ........................... (21,096) (13,256) (35,412) (69,764)
NONINTEREST INCOME:
Customer banking fees .................. (7,076)(a) (5,673)(a) (9,479)(a) (22,228)
Mortgage banking operations ............ -- -- -- --
Net gain (loss) on sales of assets .... -- -- -- --
Other .................................. (240)(a) (139)(a) (410)(a) (789)
------------- --------------- -------------- --------------
Total noninterest income .............. (7,316) (5,812) (9,889) (23,017)
NONINTEREST EXPENSE:
Compensation and benefits .............. (6,771)(a) (4,154)(a) (8,551)(a) (19,476)
Other .................................. (7,436)(a) (4,348)(a) (14,039)(a) (25,823)
------------- --------------- -------------- --------------
Total noninterest expense ............. (14,207) (8,502) (22,590) (45,299)
------------- --------------- -------------- --------------
Income (loss) before income taxes and
minority interest ..................... (14,205) (10,566) (22,711) (47,482)
Income tax (benefit) expense ........... (1,397) (1,039) (2,235) (4,671)(2)
------------- --------------- -------------- --------------
Net income (loss) before minority
interest .............................. (12,808) (9,527) (20,476) (42,811)
MINORITY INTEREST ...................... -- -- -- --
------------- --------------- -------------- --------------
Net income (loss) ...................... $ (12,808) $ (9,527) $ (20,476) $ (42,811)
============= =============== ============== ==============
</TABLE>
- ------------
(a) Represents historical information related to the retail banking
facilities in Ohio, Michigan and the Northeast. Other noninterest
expense includes occupancy, SAIF insurance premiums, marketing, OTS
assessments, data processing and telecommunications directly
attributable to the Ohio, Michigan and Northeast retail branch
operations.
P-30
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
(D) BRANCH SALES (CONTINUED)
(1) Represents increase in interest expense on borrowings to fund the
Branch Sales, as follows:
<TABLE>
<CAPTION>
FUNDING ADDITIONAL INTEREST
SOURCE PERIOD BORROWINGS RATE EXPENSE
- --------------- ----------------------------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
FHLB advances January 1, 1995 -December 31, 1995 $2,000,000 7.72%(i) $154,400
Reverse repos January 1, 1995 -December 31, 1995 2,132,967 5.92%(ii) 126,271
------------ ----------
$4,132,967 $280,671
============ ==========
</TABLE>
The sales are assumed to be funded by a combination of a one-year FHLB
advance of $2 billion and reverse repurchase agreements, as these instruments
most closely meet the Bank's current interest rate risk management objectives
in conjunction with the borrowing capacities for the respective debt
instruments. Additional pro forma borrowings are computed as follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Deposit totals at January 1, 1995 .......... $1,431,872 $749,788 $2,369,728 $4,551,388
Less:
Carrying value of office premises and
equipment ................................ 8,591 6,510 13,397 28,498
Carrying value of loans receivable ....... 2,836 3,333 6,353 12,522
Carrying value of cash and cash
equivalents .............................. 9,395 3,830 8,150 21,375
Gain on sale (iii) ........................ 131,233 52,510 172,283 356,026
------------ ---------- ------------ ------------
Additional pro forma borrowings ............ $1,279,817 $683,605 $2,169,545 $4,132,967
============ ========== ============ ============
</TABLE>
(i) Represents rate for a one-year fixed rate FHLB advance as of January
1, 1995.
(ii) Represents average reverse repurchase rate for 1995.
(iii) Represents pro forma gain on Branch Sales, computed as follows:
<TABLE>
<CAPTION>
OHIO MICHIGAN NORTHEAST TOTAL
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Deposit totals at January 1, 1995 $1,431,872 $749,788 $2,369,728 $4,551,388
Premium percentage per contract . 9.10% 7.18% 7.30% 7.85%
------------ ---------- ------------ ------------
Total pro forma premium ......... 130,300 53,835 172,990 357,125
Adjustment of intangibles
related to deposits sold ....... 933 (1,325) (707) (1,099)
------------ ---------- ------------ ------------
Gain on sale of deposits (a) ... $ 131,233 $ 52,510 $ 172,283 $ 356,026
============ ========== ============ ============
</TABLE>
(a) The remaining assets and liabilities will be sold at their
respective carrying values, resulting in no gain or loss.
(2) Represents amount necessary to adjust historical tax expense to the pro
forma computation. Pro forma tax expense for the year ended December
31, 1995 related to the Branch Sales was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced, to the extent of 90%, by net
operating loss carryovers ........................ $ (873)
State taxes, at an assumed rate of 8% ............. (3,798)
---------
$(4,671)
=========
</TABLE>
P-31
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
NOTES TO PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
(E) PRO FORMA ADJUSTMENTS
(1) Represents the decrease in interest expense relative to the paydown of
securities sold under agreements to repurchase with proceeds from the
issuance of the Capital Corporation Preferred Stock. The reduction in
interest expense was established using an interest rate of 6.008%, the
weighted average rate of these obligations during the year ended
December 31, 1995 using a one month LIBOR rate less five basis points.
(2) Represents interest expense as follows:
<TABLE>
<CAPTION>
<S> <C>
$575 million Notes ................................ $61,094
$140 million Holdings 9 1/8% Senior Subordinated
Notes ............................................ 12,775
</TABLE>
(3) Represents the amortization of:
<TABLE>
<CAPTION>
<S> <C>
$20,000 in deferred debt issuance costs over the
seven year term of the Notes ............................... $2,857
$5,600 in deferred debt issuance costs over the
seven year term of the Holdings 9 1/8% Senior
Subordinated Notes ......................................... 800
</TABLE>
(4) Represents amounts necessary to adjust historical tax expense to the
pro forma computation. Pro forma tax expense for the year ended
December 31, 1995 related to the reduction in interest expense on
borrowings related to the utilization of proceeds from the Capital
Corporation Offering, the issuance of the Holdings 9 1/8% Senior
Subordinated Notes and the Notes was computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Federal AMT, reduced to the extent of 90%, by net
operating loss carryovers ................................ $ (928)
State taxes, at an assumed rate of 4.425 .................. (2,147)
---------
$(3,075)
=========
</TABLE>
(5) Represents preferred stock dividends on the $500,000 Series A Preferred
Shares, net of tax benefits, at 9 1/8% per annum. The tax benefit is
due to the deductibility of the dividend for income tax purposes as a
result of California Federal Preferred Capital Corporation's
qualification as a real estate investment trust. It is expected that
the issuance of the Capital Corporation Preferred Stock, by increasing
core capital, will enable the Bank to retain a higher base of
interest-earning assets, resulting in incrementally higher related
earnings.
(6) Represents dividends on Holdings Preferred Stock (estimated at 12% per
annum), including the compounding effect of dividends paid-in-kind.
P-32
<PAGE>
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE ISSUER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR A
SOLICITATION IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE OF THE ISSUER
SINCE SUCH DATE.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Available Information ................... 2
Summary ................................. 3
Risk Factors ............................ 22
Strategic Acquisitions and Dispositions 31
Use of Proceeds ......................... 34
Consolidated Capitalization ............. 35
Pro Forma Financial Data ................ 36
Selected Historical Financial Data ..... 51
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................. 54
The Exchange Offer ...................... 123
Business ................................ 130
Regulation .............................. 200
Management .............................. 210
Ownership of the Common Stock ........... 217
Certain Transactions .................... 217
Description of the Notes ................ 222
Description of Other Indebtedness
and Preferred Stock .................... 246
Certain U.S. Federal Income Tax
Considerations ......................... 248
Plan of Distribution .................... 250
Legal Matters ........................... 250
Experts ................................. 251
Index of Defined Terms .................. 252
Index to Financial Statements ........... F-1
</TABLE>
UNTIL , 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING
IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
$575,000,000
FIRST NATIONWIDE
HOLDINGS INC.
10 5/8% SENIOR SUBORDINATED
EXCHANGE NOTES
DUE 2003
---------
PROSPECTUS
---------
, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. 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 ................ $174,243
Printing and engraving expenses .... *
Legal fees and expenses ............. *
Transfer agent fees and expenses ... *
Accounting fees and expenses ....... *
Blue Sky fees and expenses .......... *
Miscellaneous ....................... *
------------
Total ............................. $*
============
</TABLE>
- ---------
* To be filed by amendment.
ITEM 14. 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 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 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 15. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the organization of the Registrant, on July 27, 1994,
Holdings contributed 800 shares of common stock of the Bank to the Registrant
in exchange for 1,000 shares of common stock of the Registrant.
On July 27, 1994, the Registrant sold $194,300,000 aggregate principal
amount of its 12 1/4% Senior Notes Due 2001 (the "Old Senior Notes") to CS
First Boston Corporation, Smith Barney Inc. and Friedman, Billings, Ramsey &
Co., Inc. (the "Senior Notes Initial Purchasers") and $5,700,000 aggregate
principal amount of Old Senior Notes to Gerald J. Ford, Carl B. Webb and Lacy
G. Newman for $200,000,000 less the aggregate discount to Initial Purchasers
of $7,000,000. Such transactions were exempt from the registration
requirements of the Securities Act of 1933, in reliance on Section 4(2) of
the Securities Act on the basis that such transactions did not involve a
public offering. In accordance with the agreement pursuant to which the
Senior Notes Initial Purchasers purchased the Old Senior Notes, such Senior
Notes Initial Purchasers agreed to offer and sell the Old Senior Notes only
to "qualified institutional buyers" (as defined in Rule 144A under the
Securities Act), a limited number of institutional "accredited investors" (as
defined in Rule 501(A)(1), (2), (3) or (7) under the Securities Act) and
pursuant to offers and sales that occur outside the United States within the
meaning of Regulation S under the Securities Act.
On January 31, 1996, the Registrant sold $140,000,000 aggregate principal
amount of its Senior Subordinated Notes Due 2003 (the "Old Senior
Subordinated Notes") to Smith Barney Inc. and Keefe, Bruyette & Woods, Inc.
(the "Senior Subordinated Notes Initial Purchasers") for $140,000,000 less
the aggregate discount to Senior Subordinated Notes Initial Purchasers of
$4,900,000. The transaction was exempt from the registration requirements of
the Securities Act in reliance on Section 4(2) of the Securities Act on the
basis that such transaction did not involve a public offering. In accordance
with the agreement pursuant to which the Senior Subordinated Notes Initial
Purchasers purchased the Old Senior Subordinated Notes, such Senior
Subordinated Notes Initial Purchasers agreed to offer and sell the Old Senior
Subordinated Notes only to "qualified instituted buyers," a limited number of
institutional "accredited investors" and pursuant to offers and sales that
occur outside the United States within the meaning of Regulation S under the
Securities Act.
On September 19, 1996, First Nationwide Escrow Corp. (which merged with
and into the Registrant on January 3, 1997) sold $575,000,000 aggregate
principal amount of its 10 5/8% Senior Subordinated Notes Due 2003 (the "Old
Notes") to Smith Barney Inc., Bear, Stearns & Co. Inc., CS First Boston,
Citicorp Securities, Inc. and NationsBanc Capital Markets, Inc. (the "Initial
Purchasers") for $575,000,000 less the aggregate discount to Initial
Purchasers of $17,250,000. The transaction was exempt from the registration
requirements of the Securities Act in reliance on Section 4(2) of the
Securities Act on the basis that such transaction did not involve a public
offering. In accordance with the agreement pursuant to which the Initial
Purchasers purchased the Old Notes, such Initial Purchasers agreed to offer
and sell the Old Notes only to "qualified instituted buyers," a limited
number of institutional "accredited investors" and pursuant to offers and
sales that occur outside the United States within the meaning of Regulation S
under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
---------- -----------
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger dated as of the 27th day of July, 1996 by and
between the Registrant, CFB Holdings, Inc., Cal Fed Bancorp Inc. and California Federal Bank, A
Federal Savings Bank (incorporated by reference to Exhibit 2.1 to the Registrant's Current
Report on Form 8-K dated January 3, 1997).
*3.1 Fifth Restated Certificate of Incorporation of the Registrant.
*3.2 By-laws of the Registrant, as amended.
II-2
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- -----------
*4.1 Indenture, dated as of September 19, 1996, between First Nationwide Escrow Corp. and The Bank
of New York, as trustee, relating to the 10 5/8% Senior Subordinated Exchange Notes Due 2003
(the "New Notes").
*4.2 First Supplemental Indenture, dated as of January 3, 1997, among the Registrant, First
Nationwide Escrow Corp. and The Bank of New York, as trustee, relating to the New Notes.
4.3 Indenture, dated as of January 31, 1996, between the Registrant and The Bank of New York, as
trustee, relating to the 9 1/8% Senior Subordinated Exchange Notes Due 2003 (incorporated by
reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-1 (File No.
333-00854)).
4.4 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 "12 1/4% Senior
Note Indenture") (incorporated by reference to Exhibit 4.1 to the Registrant's Registration
Statement on Form S-1 (File No. 33-82654)).
*4.5 First Supplemental Indenture, dated as of January 17, 1997, between the Registrant and State
Street Bank and Trust Company, as trustee, supplementing the 12 1/4% Senior Note Indenture.
4.6 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 (the "2006 Indenture") (incorporated by reference to Exhibit 4.5 to the
Registrant's filing on Form 10-K for the year ended December 31, 1994).
4.7 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, as trustee, supplementing the 2006 Indenture (incorporated by reference to Exhibit
4.6 to the Registrant's filing on Form 10-K for the year ended December 31, 1994).
*4.8 Second Supplemental Indenture, dated as of January 3, 1997, among First Nationwide Bank, A
Federal Savings Bank, California Federal Bank, A Federal Savings Bank and Bank of America
National Trust and Savings Association, as trustee, supplementing the 2006 Indenture.
4.9 Note Purchase Agreement, dated as of September 1, 1994, between SFFed Corp. and each of the
purchasers (incorporated by reference to Exhibit 4.5 of the Registrant's Registration Statement
on Form S-1 (File No. 333-00854)).
4.10 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 Registrant's Registration Statement on Form S-1 (File No. 333-00854)).
*4.11 Indenture, dated February 15, 1986, between Cal Fed Bancorp Inc. and Manufacturers Hanover
Trust Company, as trustee, relating to the 6 1/2% Convertible Subordinated Debentures Due 2001
(the "6 1/2% Convertible Debenture Indenture").
*4.12 First Supplemental Indenture, dated as of December 16, 1992, among Cal Fed Bancorp Inc., XCF
Acceptance Corporation, California Federal Bank, A Federal Savings Bank, and Chemical Bank,
supplementing the 6 1/2% Convertible Debenture Indenture.
*4.13 Second Supplemental Indenture dated as of December 13, 1996 among XCF Acceptance Corporation,
California Federal Bank, A Federal Savings Bank, and The Chase Manhattan Bank, as trustee,
supplementing the 6 1/2% Convertible Debenture Indenture.
II-3
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- -----------
*4.14 Third Supplemental Indenture dated as of December 13, 1996 among Cal Fed Bancorp Inc., XCF
Acceptance Corporation, California Federal Bank, A Federal Savings Bank, and The Chase
Manhattan Bank, as trustee, supplementing the 6 1/2% Convertible Debenture Indenture.
*4.15 Fourth Supplemental Indenture dated as of December 13, 1996 among Cal Fed Bancorp Inc., XCF
Acceptance Corporation, and The Chase Manhattan Bank, as trustee, supplementing the 6 1/2%
Convertible Debenture Indenture.
*4.16 Indenture, dated December 1, 1992, between California Federal Bank, A Federal Savings Bank and
Chemical Bank, as trustee, relating to the 10% Subordinated Debentures Due 2003.
*4.17 Certificate Agent Agreement regarding participation of certificates dated as of , 1995
between California Federal Bank, A Federal Savings Bank, and Chemical Trust Company of
California.
*4.18 Registration Agreement, dated September 13, 1996, among the Registrant, First Nationwide Escrow
Corp. and the Initial Purchasers.
*5.1 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the Registrant, regarding the
legality of the New Notes.
10.1 Tax Sharing Agreement, effective as of January 1, 1994, by and among First Madison Bank, FSB,
the Registrant and Mafco Holdings, Inc. (incorporated by reference to Exhibit 10.10 to the
Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
10.2 Asset Purchase Agreement, dated as of April 14, 1994, between First Madison Bank, FSB, and
First Nationwide Bank, A Federal Savings Bank (incorporated by reference to Exhibit 2.1 to the
Registrant's filing on Form 8-K dated October 3, 1995).
10.3 Assistance Agreement, dated as of December 28, 1988, among the Federal Savings and Loan
Insurance Corporation, First Madison Bank, FSB (formerly named First Texas Bank, FSB) and
MacAndrews & Forbes Holdings Inc. (incorporated by reference to Exhibit 10.2 to the
Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
10.4 Modification Agreement, dated January 31, 1992, among the Federal Deposit Insurance
Corporation, as manager of the FSLIC Resolution Fund, Resolution Trust Corporation, First
Madison Bank, FSB (formerly named First Gibraltar Bank, FSB), First Gibraltar Holdings Inc. and
MacAndrews & Forbes Holdings Inc. (incorporated by reference to Exhibit 10.3 to the
Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
10.5 Amendment No. 1 to the Asset Purchase Agreement, dated as of September 30, 1994, between First
Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank (incorporated by reference
to Exhibit 2.3 to the Registrant's filing on Form 8-K dated October 3, 1994).
10.6 Amendment No. 2 to the Asset Purchase Agreement, dated as of September 30, 1994, between First
Madison Bank, FSB, and First Nationwide Bank, A Federal Savings Bank (incorporated by reference
to Exhibit 2.4 to the Registrant's filing on Form 8-K dated October 3, 1994).
10.7 Non-Performing Asset Sale Agreement, dated September 30, 1994, between First Madison Bank, FSB,
and Granite Management and Disposition, Inc. (incorporated by reference to Exhibit 10.1 to the
Registrant's filing on Form 8-K dated October 3, 1994).
10.8 Settlement Agreement, dated July 17, 1991, by and among First Gibraltar Bank, FSB, Affiliated
Computer Services, Inc. and the Federal Deposit Insurance Corporation, in its corporate
capacity, the Federal Deposit Insurance Corporation, as receiver for Gibraltar Savings
Association, and the Federal Deposit Insurance Corporation, as receiver for First Texas Savings
Association (incorporated by reference to Exhibit 10.2 to the Registrant's filing on Form 8-K
dated October 3, 1994).
II-4
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- -----------
10.9 Office Lease dated as of November 15, 1990, between Webb/San Francisco Ventures, Ltd. and First
Nationwide Bank, A Federal Savings Bank. Confidential treatment has been granted for portions
of this document (incorporated by reference to Exhibit 10.6 to Amendment No. 3 to the
Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
10.10 Exchange Agreement dated September 26, 1994 by and among Gerald J. Ford, the Registrant and
NationsBank of Texas, N.A. (incorporated by reference to Exhibit 10.12 to Amendment No. 2 to
the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
10.11 Exchange Agreement dated October 20, 1994 between Carl B. Webb and the Registrant (incorporated
by reference to Exhibit 10.11 to Registrant's Registration Statement on Form S-1 (File No.
333-00854)).
10.12 Stockholders Agreement dated October 3, 1994 by and among Gerald J. Ford, the Registrant and
First Nationwide (Parent) Holdings Inc. (incorporated by reference to Exhibit 10.16 to
Amendment No. 2 to the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
10.13 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Gerald J. Ford,
dated as of October 1, 1994 (incorporated by reference to Exhibit 10.13 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
10.14 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Carl B. Webb,
II, dated as of February 1, 1995 (incorporated by reference to Exhibit 10.14 to the
Registrant's filing on Form 10-K for the year ended December 31, 1994).
10.15 Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A
Federal Savings Bank, and Carl B. Webb, II (incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated August 30, 1996).
10.16 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Christie S.
Flanagan, dated as of October 1, 1994 (incorporated by reference to Exhibit 10.15 to the
Registrant's filing on Form 10-K for the year ended December 31, 1994).
10.17 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Christie S.
Flanagan, dated as of June 1, 1996 (incorporated by reference to Exhibit 10.4 to the
Registrant's Current Report on Form 8-K dated August 30, 1996).
10.18 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and James R. Staff,
dated as of February 1, 1995 (incorporated by reference to Exhibit 10.16 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
10.19 Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A
Federal Savings Bank, and James R. Staff (incorporated by reference to Exhibit 10.3 to the
Registrant's Current Report on Form 8-K dated August 30, 1996).
10.20 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Lacy Newman,
dated as of February 1, 1995 (incorporated by reference to Exhibit 10.17 to the Registrant's
Registration Statement on Form S-1 (File No. 333-00854)).
10.21 Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A
Federal Savings Bank, and Lacy Newman (incorporated by reference to Exhibit 10.5 to the
Registrant's Current Report on Form 8-K dated August 30, 1996).
10.22 Mortgage Company Asset Sale Agreement by and among Resolution Trust Corporation as conservator
for Standard Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage
Company, America's Lending Network, Inc. and StanFed Financial Services, Inc., and First
Nationwide Mortgage Corporation, dated as of December 1, 1994 (incorporated by reference to
Exhibit 10.18 to the Registrant's filing on Form 10-K for the year ended December 31, 1994).
II-5
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- -----------
10.23 Receivables Sale Agreement by and among Resolution Trust Corporation as conservator for
Standard Federal Savings Association, America's Mortgage Servicing, Inc., A Mortgage Company,
and America's Lending Network, Inc., and First Nationwide Mortgage Corporation, dated as of
December 1, 1994 (incorporated by reference to Exhibit 10.19 to the Registrant's filing on Form
10-K for the year ended December 31, 1994).
10.24 Purchase and Sale Agreement by and between Resolution Trust Corporation in its corporate
capacity and First Nationwide Mortgage Corporation, dated as of December 1, 1994 (incorporated
by reference to Exhibit 10.20 to the Registrant's filing on Form 10-K for the year ended
December 31, 1994).
10.25 Purchase and Sale Agreement by and among Resolution Trust Corporation as receiver of or
conservator for certain associations and First Nationwide Mortgage Corporation, dated as of
December 1, 1994 (incorporated by reference to Exhibit 10.21 to the Registrant's filing on Form
10-K for the year ended December 31, 1994).
10.26 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated December 2, 1994,
regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two
Purchase and Sales Agreements among such parties, as of December 1, 1994 (incorporated by
reference to Exhibit 10.22 to the Registrant's filing on Form 10-K for the year ended December
31, 1994).
10.27 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 23,
1995, regarding the Mortgage Company Asset Sale Agreement, Receivable Sales Agreement, and two
Purchase and Sales Agreements among such parties, as of December 1, 1994 (incorporated by
reference to Exhibit 10.23 to the Registrant's filing on Form 10-K for the year ended December
31, 1994).
10.28 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 24,
1995, regarding the Mortgage Company Asset Sale Agreement among such parties, as of December 1,
1994 (incorporated by reference to Exhibit 10.24 to the Registrant's filing on Form 10-K for
the year ended December 31, 1994).
10.29 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28,
1995, regarding the Mortgage Company Asset Sale Agreement among such parties, as of December 1,
1994 (power of attorney matters) (incorporated by reference to Exhibit 10.25 to the
Registrant's filing on Form 10-K for the year ended December 31, 1994).
10.30 Letter agreement between the Resolution Trust Corporation, as conservator for Standard Federal
Savings Association, et al., and First Nationwide Mortgage Corporation, dated February 28,
1995, regarding the Mortgage Company Asset Sale Agreement among such parties, as of December 1,
1994 (amendments to schedules) (incorporated by reference to Exhibit 10.26 to the Registrant's
filing on Form 10-K for the year ended December 31, 1994).
10.31 Agreement for Provision of Services between First Nationwide Bank, A Federal Savings Bank, and
Trans Network Insurance Services Inc. (then named "First Gibraltar (Parent) Holdings Inc."),
dated effective December 1, 1994 (incorporated by reference to Exhibit 10.27 to the
Registrant's filing on Form 10-K for the year ended December 31, 1994).
10.32 Assignment from Trans Network Insurance Services Inc. to First Nationwide Management Corp. of
Agreement for Provision of Services (incorporated by reference to Exhibit 10.37 to the
Registrant's filing on Form 10-K for the year ended December 31, 1995).
II-6
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- -----------
10.33 Asset Purchase Agreement between Trans Network Insurance Services Inc. and FNC Insurance
Agency, Inc. dated effective June 1, 1995 (incorporated by reference to Exhibit 10.24 to
Post-Effective Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (File No.
33-82654)).
10.34 Trans Network Marketing and Support Services Agreement between First Nationwide Bank, A Federal
Savings Bank, and Trans Network Insurance Services Inc. dated effective June 1, 1995
(incorporated by reference to Exhibit 10.25 to Post-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
10.35 Amendment No. 2 to Lease between First Nationwide Bank, A Federal Savings Bank, and RNM 135
Main, L.P. dated April 6, 1995 (incorporated by reference to Exhibit 10.26 to Post-Effective
Amendment No. 1 to the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
10.36 Consulting Agreement between First Nationwide Management Corp. and Gerald J. Ford dated as of
October 1, 1994 (incorporated by reference to Exhibit 10.27 to Post-Effective Amendment No. 1
to the Registrant's Registration Statement on Form S-1 (File No. 33-82654)).
10.37 First Amendment, dated as of January 1, 1995, by and among First Nationwide Management Corp.,
Diamond A-Ford Corporation, Trans Network Insurance Services, Inc. and Gerald J. Ford,
supplementing the Consulting Agreement between First Nationwide Management Corp. and Gerald J.
Ford dated as of October 1, 1994 (incorporated by reference to Exhibit 10.33 to Registrant's
Registration Statement on Form S-1 (File No. 333-00854)).
10.38 Management Incentive Plan for Certain Employees of First Nationwide Bank, A Federal Savings
Bank (incorporated by reference to Exhibit 10.34 to Registrant's Registration Statement on Form
S-1 (File No. 333-00854).
10.39 Reimbursement and Expense Allocation Agreement, dated as of January 1, 1996, by and between
First Nationwide Management Corp. and the Registrant (incorporation by reference to Exhibit
10.35 to Registrant's Registration Statement on Form S-1 (File No. 333-00854)).
10.40 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Roger L.
Gordon, dated as of January 30, 1996 (incorporated by reference to Exhibit 10.15 to the
Registrant's filing on Form 10-K for the year ended December 31, 1995).
10.41 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Richard P.
Hodge (incorporated by reference to Exhibit 10.16 to the Registrant's filing on Form 10-K for
the year ended December 31, 1995).
10.42 Amendment to Employment Agreement, dated as of June 1, 1996, between First Nationwide Bank, A
Federal Savings Bank, and Richard P. Hodge (incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K dated August 30, 1996).
*10.43 Employment Agreement between First Nationwide Bank, A Federal Savings Bank, and Walter C.
Klein, dated as of January 8, 1996.
*10.44 Post--Employment Consulting Agreement between California Federal Bank, FSB and Edward G.
Harshfield, dated January 6, 1997.
12.1 Statement regarding the computation of ratio of earnings to fixed charges for the Registrant.
*21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Auditors of the Registrant.
23.2 Consent of KPMG Peat Marwick LLP, Independent Auditors of Cal Fed Bancorp Inc.
23.3 Consent of Coopers & Lybrand LLP, Independent Auditors.
23.4 Consent of Deloitte & Touche LLP, Independent Auditors.
II-7
<PAGE>
EXHIBIT NO. DESCRIPTION
---------- -----------
*23.5 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in Exhibit 5.1).
24.1 Power of Attorney executed by Ronald O. Perelman.
24.2 Power of Attorney executed by Howard Gittis.
24.3 Power of Attorney executed by Irwin Engelman.
24.4 Power of Attorney executed by Laurence Winoker.
25.1 Statement of Eligibility and Qualification on Form T-1 of The Bank of New York, as trustee
under the Indenture relating to the Notes (bound separately).
*99.1 Form of Letter of Transmittal.
*99.2 Form of Notice of Guaranteed Delivery.
*99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees.
*99.4 Form of Letter to Clients.
</TABLE>
- ------------
* To be filed by amendment.
(b) Financial Statement Schedules: None
II-8
<PAGE>
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 than
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 such 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 that 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:
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-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this 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 February 3, 1997.
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
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 February 3, 1997
---------------------- Executive Officer and Director
Ronald O. Perelman (Principal Executive Officer)
* Vice Chairman and Director February 3, 1997
----------------------
Howard Gittis
* Executive Vice President and Chief February 3, 1997
---------------------- Financial Officer
Irwin Engelman (Principal Financial Officer)
*
Vice President and Controller February 3, 1997
---------------------- (Principal Accounting Officer)
Laurence Winoker
</TABLE>
*Joram C. Salig, by signing his name hereto, does hereby execute this
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-10
<PAGE>
FIRST NATIONWIDE HOLDINGS INC.
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
---------------------- --------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed charges (excluding interest on deposits):
Interest on borrowings: $ 290,037 $220,317 $287,456 $ 98,888 $ 16,700 $ 11,137 $27,283
Total fixed charges (excluding interest on deposits) 290,037 220,317 287,456 98,888 16,700 11,137 27,283
Rent interest factor 3,528 5,737 6,628 1,746 361 2,595 3,757
Income before income taxes, extraordinary item
and minority interest 507,586 86,396 122,450 31,928 146,618 215,555 (26,376)
Earnings 801,151 312,452 416,534 132,562 163,679 229,267 4,664
Fixed charges (excluding interest on deposits) 293,565 226,054 294,064 100,634 17,061 13,732 31,040
Preferred stock dividends 34,584 25,938 34,584 0 0 7,623 10,732
Combined fixed charges (excluding interest on
deposits) and preferred stock dividends 328,149 251,992 328,668 100,634 17,061 21,355 41,772
Ratio of earnings to combined fixed charges
(excluding interest on deposits) and preferred
stock dividends (note 1) 2.44 x 1.24 x 1.27 x 1.32 x 9.59 x 10.74 x (26,376)
Fixed charges (including interest on deposits):
Interest on deposits $ 323,246 $328,879 $447,359 $100,957 $ 55,410 $430,933 $630,375
Interest on borrowings 290,037 220,317 287,456 96,888 16,700 11,137 27,283
Total fixed charges (including interest on deposits) 613,283 549,196 734,815 199,845 72,110 442,070 657,658
Rent interest factor 3,528 5,737 6,628 1,746 361 2,595 3,757
Income before income taxes, extraordinary item
and minority interest 507,586 86,398 122,450 31,928 146,618 215,555 (26,376)
Earnings 1,124,397 641,331 863,893 233,519 219,089 660,220 635,039
Fixed charges (including interest on deposits) 616,811 554,933 741,443 201,591 72,471 444,665 661,415
Preferred stock dividends 34,584 25,938 34,584 0 0 7,623 10,732
Combined fixed charges (including interest on
deposits) and preferred stock dividends 651,395 580,871 776,027 201,591 72,471 452,288 672,147
Ratio of earnings to combined fixed charges
(including interest on deposits) and preferred
stock dividends (note 1) 1.73 x 1.10 x 1.11 x 1.16 x 3.02 x 1.46 x (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.
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
First Nationwide Holdings Inc.:
We consent to the use of our report included herein 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 Warwick LLP
Dallas, Texas
January 31, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
Board of Directors
Cal Fed Bancorp Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the Prospectus. Our report refers to a
change in accounting for certain acquisitions of banking and thrift
institutions in 1994 and a change in accounting for certain investments in
debt and equity securities in 1993.
/s/ KPMG Peat Marwick LLP
---------------------
KPMG Peat Warwick LLP
Los Angeles, California
January 31, 1997
<PAGE>
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 offering of 10 5/8% Senior
Subordinated Exchange Notes Due 2003 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 LLP
San Francisco, California
January 31, 1997
<PAGE>
DELOITTE & TOUCHE LLP
[LETTERHEAD]
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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
Statements.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
January 31, 1997
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints each of Glenn P. Dickes, Laurence Winoker, Renee N. Tucei and
Joram C. Salig or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
First Nationwide Holdings Inc. (the "Corporation") Registration Statement on
Form S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended, including, without limiting the generality of the foregoing, to sign
the Registration Statement in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments and supplements relating thereto, including post-effective
amendments, and any instrument, contract, document or other writing of or in
connection with the Registration Statement and any amendments and supplements
thereto and to file the same, with all exhibits thereto, and other documents
in connection therewith, including this power of attorney, with the Securities
and Exchange Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS HEREOF, the undersigned has signed these presents this 3rd day
of February, 1997.
/s/ Ronald O. Perelman
----------------------
Ronald O. Perelman
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Laurence Winoker, Renee N.
Tucei and Joram C. Salig or any of them, each acting alone, his true and
lawful attorney-in-fact and agent, with full power of substitution, for him
and in his name, place and stead, in any and all capacities, in connection
with the First Nationwide Holdings Inc. (the "Corporation") Registration
Statement on Form S-1 (the "Registration Statement") under the Securities Act
of 1933, as amended, including, without limiting the generality of the
foregoing, to sign the Registration Statement in the name and on behalf of the
Corporation or on behalf of the undersigned as a director or officer of the
Corporation, and any amendments and supplements relating thereto, including
post-effective amendments, and any instrument, contract, document or other
writing of or in connection with the Registration Statement and any amendments
and supplements thereto and to file the same, with all exhibits thereto, and
other documents in connection therewith, including this power of attorney,
with the Securities and Exchange Commission and any applicable securities
exchange or securities self-regulatory body, granting unto said
attorneys-in-fact and agents, each acting alone, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, each acting alone, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS HEREOF, the undersigned has signed these presents
this 3rd day of February, 1997.
/s/ Howard Gittis
-----------------
Howard Gittis
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints each of Glenn P. Dickes, Laurence Winoker, Renee N. Tucei and
Joram C. Salig or any of them, each acting alone, his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, in connection with the
First Nationwide Holdings Inc. (the "Corporation") Registration Statement on
Form S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended, including, without limiting the generality of the foregoing, to sign
the Registration Statement in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments and supplements relating thereto, including post-effective
amendments, and any instrument, contract, document or other writing of or in
connection with the Registration Statement and any amendments and supplements
thereto and to file the same, with all exhibits thereto, and other documents
in connection therewith, including this power of attorney, with the Securities
and Exchange Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS HEREOF, the undersigned has signed these presents this 3rd day
of February, 1997.
/s/ Irwin Engelman
------------------
Irwin Engelman
<PAGE>
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS, that the undersigned hereby
constitutes and appoints each of Glenn P. Dickes, Renee N. Tucei and Joram C.
Salig or any of them, each acting alone, his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, in connection with the First Nationwide
Holdings Inc. (the "Corporation") Registration Statement on Form S-1 (the
"Registration Statement") under the Securities Act of 1933, as amended,
including, without limiting the generality of the foregoing, to sign the
Registration Statement in the name and on behalf of the Corporation or on
behalf of the undersigned as a director or officer of the Corporation, and any
amendments and supplements relating thereto, including post-effective
amendments, and any instrument, contract, document or other writing of or in
connection with the Registration Statement and any amendments and supplements
thereto and to file the same, with all exhibits thereto, and other documents
in connection therewith, including this power of attorney, with the Securities
and Exchange Commission and any applicable securities exchange or securities
self-regulatory body, granting unto said attorneys-in-fact and agents, each
acting alone, full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, each
acting alone, or his substitute or substitutes, may lawfully do or cause to be
done by virtue hereof.
IN WITNESS HEREOF, the undersigned has signed these presents
this 3rd day of February, 1997.
/s/ Laurence Winoker
--------------------
Laurence Winoker
<PAGE>
===============================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
----------------------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
New York 13-5160382
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
48 Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
----------------------
FIRST NATIONWIDE HOLDINGS INC.
(Exact name of obligor as specified in its charter)
Delaware 13-3778550
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
35 East 62nd Street
New York, New York 10021
(Address of principal executive offices) (Zip code)
----------------------
10 5/8% Senior Subordinated Exchange Notes due 2003
(Title of the indenture securities)
===============================================================================
<PAGE>
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH
IT IS SUBJECT.
- --------------------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------------------
Superintendent of Banks of 2 Rector Street, New York,
the State of New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of 33 Liberty Plaza, New York,
New York N.Y. 10045
Federal Deposit Insurance Washington, D.C. 20429
Corporation
New York Clearing House New York, New York
Association
(B) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE
COMMISSION, ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT
HERETO, PURSUANT TO RULE 7A-29 UNDER THE TRUST INDENTURE ACT OF 1939
(THE "ACT") AND RULE 24 OF THE COMMISSION'S RULES OF PRACTICE.
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which
contains the authority to commence business and a grant of
powers to exercise corporate trust powers. (Exhibit 1 to
Amendment No. 1 to Form T-1 filed with Registration Statement
No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with
Registration Statement No. 33-21672 and Exhibit 1 to Form T-1
filed with Registration Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
-2-
<PAGE>
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York,
and State of New York, on the 31st day of January, 1997.
THE BANK OF NEW YORK
By: /s/ BYRON MERINO
-------------------
Name: BYRON MERINO
Title: ASSISTANT TREASURER
-4-
<PAGE>
EXHIBIT 7
Consolidated Report of Condition of
THE BANK OF NEW YORK
of 48 Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries, a member of the Federal Reserve
System, at the close of business September 30, 1996, published in accordance
with a call made by the Federal Reserve Bank of this District pursuant to the
provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
ASSETS in Thousands
<S> <C>
Cash and balances due from depos-
itory institutions:
Noninterest-bearing balances and
currency and coin .................. $ 4,404,522
Interest-bearing balances .......... 732,833
Securities:
Held-to-maturity securities ........ 789,964
Available-for-sale securities ...... 2,005,509
Federal funds sold in domestic offices
of the bank:
Federal funds sold ................... 3,364,838
Loans and lease financing
receivables:
Loans and leases, net of unearned
income .................28,728,602
LESS: Allowance for loan and
lease losses ..............584,525
LESS: Allocated transfer risk
reserve........................429
Loans and leases, net of unearned
income, allowance, and reserve 28,143,648
Assets held in trading accounts ...... 1,004,242
Premises and fixed assets (including
capitalized leases) ................ 605,668
Other real estate owned .............. 41,238
Investments in unconsolidated
subsidiaries and associated
companies .......................... 205,031
Customers' liability to this bank on
acceptances outstanding ............ 949,154
Intangible assets .................... 490,524
Other assets ......................... 1,305,839
-----------
Total assets ......................... $44,043,010
===========
LIABILITIES
Deposits:
In domestic offices ................ $20,441,318
Noninterest-bearing .......8,158,472
Interest-bearing .........12,282,846
In foreign offices, Edge and
Agreement subsidiaries, and IBFs ... 11,710,903
Noninterest-bearing ..........46,182
<PAGE>
Interest-bearing .........11,664,721
Federal funds purchased in
domestic offices of the
bank:
Federal funds purchased ............ 1,565,288
Demand notes issued to the U.S.
Treasury ........................... 293,186
Trading liabilities .................. 826,856
Other borrowed money:
With original maturity of one year
or less .......................... 2,103,443
With original maturity of more than
one year ......................... 20,766
Bank's liability on acceptances exe-
cuted and outstanding .............. 951,116
Subordinated notes and debentures .... 1,020,400
Other liabilities .................... 1,522,884
-----------
Total liabilities .................... 40,456,160
-----------
EQUITY CAPITAL
Common stock ........................ 942,284
Surplus ............................. 525,666
Undivided profits and capital
reserves .......................... 2,129,376
Net unrealized holding gains
(losses) on available-for-sale
securities ........................ (2,073)
Cumulative foreign currency transla-
tion adjustments .................. (8,403)
-----------
Total equity capital ................ 3,586,850
-----------
Total liabilities and equity
capital ........................... $44,043,010
===========
</TABLE>
I, Robert E. Keilman, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Robert E. Keilman
We, the undersigned directors, attest to the correctness of this Report
of Condition and declare that it has been examined by us and to the best of
our knowledge and belief has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System
and is true and correct.
-
J. Carter Bacot |
Thomas A. Renyi | Directors
Alan R. Griffith |
-
